Rethinking Colorado's Government: Principles and Policies for Fiscal Sustainability

8/4/2019 Rethinking Colorado's Government: Principles and Policies for Fiscal Sustainability

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RETHINKING

COLORADO’S

GOVERNMENT

Principles and

Policies or Fiscal

Sustainability

Report o the

University o DenverStrategic Issues Panelon State Government



22

Table o Contents

Letter From the Chancellor.........................................................................................................3

Overview From the Panel Chair ................................................................................................ 4

Fiscal Fault Lines......................................................................................................................... 6

Revenue Volatility.............................................................................................................................................. 6

Expenditure Momentum ..................................................................................................................................7

Fiscal Imbalance ................................................................................................................................................. 8

Principles or Progress .............................................................................................................. 11

Reraming Government ................................................................................................................................. 11

Citizen Value .......................................................................................................................................................13Fiscal Sustainability ........................................................................................................................................ 16

Competition and Markets ............................................................................................................................20

Program Funding .............................................................................................................................................22

Frameworks or Policy.............................................................................................................. 26

K-12 Education...................................................................................................................................................26

Higher Education .............................................................................................................................................28

Transportation ...................................................................................................................................................31

Medicaid ..............................................................................................................................................................32

PERA .....................................................................................................................................................................33

Operational Policies ....................................................................................................................................... 35

Constitutional Impediments .....................................................................................................37

Amendment 23 ..................................................................................................................................................37

TABOR ..................................................................................................................................................................37

Summary o Conclusions and Recommendations ................................................................. 39

Acknowledgments..................................................................................................................... 44

Panel Members .......................................................................................................................... 46



33

Dear Friends,

All o us are living through a time o enormous cultural, political, and economic change. Many o the immediateissues—recession, sovereign debt, joblessness, government gridlock, economic polarization, declining public schools

and decaying transportation systems, to name just a ew—are entwined with one another, and proposed solutions

on one ront oen seem to exacerbate problems on another. Tere are no simple answers, and this time history does

not seem to inorm a clear path orward: the solutions o the past seem to be generally ineective in the present. One

senses that the depth o our problems is such that successul navigation o this t ime may well entail changes in the

overall abric o our society and its reection in local, state, and ederal governments.

Tis year our Strategic Issues Program ocused its work on the many issues acing our Colorado state government,

brought on by the broader economic crisis. Rather than attack these issues individually (as many groups have

done), our panel concentrated on broad principles and on the structure o government, seeking to dene changes

that would enhance long term scal stability and at the same time be applicable to a variety o policy areas.

Consequently, the recommendations made in the report do not oer particular solutions, but rather collectively

dene a roadmap or general progress, a oundation upon which those solutions might be built.

Te panel assembled or this task represented once again a very broad spectrum o the state’s geography, economics,

culture and political opinion. Each o the thoughts and recommendations presented in this report reects a

consensus among the panel members; while there were no votes taken, ideas about which there was signicant

division are not presented. It is truly remarkable (and rereshing) that when presented with clear inormation,

people o such disparate backgrounds and perspectives can agree.Te University is grateul to the members o this Strategic Issues Panel and to Proessor Jim Griesemer, its

chairperson, or their diligence and hard work on this project. I hope that you will enjoy reading the report, and that

it will give rise to many more constructive conversations on these important matters.

Sincerely,

Letter rom the Chancellor

Robert D. CoombeChancellor, University o Denver



4

Overview rom Panel Chair

Colorado and other state governments have been experiencing scal upheaval on a scale not seen since the Great

Depression. Te severity o the nancial crisis led the University o Denver to ask its 2010–2011 strategic issues panel to ocuson the challenges acing Colorado. Te panel’s work was unded by the University as part o its ongoing commitment to support

the public good.

As with prior panels, the Strategic Issues Panel on State Government was nonpartisan in nature and comprised o accomplished

citizens rom various segments o the Colorado community. While the panel was nonpartisan, its members brought diverse

views to the process. In the course o its year-long eort, panel members received more than 30 presentations rom ofcials,

experts and advocates. In addition, they reviewed a wide range o written materials and held extensive discussions on key issues

acing Colorado and other states.

Te extraordinary breadth o the topic—the entirety o state government—caused the panel to seek broad principles rather than

oer detailed policy prescriptions. Te goal was to identiy a limited number o principles that could enhance scal stability

and, at the same time, be applicable to a variety o policy areas. As a result, the report’s emphasis is on ways to think about

government as a oundation or deciding what to do about specic issues.

In the broadest sense, the panel aced the question “How can Colorado create a strong and sustainable scal uture?” Te

responses oered by the panel suggest new approaches to state government: Shi the perspective o government rom itsel—the

institution o government—to citizens; ocus intently on creating citizen value; build citizen support by making value visible;

change the scal structure o state government; and leverage the orces o competition and markets to maximize the eective

use o resources.

Tis report reects the consensus o the University o Denver Strategic Issues Panel on State Government. It contains the panel’s

assessment o the issues, along with conclusions and recommendations or Colorado state government. Te report is organized

into our sections: Fiscal Fault Lines, Principles or Progress, Frameworks or Policy and Constitutional Impediments.

Te rst section, Fiscal Fault Lines, briey examines the scal dynamics that exist in Colorado. It concludes that the state’s

nancial difculties are the result both o cyclical events, such as economic recessions, and structural actors that undermine

Colorado’s scal stability over the long term. While Colorado’s budget situation may slowly improve as the economy recovers,

it is poised to ounder once again at the next economic downturn. Fundamental change is needed to create a sustainable scal

environment or Colorado.

4



5

Principles or Progress presents new perspectives and identies principles that could help guide ofcials as they consider difcult policy questions.

Tese principles do not oer simple solutions or quick xes. Te problems acing Colorado and other states will not be solved in a single stroke.What the principles do provide are ways to think about policy questions. aken together, these principles suggest the need to:

• Reframe government; place citizens, rather than the institution o government, at the center o public discourse and decision making.

• Focus on value; shi the ocus o government to creating measurable value or citizens instead o thinking in traditional institutional terms.

• Change the nancial structure; use accountability centers to acilitate value assessment, dampen scal imbalance and highlight public subsidies.

• Foster competition; ocus on outcomes, with the state acting as an enabler, not necessarily the provider, o public services.

• Leverage market forces; allocate resources based on citizen demand, ocusing primarily on supporting individuals rather than operating

institutions.

• Fully fund programs; align authority and responsibility in intergovernmental activities, eliminate ununded mandates and ully und annual state

obligations.

Frameworks or Policy examines several key policy issues through the prism o principles discussed in this report. Te result is a series o policy

rameworks that illustrate ways in which those principles might apply to various issues. Policy areas discussed include K-12 education, higher

education, transportation, Medicaid, PERA and others. Te nal section o the report, Constitutional Impediments, examines the impact o

Amendment 23 and ABOR on Colorado’s scal stability. Te panel concludes that these constitutional amendments have exacerbated the state’s

scal crisis.

Te conclusions and recommendations oered throughout this report imply neither an expanded or lessened role or government nor specic

tax rates or unding levels. Te panel’s aim was to step back rom day-to-day practices, look at state government anew, and consider approachesthat might lead to greater scal stability and more eective services or citizens. o the degree this report inorms the public discourse and oers

perspectives that Colorado’s legislature, governor and other policy makers nd useul, the panel’s eorts will have been worthwhile.

James Griesemer, chair

University o Denver

Strategic Issues Panel on State Government

“The report’s emphasis is on ways to think about governmentas a oundation or deciding what to do about the issues.”

5



6

A WarhovrState Government Panel Member

Report o the University o Denver

Strategic Issues Panel on State Government

FiscAl FAult linesBetween scal 2008 and scal 2010, Colorado’s general

und revenue declined by $1.3 billion, a reduction o

16.6 percent. Tose declining revenues, along with rising

expenditures, produced extraordinary budget shortall

projections: $1.2 billion in scal 2009, $1.7 billion in scal

2010, $1 billion in scal 2011 and an estimated $1 billion

in scal 2012. As required by law, legislators ultimately

produced a balanced budget each year.

Balancing the budget in each o these years required

signicant expenditure reductions. For example, when

the scal 2012 budget was adopted, spending cuts

included closing a state prison, a $230 million cut to K-12

education, an $81 million cut to higher education and

other reductions. Te state eliminated vacant employee

positions, implemented salary reezes and urlough

days, and increased employee contributions to the state

retirement und to alleviate state expenditures.

Te scal 2012 reductions described above were in

addition to budget cuts made in scal years 2009, 2010

and 2011. In spite o year-aer-year budget reductions,

orecasters predicted that the state would continue to

be under nancial pressure or many years unless major

policy changes were implemented. In sum, the nancial

challenges acing Colorado in both the near and long term

are serious and are not likely to be solved by tinkering at

the margins o scal policy.

Tere is little doubt that the scal crises experienced by

Colorado and other state governments were triggered by

the housing and nancial collapses that gave rise to what

has been called the Great Recession o 2007–2009. Te

recession was an enormously powerul event, but it was

not the only cause o nancial turmoil. In many states,

scal policy decisions made over many years created an

environment that allowed a private sector shock wave to

become a public sector tsunami.

Rv Voa

It is customary to think o government revenue as

relatively stable, while business income uctuates

signicantly based on the economy. In act, state revenues

can also be highly volatile. Figure 1 shows income and

sales and use tax collections or Colorado and all states

since 1992, a period that encompassed two recessions.

It depicts the volatility o these tax sources that together

represent the largest sources o revenue or most state

governments. Colorado is even more dependent on these

sources than many states, with income, sales and use taxes

constituting more than 90 percent o the state’s general

und revenue. As a result, Colorado’s revenues reect

a pattern similar to that o other states, but with even

greater volatility.



1996 20001992 1994 1998 2006 2008 2010200 2 200 4

Income and Sales Tax-Colorado and All States(tax collections in billions)

B i l l i o

n s o

f D o

l l a r s

B i l l i o

n s o

f D o

l l a r s

800

700

600

500

400

300

200

100

0

10

9

8

7

6

5

43

2

1

0

All States–Sales and Income Tax Colorado–Sales and Income Tax

Shaded areas indicate U.S. recessions

Fgr 1 – sa iom ad sa tax cooSource: U.S. Census Bureau, State Government Finances

1997 20011993 1995 1999 2007 20092 00 3 2 00 5

Income and Sales Tax–Colorado and All States(percent change from prior year)

P e r c e n t c h a

n g e f r o m p r i o r y e a r

15%

10%

5%

0%

-5%

-10%

-15%

All States–Sales and Income Tax Colorado–Sales and Income Tax

Shaded areas indicate U.S. recessions

Fgr 2 – Prag chag iom ad sa tax cooSource: U.S. Census Bureau, State Government Finances

Te volatility o state revenue increases during periods o economic

change, as illustrated in Figure 2, which shows the percentage change

rom year to year. Fluctuations at these times can be dramatic, making

state revenues difcult to predict. During each o the last three recessions,

average revenue estimates or all states have become progressively less

accurate and overestimates have become larger. In 2009, hal o all states

overestimated revenues by more than 10 percent. As a result, during times

o recession states like Colorado can nd themselves continually revising

income and expenditure estimates downward throughout the budget year.

expdr Momm

Highly volatile revenues, signicant as they are to scal instability,

are only one-hal o the nancial crisis equation. Te other element is

expenditure momentum that exists because government expenditures

oen have characteristics that make them difcult to control.

