Financing Colorado’s Future – An Analysis of the Fiscal Sustainability of State

Government

When did the Great Recession Become the Least Interesting Problem Facing Colorado?

Source: CBEF state macroeconomic model

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Employment Recovery

Actual June 2011 Forecast 30 Year Trend

History Forecast

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Perc

enta

ge G

row

th

Fiscal Year

Recovery Will Bring Revenue Growth

June Forecast

30 Year Trend

But Colorado’s Structural Budget Problems Will Worsen

82.5%

120.3%

213.9%

0%

50%

100%

150%

200%

250%

Cumulative Growth Rates From FY 11-12 through FY 24-25 for General and State Education Fund Revenues and Departments of Education and Health Care Policy and Financing

Net General and State Ed Fund Revenue Department of Education Health Care Policy and Financing

$0.0

$2,000.0

$4,000.0

$6,000.0

$8,000.0

$10,000.0

$12,000.0

$14,000.0

$16,000.0

$18,000.0

$20,000.0

Dol

lars

in M

illio

ns

Fiscal Year

Due to Medicaid and K-12 Education Forecasts, the Budget Picture Worsens

Comparison of General and State Education Fund Revenue with Expenditures FY 11-12 through FY 2024-25

Other Agencies

SB 228

Big 3

GF+SEF Revenue

Diagnosis: What is Happening?

Structural and demographic changes will affect revenue Medicaid growing at 1.7 times revenue Age Demographics Medical Inflation

System being used to pay for is K-12 failing the state Leakage in local property tax

Colorado is Aging

0 to 2435.08%

25 to 4427.52%

45 to 6426.91%

65 to 9910.49%

2010

0 to 2433.98%

25 to 4426.12%

45 to 6422.81%

65 to 9917.09%

2025

Source: Colorado Demographer’s Office

Aging Affects Revenue

Source: Consumer Expenditure Survey, BLS

$229.83

$397.14 $413.55

$280.05

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

Under 25 yrs 25-44 yrs 45-64 yrs 65+ yrs

Patterns of Household Contribution to the Sales Tax Baseby Age of Householder

The Economy is Changing

Source: Moody’s Economy.com

54.33%

23.29%

45.67%

76.71%

41.00%

53.70%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

Personal Consumption Expenditures for Goods and Services as a Share of Total: U.S. History and Forecast

Goods Share Services Share Services Less Health Care Share

Aged Care Represents Disproportionate Share of Medicaid Cost (FY 10 Data)

Colorado is About to Become an Older State

Source: Colorado Demographer’s Office

And Aged Care will Drive Medicaid Costs

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

$7,000,000,000

State HCPF Expenditures by Division FY 2011-12 to FY 2024-25

DHS Other Programs

DHS DD Programs

Other Medical Services

Indigent Care

Executive Director

Mental Health

Medical Service Premiums

The State Share of School Finance will Continue to Grow

62.90%

70.19%

58.00%

60.00%

62.00%

64.00%

66.00%

68.00%

70.00%

72.00%

Forecast State Share with Levy Freeze

K-12 Local and State Shares: The Problem Illustrated

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

$7,000,000,000

$8,000,000,000

$9,000,000,000

Expe

ndit

ures

Fiscal Year

A Full Departmental Forecast of CDE Adds Slightly to K-12 Funding Costs

CDE General and State Education Fund Forecast

Management and Administration

School for the Deaf and Blind

Library Programs

Other School Assistance Pgms

Categorical Programs

School Finance

Illustration: Can the Structural Imbalance be Addressed with Cuts?

Objectives of a Package of Cuts Protect receipt of federal funds Health Care Policy and Financing Human Services

Fund the constitutionally created offices within the executive branch as well as the other 2 branches Attorney General Governor State Treasurer

Fund the Department of Corrections

Illustration: A Cut Scenario

Although K-12 per pupil base funding is protected by Amendment 23, it is thought that formula “factors” can be cut.

Factors add about 25% to adjust for variances among districts in: Enrollment size Cost of living Proportion of at-risk students

Although 25% is added by the factors, only about 20% can be cut without affecting the per pupil base of some districts

Illustration: Cut Methodology Absorb first round of cuts by cutting up to the maximum in K-12 Once K-12 cuts are maximized, cut the remaining 10 departments to

balance the budget (programs in parentheses are the largest funded by the General Fund within each department) Agriculture (Agricultural Services Division) Higher education (College Opportunity Fund) Local Affairs (Divisions of Local Government and Housing) Military and Veterans Affairs (maintenance and utility costs for 15 armories) Natural Resources (Division of Water Resources) Personnel and Administration (Division of Accounts and Control) Public Health and Environment (Prevention and Disease Control and

