A pair of new reports shows Colorado lawmakers are flush with cash to spend in the next year, but an economic slowdown on the horizon is generating calls for a more cautious approach.
The paradox led Democratic Gov. Jared Polis and lawmakers from his own party to reach conflicting conclusions Friday about how to spend an estimated $30 billion for the budget year that begins July 1.
The governor’s office presented the rosier forecast that suggested new revenues would exceed the cost of Polis’ budget proposal and cover the $227 million-plus annual price tag of statewide full-day kindergarten, his top legislative priority.
“Our economy remains strong and the legislature will have $29.6 million more than anticipated to invest,” Polis said in a statement. “My administration is focused on supporting Colorado families by relieving them from financial stress and free full-day kindergarten and lowering health care costs do just that.”
But the top budget writer remains unconvinced, pointing to a cautious forecast from legislative economists that showed lower revenue projections.
“I think what the forecasts have shown today is we need to take a pause on very large fiscal commitments to the state budget,” said state Sen. Dominick Moreno, the chairman of the Joint Budget Committee and a Commerce City Democrat. “We just don’t know what the future years are going to look like.”
The new figures from the March revenue forecasts form the foundation of the state budget bill that lawmakers plan to finalize next week ahead of introduction in the Senate. The more conservative legislative forecast is expected to govern the bill.
Here’s a look at the five numbers at the center of the debate and why they matter:
Colorado’s real gross domestic product grew a “healthy” 3.1 percent in the third quarter of 2018 from the same period a year ago.
But even as economic activity is expected to remain positive, a decline in the rate is expected as a labor shortage and global slowdown impact Colorado. And the forecast warned about a “rising risk of recession.”
“Economic activity has slowed over the course of the last four months,” Kate Watkins, the chief economist for the nonpartisan Legislative Council, said in a presentation to lawmakers. “We are now shifting to a lower gear in economic activity.”
The outlook led legislative fiscal analysts to project smaller increases in state tax revenues compared to the December forecast with a $260 million drop for the current budget year and $249 million reduction for fiscal year 2019-20.
The overall growth in state revenues for discretionary spending is estimated at 4 percent for the current budget year with a decline to 2.8 percent in fiscal year 2020-21.
One of the factors leading to lower economic projections are tariffs put in place by the Trump administration and the threat of a trade war, analysts reported.
Colorado exports fell 7.1 percent in the fourth quarter of 2018 compared to the same period a year ago, a reduction attributed to the tariffs. The largest declines occurred in industrial and electrical equipment, but agricultural goods also contributed.
Rep. Chris Hansen, a budget writer and Denver Democrat, is concerned it will be only worse in coming months and pull down the state’s economy in key sectors.
“A poorly targeted federal tax change and pointless trade wars and tariffs have manufactured uncertainty in the economy and are beginning to drag down hardworking families,” he said in a statement.
Colorado lawmakers will have $1.18 billion in new money to spend or save in the next budget year, according to the legislative analysis. It represents a 9.5 percent increase from current spending levels, but lawmakers were quick to caution that it’s not a true representation of the budget picture.
Moreno, the chief budget writer, said it’s “actually a false number” because it doesn’t take into account inflationary increases from the current budget year and constitutionally required spending on education.
“We have mandated costs. We have costs by law that we are required to cover,” he explained. “That number could end up being a lot less once you factor all that in.”
Still, the sum is expected to become a political talking point for Republicans who are critical of Democratic efforts to find new revenue through changes to the state’s spending caps under the Taxpayer’s Bill of Rights. And it’s a rallying cry for other interest groups who want a piece of the money in this year’s budget.
This is the number that Polis wants to highlight from the budget forecasts. The governor’s office forecast — which is not expected to serve as the base for the budget — shows $29.6 million in additional discretionary revenue after all its priorities are included, including full-day kindergarten, a cap on college tuition rates, expanded preschool enrollment, health care measures and an increase in the state reserve fund.
But the education projections were immediately met with skepticism from the budget committee. “I see incredulity,” Lauren Larson, the governor’s budget director, said as she showed lawmakers how they could pay for full-day kindergarten.
From the beginning, budget writers have expressed concern about the long-term cost of Polis’ plan and cautioned that other priority areas also need money. Democrats are considering a plan to gradually cover the cost, but the governor is pushing back.
“Our concerns have a lot to do with the sustainability with these moves,” said Sen. Bob Rankin, a budget writer and Carbondale Republican. “Once we make that obligation to full-day K, we do not want to have to take it back.”
The wildcard in the economic forecasts is the potential for TABOR refunds. The state’s revenues are expected to exceed the spending caps by $18.5 million, triggering a refund that totals $39.8 million when an outstanding obligation from prior years is added.
Colorado taxpayers, however, won’t see a check. The entire amount will go to county governments to cover a property tax break for seniors and disabled veterans, which is first on the list of how TABOR refunds are made. The legislative forecast projects a $64.8 million refund in the next budget year, but again, it will all go toward property tax exemptions.
The governor’s forecast is significantly different. It shows the same TABOR refund in the current year, but higher revenue estimates lead to much bigger givebacks in the future — $168 million in the next fiscal year, $287 million in fiscal year 2019-20 and $499 million the following year.
All taxpayers would see modest tax refund checks in future tax years if the projections are correct.
Even though the forecasts are different, legislative economists said both are within forecast error margins.
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