Expenditure momentum may be a result o intentional public policy

decisions, economic actors beyond the control o government, scal

mandates imposed by other governments or constitutional requirements.



8

Taxes and Spending Since Start of Recession

C u m

u l a t i v e % C h a n g e

20%

15%

10%

5%

0%

-5%

-10%

-15%

Taxes Mandatory Spending Discretionary Spending TrendlinesShaded area indicates 2007-09 recession

Q1 Q2 Q3 Q4 Q1 Q2

2007 2008 2009 2010

Q3 Q4 Q1 Q2 Q3 Q4Q4

Fgr 3 – sa ad loa tax adspdg Drg 2007-09 Ro

Source: Rockeeller Institute o Government, SUNY Albany

“The scal ault line or state government lies at the intersectiono revenue volatility and expenditure momentum....a point o scalimbalance waiting to be triggered by the next economic downturn.”

Certain types o government expenditures such as unemployment

compensation, social services and some higher education programs

are countercyclical by nature; that is, demand or the service expands

as the economy contracts. Tus, at the very time when volatile revenue

sources are declining, countercyclical expenses are increasing. In theory,

countercyclical government programs can help soen the impact o

economic cycles and pave the way to recovery. However, implementing

such decit-generating programs over any period o time requires either

signicant und balances to cover the resulting decits or the ability to

print money. States typically do not maintain large surpluses and they cannot print money.

Expenditure momentum also occurs when costs rise aster than revenues

over the long term, notwithstanding economic cycles. For example,

health care costs, which are generally beyond the control o states, have

risen aster than ination or many years. Additional contributors to

expenditure momentum are long-term expenditure commitments that

must be unded annually irrespective o economic conditions. Prime

examples here are state pension und obligations and retiree healthbenets. Federal and state mandates also contribute to expenditure

momentum by requiring lower-level governments to make expenditures

irrespective o whether revenues are available. In addition, constitutional

mandates, such Amendment 23 in Colorado, may require the state to

spend money with little regard to economic conditions.

Fa imbaa

Te scal ault line or state government lies at the intersection o

revenue volatility and expenditure momentum. Tis is a point o scal

imbalance waiting to be triggered by the next economic downturn.

It is a condition that characterizes Colorado and other states. Figure

3 shows the eects o scal imbalance or all states during the 2007–

2009 recession. Te trend lines show that, as tax revenues declined,

spending on entitlement and mandated programs continued to increase.

As a result, state discretionary programs—all the other parts o the

budget—were either constrained by limited unding, reduced in scope



9

studies that have examined state and local government nance have

come to similar conclusions.

A new study, Financing Colorado’s Future, concludes that a similar

situation exists in Colorado. Prepared in 2011 by the Center or

Colorado’s Economic Future at the University o Denver, the report

presents a comprehensive picture o Colorado’s nancial situation. Te

study indicates that the state is experiencing both cyclical and structural

scal imbalance and suggests:

Long-term State and Local Deficit Simulation

P e r c e n t a g e o f G D P

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

Projected State and Local Operating Balances

1980

Surplus

Deficit

1990 2000 2010 2020 2030 2040 2050 2060

Fgr 4 - sa ad loa Govrm Projd Oprag BaaSource: Source: Governmental Accountability Ofce simulations

or eliminated. Even as revenues began to recover, mandatory spending

increased more rapidly, which continued to restrain other priorities.

Cyclical scal imbalance becomes a structural problem when the

probability exists that revenues may never catch up with constantly

growing expenditures. Tis is currently the case with health care costs

and remains a concern with entitlement programs in general. A 2011

Governmental Accountability Ofce (GAO) report uses long-term

economic model simulations to project uture state and local government

decits. It oers a grim assessment o the uture unless signicant

policy changes are made. Te GAO report looks ahead to the year 2060

and oers the ollowing commentary on the uture o state and local

government nance:

“Te model’s simulations show that the scal position ... will steadily decline

through 2060 absent any policy changes … We calculated that closing the

scal gap would require action to be taken today and maintained or each

year equivalent to a 12.5 percent reduction in state and local government

current expenditures.”

Figure 4, drawn rom the GAO report data, shows how the scal

situation o state and local government is likely to deteriorate in the

absence o undamental policy changes. Te projection is based on

estimates or 2010 with data or 2011–2060 drawn rom GAO model

simulations. Although the projection is illustrative because states cannot

run decits or any extended period o time, it is very important. Te

chart depicts the increasing pressure that governments will ace as they

try to bring their budgets into balance each year. A number o other



10

General Fund Revenue and Share of

General Fund Revenues for “All Other”

2010 Constant Dollars

2 0 1 0 D o l l a r s ( i n B i l l i o n s )

S h a r e R e m a i n i n g

$2.0

$1.5

$1.0

$0.5

$0.0

30%

25%

20%

15%

10%

5%

0%

2010 Dollars Left for General Fund OtherShare of Constant Dollar Revenue Remaining for General Fund Other

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

2 0 2 1

2 0 2 2

2 0 2 3

2 0 2 4

2 0 2 5

Fgr 5 – coorado Gra Fd Rv Avaabfor Program Ohr ha Mdad ad Madad exp

Source: Center or Colorado’s Economic Future, University o Denver

“Even a strong recovery and sustained job growth over the next decade

and a hal will not produce enough income and sales tax revenue to aord

Colorado’s share o Medicaid unding and the state’s payment or public

schools under current constitutional and statutory provisions. ... the two

biggest programs in the state general und will continue to crowd out higher

education and other programs competing or the same tax dollars.”

Te implications o the statement are graphically illustrated in Figure 5,

which depicts the scal squeeze Colorado will ace in years to come.

o summarize, many states rely heavily on income and sales taxes

that are highly volatile, especially during periods o economic change.

Colorado is more reliant on these sources than most states and

experiences greater nancial turbulence. While revenues rise and all

with economic cycles, major state expenditures continue to increase,

irrespective o economic conditions. Tis creates a structural imbalance

that constrains other budget priorities. Evidence suggests that this

imbalance will not cure itsel; rather, without basic policy changes, it will

become more severe over time.

All o these conditions—volatile revenue sources, uncontrolled

expenditures and a crowding out o other priorities—are the result o

policies and practices put in place over many years. Te state is acing

a complex scal problem, one that requires new perspectives and

structural change. Falling back on past practice is not a viable option i

Colorado is to attain scal stability. Te panel concludes that achieving

a strong and sustainable scal environment in Colorado requires

rethinking traditional practices and considering new principles to help

guide the development o state policies in the twenty-rst century.



11

PRinciPles FOR PROGRess

As the panel moved rom an analysis o Colorado’s nancial challenges

to a broad discussion o state government, six principles emerged. Tese

principles suggest the need to: rerame government; ocus on citizen

value; reorm the nancial structure; encourage competition; leverage

market orces; and ully und governmental programs. Te panel believes

these principles can help the state become more exible, adaptable

and responsive and support Colorado’s progress toward a strong and

sustainable scal uture.

Rframg Govrm

States are large, complex organizations that are not easy to control under

the best o circumstances. Fiscal conditions in Colorado and other

states make the job even more challenging. In recent years, Colorado’s

governors and legislators have done a commendable job o making tough

decisions to manage an extraordinarily difcult situation. Teir actions

allowed the state to adopt a balanced budget each year, as required by law.

“The panel concludes that achieving a strong and sustainable scal environment inColorado requires rethinking traditional practices and considering new principles ...”

Place citizens, rather than the

institution o government, at

the center o public discourse

and decision making.

ReramingGovernment

As difcult as these decisions have been, they have had limited impact

on the underlying scal environment o the state. While maintaining

a balanced budget has been no small eat during such challenging

times, the state’s scal ragility and structural imbalance remain largely

unchanged. Aer listening to numerous presentations and reviewing

extensive materials, the panel believes that the basis or solving the state’s

long-term scal problems lies beyond immediate questions o tax and

spending levels.

Debates over taxes and spending take place within a context that reects

a traditional, institutional perspective o government. Tis traditional view sees state government primarily as a supplier o public services, as

shown on the le side o Figure 6. Trough this lens, the salient issues

are those relating to production. Tese include taxes and ees to support

the spending necessary to produce and distribute public services. With

an orientation toward the production o services, the ocus o decision

making is on the institution o government itsel, with success being

dened by public ofcials. None o this, o course, is surprising; it is the

way government has long been viewed by ofcials and the public alike.While a production orientation is the prevailing perspective at all levels

o government, it is not the only lens through which public services may

be viewed. Instead o placing the institution o government at the center

o the discussion, it is possible to shi the ocus and think about public

services rom a citizen viewpoint, as depicted on the right side o Figure

6. Trough this lens, things look quite dierent. Te central issue is no

longer absolute levels o taxes or spending as in the production-oriented



12

view. Instead, the ocus is on value, the relationship between costs and

benets rom the perspective o the citizen. Using a value lens, the citizen,

not the institution o government, is at the center o the discussion.

Introducing a citizen

value perspective opens

up new ways to think

about state government.

It can aect public

discourse in important

ways. A value perspectiveallows the discussion

to move beyond taxes

and spending. ax and

spending debates are

oen driven either by

absolutes or ideology.

Absolute arguments ocus

on the act that X-level

taxes are too high or

Y-level unding is too low,

or vice versa, rom the

perspective o the public

ofcial. Value-based considerations, by contrast, are relative in nature; they

ocus on the relationship between the price paid and the benets received

as seen through the eyes o the citizen.

In addition to moving beyond absolute tax and spending arguments,

shiing the perspective can change the discourse rom difcult-to-

reconcile philosophical positions to pragmatic judgments about value.

Philosophical disagreements are oen based on ofcials’ innate belie

systems and are thus

resistant to resolution

or compromise. By

contrast, in value

discussions, the

question moves roma philosophical to a

practical one: “Is service

Z a good value, relative

to the price paid?” Tis

is a pragmatic judgment

to be made by citizens

who can convey their

views to public ofcials.

Government needs to

be about more than

delivering services at

prices driven by costs

o production; it should ocus on creating value or citizens. Shiing rom

a production-oriented perspective to a citizen-demand view is a crucial

rst step toward stabilizing state nances. It presents an opportunity or

“The panel believes that the basis or solving the state’s long-termscal problems lies beyond immediate questions o tax and spending levels.”

focus on

GOVERNMENT

focus on

CITIZENSas institutional means of

production

inputs as finite levels of taxes and spending

success defined bypublic ocials

as purchasers of service

value as relationship of cost to benefits

success defined bycitizens

Fgr 6 – i oa ad cz Prpv of Govrm



13

Do AmState Government Panel Member

“Using a value lens, the citizen, not the institutiono government, is at the center o the discussion.”

ofcials to demonstrate, and citizens to recognize, the value

o state services. Tis provides a oundation or building

citizen support, without which a sustainable scal uture

is not possible. For these reasons, the panel recommends

the legislature and governor arm that the purpose o

Colorado state government is the creation o measurable

value or citizens.

cz Va

Value—the relationship between perceived cost and

perceived benet—is not a precise mathematicalcalculation. It is an assessment made by each individual;

a judgment that exists in the mind o the purchaser about

the balance between the price o something and the

benets it provides. Value is a case where perception is

indeed reality.

