Revenue forecasts spell more budget cuts

By Marianne Goodland
THE COLORADO STATESMAN

Governor Bill Ritter is back to the drawing board this week to find more ways to cut the 2010-11 budget after new revenue forecasts show this year’s books are once again out of balance.

Monday, economists from the Legislative Council and Ritter’s Office of State Planning and Budgeting both agreed more cuts are needed, but were far apart on just how much. Both forecasts were presented Monday to members of the Joint Budget Committee.

The quarterly Legislative Council forecast showed the state finished the 2009-10 year about $96 million in the black, about $14 million more than was projected in the June forecast. That was the good news.

The bad news: the state’s statutory reserve at the end of 2009-10 was just 2 percent, half of what it should be to begin 2010-11. And to get the reserve back to its required 4 percent level, the state would have to cut $181.5 million out of the current year budget.

Legislative Council Chief Economist Natalie Mullis said Ritter is required to come up with a plan that would take care of half of the reserve shortfall, and the new forecast shows the state short in that goal by about $47 million. Add to that the $67.2 million that the state didn’t get in federal stimulus dollars for Medicaid, and the total shortfall grows to $110 million. It’s somewhat lessened by $59.6 million in budget reduction measures Ritter implemented in June, but even with those measures the forecast is still about $50 million short, she said.

The forecast from OSPB was worse. OSPB Director Todd Saliman said his forecast showed the 2010-11 budget out of balance by $256.9 million. And it would take another $206.9 million to get the statutory reserve back to 4 percent, he said.

The explanation for the revised numbers comes from lower-than-expected growth in consumer spending, sustained high unemployment and a slowdown due to expected changes in the housing market.

Jason Schrock of the Legislative Council told the JBC that there has been some slowing in the economy due to the end of the federal stimulus program for homebuyers, a resulting slowdown in construction, lower home values and a high inventory of unsold homes.

There have been positive indicators, he said, such as lower first-time claims for unemployment and growth in consumer spending, albeit at a lower pace than expected. Corporate profits are higher than expected, he said. Businesses have cut costs, and as business activity picked up profits have been higher. Exports to other countries also are up, especially to Asia; consumer spending is showing a sustained upward trend and businesses are beginning to spend on equipment and software. In addition, there are early signs that credit is beginning to loosen, he told the committee.

On the down side, Schrock likened the economic recovery to “a bad hangover — you’re a little slower and you’re less energetic.” Housing is usually a main ingredient in recovery, he explained. That includes construction, financial services, and purchases of furniture and other durable goods. But because of the excess supply of homes, “I don’t see it as a contributor to recovery,” Schrock said, adding that the economy also has been affected by slower tax growth and the long period of high unemployment.

According to the OSPB report, their higher shortfall figures were due in part to less growth in individual income tax collections and lower corporate income tax revenues. “Ultimately, individual income tax revenue constitutes the majority of General Fund revenue for the State and is closely linked to personal income growth,” the OSPB report said. “Colorado revenue receipts will therefore struggle to return to healthy growth rates until personal income and employment show sustained improvement.”

Ritter spokesman Evan Dreyer said after the hearing that the governor is working on another plan to balance the 2010-11 budget that will be somewhere between the $50 million current shortfall projected by Legislative Council and the $256.9 million estimated by OSPB.

Everything is on the table, he told reporters, but the list of options is getting smaller and shorter. Dreyer would not rule out furloughs for state employees or cuts to areas that have already been hit. Dreyer pointed out that 97 percent of the general fund goes to just “a handful of areas,” such as K-12, higher education, public safety, human services and health care. “Beyond that there are not a lot of places to go,” Dreyer said.

As to a timeline on when Ritter would submit a budget-balancing plan, Dreyer said the “responsible, conservative thing to do is to address the shortfall as quickly as possible. The longer you drag it out the harder it is to close the gap.” What complicates the issue, Dreyer said, is that while the governor is working the latest plan to address the shortfall, he also has to come up with the 2011-12 budget, which is due to the Joint Budget Committee on Nov. 1.

In a statement issued later in the day, Ritter said he would have a budget-balancing plan submitted by the end of October. “Today’s forecasts are a clear reminder that Colorado’s economic recovery is not nearly as robust as Coloradans want or need…Today’s forecasts mean we face even more difficult and unenviable decisions ahead to keep the budget balanced — and we’ll be making those decisions from a list of options that has grown shorter and shorter since the recession hit,” Ritter said, adding that the state would do what it can to “minimize pain and protect essential services.”

