Gov. Hickenlooper’s 2018-19 budget proposes to save money for the next recession, shore up pensions

“If we’re not saving money, the next downturn is going to be all that much worse,” said Henry Sobanet, the governor’s budget director.
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The budget proposed by Gov. John Hickenlooper for the fiscal year that starts July 1, 2018, calls for public sector employees to pay more to stabilize their pension fund and for the state to maintain a 7 percent reserve, more than the current goal of 6 percent but far less than economic analysts recommend.

Colorado has raided its rainy day fund repeatedly in recent years, but now it's time to save for the inevitable next recession, said Henry Sobanet, director of the Office of State Planning and Budget.

"Am I expecting another recession? Absolutely," Sobanet said. "The problem is, I can't tell you when. If we're not saving money, the next downturn is going to be all that much worse."

A recent report from Moody's Analytics looked at states' preparedness for a recession and ranked Colorado in the bottom third of states. The analysts actually recommended a 15 percent reserve to get through a recession without cuts to state services -- that's what the city of Denver maintains -- but right now the reserve is closer to 5 percent, despite a policy of maintaining a 6 percent reserve.

Sobanet noted that the last two recessions saw a 16 percent reduction in general fund revenue at a time when the reserve policy was just 4 percent. While the state now has a policy of saving more money, Colorado hasn't actually maintained a 6 percent reserve because it keeps using the money in its savings account.

Sobanet defended the use of the reserve fund in recent years. The state spent roughly $100 million to respond to the 2013 floods and help recovery efforts, paid back severance tax revenue to oil and gas companies as a result of a court decision that went against the state and handled "hiccups" in the state economic forecast without cuts to state services.

"Every year we've been trying to replenish it when we've had an unexpected drop in it," Sobanet said. "While we're growing, we think this is a great chance to get toward these standards that some analysts advise. I don't know how the state would get to a 15 percent reserve. Obviously, that's more than double what we're recommending. Baby steps."

Sobanet said there's no guarantee the state won't have to dip into reserves again, but now is the time to at least try to save more. (This sounds remarkably like a conversation I have with myself about my own budget. "At least try to save!")

"That's the funny thing about the reserve. It's for the thing you don't expect," Sobanet said. "... It's served its purpose, but what we really want to do is when there is an actual downturn, keep some consistency in state services."

The governor's budget calls for $30.5 billion in spending, a 3.7 percent increase from this fiscal year. The general fund makes up $11.5 billion of that, a 2.6 percent increase from this year. The governor's budget is a starting point from which the legislature builds its own spending plan, and any of these proposals could be rejected.

“Significant progress was made last year to address critical needs in Colorado,” Hickenlooper said in a statement. “This new budget supports education and public safety needs across the state. But history tells us to be ready for when times are not as good. By building up reserves and shoring our pension plan, this proposal meets the needs of today and provides a buffer for tomorrow.”

The state is in a much better position than the dire warnings about hundreds of millions in cuts to core services that we heard this time last year. The change in tone is largely due to Senate Bill 267, an omnibus bill out of the 2017 session that moved the hospital provider fee into an enterprise fund and freed up hundreds of millions of dollars under the TABOR cap, even though the cap itself was lowered.

The cap imposed by the Taxpayer's Bill of Rights limits how much government spending can increase each year to a formula determined by inflation and population growth and means Colorado doesn't automatically get to keep extra revenue generated by a strong economy. The hospital provider fee -- essentially a tax on hospital revenue that is matched by federal dollars and returned to hospitals to compensate for Medicaid patients -- was pushing the state over the revenue limit, but refunds to taxpayers would have come from the general fund and required cuts to other services.

This year, there is no talk of TABOR caps or refunds, and the state can use the money it collects.

"Colorado is one of those unique states where if you get to keep the money you already have, it's actually ... it's a little abnormal compared to other states," Sobanet said. "The last couple years, we had an artificial restriction on how much money we could keep in the general fund. The hospital provider fee was tipping us over the TABOR revenue limit and the rebates had to come out of the general fund.

"It took a few sessions to hold that mirror up to the world and have them appreciate that was a problem, but finally we got there. So now you're seeing economic expansion generate tax revenue that we can put toward the priorities we know the people of Colorado want to see: education, health care, public safety."

The budget calls for a 9.7 percent increase to higher education, which should keep tuition increases at state universities around 3 percent for in-state students. The budget also includes $1.5 million for emergency grants to students who experience an event that might otherwise cause them to drop out of school.

The budget requests $6.9 billion for K-12 education, a 5.2 percent increase over this year and $70 million above the increase solely from enrollment and inflation. That leaves a $758.3 million gap between what the state should spend on K-12 education and what it actually spends. This amount used to be known as the "negative factor" but is now called the "budget stabilization factor." Per pupil funding would be 4.5 percent higher. Chalkbeat Colorado has a more in-depth look at what the budget means for education.

The Colorado Department of Transportation would see an 11 percent increase, the net result of changes under SB 267. General fund transfers to CDOT will end, but the state will sell the first installment of $2 billion in certificates of participation to pay for additional road projects.

The budget restores two programs that were cut in the last legislative session: $1.25 million for film incentives and $3.1 million for the Colorado Energy Office. Legislators on both sides of the aisle have questioned whether the film incentive program really serves the interests of taxpayers and the general public (other lawmakers on both sides have defended it), while the energy office was the victim of partisan disagreements over its focus on renewable energy. The office has stayed open with the help of federal grants.

The other major policy initiative of the governor's budget is a plan to shore up the Public Employees' Retirement Association by capping cost of living increases to current and future retirees at 1.25 percent and by asking employees to increase their contribution by 2 percent. The budget also calls for 3 percent raises for state employees, so that they would get a 1 percent raise after paying more into their retirement account. The higher payments would start in 2019.

State budget officials believe this change would make PERA solvent for the next 29 years for state employees and for 31 years for the school division. There's been an enormous amount of wrangling over PERA in the last year, with the program facing significant financial shortfalls just seven years after the last effort at reform. PERA's board of trustees had recommended an increase in the state's contribution, rather than employees' contribution, but Sobanet said the state has already paid a lot toward retirement benefits. The Denver Post's Brian Eason has been closely following the PERA battle and has a good explainer here.

The budget proposal does not include specific numbers attached to two initiatives Hickenlooper would like to see move forward in his last year in office: expanded rural broadband and programs that would reduce the cost of health insurance in rural areas. If the governor's office can find enough support in the legislature for these initiatives, the money side of the equation will be addressed then.

Other spending proposals include:

  • $19.4 million to increase prison capacity and $16.5 million to expand treatment for Hepatitis C in state prison inmates
  • $4.8 million to help people getting out of prison make a successful transition
  • $1.96 million to hire the equivalent of 14.5 more Colorado State Patrol troopers and support staff
  • $1.2 million to fund a special unit within the Colorado Bureau of Investigation to pursue black- and gray-market marijuana operations
  • $384,875 for increased oversight of oil and gas flowlines -- this will not pay for a full mapping effort
  • $10 million in marijuana tax money to help hire teachers in rural districts

The budget also anticipates a slower rate of growth in Medicaid spending, as an improved economy means more people make too much money to qualify.

You can read the rest of the budget request here.

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