Four Things To Know About Colorado's Fiscal Challenges

Four things we all need to know about Colorado’s fiscal challenges Wade Buchanan, the Bell Policy Center Carol Hedges, the Colorado Fiscal Policy Institute Henry Sobanet, Colorado Strategies October 1, 2009

Four things we all need to know about Colorado’s fiscal challenges 1. Ref C has lasting implications for the TABOR revenue limit – Simply extending Referendum C will not improve the state’s revenue situation for at least the next four years. – Even though the Ref C timeout from the TABOR revenue limit expires at the end of this fiscal year (June 30, 2010), the new revenue limit is not projected to restrict state spending again until 2013 at the earliest. – There is no cliff effect when the Ref C timeout ends. The revenue base will be permanently higher.

Explanation: The next six slides show the effects of the passage of Referendum C. This first slide shows total TABOR revenues (that is, all state revenues that are subject to the TABOR restrictions) from the economic growth of the late 1990s through the economic downturn during the first part of this decade. The drop in revenues in 2002 was due in part to broad tax cuts enacted by the Legislature as well as to the recession. TABOR revenues, TABOR spending, and Referendum C $11,500 $11,000 $10,500 TABOR revenues $10,000 $9,500 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 Source: adapted from data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

Explanation: This second slide shows the amount of these revenues that could actually be spent under the TABOR revenue limit during this period. The revenues above the black line in 1997 through 2001 were returned to taxpayers as rebates. TABOR revenues, TABOR spending, and Referendum C $11,500 $11,000 TABOR revenues $10,500 Spending under old $10,000 TABOR limit $9,500 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 Source: adapted from data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

Explanation: This third slide adds total TABOR revenues received through 2009 and projected to be received through 2012. Revenues continued to recover through 2008, after which the effects of the current recession caused them to drop once again. TABOR revenues, TABOR spending, and Referendum C $11,500 $11,000 TABOR revenues $10,500 Spending under old $10,000 TABOR limit $9,500 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 Source: adapted from data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

Explanation: This fourth slide shows how the TABOR limit would have ratcheted down during the the recessions in this decade, locking in recessionary spending levels and preventing the recovery of state services. The revenues above the black line would have been rebated in 2006 through 2008, and there likely would be rebates again as early as 2011. The purpose of Referendum C was to avoid this ratchet effect. TABOR revenues, TABOR spending, and Referendum C $11,500 $11,000 TABOR revenues $10,500 Spending under old $10,000 TABOR limit $9,500 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 Source: adapted from data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

Explanation: This fifth slide shows the changes made by Referendum C: a five year timeout from the TABOR limit (2006 through 2010), followed by the imposition of a new revenue limit based on the highest level of revenues reached during those five years. Due to the recession, the highest level of revenues was reached in 2008, the third year of the timeout. So when the new limit is imposed in 2011, it will be based on population growth plus inflation since 2008. TABOR revenues, TABOR spending, and Referendum C $11,500 $11,000 TABOR revenues New TABOR limit $10,500 Spending under old $10,000 TABOR limit $9,500 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 Source: adapted from data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

Explanation: This final slide compares what would have happened had Ref C failed with what has and will happen because it passed. The ratchet effect was avoided and all TABOR revenues were used to restore state services rather than being rebated. Under current projections, the “five-year timeout” will actually last at least eight years before the new limit has any effect on spending. And when the new limit does start to affect spending (most likely in 2014), it will still allow the state to spend approximately $2 billion more each year than the old TABOR limit would have allowed. TABOR revenues, TABOR spending, and Referendum C $11,500 $11,000 TABOR revenues New TABOR limit $10,500 Spending under old $10,000 TABOR limit $9,500 $9,000 $8,500 $8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 Source: adapted from data presented by Legislative Council Staff to the Long-term Fiscal Stability Commission, July 2009.

Explanation: The Looking Forward June 2009 report (by the Bell, Colorado Fiscal Policy Institute and Colorado Children’s Campaign) extends the revenue projections to FY 2012-13, and suggest that revenues will not be constricted by the new TABOR limit until at least FY 2013-14. $12,000 New TABOR limit $11,536 m $11,060 m $10,700 m $11,000 $11,221 m $10,000 $10,264 m $9,011 m $9487 m $9,000 $8,850 m Projected TABOR revenues $8,000 $7,000 FY 2008 -09 FY 2009 -10 FY 2010 -11 FY 2011 -12 FY 2012 -13

Four things we all need to know about Colorado’s fiscal challenges 2. Constitutional constraints work together to reduce Legislative flexibility – The main effect of Amendment 23 has been to provide the state funds to backfill for local property tax revenues, which have stagnated due to the interaction of the Gallagher and TABOR amendments.

