Colorado faces budget squeeze despite strong tax collections

DENVER — Rising costs and a cap on revenue growth are squeezing Colorado’s budget at a time when most states are still looking for ways to spend their overflowing coffers.

“This is back to kind-of normal Colorado,” Gov. Jared Polis (D) said last month while presenting his fiscal 2024 budget to the legislature’s Joint Budget Committee. “Which is — there’s not a lot of money, if any, for new programs.”

Some states have raked in massive surpluses for the second year in a row thanks to higher-than-expected tax collections, despite rising prices and the threat of a recession.

There are exceptions. California could face a $25 billion budget hole because of falling tax collections.

And in Colorado, a 1992 constitutional amendment called the Taxpayer’s Bill of Rights, which limits annual state revenue growth, prohibits the state from retaining its surplus tax dollars. The state may have to pay an estimated $6.7 billion in taxpayer refunds this fiscal year and the next under TABOR, according to the Colorado Legislative Council, a nonpartisan team that advises the legislature.

That means Colorado has less money on hand to cover the rising cost of providing government services.

“We’re doing so well, we just are not able to capitalize on how well we’re doing,” said Sen. Rachel Zenzinger (D), who chairs the Joint Budget Committee.

Complicating matters further, the TABOR limit is set at the state’s prior year population growth plus the prior year’s inflation rate in the Denver area. The one-year lag means Colorado lawmakers weren’t able to increase spending this fiscal year to reflect recent rapid inflation. Consumer prices rose 7.7% nationally over the past year, according to the U.S. Bureau of Labor Statistics.

The revenue limit jumps higher next fiscal year. But some Colorado lawmakers say it will be difficult, if not impossible, to make sure funding for key government services keeps pace with inflation — let alone spend money on anything new.

“We’ll do our level best as a legislature to try to reduce the damage, the pain, but fundamentally we’re going to come up short because of TABOR,” said state Sen. Chris Hansen (D), who last session served as vice chair of the Joint Budget Committee.

Not all lawmakers are worried. Some Republicans say Colorado’s budget has been bloated for years.

“There’s a lot of room … to right-size this state government, and it hasn’t been done,” said Rep. Rod Bockenfeld (R), a Joint Budget Committee member. “It hasn’t been done for many, many years.”

Joint Budget Committee members say budgeting for fiscal 2024 will start in earnest in March, after lawmakers receive the final economic forecasts of the legislative session. Fiscal 2024 will start on July 1 next year.

Sen. Bob Rankin (R), a longtime Joint Budget Committee member, said he expects inflation to put pressure on three main areas of the budget: infrastructure costs, employee salaries and Medicaid provider rates. “We will be discussing, at great length, what those rates should be,” he said.

Polis’ budget, released Nov. 1, gives an early taste of the squeeze budget writers will face.

Polis proposed $16.7 billion in general fund spending next year. That’s less money than last year, when the state had federal COVID relief dollars to spend. But it represents a 7% increase in operating costs, almost entirely driven by inflation and caseload growth, according to Polis’ budget team.

“6.3% of the 7% growth is just caseload and inflation,” Lauren Larson, Polis’ budget director, told the Joint Budget Committee earlier this month. “There’s not a lot else in this budget.”

Although the 7% growth rate is below the rate of inflation, it’s above the rate historically allowed by TABOR. If such spending growth continues in future years Colorado could face a structural deficit, Larson said.

Polis’ budget would increase state funding for education to a record $5.5 billion, maintain Colorado’s rainy-day savings, and spend $42.1 million on new public safety programs, among other investments. But it would also scale back some planned public college renovations, allow public college tuition to rise by 4%, and raise state employee salaries by 5%, which is below the rate of inflation. Some short-staffed positions would receive bigger pay bumps.

The Polis administration negotiated the salary increase with Colorado Workers for Innovative and New Solutions, the state employees union.

“This new agreement with the state provides critical tools for attracting and retaining employees in essential positions,” Colorado WINS executive director Hilary Glasgow said in a statement released by the governor’s office this month when the agreement was signed.

Colorado WINS did not respond to a request for comment.

Polis told Joint Budget Committee members that given Colorado’s budget constraints, it will be tough to maintain high levels of education spending over time. “Really any additional spending in other areas would likely be to the detriment of education,” he said. “That’s the challenge here.”

Before Colorado lawmakers start talking about fiscal 2024, they’ll consider supplemental funding for programs and projects approved for this fiscal year which ended up costing more than lawmakers expected.

Zenzinger said she expects pressure from rising costs to be greater than usual. “Projects that we agreed to, like capital construction projects, for example, may be problematic,” she said.

Any new supplemental spending will have a knock-on effect, she said. “In order to make those adjustments, then we have to essentially take it from next year’s budget.”