Unlike the customers o a business, taxpayers have little

choice in purchasing public services. Nevertheless, the

Shit the ocus o governmentto creating measurable

value or citizens instead

o thinking in traditional

institutional terms.

CitizenValue

process by which individuals determine value is the same

or private goods or public services. For both customers

and taxpayers the task is to make a judgment about the

relationship between costs and benets. In each case,

the critical element required to judge value is accurate

inormation. In the case o an automobile purchase, or

example, inormation about the efciency, reliability, saety

and other aspects o the car is easy to obtain and the cost is

apparent. For the taxpayer, the situation is quite dierent.

In most cases it is difcult, i not impossible, or citizensto make an inormed judgment as to the value they are

receiving or the tax dollars they pay. States generate huge

amounts o data, but little o the inormation produced is

designed to help taxpayers assess value in terms that are

understandable or relevant to their own lives. Yet, without

such inormation there is no way to judge the value o state

services. With taxpayers having no clear way o assessing

the value received or the taxes they pay, it is not surprising

that, or many citizens, any tax increase is a bad idea.

In act, Colorado and other states do create signicant

value in many ways. A transportation system is a

prerequisite or commerce and economic growth. Public

health services are needed to protect the wellbeing o

individual citizens and society as a whole. Public saety

is indispensable to society. Education is the basis o a



14

Doa lState Government Panel Member

healthy civic lie and the essential ingredient or success in

a highly competitive global economy. All these activities

o state government, and a great many more, are essential

to the unctioning o modern society.

Unortunately, the value created by state government

is largely hidden rom view. Te vast majority o state

perormance assessment systems are designed around a

production perspective o government; they are systems

built by government, or government. Tere is nothing

inherently undesirable about such systems—they can helpimprove efciency and eectiveness—but the inormation

produced has little to do with citizen value.

A small, but useul, step in the right direction is

Colorado’s ax racks system (www.colorado.gov/

taxtracks). Tis interactive website breaks down the

amount o taxes paid by an individual and shows the

costs o various state services. While the inormation

provided is not adequate to allow taxpayers to judge the value o state services, the site illustrates the potential or

providing inormation to citizens.

o judge value, citizens need taxpayer-oriented

inormation rom an entity that is independent,

adequately unded and oriented exclusively toward

providing inormation to the public. o achieve this

result, the legislature should establish an independent

axpayer Value Council to provide sufcient inormation

so that citizens could assess the value o state services. Te

axpayer Value Council could be led by an unpaid citizen

board with appointments coming rom all three branches

o government. Te council would be non-partisan and

prohibited rom assessing the perormance o individual

public ofcials.

Te council would assess major state services in terms

o cost/capita, cost/taxpayer, satisaction levels, program

outcomes, levels o public subsidy and other measuresthat would be meaningul to taxpayers. For example, the

axpayer Value Council could provide inormation on the

per capita cost o highway maintenance or the relationship

between K-12 costs per taxpayer and student achievement.

Te council could analyze the cost per taxpayer o

operating correctional acilities, hearing court cases,

operating public health programs and other areas o state

government. In addition to presenting current inormation

about value, the council would provide data allowing

taxpayers to see trends over time and review benchmark

inormation comparing Colorado with other states.

In no case would the axpayer Value Council itsel render

opinions as to the value o services. Rather, it would

provide unbiased inormation that allowed taxpayers

themselves to make inormed judgments as to the value



15

“With taxpayers having no clear way o assessing the valuereceived or the taxes they pay it is not surprising that,

or many citizens, any tax increase is a bad idea.”

o state services. Equally important, value inormation would provide

a common basis or citizens and their elected representatives to have

inormed discussions about the way in which public resources were

being used and the benets being produced. In doing so, the inormation

provided by the axpayer Value Council becomes a oundation on which

public trust can be built.

Te axpayer Value Council would not duplicate the work o other state

ofces such as the Colorado State Auditor and the Legislative Council.

Te Ofce o the State Auditor ocuses on managerial and operational

issues related to reducing costs, increasing efciency, ensuring the

accuracy o nancial inormation and similar matters. Te Colorado

Legislative Council provides economic orecasts, scal notes on

legislation and policy research or the legislature. Unlike these agencies,

the axpayer Value Council would ocus exclusively on providing value

inormation geared specically to taxpayers.

Creating a axpayer Value Council is the essential element inimplementing a citizen value perspective or state government. While

not a panacea, it is a step o great signicance. By establishing a

axpayer Value Council, the legislature and governor would afrm their

commitment to citizen value and Colorado would lead the nation in its

accountability to taxpayers. With this in mind, the panel recommends

that the legislature and governor establish an independent axpayer

Value Council to provide inormation that allows citizens to judge the

value o state services.

Fgr 7 – taxpar Va co

LEGISLATIVEOFFICIALS

Establish and refineprogram scope

and services

CITIZENSJudge value,

express views topublic ocials

TAXPAYERVALUE

COUNCILProvide information

to citizens

EXECUTIVEAGENCIES

Implement deliveryof program services



16

Fgr 8 - th Gra Fd

M U L T I P L E R E V E N U E S O U R C E S

M U L T I P L E S E R V I C E S F U N D E D

$ $ $

$ $ $

$ $ $

$ $ $

$$$ $$$

$ $ $

$ $ $

$ $ $

$ $ $

L I M I T E D R E V E N U E S O U

R C E S

S E R V I C E A R E A F U N D

E D

$$$

$$$$$$

Fgr 9 – spa Prpo Fd

Fa saab

In Colorado and other states, a principle element o the scal structure is

the general und. As shown in Figure 8, a general und can be thought o

as an envelope into which various types o revenues ow and are mixed

together. Tese might include receipts rom individual and corporate

income taxes, sales taxes, excise taxes, estate taxes, etc. Out o the general

und envelope may come unding or services such as elementary and

secondary education, public welare, law enorcement, corrections,

courts, health services or other activities.

General unds present several difculties: they can obscure value, oster

scal imbalance and disguise subsidies. As the general und mixes

together various types o revenues and expenditures, it becomes difcult,

i not impossible, or taxpayers to judge the value o public services. Te

potential or structural scal imbalance exists as revenues with varying

levels o volatility are mixed with expenses having diering degrees o

expenditure momentum. Finally, programs supported by the general

und have various degrees o public subsidy. Some are subsidized 100

percent while others may rely on user ees to a signicant degree. A

“Value inormation provides a basis or citizens and their electedrepresentatives to have inormed discussions about the way in which

public resources are being used and the benets being produced.”

Use accountability centers to

acilitate value assessment,

dampen imbalance and

highlight public subsidies.

FiscalSustainability



17

“By establishing a Taxpayer Value Council, the legislature andgovernor would arm their commitment to citizen value and

Colorado would lead the nation in its accountability to taxpayers.”

general und shrouds the level o public subsidy.

An alternative approach that can acilitate value assessment, dampen

imbalance and identiy public subsidies is the accountability center .

Accountability centers are built on the concept o special purpose

unds variously called proprietary, enterprise, cash or dedicated unds.

Without descending into technicalities, special purpose unds share

the characteristic o receiving revenue rom one or a limited number

o dened sources and using that revenue to support a specic area

o service, as depicted in Figure 9. Accountability

centers may be separate unds or established as overlayson the general und, thus keeping the general und

structure intact. In either case, all accountability centers

are reestablished annually through the legislative

appropriation bill. Tis allows the legislature to

reevaluate the revenue sources used to support various

accountability centers each year.

Aoab cr

Whatever the technical structure, the essential

characteristic o an accountability center is that, by

statute, it links all or part o a dened revenue source(s)

with a specic area o service as shown in Figure 10.

Accountability centers thus become the basic building

blocks o government services. Centers are easy to

understand and they acilitate value assessment. Tis

allows them to serve as the organizing ramework or

value inormation provided by the axpayer Value Council.

By way o illustration, an accountability center could be established

to und higher education stipends or state residents attending in-

state colleges or universities. In this example, the center would be a

general und overlay ocusing exclusively on student stipends or higher

education. Te legislature would identiy specic revenue sources, or

portions thereo, that would be dedicated to und the accountability

center. Tis sets the stage or the axpayer Value Council to develop

ILLUSTRATIVE

VALUE MEASURES

FROM TAXPAYER

VALUE COUNCIL

• cost/capita

• cost/taxpayer

• satisfaction levels

• program outcomes

• subsidy/fee mix

• compare

measures with

other states

ACCOUNTABILITYCENTER

PERCENT SUBSIDY

X% of fee

Y% of fee

Z% of tax

Service

Fgr 10 – Aoab cr



18

measures such as cost per student, costs in relation to

graduation rates and similar inormation as well as

presenting trend data and comparisons with other states.

Because taxpayers know how much they are paying and

what results are being achieved, they are in a position to

assess the value o the student stipend program.

In Colorado, where state government already makes

extensive use o cash unded activities, establishing

accountability centers is quite easible. Cash unded

activities can be consolidated or converted directly intoaccountability centers. Some areas, such as the Colorado

Department o ransportation, are already structured

in a manner that would acilitate an accountability

center approach. For example, a Highway Maintenance

Accountability Center might be established and unded by

X percent o the state’s motor uel tax revenue, Y percent

o toll revenues and Z percent o vehicle registration ees.

Te axpayer Value Council could measure taxpayer

costs or highway maintenance, report results rom citizen

satisaction surveys, examine trends and benchmark

perormance with other states.

Te ability to link revenues and expenditures in

accountability centers oers the potential to mitigate

the scal imbalance experienced by Colorado and other

states. As discussed earlier in this report, scal imbalance

occurs when volatile state revenues all sharply during

economic downturns, yet expenditures continue to rise.

In establishing accountability centers, attention would be

given to aligning the volatility and growth characteristics

o revenue sources with those o expenditures supported

by the center. While it is unlikely that the scal harmonics

would ever be identical, careul alignment o revenues and

expenditures has the potential to dampen scal imbalance.

Accountability centers can be the building blocks o state

scal reorm. Introducing the nancial discipline o anaccountability center structure is a signicant change that

will take several years to complete. It represents ar more

than simply moving boxes around a chart or renaming

unds. It will require a undamental rethinking o revenue

sources to determine those that appropriately relate to

specic purposes. Te panel recognizes that the use o

accountability centers is a major structural change but

believes it can help introduce badly needed stability into

state nances. For that reason, the panel recommends that

the organizing ramework or Colorado state nances be

an accountability center structure that links dedicated

revenue sources with a specied area o service.

