More cuts likely in 2011-12 budget

By Marianne Goodland
THE COLORADO STATESMAN

Colorado’s current and future governor may not have to come up with any more cuts to the 2010-11 state budget, but the 2011-12 budget is another matter.

Monday, economists with the Legislative Council and the Office of State Planning and Budgeting presented their revenue forecasts, differing by about $70 million on just how much will need to be cut from the 2011-12 budget proposal submitted by Gov. Bill Ritter last month. The presentation was made to the Joint Budget Committee and the Executive Committee of the Legislative Council.

Reps. David Balmer, above, and Kent Lambert, below, raised questions on the economy at Monday’s briefing.

According to the Legislative Council forecast, the next General Assembly will need to trim another $43 million from the 2011-12 budget; the OSPB forecast says another $114 million needs to be cut. That’s on top of the already $1.1 billion trimmed by Ritter in his proposed budget for 2011-12.

And that isn’t the end of the problems that the next General Assembly will have to face: a substantial drop in property taxes means the legislature needs to come up with $157 million in general fund support for K-12 education or cut the same amount from the K-12 budget in 2011-12. That’s on top of a $260 million cut the public schools took in 2010-11.

The need for more general fund support from the state for the school districts is based in part on falling property tax revenues, due to drops in property values for both residential and commercial real estate over the past two years.

Todd Herreid of Legislative Council, who works on the School Finance Act, told legislators Monday that declining property values means that property tax revenues are about $10 million below what was forecasted three months ago, on top of another $13 million in declines in other local ownership taxes that also go to school finance. The state will have to come up with at least $23 million just to cover those 2010-11 drops, he said, or legislators will have to cut another $23 million from K-12.


And the news for 2011-12 is worse. The forecast shows another decline in local contributions of $143 million, bringing the total general fund the state will have to make up to $157 million.

Lawmakers will have to decide just how much, if any of that, will come from the State Education Fund. The SEF consists of about 7.4 percent of annual state income tax revenues, according to a JBC staff analysis. The General Assembly can appropriate monies from the SEF to cover education-related purposes, including school finance.

In 2010-11 the legislature took $427.5 million from the SEF, with 91 percent going to school finance; the rest went for categoricals such as full-day kindergarten and charter school construction.

Herreid said that fund’s beginning balance for 2011-12 is about $133 million, with expected deposits of $370 million and expected categorical payouts of $148 million. That leaves a maximum that can come from the SEF in 2011-12 at about $306 million, Herreid said.

The General Assembly then has several options, he explained. They could choose to put $157 million in general funds, to cover the shortfall, into the SEF, and after passage of the school finance act that would leave about $50 million in reserve in the SEF. If they chose to add an additional $43 million, to cover Gov. Ritter’s 2011-12 budget request for K-12, that also would leave the SEF with a $50 million reserve. But if they chose not to use any general fund dollars to cover the shortfall and rely only on the SEF, the fund would be overdrawn by $107 million, he explained. The Legislature also could chose to cut K-12 funding, which would increase the amount of money left in the SEF.

None of the funding needed for school finance is included in the projected 2011-12 $1 billion shortfall, Herreid told the executive committee.

Sen. John Morse, D-Colorado Springs, said the General Assembly ought to kick in the $157 million in general fund. “We do need to add this [money] just to keep schools stable,” he said.

The drop in property values is expected to hit residential properties the hardest, with a 10.4 percent decline projected for 2011, according to the forecast. Coupled with a 3.9 percent drop in commercial and other non-residential property tax values, the total assessed value dropped by nearly 12 percent in the last two years, or about $11.6 billion.

Hardest hit are property values in the state’s central mountain communities, which Mullis said is the result of a real estate bust for high-end and second homes. The drop in property value assessments for 2011 is projected at 23.3 percent, according to the forecast. The Denver metro and Colorado Springs markets also will experience steep declines in assessed property values, at 7 percent and 8.8 percent respectively.

There was little good news in Monday’s forecasts. Fiona Sigalla of Legislative Council said that while corporate profits are at record levels, business uncertainty is hindering hiring and investment. And while private employment is on the upswing, it isn’t enough to keep unemployment from rising, she said, and the state’s latest job figures show unemployment, at 8.6 percent, is at its highest level since 1983.

Sigalla also said the state continues to face problems with excess property inventory, too many homeowners with mortgages higher than the value of their homes, and Colorado banks stuck with larger than average debt levels tied to real estate, which means the banks have tightened their lending standards.

