four things to know about colorado's fiscal challenges

Four things we all need to know aboutColorado’s fiscal challenges

Wade Buchanan, the Bell Policy CenterCarol Hedges, the Colorado Fiscal Policy Institute

Henry Sobanet, Colorado Strategies

October 1, 2009


1. Ref C has lasting implications for the TABORrevenue limit

– Simply extending Referendum C will not improve the state’srevenue situation for at least the next four years.

– Even though the Ref C timeout from the TABOR revenue limitexpires at the end of this fiscal year (June 30, 2010), the newrevenue limit is not projected to restrict state spending again until2013 at the earliest.

– There is no cliff effect when the Ref C timeout ends. The revenuebase will be permanently higher.

Explanation: The next six slides show the effects of the passage of Referendum C. Thisfirst slide shows total TABOR revenues (that is, all state revenues that are subject to theTABOR restrictions) from the economic growth of the late 1990s through the economicdownturn during the first part of this decade. The drop in revenues in 2002 was due in partto broad tax cuts enacted by the Legislature as well as to the recession.

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000

$11,500

TABOR revenues

TABOR revenues, TABOR spending, and Referendum C

Source: adapted from data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

$4,500$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000

$11,500TABOR revenues

Spending under old TABOR limit



Explanation: This second slide shows the amount of these revenues that could actually bespent under the TABOR revenue limit during this period. The revenues above the blackline in 1997 through 2001 were returned to taxpayers as rebates.



$4,500$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000



Explanation: This third slide adds total TABOR revenues received through 2009 andprojected to be received through 2012. Revenues continued to recover through 2008, afterwhich the effects of the current recession caused them to drop once again.

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000


Spending under old

TABOR limit



Explanation: This fourth slide shows how the TABOR limit would have ratcheted downduring the the recessions in this decade, locking in recessionary spending levels andpreventing the recovery of state services. The revenues above the black line would havebeen rebated in 2006 through 2008, and there likely would be rebates again as early as2011. The purpose of Referendum C was to avoid this ratchet effect.

$4,500$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000





New TABOR limit

Explanation: This fifth slide shows the changes made by Referendum C: a five yeartimeout from the TABOR limit (2006 through 2010), followed by the imposition of a newrevenue limit based on the highest level of revenues reached during those five years. Dueto the recession, the highest level of revenues was reached in 2008, the third year of thetimeout. So when the new limit is imposed in 2011, it will be based on population growthplus inflation since 2008.

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000


Spending under old

TABOR limit



New TABOR limit

Explanation: This final slide compares what would have happened had Ref C failed with what hasand will happen because it passed. The ratchet effect was avoided and all TABOR revenues wereused to restore state services rather than being rebated. Under current projections, the “five-yeartimeout” will actually last at least eight years before the new limit has any effect on spending. Andwhen the new limit does start to affect spending (most likely in 2014), it will still allow the state tospend approximately $2 billion more each year than the old TABOR limit would have allowed.

Explanation: The Looking Forward June 2009 report (by the Bell, Colorado FiscalPolicy Institute and Colorado Children’s Campaign) extends the revenueprojections to FY 2012-13, and suggest that revenues will not be constricted by thenew TABOR limit until at least FY 2013-14.

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

FY 2008 -09 FY 2009 -10 FY 2010 -11 FY 2011 -12 FY 2012 -13

New TABOR limit

Projected TABOR revenues

$11,221 m

$9,011 m$10,264 m

$9487 m

$8,850 m

$11,536 m$11,060 m

$10,700 m


2. Constitutional constraints work together toreduce Legislative flexibility

– The main effect of Amendment 23 has been to provide the statefunds to backfill for local property tax revenues, which havestagnated due to the interaction of the Gallagher and TABORamendments.


• Gallagher Amendment (1982) ensures overall share of statewideproperty tax revenues paid by homeowners remains at roughly 45%(with commercial owners paying 55%). Since 1982, total value ofresidential property in Colorado has grown three times faster thantotal value of commercial property. To maintain the 45-55 split, theassessment rate for residential property has been cut repeatedlywhile the rate for commercial property has remained the same.

• TABOR Amendment (1992), among other things, limits revenuesfor all state and local governments and requires voter approval fortax increases. Local governments could no longer float mill levies tomaintain property tax revenues when Gallagher forced a reduction inresidential assessment rates.

• Amendment 23 (2000) requires per-pupil funding for K-12 educationto increase by inflation plus 1 percent each year through 2011, andby inflation each year after that. The state is responsible for fundingwhatever cannot be funded through local property tax revenues.

