Economic forecasts not pretty

The Colorado Statesman

Lawmakers will need to cut between $400-500 million in the 2012-13 budget in order to close yet another budget shortfall, according to economic forecasts presented to the Joint Budget Committee on Tuesday by Legislative Council and the governor’s budget office.

That means cuts to K-12 education, higher education, Medicaid and human services are likely once again, as lawmakers will have the difficult choice of determining where to slash the 2012-13 budget. Legislators will also likely need to transfer severance fund dollars and reprioritize cash funds. Some Democrats are already raising the possibility of keeping a property tax break for seniors suspended, which would save the state about $100 million. But Republicans have vowed to fight any further suspension of the Senior Homestead Exemption.

The two separate economic forecasts presented by the state’s top economists with Legislative Council and the Governor’s Office of State Planning and Budgeting both indicate that the economy is slowing again, with one economist even suggesting that the state and nation could be headed back into another recession, though it is not likely that it is occurring immediately.

General fund revenue is only expected to grow 0.8 percent, or about $57.8 million, in the current fiscal year, and 3 percent, or about $212 million, in the following year. Henry Sobanet, Gov. John Hickenlooper’s budget director, says revenue is growing slowly because Colorado’s job market is not improving at a fast enough pace. He points out that forecasts expect 18,000 new jobs to have been created in Colorado in 2011, with only about 10,000 new jobs expected in 2012. Considering about two-thirds of the state’s general fund comes from income taxes, and a third of the fund comes from sales tax, it is nearly impossible for the state’s revenue to grow faster without fixing a $1 billion “structural imbalance” in the budget, said Sobanet.

“The fundamental reason that revenues are weak is that job growth is very slow,” explained Sobanet. “Job growth is going to drive income; it’s going to drive people buying things.”

The September forecasts do not deviate too far from forecasts presented in June, though economic conditions have deteriorated a bit since then, according to presentations given on Sept. 20. Natalie Mullis, the legislature’s chief economist, cautioned that the state could be headed back into another recession, though she was hesitant to discuss that likelihood or provide a timeframe.

“It just feels like the economy could be at a turning point right now, but I haven’t seen any evidence that we are in a recession, we just wanted to make a warning that the potential for that could happen,” she said.

“The economy is dealing with a real hangover from the housing bubble and the financial bubble and that hangover is not going to go away…” Mullis continued. “The economy is going to take a long time to recover and therefore there will be difficult budget processes for several years.”

Sobanet is less eager to point to the realities of another recession, though his office is also cautioning lawmakers that it is a possibility.

“We do have a risk of a recession and we’ve outlined a few of those risks… but we’re not predicting a recession in this forecast, it’s a pretty slow projection — slow revenue growth, very slow job growth — but Colorado remains in a little better position than the rest of the country, and so the risk of our having a shrinking of our economy, there is a risk of it, but we’re not calling for it right now,” Sobanet said.

The forecasts presented by the governor’s office and Legislative Council do not differ greatly from one another. Mullis says the two reports are “nearly identical.” Given the consistency, lawmakers on the Joint Budget Committee are taking the predictions very seriously, though they will have two more forecasts to consider before finalizing the so-called Long Bill.

Rep. Mark Ferrandino, a Denver Democrat and member of the powerful JBC, says the committee will be forced to look at cuts made last year, including K-12 education, higher education and Medicaid. K-12 makes up about 40 percent of the general fund, so it is always a likely target.

“We still have tough choices to make,” Ferrandino said.

Gov. Hickenlooper made the tough choice of proposing a $332 million cut to K-12 education last year, though the legislature only ended up slashing K-12 funding by a little more than $200 million. Some theorize that the governor purposely started with a higher number in order to start negotiations between Republicans and Democrats, with the goal of getting to a lower number. If that analysis is correct, the governor’s plan worked. He is expected to propose cuts to K-12 of as much as $300 million when he makes his budget proposal on Nov. 1.

Education advocates are already bracing for the likely cuts, concerned that further reductions will slow progress in the classroom.

“Educators across Colorado watched class sizes grow and quality programs vanish as nearly a half-billion dollars in spending cuts hurt students over the last two years,” Mike Wetzel, spokesman for the Colorado Education Association, said in a prepared statement. “Teachers and education support professionals are hoping for the best in the next state budget, but fear students will lose even more opportunities in yet another year of massive education cutbacks.”

Wetzel went on to raise concerns over future progress in Colorado, worried that further cuts will make it more difficult for schools to advance reform efforts.

“New statewide standards, tests and educator effectiveness evaluations won’t work for the benefit of students without resources,” Wetzel said.

Meanwhile, Democrats are already looking at the possibility of revenue enhancements stemming from suspending tax breaks. Ferrandino says “everything must be on the table,” including the property tax break enjoyed by seniors.

“It needs to be part of the conversation,” Ferrandino explained. “The Speaker [Frank McNulty, R-Highlands Ranch] has said that we aren’t going to do it at all, however, I don’t think saying that he’s going to promise that now without looking at the full budget picture, it’s not the responsible thing to do.”

But Rep. Cheri Gerou, R-Evergreen, a member of the JBC, says suspending the Senior Homestead Exemption is off the table. She says the exemption is protected in the state constitution, and therefore suspending the break is not an option for lawmakers.

“Everything does not have to be on the table, we just have to look at it in a balanced way, and I know a whole lot of seniors want that tax exemption, so I’ll do everything in my power to make sure they get it,” she said.

The legislature would need a measure to suspend the tax exemption, which would most likely start in the Democratic-controlled Senate. It would, however, probably die in the Republican-controlled House.

Gerou would also like to take another look at a measure that would ask certain low-income parents to pay monthly premiums for their children’s health insurance. Senate Bill 213 was the only veto by Hickenlooper last year. The proposal would have applied to families with income of 150 to 205 percent of the federal poverty level, who would pay about $20 per month for the first child and $10 per month for each additional child enrolled in the Children’s Basic Health Plan (CHP+), up to a maximum of $50 per month per family.

Hickenlooper said the measure would have restricted children’s access to basic health care in Colorado. But Gerou says it may be wise to take another “whack” at the measure.

She is also open to once again looking at a controversial proposal raised by Republicans last year that called for parents to pay 30 cents a day per child for school breakfasts that were offered by the state for free. Republicans on the JBC last year would not approve additional funding for the program, though they took a public beating from Democrats over blocking the $125,000 funding extension, considered small change during budget talks.

“I’m not trying to starve children, but keep in mind that none of those kids were Medicaid children,” said Gerou. “I’m looking at everything.”