DU Strategic Issues Panel Aug. 12, 2010

This Morning’s Presentation Addressing Four Questions 1.Where is state government financially? 2.What are the immediate causes that put us here? 3.What are the proximate causes and underlying conditions that put us here? 4.What challenges will we face in the next 20+ years?

Where Is State Government Financially?

Dramatic Economic Downturn “Lost Decade” CO March 08 Unemployment Rate = 4.6% June 2010 = 8.0%; (US = 9.5%) From May 08 to July 09, state shed 110,000+ jobs Most construction activity outside transportation is minimal; approx. 10,000 home permits in 2009 and 2010 (45,400 in 2005) Stock market near post-DotCom bust level

Employment Growth Since 2000

The Case for Slow Growth Consumer spending is a huge driver of the economy. – Debt levels are high; limited borrowing capacity and debt payments remain – Shift to services; selling time – Many jobs have been permanently lost – Loss of housing and stock wealth hurts confidence Current activity distorted by stimulus; the natural drop from loss of debt-financed spending may yet continue.

Some Philosophy “Every system is perfectly designed to achieve exactly the results it gets.” –Dr. Paul Batalden and various others

How NOT to Run a Railroad TABOR: Restricts revenue growth to population plus inflation; popular vote for new taxes* Amendment 23: Mandates growth in K-12 spending (largest single state budget item); cuts proposed in next year’s budget. Gallagher: Mandates fixed ratio of commercial and residential property tax share; result has been dropping residential assessment rate, shifting school finance burden to State *Except when Supreme Court says “OK”

General Fund operating budget FY (Enacted)

Annual Change in Level since FY 01 GF $ and K-12+Medicaid

Revenue Subject to the TABOR Limit (Millions)

Understanding Referendum C

School Finance Act determines the minimum required funding for each district, plus adjustments for size, cost of living, and at-risk. “Total Program” State “backfills” whatever shortfall in local property taxes relative to that minimum. Amendment 23 mandates minimum growth in Total Program funding. How do we fund K-12 education?

So What? Limited flexibility to make smart decisions Readily available options are in many cases not the most optimal General Fund subsidy to students for higher education is a reasonable risk of elimination State is losing its ability to support human and physical capital

Slowly Building Issues

Real Value of Gas Tax Since 1992 (Adjusted by Colorado Construction Cost Index)

A Service-Oriented Economy Personal Consumption Expenditures (GDP)

Age Cohort Projections (now and 20 years)

The Big Asterisk *

Three 2010 Fiscal Initiatives Proposition 101: Various reductions in State and local fees and taxes Amendment 60: Cuts School taxes in half Amendment 61: Prohibits State public financing and restricts local district financing

At Least $4.2 Billion in New Deficits Estimates prepared by Colorado Strategies, LLC and Bell Policy Center, subject to revision.

Private and public sector job losses Estimates prepared by Colorado Strategies, LLC July 2010.

Questions?

Revenue Forecasts A Cautionary Tale September The high point in state revenue forecasted by Legislative Council during the Great Recession. Of seven quarterly forecasts since then, six have been revised downward. The downward revisions have totaled -$999.8 million for FY (-12.9%); -$1.9 billion for FY (-22.9%); and - $1.9 billion for FY (-20.8%). FY revenues came in $60 million below the June 2010 forecast.

The (Partial) Shortfall

24-Month Shortfall Recap FY – $175 million reserve shortage – $70 million due to lower-than-expected FMAP extension – TOTAL FOR FY = $245 million (3.4% shortfall in funds available) FY – $61.4 million reserve shortfall – $300 million caseload and inflationary costs – $427 million to replace loss of stimulus funds for Medicaid – $96 million to replace loss of Amendment 35 tobacco taxes for Medicaid – $89.2 million to replace stimulus funds for higher education – $3.9 million to replace stimulus funds for child welfare – TOTAL FOR FY = $977.5 (13.3% shortfall in funds available)

Costs of three programs, accounting for 73% of the General Fund (K-12 Education, Medicaid, and Corrections) are growing at nearly three times the rate of General Fund revenues. General Fund taxes becoming increasingly unproductive. General Fund taxes becoming increasingly volatile. Colorado’s love affair with constitutional fiscal limitations and spending mandates. Colorado’s budget appears to be structurally broken and unsustainable. Proximate Causes of the State’s Ongoing Crisis 4 Causes, 1 Result

General Fund operating budget FY (Enacted)

36.4% growth since start of recession

6.5% of Colorado's population 96% caseload growth 31% population growth

Proximate Causes – Health Care Dramatic Medicaid caseload growth not expected to return to pre- recession levels. One-time sources for Medicaid available for spending in FY likely not available in FY or beyond- approaching $500 million. JBC estimates that an extra $581 million in General Fund money will be needed to fund state’s Medicaid portion through FY Looming Health Care Expansion Fund deficit – $69.1 million in FY 12-13, $84.7 million in FY 13-14, $95.8 million in FY Federal health care reform – Federal government picks up cost of expansion in first 3 years, then state responsibility phases in.  $31 million estimated state cost in 2017  By 2020, state cost ramps up to $72.5 million Long-term care

Today, about 17.5% of Colorado householders are 65+ By 2030, nearly one-third of Colorado householders will be 65+

Medicaid Enrollees & Expenditures FY

Average annual growth rate of about 10% (about 2% average yearly growth for state pop.) DOC was 2.8% of GF budget in FY It was 9% of GF budget in FY

* Appropriated

Highlights of Colorado’s Love Affair with Fiscal Limits and Spending Mandates 1876 – Constitutional prohibition on state general obligation debt 1913 – 5.5% property tax revenue limit 1934 – Earmarking for the Highway Users Tax Fund 1937 – Earmarking for the Old Age Pension Fund 1977 – Kadlecek Amendment restricting General Fund growth 1982 – Gallagher Amendment restricting residential property tax assessments 1992 – Arveschoug-Bird General Fund appropriations limit 1992 – Taxpayer’s Bill of Rights 2000 – Amendment 23 requiring K-12 education increases

Underlying Conditions - What Is It About Us… ?

Colorado - A Unique System of Government and Finance A governmentally decentralized state A relatively small and limited state government 3,271 local governments, almost 90% of which are special districts We have added about 175 local governments per year on average over the course of the past 5 years, about 14.6 per month! A fiscally decentralized State In 2007, ranked 45 th in per capita state taxes and 48 th in state taxes per $1,000 of personal income Ranked 9 th in per capita local government taxes and 10 th in local taxes per $1,000 of personal income Ranked 37 th in combined state and local taxes per capita and 47 th in combined state and local taxes per $1,000 of personal income Colorado’s state government share of state and local taxes ranked 47 th, while the local government share ranked 4th

Median Household Income By County

Tax Capacity By County

Points to Ponder Widespread mistrust of state government appears to arise from historical roots. Sub-state regionalism, while existing in other states, appears to be much more pronounced in Colorado. Most taxes are imposed and services are delivered by a constantly growing patchwork of local governments. Limitations result in workarounds that often lead to unanticipated consequences. The state’s budget appears to be structurally broken and unsustainable. The ability of representative government to cope with the ongoing crisis is severely constrained by the state constitution. Addressing the state’s financial crisis will require constructive engagement of voters. The Center for Colorado’s Economic Future is currently working on recommendations, based on comprehensive research and analysis, to create a financial roadmap for Colorado’s policymakers and voters.