Since the recession of 2001, The Colorado legislature has faced ever-mounting challenges to adequately funding essential services.
Colorado’s ability to recover was more severely affected than other states due to limits in the state’s constitution. The resulting fragmented system for creating fiscal policy has resulted in a complex mosaic of constraints on revenue and budgeting. These constraints now severely limit the legislature’s ability to adequately fund departments and agencies that are key to our economic health. The law of unintended consequences has come home to roost in Colorado.
Five major policy constraints and requirements guide the fiscal and budget procedures of state government. Four of these major policies are contained in the Colorado Constitution, and the fifth, a state law, was adopted by the legislature in 1991.
State Debt Limit: Section 3 of Article XI of the constitution, as interpreted by a series of court rulings, prohibits the state from issuing general obligation bonds payable from property or any other taxes otherwise available for the general fund. This has forced the state to turn to other, more expensive financing mechanisms to build and improve highways, prisons, and other state facilities.
Gallagher Amendment: Put on the ballot by the legislature 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 (45 percent) of total statewide taxable value. The effect of this has been that a business property with the same market value as a residential property pays about three times more property tax. This is a disincentive for businesses to keep or expand their facilities in Colorado, and for out-of-state businesses to relocate.
Taxpayer’s Bill of Rights: A citizen-sponsored initiative, TABOR became part of the state constitution after approval by 54 percent of voters in 1992. Its goal 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 (inflation plus population growth) the surplus must be refunded to taxpayers, unless voters approve its retention. When revenues do not reach the limit, the 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 declined by nearly $1.2 billion, or 13 percent, between 2001 and 2003. Because of the ratchet effect, the state’s revenue limit is permanently reduced to these recessionary revenue levels. In addition, TABOR provides that existing restrictions on revenue, spending or debt cannot be weakened without voter approval. This provision has had major implications for the next policy constraint.
Bird-Arveschoug Limit: Enacted by the legislature in 1991, this law limits any increase in annual appropriations from the state’s general fund to 6 percent a year. With approval of TABOR, 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.
Amendment 23: This citizen initiative, which became part of the constitution in 2000, requires that total per pupil spending from state aid and local property taxes increase annually at no less than the rate of inflation plus 1 percent 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 TABOR and the Gallagher amendment, and the state must make up the difference.
Some blame Amendment 23 for exacerbating the budget crisis by mandating increased funding for K-12 education when other programs had to be cut. Others blame TABOR for ratcheting down the state’s budget and not allowing it to recover in proportion to the recovery in the economy. Regardless of which provision bears the greatest fault, one thing is clear – because the two operate to reduce total state revenue while mandating increased funding for education, money for other critical state services is being squeezed. 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 some other program, such as higher education, early childhood inoculations, or Medicaid.
So, because of the recession and the permanent cut in the state spending base, the state faces a major budget crisis. Thanks to the collaborative, bipartisan efforts between Gov. Bill Owens and the current legislative leadership, constructive proposals to address the crisis on a short-term basis will be submitted to the voters in November.
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 and be skeptical of initiatives amending the state constitution that do not alleviate the conflicts, but instead make them worse. As responsible Coloradans, we need to be wary of narrow proposals that are not in our best long-term interests.
Harry Lewis is owner of Harry T. Lewis Jr. Investments and a member of the Colorado Economic Futures Panel, a blue-ribbon group that is studying the state’s fiscal structure and problems.
