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The dome of the Colorado Capitol on July 26, 2019. (Jesse Paul, The Colorado Sun)

In early February, the governor’s office and state treasurer issued a warning to lawmakers: Colorado is the only state in the nation without a rainy day fund to buffer against a recession. Now is the time the state should save for a downturn, they said, before it’s too late.


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“We all know that the economy, at some point, may turn,” Treasurer Dave Young said at the time. “It usually does. We don’t know when.”

The Feb. 6 presentation to the legislative budget committee made no mention of the coronavirus. But only weeks later, the spread of COVID-19 became a pandemic that crippled the economy and made the premonition about Colorado’s weak fiscal safety net all too real.

“No one could have imagined at that point in February that we were going to be in this kind of economic and health crisis today,” Young said in a recent interview. “It didn’t give us enough time to actually enact the plan and start to carry it out.”

Even if a pandemic is difficult to imagine, the state’s lack of preparation for an economic slump is entirely predictable. The warnings about the state’s limited savings date back at least a decade to the end of the Great Recession, according to a series of interviews and review of legislative documents. 

The General Assembly began to set aside more money in the reserves as the economy rebounded in recent years, but the notion of a permanent savings account never became a priority — even as cautions about a cyclical downturn grew louder. Lawmakers focused instead on backfilling losses from the recession, meeting the needs of a growing state and other policy initiatives.

Now, the legislature faces the prospect of major spending cuts in the roughly $30 billion budget and a retreat from recent spending priorities on suicide prevention, school safety, opioid treatment and conservation programs.

The reserves “are going to be nowhere near adequate,” Sen. Dominick Moreno, vice chairman of the Joint Budget Committee, said in a recent interview. “We have close to $900 million in reserves, which actually ends up covering a very small amount of operations of state government.”

MORE: With Colorado’s budget in tatters, advocates worry the public safety net will further fray

When it comes to reserves, each dollar saved is one less that lawmakers can spend on their top initiatives — whether a new education initiative, a boost in spending to help vulnerable populations or an incentive program to boost job creation. And the lobbying from various interests on the budget is fierce.

Young, a former state lawmaker, told the budget committee in February that he knows the demands on them. “I remember sitting where you sit and understand the pressures you’re under,” the Democrat said. “There are a lot of people who say, ‘Rainy day fund, really? Look out the window — it’s raining right now.’ I get that.”

But he implored the budget writers to think of the consequences if the state doesn’t save enough money. “When the economy turns, those that will be hardest hit are counting on us to be there for them,” he told them. “And if our budget is not a sustainable budget that can withstand the downturns because we haven’t prepared well, we are going to end up not being able to help them.”

The budget reserve is less than half the impact of either recent recession

The state’s current budget reserve requires lawmakers to set aside a portion of discretionary spending from what is known as the general fund. It represents a key tool for lawmakers to withstand an economic slide. 

In the 2001-02 fiscal year, amid a recession caused by the dot-com bubble, lawmakers used every penny in the 4% reserve at the time to help balance the budget, draining it to zero. And in the Great Recession, lawmakers lowered the reserve to 2% from 4% and it remained at that level for two more years.

This time, the reserve is larger than ever at 7.25% lifted by gradual increases since 2012, but leaders knew all along it wouldn’t be enough to weather the next storm. 

Tax revenue dropped by 16% over two years in each of the prior two recessions, state figures show. And in the immediate aftermath of each, Colorado had at least $3 billion less in discretionary spending over a four-year period, according to the governor’s budget office. Not until this year did per-person state spending, adjusted for inflation, rebound to the peak before the Great Recession — a full 11 years later. 

In October, Moody’s Analytics submitted state budgets to stress tests with two scenarios for a recession, one moderate and one severe. In both, Colorado didn’t have enough reserves available and nationally ranked toward the back of the pack. To be ready, the firm suggested the state’s reserve needed to be between 11% and 15% of discretionary spending. The limited savings also negatively impacted the state’s credit rating.

This time, the financial hit appears far worse than prior recessions and analysts are preparing for even deeper cuts, possibly as much as 20%. A pair of new economic forecasts are expected Tuesday, but it’s already apparent that the state’s cash reserves won’t close the gap.

On April 30, the Polis administration sent lawmakers a letter stating that it projects the reserve is less than half the required 7.25% because of declining revenues. The revelation led to  immediate spending cuts and more may be needed when the new forecasts are finalized.

MORE: Colorado lawmakers are looking at how to close a $3 billion budget shortfall. Here’s the roadmap.

Colorado’s dismal rankings lead to push for a rainy day fund 

Colorado’s total set aside remains below the national average of 7.6%, according to the National Association of State Budget Officers, with only 10 states showing smaller reserves. When Colorado’s volatile tax revenues are factored into the picture, it ranks as the highest risk state in the nation.

