Where do you find $3.3 billion?
That's the monumental task faced by the Joint Budget Committee and the rest of the Colorado General Assembly as they seek to keep the wheels of state government from falling off in the wake of a pandemic that has shut down the economy, caused unemployment to soar and left lawmakers with an unprecedented budget shortfall next fiscal year.
And the hole is still getting deeper, as the shutdowns and plunging consumer confidence continue to take their toll.
State Sen. Ray Scott, a prominent Western Slope Republican, said the withered state budget reflects the havoc in people’s lives, financially and emotionally. Recovery will be an evolution, not a revolution, he suggested.
“But now it is time to rebuild,” Scott said. “People have lost their most basic freedoms and truly understand how precious freedom and our health is. The pain of losing loved ones is unimaginable in these circumstances, but we must move forward and begin recovering economically in every way we can, but in a safe manner."
Lawmakers will try to preserve the pillars of education, critical social safety nets and the economy, some of the state’s sharpest economic minds told Colorado Politics.
Earl Wright, CEO and chairman of the Board of Directors of Colorado-based AMG National Trust Bank and board chairman for the business-minded think tank Common Sense Policy Roundtable, said lawmakers should remember what gave Colorado one of the nation's strongest economies before the coronavirus pandemic.
“Above all, we must preserve the foundations of our economy for the long run and the most important is education,” he said. “We have to give the next generation the tools and knowledge they need to succeed, to be innovators and to continue to grow our economy.”
As deep as Colorado’s cuts go, it’s hard to imagine many, if any, state programs will be unscathed.
On May 12, economists from the Legislative Council and the governor’s Office of State Planning and Budgeting (OSPB) presented grim news to lawmakers: The state will end its current budget year next month a staggering $895.8 million in the hole, despite the state law that requires a balanced budget. That will be covered by the state’s general fund reserve and leave a little left over to begin 2020-21.
The budget year that begins July 1 looks even worse.
General fund revenues, which make up a large portion of discretionary spending in state government, will be down $2.43 billion. The Legislative Council economists estimated the total shortfall at $3.3 billion. OSPB economists were more optimistic, estimating the deficit at only $2.1 billion.
Assuming the budget writers use the Legislative Council forecast, as usual, that means the chopping block is a crowded piece of real estate when lawmakers return May 26 to work out a spending plan.
The cuts amount to 25.2% of the general fund.
“It won’t be anything like what we’ve ever done before,” said JBC member Sen. Bob Rankin, a Carbondale Republican, the senior member on the JBC with seven years of experience shaping the state’s spending plans. “We’ve always had extra money and argued about how to spend it.”
Colorado has dug out before, but the hole wasn’t this deep. In the second year of the post-9/11 recession left a state budget shortfall of $850 million. The third year, it was about $900 million, a cut of about 7% of the then-$13 billion budget. By 2004, Colorado’s unemployment rate doubled to around 5.7%.
In 2009, the Great Recession produced a $604 million shortfall. As a result, the state furloughed state employees, froze hiring and closed two prisons, including the Fort Lyon facility in Bent County.
The unemployment rate was 6.6%. In addition to cutting budgets, the General Assembly also passed a law ending an annual transfer to the state’s transportation fund. The state also received about $2 billion in federal aid, some of which was used to backfill budget cuts.
How much the state might get from the federal government this time is still an open-ended question, and one of the drivers of the decision to postpone resuming the session from May 18 to May 26. Democrats and Republicans in Washington, however, seem hopelessly gridlocked, with Colorado Rep. Ken Buck, a Republican from Windsor, questioning the need to spend more federal resources.
Sen. Dominick Moreno, vice chairman of the JBC and a Commerce City Democrat, said on May 13 the state can't just cut its way out of the budget hole, meaning federal aid would be essential. “We’re pushing the congressional delegation,” Moreno said.
But, that said day, President Donald Trump said that a new stimulus proposal from Speaker of the House Nancy Pelosi, a California Democrat,was “DOA” (dead on arrival). That package would have sent $500 billion to states; Colorado’s share was estimated at $4 billion, enough to bail out the budget. Gov. Jared Polis met with the president on May 13 about state budgetary needs; Trump wants liability protection for businesses in exchange for help for workers in the next package, and Polis said he is “optimistic that the House and Senate will agree on an effort that helps Coloradans.”
Other tools and funds available to lawmakers in the past two recessions are largely unavailable now. Far more people are out of work as the numbers continue to climb, putting an enormous strain on the state’s unemployment fund. Legislative Council economists predict the fund will run out of money next year.
In the eight weeks leading up to May 9, 451,155 Coloradans filed for unemployment insurance, according to the Colorado Department of Labor and Employment.
Legislative Council staff say they expect the unemployment rate in Colorado to rise to 10.1% this year before declining to 7.1% in 2021. It was 2.8% in 2019, and 2.5% in February, the month before coronavirus shutdowns.
