Rethinking Colorado's Government: Principles and Policies for Fiscal Sustainability
Summary of Recommendations:
FISCAL FAULT LINES
Colorado relies heavily on income and sales taxes that are highly volatile. These revenues rise and fall abruptly with economic cycles, while major state expenditures continue to increase irrespective of economic conditions. This creates a structural imbalance and constrains other budget priorities. Evidence suggests that this structural imbalance will not cure itself; rather, it will become more severe over time. These conditions—volatile revenue sources, expenditures that are difficult to control and a crowding out of other priorities—are the result of state policies and practices put in place over many years.
Rethinking State Government
The panel concludes that achieving a strong and sustainable fiscal environment in Colorado requires rethinking traditional practices and considering new principles to help guide the development of state policies in the twenty-first century.
PRINCIPLES FOR PROGRESS
As the panel moved from an analysis of Colorado's financial challenges to a broad discussion of state government, a number of principles emerged. These principles suggest the need to: reframe government; focus on citizen value; reform the financial structure; encourage competition; leverage market forces; and fully fund governmental programs. The panel believes these principles can help the state become more flexible, adaptable and responsive and support Colorado's progress toward a strong and sustainable fiscal future.
The panel recommends the legislature and governor affirm that the purpose of Colorado state government is the creation of measurable value for citizens.
Taxpayer Value Council
The panel recommends that the legislature and governor establish an independent Taxpayer Value Council to provide information that allows citizens to judge the value of state services.
The panel recommends that the organizing framework for Colorado state finances be an accountability center structure that links dedicated revenue sources with a specified area of service.
The panel recommends that the extent of public subsidy in each state activity be identified through its accountability center and disclosed to citizens through Taxpayer Value Council reports.
Government as Enabler
The panel recommends that the role of state government in Colorado be one of enabling public services, using private contractors when appropriate and allowing other organizations to offer public services in competition with the state unless public policy clearly necessitates a monopoly status.
Using Markets to Allocate Resources
The panel recommends that, when practical, Colorado utilize a market approach to allocate public resources, focusing primarily on supporting individuals rather than operating institutions.
Funding Intergovernmental Programs
The panel recommends that the legislature and governor adopt a full-funding approach for all state/local programs, prohibit unfunded mandates and work to encourage the federal government to take a similar approach with its intergovernmental programs.
Funding State Programs
The panel recommends that the legislature fully fund all current programs and annual payments on multiyear obligations, using conservative estimates when calculating Colorado's long-term liabilities.
FRAMEWORKS FOR POLICY
If Colorado is to address its financial challenges and create a fiscally sustainable future, it should reconsider several major policies. The panel's goal was not to provide detailed policy recommendations, an infeasible task given the broad scope of this report. Instead, panel members examined several key policy issues in light of the principles discussed herein. The result is a series of policy commentaries that illustrate ways in which those principles might be applied to various issues. These commentaries serve as principle-based frameworks around which sustainable policies may be developed.
The panel concludes that the principles of full funding for intergovernmental programs, market allocation of resources, competition and citizen value could be beneficially applied to K-12 education in Colorado. The state's role should be limited to defining and assessing outcomes and fully funding the K-12 program. Local school districts should be free to determine how best to achieve outcomes defined by the state. The state should fund students, not school districts, through stipends to students attending public schools. The Taxpayer Value Council should provide information that allows citizens to judge the value being created by the state's K-12 program and individual school districts.
The panel concludes that the principles of market allocation of resources, competition and a value perspective should be applied to higher education in Colorado. The state should support higher education through a system of stipends, scaled to reflect student financial need, which builds upon the existing College Opportunity Fund infrastructure. The boards of Colorado's universities and colleges should be given the authority to manage each institution with minimal involvement by state agencies. Colorado's institutions of higher education should be allowed to succeed or fail based upon the value they create for students.
The panel concludes that the Colorado Department of Transportation is well suited to apply principles of accountability centers, distinguish between subsidies and fees, and adopt a value perspective. CDOT should use an accountability center structure linking defined revenue sources to specific service areas and clearly identify the degree to which tax subsidies and fees are used. The department should shift from a technical, production perspective to a focus on citizen value, presenting its public information in those terms.
The panel concludes that principles relating to fiscal sustainability, value and full funding of intergovernmental programs are useful in connection with Medicaid. The governor and legislature should study the best practices of other states and take full advantage of federal waivers to create an effective program while managing financial risk. Colorado taxpayers should be provided with value information related to Medicaid by the Taxpayer Value Council. Colorado should join with other states in urging the federal government to rethink Medicaid, redefine outcomes to be achieved and fund 100 percent of the cost of the federal program.
The panel concludes that the state should apply principles related to full funding of state programs, fiscal sustainability and value to Colorado's Public Employees' Retirement Association (PERA). To minimize risk, PERA should use a conservative discount rate when calculating future investment earnings and long-term liabilities. The Colorado legislature should fully fund its annual PERA contribution. Retiree benefits should be expanded only if the plan is 100 percent funded and after careful study of long-term implications. Colorado citizens should be provided with value information on PERA through the Taxpayers Value Council.
The panel concludes that Colorado can benefit from applying the principle of competition to internal state services. State departments and agencies should be allowed to select internal or external suppliers of support services except in cases where interdepartmental consistency requires the use of an internal service agency or designated system.
The panel concludes that applying principles of citizen value and the use of accountability centers can reshape compensation systems for public managers in positive ways. Colorado should create a process that uses independent information on value creation from the Taxpayer Value Council as a significant element in the state's performance review and compensation system for managerial employees and departmental teams.
Colorado is burdened with conflicting constitutional provisions that impede the state's fiscal stability. The most significant of these are Amendment 23 and the Taxpayer Bill of Rights (TABOR). Taken together, these constitutional amendments have exacerbated the state's fiscal crisis. In effect, they mandate spending and limit spending at the same time, with little regard to economic conditions or revenue availability. The amendments put the state's spending on autopilot, without the ability to alter course when conditions change. Revisiting these constitutional amendments is an important step in restoring Colorado's fiscal sustainability.
The panel concludes that Amendment 23 runs counter to principles of fiscal sustainability by increasing expenditure momentum and mandating expenditures with little regard to the availability of revenue. Amendment 23 should be repealed.
The panel concludes that TABOR reduces the state's ability to create a sustainable fiscal environment by substituting formulaic approaches for legislative judgment and prohibiting certain taxes irrespective of voter preferences. The sections in TABOR that require a vote of the people for new or increased taxes should be retained. The remaining provisions of TABOR should be repealed.