Days of red ink reckoning loom for foreseeable future

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Spurred on by the then-booming economy during 2007, Colorado legislators and liberal interest groups were poised to load the 2008 ballot with revenue-enhancing proposals — or, less politely, new taxes.

Interviewed by the Denver Post during October of 2007, then-House Speaker Andrew Romanoff said, “If I had to choose today between providing health care for every citizen in Colorado or making sure that our kids can get a decent education, I’d say we can do both.”

Two years later, Romanoff is no longer in office, state tax revenue has declined sharply, and Democratic Gov. Bill Ritter has been forced to make drastic cuts in an already bare-bones budget.

On Sep. 1, Republican state Sen. Al White gave a succinct account of the state’s budget woes — a tragedy in three acts.

At the onset of the recession, White said, the state cut $800 million from the 2008-09 budget. More recently, cuts of more than $700 million were made in the 2009-10 budget, which had been approved by the legislature just a few months earlier.

And, White predicted, worse is yet to come when American Reinvestment and Recovery Act funding is no longer available for the 2010-11 budget.

The ARRA, or “the stimulus,” signed this February by President Barack Obama, will inject more than $750 billion into the American economy during the next two years.

According to Bell, Colorado’s share of such federal aid is estimated at $2.8 billion.

The money, some of which has gone directly to local governments, has been used to backfill the state’s depleted budget.

Likening the 2010-11 budgetary cycle to the third act of a Shakespearean tragedy, White said, “that’s when Hamlet gets it in the gizzard.”

On Sept. 2, Ritter released a list of $320 million in additional cuts. They included slashing funds for DUI checkpoints, hundreds of additional layoffs and reduced funding for every state department.

Like California, Colorado permits voter-initiated constitutional amendments. The process is simple and transparent, requiring only that proponents persuade about 70,000 registered voters to sign petitions. Paid signature collectors are usually hired, at a cost of $2.50 per signature.

In practice, this has meant that, in every election cycle, voters are confronted with multiple amendments. Some, like a successful 2008 initiative liberalizing casino gambling, are entirely driven by special interests. Others, like an unsuccessful proposal the same year which would have defined a fertilized egg as a person, emerge from the beliefs and commitments of thousands of volunteers.

Three such initiatives have shaped Colorado and, according to many observers, made the state virtually ungovernable.

The Taxpayer’s Bill of Rights, approved by voters during 1992, forbade legislators to increase taxes without voter approval and limited annual budget increases to inflation plus population growth.

Amendment 23, enacted during 2000 after TABOR’s constraints had gutted K-12 funding, requires that state funding for education grow 1 percent annually.

These two, combined with the 1982 Gallagher amendment, which mandates a 55-45 split of state property tax between commercial and residential property, as well as fixing the commercial assessment rate at 29 percent, have created a tangled web of conflicting mandates, especially during the present recession.

Thanks to the complex interplay of voter-approved constitutional amendments, state government funding has failed to keep pace with population increases since the early 1990s. Per capita funding for higher education, transportation and Medicaid had declined so sharply that the once-progressive state ranked 49th, 48th and 48th in the three categories.

During 2007, the Colorado Legislative Council, the nonpartisan research arm of the legislature, predicted that state general fund revenue would grow from $8.2 billion during FY 2007-08 to $10.6 billion during FY 2012-13.

Those numbers, which analysts at the Bell Policy Center characterized as inadequate to maintain 2007 levels of service, now seem absurdly optimistic. Fiscal year 2007-08 revenue was $500 million below CLC projections, and 2008-09 revenue, at $6.6 billion, is $1.9 billion below 2007 figures.

This June, using CLC’s most recent budget numbers, Bell projected a cumulative revenue shortfall from 2007 projections of $11.05 billion.

Stimulus funds were used to make up for cuts of $350 million in higher education for both FY 2008-09 and FY 2009-10. Another $202 million was used to offset cuts in K-12 education. Reductions in the federal matching requirements under Medicaid as part of ARRA will save the state $542 million over the two fiscal years, and another $55 million was made available to cover health care costs for both fiscal years. About $500 million will be available for state transportation infrastructure projects.

As a critical report jointly authored in July by Bell, the Colorado Fiscal Policy Institute and the Colorado Children’s Campaign notes, “… while the economic stimulus package will help the state avoid severe program cuts over the next two years, the vast majority of the federal aid will run out at the end of fiscal year 2009-10. At that time, Colorado will have to either use state funds to maintain the level of appropriations or make cuts in programs. Based on revenue projections released in June 2009, state policymakers will face difficult budget choices in future fiscal years.