Senate Republicans called the latest revenue forecasts “a wake-up call for state lawmakers,” in a Monday statement. “It is time we identify and budget to the core functions of government to reduce the cost of government,” said Sen. Scott Renfroe, R-Greeley. Assistant Sen. Minority Leader Greg Brophy, R-Wray, added that policies of Ritter and the Legislature’s Democrats “are making things worse. Rather than prioritize state spending, the Democrats chose to continue this unsustainable path.” The state needs to “chart a new course with new priorities,” Brophy said.

Gubernatorial candidate Tom Tancredo of the American Constitution Party said in a statement Tuesday that the state could be facing a $1.5 billion budget hole before the next governor and legislature is in office. He asked Ritter to enact across-the-board reductions for the 2010-11 budget and to call a special session of the General Assembly to begin making the necessary structural changes that government must make to get state spending back into line with available revenues.

“These things have to be done soon and there is no reason to put off the inevitable,” Tancredo said. “The people of Colorado expect and deserve fiscal responsibility from their elected officials; and they can’t afford higher taxes. The only solution is to cut spending.”
Tancredo said that on his first day as governor, he would direct his cabinet to identify 10 percent across-the-board cuts. He also would call for a top-to-bottom review of state agencies “with everything on the table except the safety of our citizens and tax hikes.”

And it could be worse the following year
As bad as the new revenue numbers looked for the 2010-11 budget, the cutting will likely get a lot worse for the following year.

Mullis said her forecast only dealt with general fund dollars, not the cash funds or federal dollars the state has used to shore up the 2010-11 budget. Much of those dollars are in the form of one-time funds that will be gone in 2011-12. That means next year’s state budget could be short by as much as $1.1 billion.

The $1.1 billion shortfall begins with the statutory reserve, which at the beginning of 2011-12 is forecast to be $202 million short, a figure that is “artificially low,” according to the Legislative Council report. That $202 million does not include increased caseload growth or inflation, and if those factors are taken into account, the report said, the shortfall could grow to more than $500 million.

Then lawmakers must then take into account the disappearance of the one-time funds. Those include $96 million from Amendment 35 tobacco revenues, $363.6 million in federal stimulus funds for Medicaid, $89.2 million in federal stimulus funds for higher education, and $3.9 million in federal stimulus dollars for child welfare. Those one-time funds total $552.7 million, bringing the total shortfall to $1.1 billion.

Lawmakers also had their eyes Monday on another problem that could impact state revenues — the November general election, and three ballot measures that cut taxes and fees.

JBC Chair Rep. Mark Ferrandino, D-Denver, asked how revenues would be affected if voters approve Amendments 60 and 61 and Proposition 101 in November. Mullis said she did not have exact figures, but pointed out that Amendment 60 will lower property taxes and as a result will increase pressure on the state budget for K-12 education. Proposition 101 would enact an immediate reduction in the state’s income tax rate, which would reduce state revenues in the current fiscal year and in 2011-12, she said.

The prospect of the any or all of the three amendments passing in November has already impacted six cash-strapped rural school districts, and Monday the JBC provided $2.9 million in emergency funds to those districts.

According to a JBC analysis, the state treasurer has suspended an interest-free cash flow loan program available to school districts pending the outcome of the vote on Amendment 61, based on concerns that passage of the amendment would render the loan program unconstitutional. The JBC voted to provide the contingency funds to districts in Custer, Eagle, Gunnison, Routt and Teller counties, to cover cash flow needs through the end of November. If Amendment 61 passes, the funds would be classified as grants; if it fails, the money would have to be repaid by all of the districts except for the one in Eagle County.

The JBC also reviewed the forecasts Monday afternoon with Chief of Staff John Ziegler, who gave them an overview of the general fund situation and what they might need to cut. Based on the OSPB report, Ziegler told the JBC they would need to cut $267.2 million just to get to the minimum 2 percent statutory reserve in 2010-11, and about $407.3 million to fully fund the reserve.

In 2011-12, the amount that would have to be cut to get to the 4 percent reserve is just under $125 million. Ziegler said the difference between the OSPB and Legislative Council forecasts is that if the JBC used the OSPB figures the shortfall would be addressed sooner, and using Legislative Council numbers the shortfall would be addressed more slowly.

Marianne@coloradostatesman.com