Colorado has created a fiscal cliff; the state is woefully unprepared for the revenue shortfall that will accompany the next recession. Citizens might be surprised to learn that the state has been pursuing imprudent policies that will result in a fiscal crisis when the next recession hits. It is important to understand how the fiscal cliff was created and what we can do about it.
Over the past two decades, Colorado has weakened the fiscal constraints imposed by the Colorado Taxpayer ‘s Bill of Rights (TABOR), which limits the rate of growth in state spending to the sum of inflation plus population growth, regardless of the amount of revenue the state takes in.
But most state revenue is now exempt from the TABOR limit. The exempt funds include the revenue from enterprises and the fees collected by government agencies, which have grown rapidly over this period. As a result, over the past decade TABOR has not constrained the growth in spending, and this year the state will spend virtually every dollar of revenue it takes in.
Increasing debt is also incurred in the form of unfunded liabilities. Despite the recent reforms enacted in the Public Employees Retirement Association, unfunded liabilities continue to increase. The official estimate of these unfunded liabilities is $32 billion; but with realistic assumptions regarding rates returns on assets, the actual unfunded liabilities are estimated to be in excess of $100 billion.
As this fiscal cliff has grown, the state has done nothing to prepare for the revenue shortfall that will inevitably accompany the next recession. While we can’t predict when the next recession will occur, we can predict the revenue shortfall that will accompany the recession. During the most recent financial crisis, from FY 2009/10 to FY 2014-15 the cumulative revenue shortfall in the General Fund was almost $3 billion. Because state spending and debt have increased rapidly over the past decade, we should expect an even greater revenue shortfall in the next recession.
Unfortunately, the state is not prepared for this revenue shortfall. The state maintains a budget reserve fund with less than half a billion dollars; but that fund cannot be used to offset revenue shortfalls in periods of recession. Most states try to set aside about 7% of general fund revenue in a rainy day fund. In a state with volatile revenues, such as Colorado, the rainy day fund should be double that size. Over the past decade when revenues were growing, Colorado should have been socking away at least $2 billion in a rainy day fund. Even that rainy day fund would not fully offset revenue shortfalls anticipated during the next recession.
The absence of a true rainy day fund means that when the next recession hits, the state will have to make draconian cuts in spending. You can be sure that this fiscal crisis will be blamed on TABOR, and critics will again call for eliminating this amendment from the Constitution. But taxpayers should place the blame squarely where it belongs, with the special interests and politicians who have weakened TABOR, and allowed state spending and debt to increase at an unsustainable rate.
Critics of TABOR argue that the Legislature should control taxes and spending. But changes in TABOR over the years have weakened the power of the Legislature as well as citizens to control the growth of government. The University of Colorado, where I am an emeritus professor, is now free to set tuition and fees and issue debt without approval from the Legislature or citizens. Many school districts and local jurisdictions can spend surplus revenue without seeking voter approval.
Citizens should take back control of government at all levels. Taxpayers know what is required to restore sustainable fiscal policies. Effective fiscal rules must again be enacted to control the growth in spending and debt. Reforms must be enacted in PERA to reduce and eliminate unfunded liabilities. And the state must create a true rainy day fund, setting aside enough revenue in the fund to offset revenue shortfalls in the next recession.
We don’t need to watch Wylie Coyote go off a fiscal cliff.
Barry W. Poulson is professor emeritus of economics at the University of Colorado. He has served on the Colorado Tax Commission and as vice chair of the State Treasurer’s Advisory Group on Constitutional Amendments in Colorado.