University of Denver

April 25, 2005Fragmented Fiscal Policymaking in Colorado
Have we Painted Ourselves Into a Corner?

By Harry Lewis

Since the economic recession that enveloped the United States during 2001, The Colorado legislature has been faced with ever-mounting challenges to adequately fund essential services to meet the needs of its citizens. Although the economic recession caused a general decline in tax receipts and revenue sources throughout the country, Colorado’s ability to recover was more severely affected, due to the constraints and limits imposed by voter-approved legislative referendums and citizen-sponsored initiatives that amended the state’s constitution. The subsequent interrelationship and effect of this fragmented system for creating fiscal policy in Colorado has resulted in a complex mosaic of constraints on Colorado’s revenue and budgeting systems. These constraints now severely limit the legislature’s ability to adequately fund several departments and agencies that are key to our economic health. The law of unintended consequences has come home to roost in Colorado’s current state taxation and annual budget processes.

Five major policy constraints and requirements guide the fiscal and budget procedures of state government in Colorado — four of these major policies are now contained in the Colorado Constitution, and the fifth, contained in statutory law, was created and adopted by the state legislature in 1991.

1. State Debt Limit: Section 3 of Article XI of the Colorado constitution adopted in 1876, as interpreted by a series of court rulings, prohibits the State from issuing general obligation bonds payable from property taxes or any other tax otherwise available for general fund purposes. This has forced the state to turn to other more expensive financing mechanisms to build and improve highways, prisons, and state facilities.
2. Gallagher Amendment: Added to the state constitution by a legislative referendum and approved by the voters in 1982, the Gallagher Amendment mandates that the property tax assessment rate on residential property be adjusted to maintain a constant percentage (currently 47%) of total statewide taxable valuation attributable to residential property. After 23 years of operation, a parcel of business property that has the same market value as a parcel of residential property pays an average of about 3 ½ times more property tax than a residential property taxpayer. From an economic development perspective, this is a disincentive for Colorado businesses to keep or expand their facilities in Colorado, and for out-of-state businesses to relocate their facilities to Colorado.
3. TABOR (Taxpayer’s Bill of Rights): A citizen-sponsored initiative (that failed to pass in two prior elections), TABOR became part of the state’s constitution after approval by 54% of the voters in 1992. Its rationale was to establish limits on the growth of the state budget, and the budgets of counties, cities and towns, school districts, and special districts. TABOR mandates that when annual government revenues exceed annual percentage limits (defined as inflation plus population growth): the “TABOR surplus” must be refunded to taxpayers, unless voters approve its retention. When revenues do not reach the limit, lower revenue amount must be used to calculate the limit in following years. This is termed “the ratchet effect.” For example, combined state tax and fee revenues contained in the state general fund and numerous cash funds declined by nearly $1.2 billion or 13% between 2001 and 2003. Even as the recovery has begun, this is still $500 million lower in 2005 than in 2001. Because of the ratchet effect, the state’s revenue limit is permanently reduced to these recessionary revenue levels. In addition, TABOR provided that existing restrictions on revenue, spending, or debt could not be weakened without voter approval. This provision has had major implications for the next policy constraint.
4. Arveschoug-Bird Limit: Enacted by the state legislature in 1991, this statute limits any increase in annual appropriations from the State’s general fund to 6% per year. With approval of the TABOR amendment in 1992, this statute effectively became part of the state constitution. Because the limit applies to the previous year’s general fund spending base, which must be reduced during periods of revenue decline, it also “ratchets down” the state general fund in a manner similar to TABOR.
5. Amendment 23: This citizen initiative, which became part of the state constitution when approved by the voters in 2000, requires that total per pupil revenue from state aid and property taxes increase annually at no less than the rate of inflation plus 1% until 2011, and at no less than the rate of inflation thereafter. This puts considerable pressure on state aid because the local property tax share is limited by factors in TABOR and the Gallagher amendment to grow more slowly, and the state must make up the difference.

Some blame Amendment 23 for exacerbating the State’s current budget crisis by mandating annual increased funding for K-12 public education at the same time that the rest of state budget appropriations are on the decline. Others blame TABOR for ratcheting down the state’s budget and not allowing it to recover its ability to fund vital services in proportion to the recovery in the economy. In fact, many suggest that the restrictions in TABOR were the principal motivation leading to the Amendment 23 initiative and subsequent voter approval. Regardless of which provision bears the greatest fault, one thing is clear – because the two operate to reduce total state revenue while mandating increased state funding for K-12 education, funding for other critical state services is being squeezed out. Unless this situation is resolved, it will be only a matter of time before we will be confronted with yet another citizen initiative to mandate more spending for another budget item, such as higher education, early childhood inoculations, or Medicaid.

Due to the economic recession, beginning in 2001, and the permanent reduction of Colorado’s general and cash fund appropriations base mandated by TABOR’s “ratchet effect,” the state currently faces a major budget crisis. Thanks to the collaborative bipartisan efforts between the Governor’s office and the current legislative leadership, it appears that some constructive proposals to address the current budget crisis on a short-term basis will be submitted to the voters. I am hopeful that they will be approved, but until we address the underlying conflicts between the major financial provisions of our state constitution and laws, we are likely to remain where we are – painted into a corner by our fragmented system for making fiscal policy. Our founding fathers believed in a strong and accountable system of representative government. Colorado needs to reaffirm that principle in the future, and be skeptical of initiatives amending the state constitution that do not alleviate the conflicts, but instead make the conflicts worse. As responsible Coloradans, we need to be wary of proposals coming from a fragmented fiscal policymaking system that that are not in our best long-term interests.