Pb sbd

Inormed, intentional decisions are a key to scal

sustainability. Accountability centers acilitate inormedGar DdState Government Panel Member



19

decision making by creating easy-to-understand nancial structures

that clearly link revenue sources with a specic service area. Along with

establishing such links, it is important to identiy the degree to which

tax dollars, as opposed to user ees, are being used to support various

services.

Te use o general tax dollars to support a service is reerred to as a

subsidy in this report. It is important to note that the term isnot used

in a negative or pejorative

sense. Businesses subsidize

new products with revenuesrom existing product lines

and governments subsidize

organizations and individuals

or a variety o reasons. Te

key point is not that subsidies

should be avoided, but that

they be clearly visible and

undertaken as a matter o intent.

Whether a subsidy is too low,

too high or just right is a matter

or legislators to establish and

taxpayers to ultimately judge.

Te process o determining

the appropriate level o

subsidy is aided by organizing

“Accountability centers can be the building blocks o state scal reorm.”

Fgr 11 – Pb, Mxd ad Prva-ar Aoab cr

ACCOUNTABILITYCENTER

PUBLIC-NATURESERVICES

MIXED-NATURESERVICES

PRIVATE-NATURESERVICES

Revenue Source:Taxes

Level of Subsidy:Can be 100%

Level of Subsidy:X%

Level of Subsidy:Can be 0%

Revenue Source:Taxes/Fees

Revenue Source:Fees

accountability centers into one o three categories. Te rst category

involves what are called pure public goods or public services. Tese

benet everyone in society and the benet obtained by one person does

not diminish the benet others receive. Examples include clean air

and communicable disease prevention, both o which benet society

generally. In cases where it is difcult to identiy varying levels o benet

among individuals services can logically be unded by general taxes, in

which case the subsidy level would be 100 percent. Public-nature services

are shown on the le side o

Figure 11.At the other end o the

spectrum, shown on the right

side o Figure 11, are services

where the individual user is the

distinct beneciary, as in the

case o gol courses, recreation

classes, hunting licenses, etc.

Tese types o activities can

be unded entirely by ees, and

no public subsidy is required.

In act, services o this type

are sometimes provided by

governments as well as private

organizations. Te use o taxes

to und private-nature services

represents an opportunity cost



20

since unding could come entirely rom ees. I the state chooses to

subsidize a service o this type, the decision should be overt and the level

o subsidy made clear to taxpayers.

While some state activities are clearly public or private in nature, a great

many services have both public- and private-nature characteristics. Tese

are mixed-nature services that provide a clear advantage to the general

public but also oer signicant individual benet. Examples here include

highways where everyone benets rom an eective transportation system

but those who drive on the highways receive particular benet. Te same

is true with education; all o society benets rom an educated populace,but those receiving the education enjoy signicant personal benet.

In the case o mixed-nature services there is no technical “correct

answer” as to the mix o ees and taxes. Initially, the appropriate

combination o ees and public subsidy, i any, is determined by public

ofcials. In the longer term, citizens, given the necessary inormation to

judge value, can evaluate the appropriate blend o ees and public subsidy

and convey those judgments to elected ofcials. Given the importance

o understanding the level o tax subsidy in public services the panel recommends that the extent o public subsidy in each state activity be

identied through its accountability center and disclosed to citizens

through axpayer Value Council reports.

compo ad Mar

Govrm a eabr

Government activities have traditionally enjoyed a monopoly status.While there are areas in which public monopolies are advantageous,

such as public health or deense, there are signicant disadvantages to

monopolies. By their very nature, monopolies, whether public or private,

tend to serve their own institutional interests at the expense o others.

Tey establish practices that work to the benet o the organization

rather than other stakeholders because they enjoy singular market power

and, in the case o government, compulsory authority as well. As they

ocus on their own interests, monopolies tend to become inefcient. In

the case o private monopolies such as utilities, government can regulate

potential abuses and encourage efciencies. In the case o government

monopolies, there is only sel-restraint.

Te advantages o introducing competition into government services

has been recognized or decades and has led, among other things, to the

privatization, or contracting out, o public services. Te use o private

contractors paid by the government to deliver services has become quite

common and has the potential to introduce efciencies into the delivery

“The key point is not that subsidies should be avoided, but thatthey be clearly visible and undertaken as a matter o intent.”

Leverage competitive and market

orces to improve government

operations and efectively

allocate public resources.

Competitionand Markets



21

ed MrState Government Panel Member

process. Private contractors can also provide additional

exibility, allowing governments to expand or reduce

services airly rapidly.

It is important to note, however, that simply privatizing

a public service ensures neither lower costs nor better

services. Privatization works best when there is a highly

competitive marketplace and the government has the

capability to actively monitor contractors. Te choice

between government provision o services and the use o

contractors is best determined on a case-by-case basis.

A greater leap on the competitive scale involves a

government restraining its own monopoly power to allow

private organizations to compete in oering services to

citizens. Tere are, in act, many areas where governments

have chosen not to exercise monopoly power, such as

the U.S. Postal Service which competes with United

Parcel Service and Federal Express. Privately owned gol

courses compete with city-owned courses, state parksmay compete with private acilities and private schools

compete with public schools.

In the panel’s view, competition oers the same

advantages to government that it does in business: lower

costs, better services and innovative approaches. Tere

may be occasions when the state has a legitimate interest

in preserving a monopoly status or certain unctions. As

a general matter, however, the panel believes competition

should be encouraged. Tereore, the panel recommends

that the role o state government in Colorado be one o

enabling public services, using private contractors when

appropriate and allowing other organizations to oer

public services in competition with the state unless public

policy clearly necessitates a monopoly status.

Mar Aoao

For many years, economists have recognized that

resources can be allocated through hierarchies

(organizations) or through markets. Allocating resources

through hierarchies reects a production perspective that

places the organization at the center o control. Allocating

resources through markets ocuses on demand and places

the consumer at the center o the process.

raditionally, both business and government used

organizations as the means to allocate resources. Tey

relied on decisions o leaders in the organizational

hierarchy to decide what services to oer, what price or

tax level to charge, how to organize operations, etc. When

Henry Ford reportedly oered his customers cars o any

color “so long as it is black” the organization, not the

customer, was making decisions.

Over the years, businesses have increasingly shied

to markets as a means to determine how to allocate



22

their resources and what activities to undertake. Tey

have done so in order to compete more eectively or a

purchaser’s dollars by providing products and services that

meet the needs o their customers. Te same challenges

ace government today as they try to build public support

or tax resources, user ees or other charges.

In an age o mass customization, where customers

expect a range o choices and value or their money, state

governments need to think in terms o markets. However,

relatively ew do so, relying instead on a traditionalcommand and control approach that allocates resources

based on the priorities o ofcials rather than the pull

o citizen demand. For example, when a state unds its

public universities through grants to institutions, there

is the assumption that state ofcials know best how the

public’s money should be allocated. By contrast, when a

state unds student educational stipends, it is the students,

acting through their market choices as to which schools to

attend, who allocate public resources.

Te panel believes that it is appropriate or Colorado to

shi its general approach rom a production-oriented

view centered on the institution o government to a

perspective that ocuses on individuals and leverages

market orces to allocate resources. With this in mind,

the panel recommends that, when practical, Colorado

utilize a market approach to allocate public resources,

ocusing primarily on supporting individuals rather than

operating institutions.

Program Fdg

An important cause o the nancial crises acing Colorado

and other states is the disconnect that exists between the

authority to establish programs and the responsibility

to adequately und them. Tis disconnect exists in

intergovernmental programs such as Medicaid, where the

ederal government establishes program standards but

states are required to pay a portion o the costs resultingrom those requirements. Te disconnect can also exist

within a single government when a program generates

long-term obligations that are not ully unded. For

example, many states approved public employee pension

benets but ailed to ully und the annual payments

required to meet the resulting uture obligations.

Te principles outlined to this point—reramingJrr GrowodState Government Panel Member

Align authority and

responsibility in inter-

governmental activities,

eliminate ununded

mandates and ully-und

annual state obligations.

ProgramFunding

“In an age o mass customization, where customers expect a range o choicesand value or their money, state governments need to think in terms o markets.”



23

government, ocusing on value, creating new nancial structures,

leveraging competition and market orces—are tools or strengtheningnancial discipline and building citizen support by creating value.

Complementing these principles is the need to balance authority with

responsibility by requiring that governments provide ull unding or

programs they create.

Fdg irgovrma Program

Many Americans think o the U.S. ederal system as rather like a three-

layer cake, with the ederal government at the top, state government in

the middle and local government below. In reality however, ederalism

is much more like a marble cake, with responsibilities and programs

intermixed among ederal, state and local governments.

Multilevel, intergovernmental activities are very common. At the ederal

level, they include programs such as Medicaid and the No Child Le

Behind Act, an array o highway and transportation programs, social

service activities and other programs. Multilevel programs are also

used at the state level. K-12 education, highway maintenance and other

activities all involve joint eorts by state and local government.

Multilevel programs have been useul in a number o respects. Tey

have allowed governments to pool resources in order to tackle difcult

problems such as environmental protection. Tey have also permitted

services to be delivered by governments located close to recipients, as

in the case o social service programs. However, multilevel programs

can, and do, contribute to scal instability. Program mandates can orce

governments to provide services without regard to economic conditions

or the ability to und activities. Te same is true o program inducements

where a higher-level government oers partial unding to encourageparticipation by lower-level governments.

Te scal difculties resulting rom intergovernmental programs suggest

it may be time to rethink the structure o such multilevel programs. Te

goal is not to hamper intergovernmental cooperation but rather to ensure

that authority and responsibility are aligned. Te panel believes that an

eective means o achieving this goal is by requiring thateach level o

government must ully und all programs it establishes.

Under this approach, the ederal government or a state government

would have several choices when initiating a new program. It could

design, und and operate the program using its own sta or contractors,

or it could share the eort with another level o government. I it chose

an intergovernmental approach, the higher-level, initiating government

would have the responsibility to determine the scope o the program,

identiy the outcomes to be achieved and ully und the program at a

level sufcient to achieve the stated outcomes.

Te lower-level, partnering government would be responsible or

delivering the program, or obtaining contractors to do so, and achieving

specied outcomes. Te implementing government should have the

exibility to adapt the program to meet local conditions but it would

remain responsible or achieving the desired results without sacricing

quality. Te relationship is depicted graphically in the ull unding model

shown in Figure 12.



24

In addition to implementing the intergovernmental activity, the

lower-level government could enhance the basic program. It woulddo so by creating a complementary program that oered additional or

enhanced services. Te complementary program would be operationally

coordinated but nancially sel-contained, unded entirely by the lower-

level government.

A ully unded structure or intergovernmental programs oers a

number o advantages. It claries governmental roles while leveraging

the resources o multiple levels o government. It strengthens scalstability by requiring that the initiating government ully und the cost o

delivering the program. I the program creates expenditure momentum,

it is the initiating government that must deal with the nancial

consequences. Te approach oers exibility or the implementing

government and responsiveness to local conditions as long as specied

outcomes are achieved. Te implementing government can urther

customize the program through a complementary

program that it unds.