“Our analysis shows that the lack of revenue is the primary factor constraining state services. Measured as a percentage of Colorado’s economy, state General Fund revenues are projected to drop to levels not seen in recent history. They will average 3.3 percent of total state personal income through 2012, which is 21 percent below the 4.2 percent average since 1981.”

Those choices may involve jettisoning entire programs, even those perceived to be essential components of any state budget.

The Department of Corrections receives 90 percent of its operating budget from the general fund, K-12 education 75 percent, health care 41 percent, higher education 40 percent, and human services 32 percent.

Of these, only higher education funding is unprotected by constitutional or federal mandate. Twenty-five years ago, state support accounted for 62 percent of higher education operating budgets  and 38 percent came from tuition. That percentage is now reversed, and some administrators anticipate that Colorado will be the first state without meaningful support for higher education.

“Reductions in state funding mean our students wind up shouldering a greater and greater share of the cost to go to school,” said Colorado State University President Tony Frank, “while the quality and scope of the programs available to them inevitably decline.”

Because of the interaction of the “Three Horsemen of the Apocalypse,” as some refer to TABOR, Gallagher and Amendment 23, K-12 public schools are now dependent upon the state for more than 75 percent of their funds, as compared to 20 years ago when they received 65 percent of their funding from local property tax and 35 percent from the state. State revenue is almost entirely derived from sales and income taxes, which are less stable than property taxes.

During a recession, cuts to programs unprotected by the state Constitution are inevitable.

During August, state support for higher education was slashed by another $81 million to help close an anticipated $318 million shortfall in the FY 2009-10 budget. The state hopes to make up for the cuts with ARRA funds.

K-12 education, at $3.25 billion, is the largest item in the Colorado state budget. ARRA funds enabled public schools to avoid massive cuts in FY 2009-10, but state budgeters notified school districts to expect more than $200 million in cuts next year.

Ironically, by accepting ARRA funds to backfill and stabilize budgets for this year and next, the state may have simply dug itself into a deeper hole.

In a report on state budgets earlier this year, Standard & Poors credit rating agency noted that the added federal money has enabled states to defer real reform.

“We believe that, were these resources to impede the implementation of meaningful structural budget solutions, down the road new budget difficulties could arise, especially if economic recovery is slow to arrive,” according to the report.

Scott Downes of the Colorado Fiscal Policy Institute said that Colorado’s tax system needs sweeping revision.

“We haven’t had a comprehensive study of the state tax system for more than 50 years,” he said, “and it’s clear that the existing system is not well aligned with today’s economy — the consumer sector, the service sector, and almost everything else.”

Downes criticized the state’s extensive use of tax breaks for “economic development” purposes.

“There is only anecdotal evidence that these (programs) have any positive effect,” he said

Downes, noting that backfilling the budget with ARRA money only postpones the inevitable, said that the state tax system simply cannot produce enough revenue to sustain critically important services.

“Do we want to decide which kids don’t get to go to preschool, which students don’t get to go to college?” he asked. “(As state services diminish), the most vulnerable and the least visible will be most affected. We’re a very lean state to begin with. We’ve already cut more than $1 billion, and now we have to cut another $300 million. There’s no more room.”

One Response to Days of red ink reckoning loom for foreseeable future

  1. “We haven’t had a comprehensive study of the state tax system for more than 50 years,” he said, “and it’s clear that the existing system is not well aligned with today’s economy — the consumer sector, the service sector, and almost everything else.” Said Scott Downes of the Colorado Fiscal Policy Institute.

    Have we ever had a comprehensive study of the State Government? Or the County or City Governments? Should we? How about a efficiency expert study? Are we getting way more government than we need or want?

    And it is at least entertaining to watch the governments struggling with recession caused falling revenue as they make several obvious decisions and avoid one. The best one is the decision that real estate property taxes are “better because they are more stable.” There is a widespread opinion on the business side of the equation, and that opinion is that real estate, and particularly commercial real estate, is about to fall sharply in value. The predicted drops are in the 20% to 30% range. If government switches from sales tax to real estate tax, they might be going from the frying pan to the fire.

    We will see.

    FactFinder
    September 16, 2009 at 7:50 pm