Colorado state budget woes grow as tax cuts, Medicaid costs and economic slowdown take a toll
The tax cuts are kicking in as inflation, wage growth and consumer spending cool off and unemployment ticks up — all factors that will reduce state tax collections and how much it can spend under the state's revenue cap even as demands on the state budget are growing.
State economists Thursday briefed the Joint Budget Committee on their quarterly revenue forecasts, the first since lawmakers passed a new round of property tax cuts during an August special legislative session.
The special session tax cuts represent a relatively small piece of the budget crunch. But the culmination of repeated tax cuts, a cooling job market and growing spending on education and health care has left the state of Colorado in a dire financial position despite a relatively strong economy.
The state's share of K-12 spending is expected to rise more than $500 million this budget year, largely due to the successive rounds of tax cuts. Legislative forecasts also show the state education fund is at risk of being completely depleted within 3 to 4 years. That means the state may have to increase general fund spending on K-12 schools, leaving less for other state services. Otherwise, lawmakers may need to back off of their plans to implement a new school finance formula .
Medicaid costs, too, are rising. The state Department of Health Care Policy and Financing overspent on the low-income health care program by as much as $154 million last budget year, which ended June 30, in part by underestimating how much care its patients would need .
Medicaid enrollment has been unusually volatile as a pandemic-era federal expansion of the program winds down. But those patients who remain on Medicaid tend to be older and less healthy than the population as a whole, driving up medical costs beyond the department's expectations.
"This is not unique to Colorado — this is something we're seeing nationwide of higher utilization of Medicaid services," Mark Ferrandino, the governor's budget director, told the JBC.
"The question is," he added, "is that a new normal?"
If the Medicaid trend continues, economists with the governor's Office of State Planning and Budgeting say the state could face a deficit of $1 billion or more as lawmakers and Gov. Jared Polis try to craft the 2025-26 spending plan. The governor's budget proposal is due Nov. 1.
The Medicaid overruns alarmed state lawmakers, some of whom suggested it was a symptom of broader administrative problems at the department. Sen. Barbara Kirkmeyer, a Brighton Republican, said she'd heard a number of complaints from medical providers about not getting paid properly, after lawmakers recently increased the state's reimbursement rates for health care services.
"I think our budget problem is just going to get that much worse," Kirkmeyer said. "I think there's a lot of deflecting that goes on. I think there's a lack of transparency, and I know there's a lack of accountability.
"I want to know how we're going to fix this," she added. "How are we going to put together a plan that we can actually fund and that we actually can provide services to those who are the most vulnerable residents in our state without breaking the budget?"
Colorado Legislative Council's nonpartisan staff anticipate a $921 million shortfall that would require the state to cut spending or dip heavily into its reserves, which are required by state law to set aside 15% of general fund spending. That's up from a $575 million projected shortfall reported during the June forecast.
In the current budget, which started July 1, the state is now expected to need more than $300 million in midyear spending cuts to maintain its 15% reserve.
Rep. Shannon Bird, the JBC chair, suggested the solution may involve decreasing the reserve requirement after years of trying to save money for a rainy day.
"This is why we have the reserve that we have — so it could be there at a time when the most vulnerable in our state need health care," said Bird, a Westminster Democrat.