Te requirement that each government pay the ull

cost o any program it creates is likely to moderate

expenditure momentum by encouraging a careul

denition o program scope. Federal programs, which

would need to embrace a wide variety o conditions

and circumstances, would tend to ocus on common

needs shared by most o the citizens in the country. A

state complementary program could be more targeted,

ocusing on the particular needs o the citizens o that

state. Local complementary programs, i established,

would be more tightly ocused yet designed to meet

the conditions o a particular city or county or

geographic region. Given these advantages, the panel

recommends that the legislature and governor adopt

a ull-unding approach or all state/local programs,

prohibit ununded mandates and work to encourage

“Each level o government must ully und all programs it establishes.”

Fgr 12 – F Fdd Program

RESPONSIBILITIES OF HIGHER-LEVEL, INITIATING GOVERNMENT

RESPONSIBILITIES OF LOWER-LEVEL, IMPLEMENTING GOVERNMENT

COMPLEMENTARY PROGRAM, LOWER-LEVEL GOVERNMENT

AUTHORITY:

• determine program scope• identiy and assess outcomes

RESPONSIBILITY:

• ully und the program at levelsufcient to achieve outcomes

AUTHORITY:

• adapt program to local conditions

• deliver program or use contractors

RESPONSIBILITY:

• achieve outcomes

• und complementary program

AUTHORITY:

• enhance the basic program witha local complementary program

RESPONSIBILITY:

• implement complementary programusing local unding

FUNDING

FUNDING



25

the ederal government to take a similar approach with

its intergovernmental programs.

Fdg sa Program

Te need to ully und activities and obligations applies

within state government just as it does in the case o

intergovernmental programs. While many operating

programs are routinely unded during the budget process,

some states have ailed to adequately und longer-term

obligations. Examples include the need to realistically

schedule and ully und annual maintenance costs o

buildings, highways and other capital acilities. O equal

importance is the requirement that states ully und the

annual contributions necessary to support long-term

pension obligations or state employees and retiree

health benets. In recent years, several states have been

required to signicantly increase unding or pension

plans, creating extraordinary nancial pressure on those

governments.

Scheduling maintenance or capital acilities, calculating

ununded liabilities and uture earnings or pension

unds and creating a unding schedule or retiree health

benets are all areas where conservative assumptions

need to be used in calculating annual unding obligations.

Fiscal sustainability requires ull unding o both

current programs and annual payments necessary to

support long-term obligations. For that reason, the

panel recommends that the legislature ully und all

current programs and annual payments on multiyear

obligations, using conservative estimates when

calculating Colorado’s long-term liabilities.

Forr caoState Government Panel Member



26

lda carState Government Panel Member

FRAMeWORks FOR POlicy

In examining the challenges acing Colorado, the panel

ound it useul to consider existing policies that have a

signicant impact on state nances. Te goal was not to

provide detailed policy recommendations, an ineasible

task given the panel’s comprehensive scope. Instead, panel

members examined several key policy issues through the

prism o principles discussed in this report. Te result is

a series o policy rameworks that illustrate ways in which

those principles may apply to various issues. Te panelhopes these rameworks might be useul as the legislature

and governor address the challenges acing the state and

prepare Colorado to capture the opportunities o the

twenty-rst century.

k-12 edao

As the largest single appropriation in Colorado’s general

und budget, K-12 education accounts or roughly 46

cents o every general und dollar. In scal 1994 the stateunded about 55 percent o all K-12 expenses. By scal

2011 the state’s share had risen to 63 percent and estimates

suggest that state unding or K-12 education will reach

70 percent by scal 2025. Even as costs continue to rise,

the complex school nance ormula and the interplay o

constitutional provisions make it virtually impossible or

citizens to judge the value being created by Colorado’s

K-12 educational system.

Te unding o schools is an intergovernmental unction

primarily involving the state and local school districts.Consistent with the principles suggested or unding

multilevel programs, the panel believes that the role o

state government should involve (1) establishing the

scope o the state’s involvement in K-12 education, (2)

determining outcomes to be achieved and assessing

results, and (3) providing ull unding or K-12 education

at a level sufcient to achieve the desired outcomes.

In a number o respects the state is already moving alongthis path. Colorado currently has a student assessment

program in place that denes and measures K-12 student

outcomes. Te major question in K-12 education in

Colorado relates to unding. In Colorado, support or

K-12 education is the largest part o the state budget,

yet in terms o per-pupil unding Colorado is still ar

below the national average. While per-pupil unding is

a measure o input, not outcomes, the disparity between

Colorado and other states suggests the need to reexamine

the state’s approach.

Te state should pay the ull cost necessary to achieve

the K-12 outcomes it establishes. As a consequence,

legislators will wish to careully consider the outcomes

desired by the state. For example, in creating its program,

the state may wish to limit its outcomes to prociency



27

Fgr 13 – srr of coorado k-12 edao Program

K-12 EDUCATION, STATE RESPONSIBILITIES

K-12 EDUCATION, SCHOOL DISTRICT RESPONSIBILITIES

K-12 EDUCATION, SCHOOL DISTRICT COMPLEMENTARY PROGRAM

AUTHORITY:

• establish scope o state K-12 program• identiy/assess outcomes to achieve

RESPONSIBILITY:

• ully und the K-12 program atlevel sufcient to achieve outcomes

AUTHORITY:

• adapt program at local schools• deliver program or use contractors

RESPONSIBILITY:

• achieve state outcomes• und complementary program

AUTHORITY:

• enhance state K-12 program withlocal complementary program

RESPONSIBILITY:

• implement district complementaryprogram using local unding

FUNDING

FUNDING

in traditional academic areas such as reading, writing, mathematics

and science. Whatever the scope, the state has the reedom to denethe outcomes it wishes to obtain and the responsibility to ully und

implementation o a program to achieve those results. Te state’s

responsibilities are shown in the top section o Figure 13.

Local school districts are responsible or implementing the state’s K-12

program and should be given considerable reedom in deciding how to

best achieve the required results. Beyond the

basic program prescribed by the state, local

school districts should be ree to developcomplementary programs that could expand

the curriculum to cover additional areas,

employ the use o advanced technology,

provide support services to students, etc.

Te costs o such complementary programs

would be ully unded by the local school

district. Responsibilities o local school

districts are shown in the center o Figure 13,

and the district’s optional, complementary

program is depicted at the bottom o the

graphic.

In allocating its resources to local schools,

the state should rely on market orces rather

than bureaucratic control mechanisms. Te

state should ocus on supporting students,

not institutions. Funding should be allocated in the orm o stipends

that ollow students instead o direct unding to local school districts.Stipends could be used at any public school or public charter school

within the student’s home school district or any other district able to

accept nonresident students.

Tose public schools that are seen as creating value will attract more

students and, thus, more state unding. Schools viewed by parents as

“The state should pay the ull cost necessary to achieve the K-12 outcomes it establishes.”



28

inerior will lose state unding as student attendance shis to other

schools or dierent districts. I a school has insufcient resourcesbecause poor outcomes reduce enrollment, the district can either obtain

additional unding rom local taxpayers or close the school. Tere should

be little need or a state bureaucracy to manage local schools. Te state

needs only to assess and publicize outcomes and value inormation so

that judgments can be made. Parents, through the educational market,

will do the rest.

K-12 education is one o the most important unctions the state

perorms, in partnership with local school districts. As a result, it isessential that citizens be able to judge the value that is being created.

In terms o learning outcomes, the state should monitor results and

disseminate inormation, as it does now. Te key to building public

support, however, lies in providing inormation that citizens can use

to assess value. Tis is achieved when the axpayer Value Council

translates technical results data into value inormation or citizens by

relating K-12 learning outcomes to taxpayer costs.

Te panel concludes that the principles o ull unding or intergovernmental programs, market allocation o resources,

competition and citizen value could be benecially applied to K-12

education in Colorado. Te state’s role should be limited to dening and

assessing outcomes and ully unding the K-12 program. Local school

districts should be ree to determine how best to achieve outcomes

dened by the state. Te state should und students, not school districts,

through stipends to students attending public schools. Te axpayer

Value Council should provide inormation that allows citizens to judge

the value being created by the state’s K-12 program and individual

school districts.

Hghr edao

State support or higher education in Colorado has declined dramatically.

Since scal 1990, unding has allen rom over 20 percent to 9 percent

o the state’s general und budget. It is a tangible example o the

consequence o expenditure momentum, where programs such as

K-12 education and Medicaid displace unding or higher education in

Colorado. Te impact o higher education unding cutbacks has been

compounded as enrollment continued to climb at community colleges

and our-year institutions.

Te nancial picture acing higher education in Colorado is, rankly,

bleak. Yet nothing is more important to Colorado’s economy than the

quality and accessibility o its institutions o higher education. By 2018,

it is estimated that 62 percent o U.S. jobs will require education beyond

high school—up rom 28 percent in 1973. Te way in which Colorado

responds to the realities o an education-driven, globally competitive

environment will, literally, determine the state’s uture. Tese conictingorces—a declining level o unding and the essential role o higher

education in the state’s economic uture—suggest the need or a thorough

reexamination o higher education unding in Colorado.

For a moderately sized state, Colorado has a complex public higher

education system. It includes 13 our-year colleges and universities, 13

two-year community colleges, and 2 local district two-year colleges.

State organizations designed to oversee or coordinate institutions

“The panel believes higher education in Colorado sufers rom toomuch reliance on control and too little reliance on market orces.”



29

Ha logaState Government Panel Member

include the Department o Higher Education, the

Colorado Commission on Higher Education, an electedBoard o Regents or the University o Colorado as

well as individual boards o one kind or another or

each institution. Te notion that state government can

eectively control, or even coordinate, such ar-ung

enterprises is open to question. Te panel believes higher

education in Colorado suers rom too much reliance on

control and too little reliance on market orces.

Fortunately, Colorado has a unique vehicle upon whichto build. In 2004, Colorado adopted an act creating

the College Opportunity Fund (COF), the nation’s rst

attempt to leverage market orces using a system o

stipends directed to students. Although the act publicly

ocused on the use o stipends, it actually had a number

o other objectives. Notable among these was the attempt

to remove higher education rom the grip o ABOR by

establishing schools as “enterprises”. While the goal o

insulating much o higher education rom ABOR was

achieved, the system o stipends established by the act

was accompanied by provisions that essentially protected

institutions o higher education rom the eects o

marketplace competition.

Nevertheless, the College Opportunity Fund legislation

created the institutional inrastructure necessary or

a market-based resource allocation system. It set up a

means or processing and awarding stipends at the state

level and caused universities to consider appropriatechanges to their own systems to handle such stipends. Te

panel believes the state should capitalize on the stipend-

processing inrastructure created through the COF and

use the program as the exclusive basis or unding the

operations o higher education in Colorado.