Epidemiology Divisions) Public Safety (Division of Criminal Justice, CBI, Colorado State Patrol) Regulatory Agencies (Civil Rights Division) Revenue (Taxation Business Group)

$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

$14,000,000,000

$16,000,000,000

$18,000,000,000

$20,000,000,000

Gen

eral

Fun

d Re

venu

e an

d Ex

pend

itur

es

Fiscal Year

This is How Such a Package of Cuts Would Look

SB 228

Other

Dept of Education

Const Branches/Offices

DHS

Health Care Pol & Fin

Corrections

Net GF & SEF Revenue

Maximum Negative Factor for K-12

0.60%

72.73%

1.21%

0.63%

2.73%

0.59%

3.20%

9.64%

0.19%

8.48%

Distribution of “Other”

Higher Education

Agriculture

Revenue

RegulatoryAgencies

Public SafetyPublic Health

Personnel

Natural Resources

Military &Veterans Affairs

Local Affairs

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

Cum

ulat

ive

Perc

enta

ge In

crea

se

Fiscal Year

Options for Addressing the Imbalance with Revenue

Total Expenditures (Incl SB 228 Transfers)

Baseline Revenue Forecast (GF + SEF)

Double Sin Taxes

Eliminate Exemption for Food at Home (no offset)

Restore Sales Tax Rate to 3%

Restore Income Tax Rate to 5% (Indiv and Corporate)

Eliminate Exemption for Home Energy (no offset)

Extend Sales Tax to Personal Services (at 2.9% rate)

Graduated Income Tax, Individual Income Tax Only

Statewide Property Tax

Illustration: Addressing the Structural Imbalance with Revenue

Objectives of a package Revenue sources that grow in step with future spending

pressures (adequacy) Revenues produced sufficient to fill the gap (capacity) Revenue sources that reflect the structure of the economy

(efficiency) Revenue sources that are balanced A balanced package would contain a mix of sources in which

the strengths of each compensate for the weakness of others Mitigate volatility Address structural issues Maintain or enhance the fairness of the tax system

Competitive with other states

Illustration: Revenue Methodology

Elements of a Package Add personal services to the sales tax base Levy property taxes for schools with a statewide mill levy Phase statewide levy in for full implementation by FY 2024-25 Reduce state share from 63.2% to 60% over the phase-in period

Restore four graduated income tax brackets Index the brackets to prevent “bracket creep”

Tax first $50,000 of income ($0 to $50,000) at 4% Tax next $50,000 of income ($50,000 to $100,000) at 4.7% Tax next $100,000 of income ($100,000 to $200,000) at 5.4% Tax income above $200,000 at 6.1%

$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

$14,000,000,000

$16,000,000,000

$18,000,000,000

$20,000,000,000

Reve

nues

and

Exp

endi

ture

s

Fiscal Year

This is How Such a Package of Taxes Would Look

Property Tax Added by Statewide School Levy

Graduated Income Tax

Sales Tax on Personal Services

General + State Education Fund Revenue

General Fund Total Spending (Incl SB 228)

Volatility Remains a Concern

3.06%

1.82%

0.03%

2.71%

1.24% 1.00%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

Individual Income Tax Sales and Use Tax Selective Excise Taxes

Percent Increase in the Rate of Growth in the Revenue Source that Results from a 1% Change in the Rate of Growth

of Personal Income

Colorado (1992–2009) 50 States (1992–2009)

$0.0

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

$7,000.0

$8,000.0

$9,000.0

$10,000.0

$ M

illio

ns

Fiscal Year

Keeping the Wolf From the DoorIllustration: General Fund Spending Rule Based on Personal Income Growth and Budget

Stabilization Fund

Budget Stabilization Fund Balance

Gross General and State Ed Fund Revenue

Allowable General and State Ed Fund Limit Based on Personal Income Growth

Minding the Store

Forecasts are only as good as current assumptions and policies Long term forecasting should be done routinely Analyze policy changes for long term impact

We agree with the GFOA recommendations Financial capacity and long-term service objectives should be aligned Longer term horizon - 10 years Use revenue and expenditure forecasts, debt positions and monitoring

mechanisms such as a scorecard of key indicators of financial health Elected officials and the public should be able to easily grasp the

government’s long-term financial prospects and the strategies in place for achieving financial balance.

Thank You!In addition to the direct support from the University of Denver, the following foundations supported this work

• Boettcher Foundation• Bonfils-Stanton Foundation• Colorado Health Foundation• Colorado Trust• El Pomar Foundation• Gates Family Foundation• Kaiser Permanente• Piton Foundation• Rose Community Foundation