Four things we all need to know about Colorado’s fiscal challenges • Gallagher Amendment (1982) ensures overall share of statewide property tax revenues paid by homeowners remains at roughly 45% (with commercial owners paying 55%). Since 1982, total value of residential property in Colorado has grown three times faster than total value of commercial property. To maintain the 45-55 split, the assessment rate for residential property has been cut repeatedly while the rate for commercial property has remained the same. • TABOR Amendment (1992), among other things, limits revenues for all state and local governments and requires voter approval for tax increases. Local governments could no longer float mill levies to maintain property tax revenues when Gallagher forced a reduction in residential assessment rates. • Amendment 23 (2000) requires per-pupil funding for K-12 education to increase by inflation plus 1 percent each year through 2011, and by inflation each year after that. The state is responsible for funding whatever cannot be funded through local property tax revenues.

Statewide residential assessment rates declined repeatedly after 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 the 1994 School Finance Act required school districts to cope with TABOR surpluses by dropping mill levies. • If property taxes in 2008 were equal to the same percentage of property value as they were in 1995, the local contribution to school funding would have been $3.1 billion higher annually (according to analysis by Augenblick, Palaich and Associates, Inc.). • In 2008, the total state share of the school finance act was $3.15 billion.

Explanation: The interaction of the Gallagher Amendment, TABOR, the School Finance Act of 1994 resulted in a significant shift away from local funding and toward state funding for public schools. The main effect of Amendment 23 has been to fund this shift by backfilling for the declining local share. Sources: Legislative Council Staff, School Finance in Colorado, January 2009. Colo. Children’s Campaign, Understanding Mill Levy Stabilization In Colorado, April 2007.

Four things we all need to know about Colorado’s fiscal challenges 3. State spending is low and constrained – State spending in Colorado is well controlled. It is near historic lows when measured against the overall economy, and it is among the very lowest of all states. – But Colorado does have a spending “problem.” It is the lack of flexibility state leaders have in making budget decisions. Amendment 23 and the Gallagher Amendment have significantly decreased this flexibility. – This lack of flexibility has meant that Higher Education and Human Services have borne disproportionately large shares of overall budget cuts.

Change in total General Fund revenues (blue) and combined K- 12 Education and Medicaid spending (red) from FY 2001 to FY 2008 and from FY 2001 to FY 2009. Even when revenues dropped, spending in these areas had to continue to grow. Source: Henry Sobanet, Colorado Strategies.

Explanation: As “mandates” for K-12 Education (Amendment 23 and Gallagher), Medicaid (minimum federal mandates and health care inflation) and Corrections (strict sentencing laws) drive increased state spending in these areas, the less protected departments have borne the brunt of stagnating revenues. For instance, as the state has funded more of the K-12 budget, it has been able to fund less and less of the Higher Education budget. College students and their families have picked up the difference through tuition. Sources: Legislative Council Staff, School Finance in Colorado, January Source: State Higher Education Executive Officers (SHEEO), State 2009. Colo. Children’s Campaign, Understanding Mill Levy Stabilization In Higher Education Finance FY 2008 final report. Colorado, April 2007.

Four things we all need to know about Colorado’s fiscal challenges 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 trends show that state revenues are not keeping pace with the overall economy and will not be adequate to sustain existing public services, let alone any reform efforts. – The TABOR limit and Amendment 23 are not the major culprits in this problem. Our tax structure was designed in the mid-20th Century and is not adequate to today’s needs.

Stagnant General Fund Revenues Explanation: General Fund revenues have gone up and down with the economy during the decade. Gross revenues in actual dollars, represented by the green line, show a slight upward trend through the period. The blue line reflects these revenues adjusted for inflation (constant 2009 dollars), and shows a flat or even a slight downward trend. Neither line reflects any adjustment for case loads, which have increased significantly during the period. Gross GF Revenues In 2009 dollars Source: Calculations by the Bell Policy Center based on Legislative Council June 2009 revenue forecast.

General Fund Revenues and Expenditures as a Percentage of Total State Personal Income 5.5% TABOR Rebates 5.0% Actual GF Expenditures Projected Actual Expenditures 4.5% 4.0% 4.0% 4.1% 3.9% 3.6% 3.5% 3.6% 3.0% 3.2% 3.2% 2.5% Expenditures without Ref C 2.0% Source: Looking Forward project, the Bell Policy Center, the Colorado Fiscal Policy institute and the Colorado Children’s Campaign.

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 a traditional sales tax does. And as vehicles become more fuel-efficient, the we are driving many more miles on each dollar of gas tax we pay. 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.

Four things we all need to know about Colorado’s fiscal challenges Conclusion – The long-term fiscal health of Colorado, and of the critical public systems like our schools, colleges and roads, requires changes that will result in increased and more stable revenues. – There is no consensus yet on the level of increase that is required. That should be determined through an open process that reflects Coloradans’ aspirations for the kind of state they want to live in. – A comprehensive long-term solution should maximize legislative flexibility to make budget choices based on existing challenges and priorities.

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Four Things To Know About Colorado's Fiscal Challenges

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Four Things To Know About Colorado’s Fiscal Challenges — Presentation Transcript