Using this approach, unding or higher education would

be channeled exclusively through a system o stipends

to Colorado students qualied or admission. Te statewould und students, not institutions, with stipends

scaled to reect the level o student nancial need. Tere

would be no direct unding o institutions, however the

total state unds available or student stipends should at

least equal the total unding level currently supporting

Colorado’s public colleges and universities. Tis ensures

that, overall, the unding available to all state institutions

is not initially diminished, but it does not guarantee

a specic unding level or any particular college or

university. Te success o each individual institution

would be determined by its ability to create value and,

thereby, attract students and unding.

In addition to unding student stipends, the state could

provide capital unding or any institution under whatever

terms were approved by the legislature and governor.

Cities, counties or other public entities could also



30

low HarState Government Panel Member Fgr 14 spd-bad Hghr edao sm

$$$ CHOICESTATESTIPEND

QUALIFIEDCOLORADOSTUDENT

4-yearUniversity

CommunityCollege

4-year

College

TechnicalSchool

contribute capital unding to an institution either directly

or through regional districts. And, o course, institutionswould be encouraged to undertake their own undraising

activities.

Te state o Colorado would continue to own the physical

property that it had contributed to each entity, but it

would not control the institution’s operations. Te board

o each state college, university, two-year community

college or technical school would

be given ull responsibility andauthority or the operation

o that institution. Te board

would appoint the CEO, approve

strategies or the institution and

determine degrees to be oered,

while the aculty would establish

the curricula. Boards would be

ree to set tuition at levels that

reected marketplace realities

and the quality o education

provided. Te success o an

institution would be determined

by the degree to which students

perceived they were receiving

value. Figure 14 depicts the

nature o such a higher-

education unding system.

Te panel concludes that the principles o market

allocation o resources, competition and a value

perspective should be applied to higher education in

Colorado. Te state should support higher education

through a system o stipends, scaled to reect student

nancial need, which builds upon the existing College



31

Opportunity Fund inrastructure. Te boards o Colorado’s universities

and colleges should be given the authority to manage each institutionwith minimal involvement by state agencies. Colorado’s institutions o

higher education should be allowed to succeed or ail based upon the

value they create or students.

traporao

Te Colorado Department o ransportation (CDO) maintains 23,000

lane miles o state highways and 3,754 bridges, on which Coloradans and

visitors travel more than 28 billion miles per year. In scal 2012, CDO

planned to receive some $1.1 billion dollars in revenue. Colorado’s motor

uel taxes and vehicle registration ees, such as rom the state’s recently

adopted FASER program, comprised nearly 60 percent o CDO’s

expected revenue while ederal government provided about 35 percent.

Motor uel taxes, which are levied as a xed amount per gallon, have

long been the principle unding source or highway construction and

maintenance. Teir utility, however, is being diminished as vehicles

with greater uel efciency gain market share. As a result, while user

ees and charges currently play a relatively minor role in unding, they are increasingly viewed as a potential source o revenue to create and

maintain transportation inrastructure. o that end, some state and local

governments are looking at mileage-based ees and charges or using

crowded highways or entering congested business districts.

Te joint ederal-state-local nature o Colorado’s transportation program

lends itsel to the concept o ully unding intergovernmental programs,

as described earlier in this report. Indeed, the structure o Federal

Highway rust Fund (HF) and related programs already reect that

principle to some degree. Federal and state roles are reasonably welldened. Te ederal government provides unding or its priorities and

the state is responsible or construction and maintenance.

With a limited number o revenue sources dedicated to specic services,

CDO is an ideal candidate or the use o accountability centers. Under

its existing structure, the Colorado Department o ransportation

already links certain revenues with particular unctions. Te existing

approach can be simplied and rened to be more useul or citizens,

but the basics are already in place. Te Colorado Department o ransportation can, and should, move to ully utilize an accountability

center structure.

In the panel’s view, what CDO lacks is not so much operational

efciency as a ocus on citizen value. In reviewing an array o literature

and statistics related to the department, it is difcult to nd inormation

that speaks to value in terms that are meaningul to citizens. For the

Colorado Department o ransportation, shiing rom a production

perspective to a ocus on citizen value could produce signicant benets.An accountability center structure could set the stage or CDO to depict

the value it creates. A concerted eort by the department to ocus on

value, along with reports by the axpayer Value Council, could enhance

trust and support among voters.

Te panel concludes that the Colorado Department o ransportation

is well suited to apply principles o accountability centers, distinguish

between subsidies and ees, and adopt a value perspective. CDO

“CDOT is an ideal candidate or the use o accountability centers.”

“I b i i h U S



32

should use an accountability center structure linking dened revenue

sources to specic service areas and clearly identiy the degree to whichtax subsidies and ees are used. Te department should shif rom a

technical, production perspective to a ocus on citizen value, presenting

its public inormation in those terms.

Mdad

Although Medicaid and Medicare were both created in 1965, and each

ocuses on health care, the programs dier in signicant ways. Medicare

is a program that provides health insurance coverage to all citizens

age 65 and older. It is unded and operated by the U.S. government.

Medicaid, by contrast, is a means-tested, health care insurance program

or individuals and amilies with low incomes and limited resources.

Medicaid is jointly unded by the U.S. government and the states and is

administered by state governments.

Although Medicaid is a voluntary program, all states do participate.

Depending on wealth, states pay 25 percent to 50 percent o the cost o

Medicaid with the ederal government paying the balance. Colorado

began its participation in Medicaid in 1969 and, as a relatively wealthy state, is required to pay 50 percent o the cost. Colorado also participates

in the companion program to Medicaid or low income children and

pregnant women, Child Heath Plan Plus (CHP+). States operate Medicaid

programs under broad ederal guidelines although each state has a degree

o exibility in terms o eligibility standards and services oered.

Medicaid represents a great nancial challenge or all states, including

Colorado. Over the next decade, the cost o Medicaid and CHP+

is predicted to increase aster than any other major component o

Colorado’s budget. According to the Center or Colorado’s EconomicFuture, Colorado’s expenditures or Medicaid will increase dramatically

between 2012 and 2025, rising rom 18 percent o general und

expenditures to 27 percent. Beyond 2025, costs could rise even more

rapidly as Colorado’s baby boomers, who use medical services ar more

than younger adults and children, swell program enrollment. For this

aging cohort, Medicaid spending is likely to be up to ve times greater

per capita than or younger adults and children.

Medicaid expenditures are driven primarily by rising health care costsand growing enrollment. Colorado has virtually no control over national

health care costs and limited inuence over enrollment. Health care

costs are rising much aster than general ination. In 1970, health care

spending accounted or barely more than 7 percent o the U.S. gross

domestic product (GDP), the equivalent o $356 per resident. It is

projected that by 2018 health care spending will represent more than

20 percent o GDP, about $13,100 per resident. Looking ahead, the

Congressional Budget Ofce estimates that the annual rise in Medicaid

costs between 2012 and 2020 will be 2.8 to 3.4 percent greater than the

general ination rate.

Enrollment is a major driver o Medicaid spending growth. In 2009,

about one in every ve persons in the U.S. was enrolled in Medicaid or at

least one month, and enrollment is projected to increase by an average

o 4.5 percent per year over the next ten years. In Colorado, Medicaid

enrollment has increased by 121 percent over the last decade. For states

like Caliornia, where nearly 30 percent o the state’s population was

“In 2009, about one in every ve persons in the U.S.was enrolled in Medicaid or at least one month ...”



33

Jd GaomState Government Panel Member

enrolled in Medicaid by 2007, budgetary implications

may be particularly proound. Tere is every reason tobelieve that enrollment will continue to rise, propelled by

slow economic growth, an aging population and the 2010

Patient Protection and Aordable Care Act (PPACA),

which expands Medicaid eligibility in 2014.

Te panel believes Colorado should approach Medicaid

on two levels. At a strategic level, the state should ocus on

risk. Every indicator suggests that the Medicaid program

is a runaway train due to health care costs and growingenrollment. Colorado should cooperate with other states

to urge the ederal government to restructure Medicaid

into a ully unded intergovernmental program based

on the principle described earlier in this report. In the

near term, Colorado should make maximum use o

ederal waivers to shape the program in a manner that

provides the best outcomes possible or Coloradans while

managing nancial risk.

Te panel concludes that principles relating to

scal sustainability, value and ull unding o

intergovernmental programs are useul in connection

with Medicaid. Te governor and legislature should

study the best practices o other states and take ull

advantage o ederal waivers to create an eective

program while managing nancial risk. Colorado

taxpayers should be provided with value inormation

related to Medicaid by the axpayer Value Council.Colorado should join with other states in urging the

ederal government to rethink Medicaid, redene

outcomes to be achieved and und 100 percent o the cost

o the ederal program.

PeRA

Tere is no more powerul example o the hazards o

underunding government obligations than the crisis

being aced by state pension unds. Not only are taxpayers

ultimately responsible or hundreds o billions o dollars

in pension obligations, current public employees who

joined pension unds with an expectation o a sound

retirement are acing an unknown uture. It should

be pointed out that not every state has been remiss in

unding its pension obligations, but many have.

In 2009, the Pew Center on the States estimated the

uture cost o state pensions, retiree health care andother retirement benets to be underunded by $1.26

trillion dollars. While there are diering opinions as to

the exact level o underunding, there is little doubt that

the problem is serious. In 2009, only 22 states paid their

annual pension bills in ull and, nationally, state retiree

health care liabilities remained 95 percent ununded .

Te $1.26 trillion estimate above is based on what

“C l d k th d th h d



34

Pgg krState Government Panel Member

some consider to be an optimistic calculation o uture

investment earnings by pension unds. Tis utureinvestment earning capacity is reerred to as the discount

rate. Small changes in discount rate assumptions have

enormous implications or pension unding. I states used

the same discount rate required o private corporations,

the shortall would balloon to $1.8 trillion. I the so-called

“riskless rate” based on the 30-year U.S. reasury bond

were used, the unding gap rises to an astronomical $2.4

trillion. o appreciate the impact o discount rates, when

the state o Rhode Island recently considered revising

several assumptions, including a reduction o the discount

rate rom 8.25 percent to a more conservative 7.5 percent,

the estimated ununded liability or the state’s pension

und rose 27 percent.

Te ailure to ully und pension obligations is having

a spillover eect on state credit ratings as Moody’s now

combines both debt levels and pension liabilities as part o

an overall process to judge the credit worthiness o state

governments. In addition, the Governmental Accounting

Standards Board is considering rules that would, among

other things, have pension und inormation appear

directly on state government balance sheets. It is clear

that adequate unding o all state obligations, including

obligations or pension and retiree health care, is essential

i states are to avoid uture nancial crises.

In Colorado, Public Employees’ Retirement Association

(PERA) provides retirement and other benets to theemployees o more than 400 government agencies and

public entities, including state employees. With more than

200,000 members PERA is the 21st largest public pension

plan in the United States. Colorado knows rsthand

the hazards o underunding state pension obligations.