Moreover, the state’s reserves are not the same as a rainy day fund. These separate accounts — in place or being implemented in 49 states, according to the governor’s office — are considered more secure because of stringent rules that dictate when money is added or withdrawn. In other states, the money is often diverted to savings based on certain benchmarks, such as personal income growth, or a dedicated stream of revenue, such as levies on oil and gas extraction or capital gains taxes.

In Colorado, the general fund reserves essentially represent money left unspent from the bank account, rather than dollars moved to a vault for safekeeping.

The dismal assessment — and the need for a more concerted savings plan — is the core of what the governor’s office and treasurer presented to lawmakers in February. 

Lauren Larson, the governor’s budget director, said the numbers show that the size of the reserves — even when combined with other unspent cash in different accounts — may help the state “squeak through the first year” of a downturn. 

But, she added, “the second year starts to feel … painful, by the third and even fourth years things are really painful,” when the reserve runs dry.

MORE: Colorado lawmakers began slashing the budget and state employees are bracing for the worst

The hour-long pitch represented the most concerted effort in recent years to improve Colorado’s fiscal sustainability, but it certainly didn’t represent the first push.

In 2018, then-Gov. John Hickenlooper asked lawmakers to boost  the reserve to 8%, a $90 million increase his final budget proposal. “Every dollar we neglect to save when times are good means we come up a dollar short in the next economic downturn — a dollar short for state troopers, fire fighting and health care,” he wrote to lawmakers.

His successor, Jared Polis, kept the request for a larger reserve in his first budget plan presented in early 2019, but the idea of saving contradicted the new governor’s demand for millions in new spending on full-day kindergarten and a reinsurance program to lower health care costs in certain areas.

Polis reiterated his request in his latest budget proposal for the budget year that begins July 1. He asked lawmakers for a $118 million-plus package that included an increase in the reserve to 7.5% of state discretionary spending and the creation of a permanent rainy day fund “for responding to and recovering from a downturn.” But once again, he paired the savings with additional spending for his key initiatives, which undercut his argument in the minds of lawmakers.

The new budget stabilization fund the administration and treasurer’s office proposed to lawmakers left open the details on how it would save money, but the goal was to put the savings on autopilot and make it harder to reverse. The proposal also included restrictions to phase spending from the account over three years of a downturn. 

“This is not just parking some needed funds, but organizational discipline — some guardrails to help guide us … if we need to make dramatic decisions about how to shore up our budget in certain ways,” Young told lawmakers. 

MORE: Colorado’s coronavirus budget crunch is putting Democratic accomplishments at risk

TABOR and immediate needs made it difficult to save money 

The concept of a rainy day fund met with interest — and initial skepticism — from lawmakers at the February hearing. Much of the concern reflected the debate a decade earlier that scuttled the discussion.

Sen. Bob Rankin, a Republican budget writer from Carbondale, suggested the state’s low ranking compared to other states doesn’t factor in numerous other accounts scattered throughout the budget that act as reserves, such as extra dollars in the state education fund. “We are making an argument that we are so far down, but is that really true when we take all our reserves together?”

Democratic lawmakers said the state’s unique constitutional spending requirements — which both limit spending and require certain increases each year — handcuff lawmakers when it comes to saving money. 

MORE: What you need to know about TABOR, Gallagher, Amendment 23 and the hidden forces that constrain spending in Colorado

The Taxpayer’s Bill of Rights, which caps revenue growth at population plus inflation increases, forced the state to issue refunds three times with the first in the 2014-15 fiscal year. The most recent one, which taxpayers received this year from their 2019 taxes, amounted to $428.5 million, in part through a temporary income tax deduction.

State Rep. Daneya Esgar, a Pueblo Democrat and the chairwoman of the budget committee, questioned whether the comparison to other states with rainy day funds is “really an inequitable assessment when Colorado has the limitations we have.”

“Other states can afford to bank a reserve. Other states don’t have the obligations we have,” she added. “To put us on a graph that shows how far down we are compared to other states I don’t know is necessarily fair.”

Looking back on the hearing, lawmakers now largely lamented the cruel timing. “We all felt there was time to slowly build up the reserves,” Rankin said.

The topic of creating a rainy day fund is now on a back burner given the fact the state is cutting spending and not saving money right now. But the governor’s office and treasurer remain committed to the idea. The current situation “actually puts a pretty big exclamation point on the fact it’s important to do,” Young said in an interview.

Rankin and other budget writers said it’s a topic lawmakers in the future will need to remember when the economic situation improves. But it’s not the top priority for now. 

“If the house is on fire, you don’t spend time on how to save it in the future,” said Moreno, a Democrat from Commerce City. “We are not losing sight of the conversation, but we also are not not losing sight of the situation we are in.”

John Frank is a former Colorado Sun staff writer. He left the publication in January 2021.