As a result, Colorado’s recovery from the financial crisis is slow, Sigalla said; and state economists estimate the state lags the national recovery by about six months.

Among concerns raised by Republicans in Monday’s hearing: the effect of oil and gas regulations on revenue coming from the mining industries, brought up by Assistant House Minority Leader Balmer, R-Centennial. Balmer asked if the economists had any comparison data on the impact of those regulations on the number of drilling rigs in the state. That brought out one of the few bright spots in the forecast. Chief Economist Natalie Mullis told the committee that the number of drilling rigs in Colorado, primarily in natural gas, is increasing at a faster rate than in Wyoming or New Mexico. And Jason Schrock of Legislative Council said the state expects employment in mining and logging to increase in the coming year, especially with a new pipeline about to open in Wyoming that will carry 1 million cubic feet of Colorado natural gas to California and Oregon. The economists also pointed out that severance tax revenue is likely to increase because natural gas prices are on the rise, which the forecast said shows a “strengthening in the economy.”

JBC member and Sen.-elect Kent Lambert, R-Colorado Springs, questioned that conclusion. He said that higher prices for natural gas was an indicator of a lowering value of the dollar and inflation rather than stimulating the economy, as was concluded by the economists, and asked that the economist bring back data in the future showing how they made those assumptions.

Mullis also told legislators that the revenue forecasts in December differed little from September, with revenue projections up slightly, about $45 million. As a result, the state has enough money to pay for its 2010-11 budgeted appropriations, cover a 2 percent statutory reserve and is about $137 million shy of the 4 percent reserve.

The projections for 2011-12, however, show the state will still have to deal with a $1 billion shortfall, requiring significant budget cuts, Mullis said.

Among the mixed bag of economic news is a first-ever decline in the state’s prison population. Marc Carey of the Legislative Council said the total population has declined by 1.4 percent, and is expected to drop by 2 percent in 2011-12. Next year’s total population could be down by more than 800 inmates from its high of 23,186 in 2009, according to the forecast. If the trend continues into 2013, the state’s prison population would drop by more than 2,000 inmates, or about 9.5 percent.

Carey attributed part of the decline to legislation passed by the General Assembly earlier this year. HB 10-1352 changes the penalty for certain drug-related offenses from a felony to misdemeanor and reduces sentences for other crimes, which could reduce new admissions by more than 100 in its first year and more in future years. HB 1360 allows certain parolees to go to community facilities rather than state prisons and could reduce parole violations by 150 inmates per year. HB 1376 allows inmates to get up to 12 days of earned time under certain conditions; and HB 1338 allows inmates with two or more felony convictions to be sentenced to probation, reducing the number of new prisoners by about 90 every year.

The parolee caseload, however, is projected to increase over the next three years, continuing a nearly 8.2 percent average increase per year over the past decade.

Legislators also got revenue forecasts from the Office of State Planning and Budgeting, and it had at least one big difference from the Legislative Council forecast.

In 2009, the General Assembly passed SB 09-228, which repealed the Arveschoug-Bird spending limit and replaced its 6 percent spending limit with one based on 5 percent of state cumulative personal income. Beginning in 2011-12, if personal income grows by 5 percent, the state would have to put 0.5 percent of its general fund into capital construction and transportation funding, and another 0.5 percent toward increasing the statutory reserve. The Legislative Council forecast said the state was not likely to see income growth at those levels until at least 2014-15. But the OSPB forecast expects the SB-228 trigger to hit the state budget for the first time in 2012-13, requiring the state to put $233 million into capitol construction and transportation funding and to increase the general fund reserve to 4.5 percent.

JBC member Rep. Cheri Gerou, R-Evergreen, challenged the OSPB projections regarding personal income growth. “Where are you getting these numbers? It doesn’t match anything I’ve seen!” Peter Strecker from OSPB said the forecast was devised using national projections provided by Moody’s, and not from any specific industry.

OSPB Deputy Director Lisa Esgar agreed with the Legislative Council that based on the December forecast, no further budget cutting is needed for 2010-11. But their forecast shows another $114 million will need to be cut from 2011-12, she said.

Gov. Ritter and Gov.-elect John Hickenlooper are discussing future budget balancing plans, Esgar told the committee, and if further balancing is necessary for 2011-12, those plans will be submitted to the General Assembly and JBC in February.

Marianne@coloradostatesman.com