In 2008, the Pew Center or the States rated PERA as a

pension und about which they had “serious concern”

given its unding level o less than 70 percent. Subsequent

to that report, the Colorado legislature deserves credit

or instituting several steps to improve the stability o

the system. Although progress has been made, careul

monitoring, caution and scal conservatism remain the

best advice or Colorado.

Te panel concludes that the state should apply

principles related to ull unding o state programs, scal

sustainability and value to Colorado’s Public Employees’

Retirement Association (PERA). o minimize risk, PERA

should use a conservative discount rate when calculating

uture investment earnings and long-term liabilities. Te

Colorado legislature should ully und its annual PERA

contribution. Retiree benets should be expanded only

i the plan is 100 percent unded and afer careul study

o long-term implications. Colorado citizens should be

provided with value inormation on PERA through the

axpayers Value Council.

“Colorado knows rsthand the hazards o underunding state pension obligations.”



35

Opraoa Po

In the course o its work, the panel identied two other areas that relateto Colorado’s scal sustainability. Although these matters have less

visibility than the policy issues discussed above, they are important rom

an operational perspective.

ira srv

An oen unheralded, but important, aspect o state government is the

internal service agencies that provide support or operating departments.

Tey include services such as purchasing, printing, supplies, real estate,

maintenance, personnel, technology, law, etc. Tese unctions oen enjoy

a monopoly status within state government.

ypically, such unctions were established on the premise that it was

less expensive and/or more convenient to provide the service internally

than to use outside contractors. While internal agencies can certainly be

efcient, those that are less responsive have the potential to impede the

eectiveness o operating departments. Tis may be a result o inadequate

stafng o the internal department, complex state rules or other actors.

Whatever the reason, i internal support units are unable to respond to

requests rom operating departments on a timely basis, the result can

be delays and inefciencies in delivering public services. Te resulting

slippage in departmental operations may ar outweigh theoretical

efciencies gained through centralized support units. At the same time,

there is a balance to be achieved between improving the efciency o a

single department and achieving greater eectiveness across the entire

state government, as in the case o an inormation technology network

aecting all state departments. Nevertheless, introducing competition

into the internal environment o state government oers the potential toimprove state operations and should always receive careul consideration.

Te panel concludes that Colorado can benet rom applying the

principle o competition to internal state services. State departments

and agencies should be allowed to select internal or external suppliers

o support services except in cases where interdepartmental consistency

requires the use o an internal service agency or designated system.

empo compaoNotwithstanding the use o the term “pay or perormance,” government

compensation systems or managerial employees are not generally built

around perormance in the sense that businesses use the term. Rather,

state systems are oen structured around achieving internal goals and/or

comparability with similar positions elsewhere. Attempts to make state

management compensation systems more eective through the use o

perormance bonuses have also had limited success. In some cases, public

sector bonuses are so small as to be irrelevant. Where bonuses have

been more substantial, they have sometimes generated protests romthe media and the public who have little inormation on which to judge

whether the bonus was warranted.

In large measure, these conditions exist because it has been extremely

difcult to measure managerial perormance in government rom the

perspective o value creation. While government and business are not the

same, they share a common interest in customer satisaction. Yet, most

government management compensation systems rely primarily on internal

“M t t t ti t l i il i t l



36

standards rather than encompassing measures o customer value creation.

From a managerial perspective, there are other signicant dierences

between the private and public sectors. Where business usually views

senior management as the company’s most important asset, public

managers are oen described as overhead. Where non-perorming

business executives are quickly removed, dismissing ineective public

employees may be prohibitively time consuming due to civil service or

union rules. While top managers in business are oen very well paid,

public sector executives tend to be compensated at lower, sometimes

much lower, levels. Tese conditions create an invisible, but very real, dragon the eective management and resulting perormance o government.

Accountability centers provide a structure or bringing value creation

into the employee evaluation and compensation process. Departmental

reviews assessing managerial perormance in terms o internal goal

achievement and other institutional criteria would continue to be

important. However, these traditional measures could be supplemented

with value inormation provided to citizens by the independent axpayer

Value Council. Tis would provide inormation on the degree to whichthe department or agency created value rom a citizen perspective. Te

approach would blend traditional internal, institutional measures with

externally ocused value-creation inormation.

Te panel believes that such a balanced system could produce a number

o positive benets. Te orientation o managers and departmental

teams would not simply be internal, but external as well. Departmental

personnel would receive useul eedback rom a value perspective—the

viewpoint most meaningul to citizens, the department’s ultimate

customers. Managers would be inclined to ocus on the value beingcreated by their departments, a mutually benecial situation or both

citizens and state government.

Te axpayer Value Council would provide the same inormation on

value creation to managers as it gave to citizens. Te council wouldnot

tell managers how to manage, it would simply give them a window into

the perspective citizens use as they judge the success o government

programs. Te degree to which accountability center managers and their

teams were able to create value would become clear over time. Whenan accountability center created taxpayer value through lower costs

or better outcomes, a sound basis would exist or rewarding managers

and employees. Conversely, i perormance suered and taxpayer value

declined over time, there would be a basis or removing low-perorming

managers without endless delay.

Te panel concludes that applying principles o citizen value and the use

o accountability centers can reshape compensation systems or public

managers in positive ways. Colorado should create a process that usesindependent inormation on value creation rom the axpayer Value

Council as a signicant element in the state’s perormance review and

compensation system or managerial employees and departmental teams.

“Most government management compensation systems rely primarily on internalstandards rather than encompassing measures o customer value creation.”



37

cOnstitutiOnAl iMPeDiMents

Colorado is burdened with conicting constitutional

provisions that impede the state’s scal stability. Te most

signicant o these are Amendment 23 and the axpayer

Bill o Rights (ABOR). At the time o their adoption,

proponents argued that both o these constitutional

amendments would benet Coloradans. Amendment 23

was meant to ensure that K-12 education would receive

adequate unding. ABOR was intended to limit the

growth o government and prevent new or increased taxesrom being established without a vote o the people. Each

amendment was approved through a statewide vote.

aken together, these constitutional amendments

have exacerbated the state’s scal crisis. In eect, they

mandate spending and limit spending at the same time,

with little regard to economic conditions or revenue

availability. Amendment 23 and ABOR put the state’s

spending on autopilot, without the ability to alter coursewhen conditions change. Revisiting these constitutional

amendments is an important step in restoring Colorado’s

scal sustainability.

Amdm 23

Amendment 23 was adopted by Colorado voters in

2000. Among other things, it generally required that the

state increase K-12 unding at the rate o ination plus 1

percent through 2011. Tereaer, unding is to increase

at the rate o ination. Te problem with Amendment23 is neither the intent o its ramers nor the goal o

providing quality education. Te difculty lies in the act

that Amendment 23 mandates spending with little regard

to economic conditions. It is an example o expenditure

momentum that has, and will continue to, exacerbate the

state’s scal crisis and displace other budget priorities.

Proponents o Amendment 23 point out, correctly, that

Colorado’s per-pupil unding has declined consistently since 1982. As the panel noted in the section on K-12,

Colorado has a major responsibility or unding schools

to ensure a thorough and uniorm system o public

education. However, requiring the state to make

expenditures without regard to economic conditions is

not the solution; it is a serious problem in itsel.

Te panel concludes that Amendment 23 runs counter

to principles o scal sustainability by increasing expenditure momentum and mandating expenditures

with little regard to the availability o revenue.

Amendment 23 should be repealed.

tABOR

Mandates may require spending, as with Amendment

23, or they may limit or prohibit spending, which is the

eect o ABOR, the axpayer Bill o Rights. ABOR wasPh tammgaState Government Panel Member

“Amendment 23 and TABOR put the state’s spending on autopilot



38

Rob DState Government Panel Member

approved by Colorado voters in 1992. It is considered by

many to be the most comprehensive tax and expenditurelimit in the nation. It is a constitutional amendment that

establishes ormulas limiting the growth o revenue and,

thus, spending. ABOR requires voter approval or new

and increased tax rates and outlaws certain types o taxes

entirely, irrespective o voter preerences.

ABOR, through its ormulas and prohibitions, has

greatly reduced the ability o elected ofcials to enact

scal policies that respond to changing economicconditions. As Amendment 23 limits ofcials by orcing

expenditures up, ABOR limits ofcials by constraining

revenue. I one were trying to design a state nancial

system to be as rigid and non-responsive as possible,

Colorado might be the model.

While ABOR creates problems, it also produces some

important benets. By prohibiting new taxes or increased

tax rates without a vote o the people, ABOR has givencitizens a strong measure o control over the level o

taxes they pay. Tis provision may have contributed to

Colorado’s status as a relatively low-tax state. ABOR’s

ormulas limiting revenue growth also tend to restrain the

growth o state government during periods o economic

expansion, as occurred during the 1990s.

Tat said, ABOR has impaired Colorado’s scal viability

by limiting what might be called natural revenue growth;that is, growth not resulting rom new taxes, higher

tax rates or an expanded denition o those covered

by a tax. Examples o natural revenue growth include

increases in sales and income taxes resulting rom a

robust economy or new businesses entering the state.

While ABOR’s revenue limits have little eect during

the depths o a recession, they may constrain the state’s

ability to participate in the recovery by capping revenue

growth. In the panel’s view, ABOR is neither a complete

impediment to progress nor an unmixed blessing or

Coloradans.

Te panel concludes that ABOR reduces the state’s

ability to create a sustainable scal environment

by substituting ormulaic approaches or legislative

judgment and prohibiting certain taxes irrespective o

voter preerences. Te sections in ABOR that require a

vote o the people or new or increased taxes should be

retained. Te remaining provisions o ABOR should be

repealed.

“Amendment 23 and TABOR put the state’s spending on autopilot,without the ability to alter course when conditions change.”

S C l i d R d ti



39

FiscAl FAult lines

Colorado relies heavily on income and sales taxes that are highly volatile. Tese revenues rise and all

abruptly with economic cycles, while major state expenditures continue to increase irrespective o

economic conditions. Tis creates a structural imbalance and constrains other budget priorities. Evidence

suggests that this structural imbalance will not cure itsel; rather, it will become more severe over time.

Tese conditions—volatile revenue sources, expenditures that are difcult to control and a crowding out

o other priorities—are the result o state policies and practices put in place over many years.

Rhg sa Govrm

Te panel concludes that achieving a strong and sustainable scal environment in Colorado requiresrethinking traditional practices and considering new principles to help guide the development o state policies

in the twenty-rst century.

PRinciPles FOR PROGRess

As the panel moved rom an analysis o Colorado’s nancial challenges to a broad discussion o state

government, a number o principles emerged. Tese principles suggest the need to: rerame government;

ocus on citizen value; reorm the nancial structure; encourage competition; leverage market orces; and

ully und governmental programs. Te panel believes these principles can help the state become more

exible, adaptable and responsive and support Colorado’s progress toward a strong and sustainable scaluture.

taxpar Va

Te panel recommends the legislature and governor arm that the purpose o Colorado state government is

the creation o measurable value or citizens.

taxpar Va co

Te panel recommends that the legislature and governor establish an independent axpayer Value Council to

provide inormation that allows citizens to judge the value o state services.

