CFI Notes: Five Takeaways from the 2016-17 State Budget

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By Chris Stiffler

CFI Economist

For months, there has been anxiety over cuts to state services coming in the 2016-17 budget, cuts to such programs as education, healthcare and colleges. Gov. John Hickenlooper in November had recommended cuts to higher education, capital construction and to Medicaid reimbursement rates to deal with a then predicted $373 million shortfall. Latest estimates now show the cuts to the 2016-17 budget won’t be nearly as dramatic as thought in November. Here are five takeaways from the “long bill,” also known as the state budget in legislative form:

1. The budget shortfall for FY 2016-17 will not be on the back of education as neither colleges nor schools will see the budget cuts initially expected when the governor released his budget proposal a few months ago. This is good news for the education community considering that the governor’s proposed budget initially included $20 million in budget cuts for colleges and universities and $50 million in cuts to K-12. The proposed budget, however, does not allow K-12 to make up any ground on inflation. The negative factor will remain at $831 million.

2. Part of the budget shortfall for FY 2016-17 will be bridged by reducing the general fund’s “savings account.” Currently 6.5 percent of the general fund is placed in a reserve to help offset the need for budget cuts during tough economic times. The FY 2016-17 budget will drop that general fund reserve from 6.5 percent to 5.6 percent, which frees up about $84 million. With such a low level of savings, it is difficult for Colorado to weather an economic downturn (when tax revenue isn’t as abundant) without making cuts.

3. The FY 2016-17 budget shortfall will largely be addressed by cutting medical services for low-income Coloradans. The proposed budget would reduce the Hospital Provider Fee by $73 million. This has the effect of freeing up some general fund dollars because Colorado won’t be issuing TABOR rebates in 2017. These cuts hurt twice as much because they also reduce the amount of federal dollars Colorado draws in to help pay for medical care for low-income and disabled populations. The reduction in dollars for Medicaid to help balance the budget will be done by lowering reimbursements to primary care doctors, which will make it harder for Medicaid patients to access a primary care doctors.

4. The proposed budget decided to split the difference for the money available to be transferred for transportation. For the last several months, slight fluctuations in tax revenue collections determined whether transportation received about $200 million or $100 million (known as 228 transfers). Instead of relying on “hair pin trigger” budgeting, the proposal settled on roughly $150 million for transportation. The budget also allocated about $50 million for capital construction.
5. The FY 2016-17 budget illustrates the difficult decisions Colorado budget-makers must deal with in a fiscal environment with low taxes and a small state government. Despite the strong economy, Colorado’s limited state tax collections forces budgeters to make funding trade-offs between schools and healthcare. It also highlights the state’s special fiscal conundrum — the fact that Colorado makes cuts to services during bad times and during good economic times. This budget also accentuates how complicated it is to adequately fund state services when legislators’ hands are tied by rigid formulas.