Statewide residential assessment rates declined repeatedlyafter the passage of the Gallagher Amendment in 1982.

Source: from presentation by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

• Gallagher caused residential assessment rates to decline and the1994 School Finance Act required school districts to cope withTABOR surpluses by dropping mill levies.

• If property taxes in 2008 were equal to the same percentage ofproperty value as they were in 1995, the local contribution to schoolfunding would have been $3.1 billion higher annually (according toanalysis by Augenblick, Palaich and Associates, Inc.).

• In 2008, the total state share of the school finance act was $3.15billion.

Explanation: The interaction of the Gallagher Amendment, TABOR, the SchoolFinance Act of 1994 resulted in a significant shift away from local funding andtoward state funding for public schools. The main effect of Amendment 23 hasbeen to fund this shift by backfilling for the declining local share.

Sources: Legislative Council Staff, School Finance in Colorado, January 2009. Colo. Children’sCampaign, Understanding Mill Levy Stabilization In Colorado, April 2007.


3. State spending is low and constrained

– State spending in Colorado is well controlled. It is near historiclows when measured against the overall economy, and it isamong the very lowest of all states.

– But Colorado does have a spending “problem.” It is the lack offlexibility state leaders have in making budget decisions.Amendment 23 and the Gallagher Amendment havesignificantly decreased this flexibility.

– This lack of flexibility has meant that Higher Education andHuman Services have borne disproportionately large shares ofoverall budget cuts.

Change in total General Fund revenues (blue) and combined K-12 Education and Medicaid spending (red) from FY 2001 to FY2008 and from FY 2001 to FY 2009. Even when revenuesdropped, spending in these areas had to continue to grow.

Source: Henry Sobanet, Colorado Strategies.

Sources: Legislative Council Staff, School Finance in Colorado, January2009. Colo. Children’s Campaign, Understanding Mill Levy Stabilization InColorado, April 2007.

Source: State Higher Education Executive Officers (SHEEO), StateHigher Education Finance FY 2008 final report.

Explanation: As “mandates” for K-12 Education (Amendment 23 and Gallagher), Medicaid (minimumfederal mandates and health care inflation) and Corrections (strict sentencing laws) drive increased statespending in these areas, the less protected departments have borne the brunt of stagnating revenues. Forinstance, as the state has funded more of the K-12 budget, it has been able to fund less and less of the HigherEducation budget. College students and their families have picked up the difference through tuition.


4. State revenues are inadequate and volatile

– The state’s primary fiscal problem is a revenue problem.

– Even without the current economic downturn, long-term trendsshow that state revenues are not keeping pace with the overalleconomy and will not be adequate to sustain existing publicservices, let alone any reform efforts.

– The TABOR limit and Amendment 23 are not the major culpritsin this problem. Our tax structure was designed in the mid-20th

Century and is not adequate to today’s needs.

Gross GF Revenues

In 2009 dollars

Stagnant General Fund RevenuesExplanation: General Fund revenues have gone up and down with the economy during thedecade. Gross revenues in actual dollars, represented by the green line, show a slight upwardtrend through the period. The blue line reflects these revenues adjusted for inflation (constant2009 dollars), and shows a flat or even a slight downward trend. Neither line reflects anyadjustment for case loads, which have increased significantly during the period.

Source: Calculations by the Bell Policy Center based on Legislative Council June 2009 revenue forecast.

General Fund Revenues and Expenditures as aPercentage of Total State Personal Income

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

Actual GF Expenditures

TABOR Rebates

Expenditures without Ref C

Projected ActualExpenditures

3.9%

4.0%

3.2%

3.6%

4.1%

3.2%

3.6%

Source: Looking Forward project, the Bell Policy Center, the Colorado Fiscal Policy institute and the Colorado Children’s Campaign.

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

Source: CDOT data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

Explanation: One example of a revenue source that has not kept pace with need is the state gasoline tax.Because it is assessed on a per-gallon rather than a price basis, it does not keep pace with inflation as atraditional sales tax does. And as vehicles become more fuel-efficient, the we are driving many more mileson each dollar of gas tax we pay.


Conclusion

– The long-term fiscal health of Colorado, and of the critical publicsystems like our schools, colleges and roads, requires changes that willresult in increased and more stable revenues.

– There is no consensus yet on the level of increase that is required. Thatshould be determined through an open process that reflectsColoradans’ aspirations for the kind of state they want to live in.

– A comprehensive long-term solution should maximize legislativeflexibility to make budget choices based on existing challenges andpriorities.