The Joint Budget Committee has spent long hours poring over documents, looking for potential cuts:
• As a result of 2018 legislation, the state makes an annual payment of $225 million to the Public Employees Retirement Association — the pension plan for teachers and other state employees — to help the struggling plan with its unfunded liability to future retirees. Not making that payment would make PERA’s efforts to cover its payouts to current retirees more difficult, a risk of insolvency that drove the discussion of the 2018 legislative session. Insolvency for the state employees’ retirement plan could endanger the state’s credit rating and make borrowing more expensive for nearly every facet of local, county and state government.
• One of the state’s most popular programs, the senior homestead property tax exemption, allows Coloradans 65 and older who have lived in their primary residence for at least 10 years to defer property taxes until they no longer own the home. Counties are reimbursed for those property tax exemptions. This pot of money has been a go-to lifeline for the state budget in past recessions.
• The reinsurance program, another possible target, passed in 2019, helps those in the individual health insurance market get lower premiums — 18% on average — with bigger savings on the eastern plains (27%) and Western Slope (30%).
Meanwhile, the Colorado Department of Transportation has to cover an annual $50 million payment tied to 2017 legislation — Sustainability of Rural Colorado — that allowed the state to sell and then lease back state buildings. CDOT has said it could cover those payments out of its existing funds, according to JBC staff.
The governor’s long-term transportation plan, announced in early March, relied on an extra $500 million annually for a decade to help catch up on the $9 billion in estimated needs for the state’s roads, bridges and transit. That money was going to be hard to come by before the downturn; now it’s off the table for the foreseeable future, advocates inside and outside the Capitol tell Colorado Politics.
The Colorado Oil and Gas Conservation Commission is due to receive $1 million extra in its 2020-21 budget to hire a “professional commission” that would continue the work of implementing last year’s Senate Bill 181.
The law changed the commission’s mission as well as changing regulations for the industry. In its response to the JBC, the commisison said that cutting $1 million would effectively end its work on the rules.
An old debt from the last recession is still owed to K-12 education. At its high point, in 2009-10, the debt was more than $1 billion. Since then, the state has repaid $428 million. JBC members discussed letting the debt rise again, but so far have held off.
On March 30 the OSPB ordered state agencies to make 5% across-the-board budget cuts, plus institute a hiring freeze on vacant positions along with delaying some contracts that were authorized by legislators last year.
Lawmakers are carefully weighing the impact to programs that help vulnerable populations.
“How do you decide to reduce services for people with (intellectual and developmental disabilities)” versus those in the state’s ... program, which provides medical services to low-income children? asked Eric Kurtz, JBC staff analyst.
Hooked on pot
The first round of budget cuts made during the week of May 4 showed one difference between previous recessions and this one: how much the state now relies on marijuana money. In almost every place where the JBC could swap cannabis cash to cover general fund shortfalls, they took that action.
In 2019, the state took in $302 million in sales and excise taxes, licenses and fees from marijuana businesses. In 2017-18, when the state took in $247.3 million, $30 million went to the state education fund, and $40 million went to the Building Excellent Schools Today program. An additional $2 million each went to fund bullying and dropout prevention services, and $11.9 million funded grants for behavioral health professionals in schools.
In the first week of the budget cuts, the JBC took $1 million from the bullying program, $3 million from the behavioral health grants and $25 million from the BEST fund. All that is headed to the general fund to help with the shortfall.
The JBC took $3 million from enforcement activities tied to marijuana and moved that into the general fund budget. However, JBC staff analysts pointed out that the fund for enforcement activities had more money than it was supposed to by law, so that cut doesn’t impact enforcement.
“This can be done,” said Jeff Hunt, director of the conservative Centennial Institute policy center at Colorado Christian University, of the massive cuts to be made. “Spending must be prioritized toward state programs that protect those most in need, efforts to plan for a potential coronavirus resurgence this fall, and those that spur economic activity.”
Hunt said lawmakers have spent themselves into this problem. The state budget has grown by the amount of the deficit in just the past two legislative sessions, he pointed out.
Scott Wasserman, president of the left-leaning Bell Policy Center think tank in Denver, said big problems can lead to innovative solutions.
“This is like waking up from a bad dream into a nightmare,” he said. “We were already straining to adequately fund bedrock public priorities like schools and roads and falling short. Unless we change our state’s fiscal rules and consider making some changes to our tax code, Colorado will end up deepening and worsening this recession with these budget cuts. Budget writers will have to decide if they want to spread the pain or cut off a limb.”
Kristin Strohm, executive director of the Common Sense Policy Roundtable, is looking to a future that has solutions and isn’t mired in the problems.
“The only way this horrible budget-cutting exercise doesn’t become a multiyear thing is to dramatically increase testing so the people of this state can get back to work safely and this economy can get rolling,” she said. “The budget cuts are going to be dramatic, painful and necessary, and we all have to work together to make the numbers balance. But if we can scale testing, and we can more effectively isolate infection in the community, then everyone from Jared Polis on down can feel good about unleashing this economy of ours.
“It’s not a maybe. It’s a must.”