The Taxpayer’s Bill of Rights, passed by Colorado voters in 1992, contains limits on government’s ability to expand revenues and expenditures. One key feature of the growth limits is their peg to a combination of inflation (as measured by the Consumer Price Index) and, in the case of state government, the growth rate of the state’s population.
For example, if inflation is 2 percent and the state’s population grows 1 percent, state revenue and expenditures may not grow more than 3 percent in the subsequent year. Another pre-existing legislative limit cemented in by TABOR limits state general-fund growth to 6 percent, regardless of the actual sum of inflation and population growth.
When revenues decline, as they did in 2002 and 2003, expenditures must fall to match. This resulting level becomes the new base for setting the budget the subsequent year. When such a decline occurs, the TABOR inflation/ population growth limits are then applied to that lower base. This so- called “ratchet effect” is addressed by the ballot measure that has been referred to voters in the November 2005 election.
The Colorado Economic Futures Panel has taken a neutral position on the ballot measure. Our focus is on more fundamental, long-term questions, including whether TABOR is the right way to limit the growth of state government.
During the 1990s, with the state’s population growth averaging just less than 3 percent per year (a cumulative 31 percent growth over the decade) and inflation averaging just over 3 percent per year, the limit on state government revenues and expenses expanded roughly 6 percent per year. Bolstered by a booming economy, revenues grew even faster so that by the late 1990s, very large TABOR refunds were enjoyed by state residents. In that environment, the question of whether TABOR limits were appropriate seldom came up as the state was able to fund its basic obligations.
Since the recession of 2001-02, the state has been faced with massive general fund budget and service cuts to make revenues and expenses match.
Intuitively, the inflation-plus-population growth formula seems attractive. And it may make sense for a few functions of state government. One example is driver’s licenses, an area of government service that grows reasonably consistently with the rate of population growth. However, other major functions of state government are far more complex, such as K-12 education, Medicaid, higher education and the penal system. These functions accounted for almost 85 percent of state general fund expenditures in the most recent budget year.
K-12 education: The single largest component of this expense is personnel costs. While large increases in enrollment will cause costs to rise, small increases in enrollment have very little effect on the largely fixed costs of running schools. And static or declining enrollment, as is the case for many school districts in Colorado, leave local school boards struggling to balance their budgets with increasing fixed costs for heating, school bus fuel and maintenance, plus salaries. Teacher salaries can certainly be limited to inflation over the short run; however, this leaves no room for merit increases.
But a deeper look at just one factor makes the issue more complex. An important component of teacher compensation is health benefits. A recent survey by the non-partisan Center for Studying Health System Change showed that health care costs rose more than 8.2 percent in both 2004 and 2003, down from a peak increase of 11.3 percent in 2001. These increases came at a time when CPI increases averaged just 2 percent.
Medicaid and related health care programs make up the second-largest component of the state budget, at about 22 percent. Medicaid is a partnership with the federal government under which the state is required to pay 50 percent of the costs of the program and must follow the eligibility and coverage rules.
Of course, the biggest component of Medicaid is the cost of payments to doctors, hospitals, nursing homes and other providers. We have just seen how far increases in the costs of health care have outstripped CPI increases. To make matters worse, the aging of our state population, combined with a growing uninsured population, are driving the number of Medicaid cases up significantly. Currently, Medicaid covers one in six children in Colorado, six out of 10 people in nursing homes and labor and delivery costs for one out of three births.
The costs of state colleges, the third biggest expense, track K-12 costs, so it is easy to see a similar mismatch there. Before you take off on the whole tuition controversy, though, it’s important to note that state funding for the University of Colorado fell 40 percent per resident student between 2002 and 2005. With less than 10 percent of its total budget now coming from state funds, the legislature granted CU “enterprise status,” freeing it from TABOR limits.
Finally, let’s take a quick look at the fourth largest component of the state budget – corrections. This seems like an area where cost increases should track the TABOR inflation-plus-population growth limit, right? Wrong. Tougher law enforcement and sentencing laws drove the inmate population up 123 percent over the 1990s – a rate of increase nearly four times that of the population.
So how do we match Colorado’s need with TABOR’s limits? Maybe while you’re waiting in line at the driver’s license office you can think of a solution. Better yet, with all that time on your hands, maybe you can think of a better measure than population-plus-inflation to limit the growth of state government so that the limits match the real costs of the functions we require of state government. The Colorado Economic Futures Panel (www.du.edu/economicpanel) is very interested in your ideas.
Jon Zeschin is the president and founder of ESSENTIAL Advisers, Inc., a wealth management and investment advisory firm.