Summary o Conclusions and Recommendations

S C l i d R d ti ti d



40

Aoab cr

Te panel recommends that the organizing ramework or Colorado state nances be an accountability center structure that links dedicated revenue sources with a specied area o service.

Pb sbd

Te panel recommends that the extent o public subsidy in each state activity be identied through its accountability center

and disclosed to citizens through axpayer Value Council reports.

Govrm a eabr

Te panel recommends that the role o state government in Colorado be one o enabling public services, using private

contractors when appropriate and allowing other organizations to oer public services in competition with the state unless public policy clearly necessitates a monopoly status.

ug Mar o Aoa Ror

Te panel recommends that, when practical, Colorado utilize a market approach to allocate public resources, ocusing

primarily on supporting individuals rather than operating institutions.

Fdg irgovrma Program

Te panel recommends that the legislature and governor adopt a ull-unding approach or all state/local programs, prohibit

ununded mandates and work to encourage the ederal government to take a similar approach with its intergovernmental programs.

Fdg sa Program

Te panel recommends that the legislature ully und all current programs and annual payments on multiyear obligations,

using conservative estimates when calculating Colorado’s long-term liabilities.

Summary o Conclusions and Recommendations, continued

Gorg smoState Government Panel Member



41

FRAMeWORks FOR POlicy

I Colorado is to address its nancial challenges and create a scally sustainable uture, it should reconsider

several major policies. Te panel’s goal was not to provide detailed policy recommendations, an ineasible task

given the broad scope o this report. Instead, panel members examined several key policy issues in light o the

principles discussed herein. Te result is a series o policy commentaries that illustrate ways in which those

principles might be applied to various issues. Tese commentaries serve as principle-based rameworks around

which sustainable policies may be developed.

k-12 edao

Te panel concludes that the principles o ull unding or intergovernmental programs, market allocation o

resources, competition and citizen value could be benecially applied to K-12 education in Colorado. Te state’s

role should be limited to dening and assessing outcomes and ully unding the K-12 program. Local school

districts should be ree to determine how best to achieve outcomes dened by the state. Te state should und

students, not school districts, through stipends to students attending public schools. Te axpayer Value Council

should provide inormation that allows citizens to judge the value being created by the state’s K-12 program and

individual school districts.

Hghr edao

Te panel concludes that the principles o market allocation o resources, competition and a value perspectiveshould be applied to higher education in Colorado. Te state should support higher education through a system

o stipends, scaled to reect student nancial need, which builds upon the existing College Opportunity Fund

inrastructure. Te boards o Colorado’s universities and colleges should be given the authority to manage each

institution with minimal involvement by state agencies. Colorado’s institutions o higher education should be

allowed to succeed or ail based upon the value they create or students.

Mar lo MapaState Government Panel Member

S C l i d R d ti ti d



42

traporao

Te panel concludes that the Colorado Department o ransportation is well suited to apply principles o accountabilitycenters, distinguish between subsidies and ees, and adopt a value perspective. CDO should use an accountability center

structure linking dened revenue sources to specic service areas and clearly identiy the degree to which tax subsidies and

ees are used. Te department should shif rom a technical, production perspective to a ocus on citizen value, presenting its

public inormation in those terms.

Mdad

Te panel concludes that principles relating to scal sustainability, value and ull unding o intergovernmental programs

are useul in connection with Medicaid. Te governor and legislature should study the best practices o other states and take

ull advantage o ederal waivers to create an eective program while managing nancial risk. Colorado taxpayers should be provided with value inormation related to Medicaid by the axpayer Value Council. Colorado should join with other states

in urging the ederal government to rethink Medicaid, redene outcomes to be achieved and und 100 percent o the cost o the

ederal program.

PeRA

Te panel concludes that the state should apply principles related to ull unding o state programs, scal sustainability and

value to Colorado’s Public Employees’ Retirement Association (PERA). o minimize risk, PERA should use a conservative

discount rate when calculating uture investment earnings and long-term liabilities. Te Colorado legislature should ully und

its annual PERA contribution. Retiree benets should be expanded only i the plan is 100 percent unded and afer careul

study o long-term implications. Colorado citizens should be provided with value inormation on PERA through the axpayers

Value Council.

ira srv

Te panel concludes that Colorado can benet rom applying the principle o competition to internal state services. State

departments and agencies should be allowed to select internal or external suppliers o support services except in cases where

interdepartmental consistency requires the use o an internal service agency or designated system.

Summary o Conclusions and Recommendations, continued

Jo ZhState Government Panel Member



43

empo compao

Te panel concludes that applying principles o citizen value and the use o accountability centers can reshapecompensation systems or public managers in positive ways. Colorado should create a process that uses independent

inormation on value creation rom the axpayer Value Council as a signicant element in the state’s perormance

review and compensation system or managerial employees and departmental teams.

cOnstitutiOnAl iMPeDiMents

Colorado is burdened with conicting constitutional provisions that impede the state’s scal stability. Te

most signicant o these are Amendment 23 and the axpayer Bill o Rights (ABOR). aken together, these

constitutional amendments have exacerbated the state’s scal crisis. In eect, they mandate spending and limit

spending at the same time, with little regard to economic conditions or revenue availability. Te amendments

put the state’s spending on autopilot, without the ability to alter course when conditions change. Revisiting

these constitutional amendments is an important step in restoring Colorado’s scal sustainability.

Amdm 23

Te panel concludes that Amendment 23 runs counter to principles o scal sustainability by increasing expenditure

momentum and mandating expenditures with little regard to the availability o revenue. Amendment 23 should be

repealed.

tABOR

Te panel concludes that ABOR reduces the state’s ability to create a sustainable scal environment by substituting

ormulaic approaches or legislative judgment and prohibiting certain taxes irrespective o voter preerences. Te

sections in ABOR that require a vote o the people or new or increased taxes should be retained. Te remaining

provisions o ABOR should be repealed.

Ackno ledgments



44

Acknowledgments

Pa Prr

Te DU Strategic Issues Panel on State Government wishes to acknowledge and extend its sincere appreciation to theollowing individuals whose expertise, inormation and viewpoints contributed to the panel’s process and to this report.

itles shown reect the positions held by individuals at the time o their presentations to the panel.

Bruce Benson - President, University o Colorado

Karen Beye - Executive Director, Colorado Department

o Human Services

Charlie Brown - Director, Center or Colorado’s

Economic Future, University o Denver

om Clark - Executive Vice President, Metro Denver

Economic Development Corporation, Denver Metro

Chamber o Commerce

Ken DeLay - Executive Director, Colorado Association o

School Boards

Jennier Dennis - Co-Director, Strategic Issues Program,

University o Denverim Foster - President, Mesa State College

Russell George - Executive Director, Colorado

Department o ransportation

Robert Gibson - Executive Director, Colorado WINS

James Griesemer - Proessor and Dean Emeritus, Daniels

College o Business, University o Denver

Joan Henneberry - Executive Director, Colorado

Department o Health Care Policy and Financing

Roxy Huber - Executive Director, Colorado Department

o Revenue

David Longanecker - President, Western Interstate

Commission or Higher Education

Donna Lynne - Group President, Kaiser Foundation

Health Plan, Inc. and Kaiser Foundation Hospitals;

President, Kaiser Foundation Health Plan o Colorado

Sam Mamet - Executive Director, Colorado Municipal

League

Don Marostica - Executive Director, Colorado Ofce o Economic Development and International rade

Jerry Marroney - State Court Administrator, Colorado

Judicial Branch

Mary Mullarkey - Chie Justice, Colorado Supreme

Court

Rico Munn - Executive Director, Colorado Department

o Higher Education



45

Kay Norton - President, University o Northern Colorado

Jack Pommer - State Representative, House District 11

(Boulder), Member JBC

Bill Pound - Executive Director, National Conerence o

State Legislatures

Bill Ritter, Jr. – Governor o Colorado

Je Roberts - Public Policy Analyst, Center or Colorado’s

Economic Future, University o Denver

odd Saliman - Director, Colorado Governor’s Ofce o

State Planning and Budgeting

Ron Snell - Director o State Services Division, National

Conerence o State Legislatures

Henry Sobanet - President, Colorado Strategies, LLC

Chip aylor - Executive Director, Colorado Counties, Inc.

Ann erry - Executive Director, Special District

Association o Colorado

John Tomasian - Director, Center or Best Practices,National Governors Association

Jay Want - Chairman o the Board, Center or Improving

Value in Health Care

Scott Wasserman - Political Director, Colorado WINS

Peter Weir - Executive Director, Colorado Department

o Public Saety

Meredith Williams - CEO, Colorado Public Employees’

Retirement Association

Te panel extends special appreciation to the University o Denver Chancellor Robert D. Coombe and Provost Gregg

Kvistad or their support and interest in the panel’s work. Teir commitment to serving the public good has been

instrumental to the panel’s endeavors. spha VafrState Government Panel Member

Panel Members



46

James Griesemer, Chair

Proessor and Dean Emeritus

Daniels College o Business, University o Denver

Don Ament

Former Colorado Commissioner o Agriculture

Forrest Cason

CFO, Mental Health Center o Denver

Linda Clark

Retired Managing Director, Piper Jaray & Co.

Rob Deline

President, Monaghan Management Corporation

Gary Dudley

Retired ax Partner, Deloitte & ouche LLP

Judy Giacomini

Retired Vice President o Student Services, Northeastern

Junior College

Jerry Groswold

Consultant and Retired CEO, Winter Park Resort

Panel Members

Lowell Hare

Managing Partner, H & L Investment Company

Peggy Kerns

Director o the Center or Ethics in Government, National

Conerence o State Legislatures

Hal Logan

Co-Founder and Director o Basic Materials andServices LLC

Donna Lynne

Group President, Kaiser Foundation Health Plan, Inc.

and Kaiser Foundation Hospitals; President, Kaiser

Foundation Health Plan o Colorado

Mary Lou Makepeace

Vice President, Gay & Lesbian Fund or ColoradoEd Mueller

Retired Chairman and CEO, Qwest Communications

International Inc.

George C. Simon, Jr.

Associate Clinical Proessor and Academic Director,

PMBA Program, University o DenverPh VaghaState Government Panel Member

Mmbr of h 2010–11 Pa o sa Govrm



47

Phil amminga

CEO, Wellok, Inc.

Phil Vaughan

President, Phil Vaughan Construction Management, Inc.

Stephanie Villauerte

Executive Director, Rocky Mountain Children’s Law

Center

Anne Warhover

President and CEO, Te Colorado Health Foundation

Jon Zeschin

Partner and CEO, Essential Investment Partners, LLC

Tis report was authored by James Griesemer, Chair o

the Panel and Dean Emeritus o the Daniels College o

Business at the University o Denver. Portions previously copyrighted by Dr. Griesemer are used with permission.

Appreciation is extended to Jennier Dennis or editing

and production o the report and Rebecca Swanson or

research assistance throughout the project.

Rethinking Colorado's Government: Principles and Policies for Fiscal Sustainability

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