State Budget 101

Colorado's lame duck Governor, Republican Bill Owens, submitted his final budget to the General Assembly's Joint Budget Committee yesterday. The details are available here.

Over the next few weeks, the Joint Budget Committee will rip it to pieces, revising its details in accord with the priorities of Democratic party legislators and the agenda of Governor-Elect Bill Ritter, a fellow Democrat, to produce a draft of the "long bill" in the 2007 legislative session.

But, neither the total amount of the budget, which is constrained by Colorado's Taxpayer Bill of Rights Amendment (TABOR), as relaxed by Referendum C, passed by voters in 2005, nor the broad outlines of the budget, will be much different. Most of the fights will be over how to spend the roughly $411 million in new funds available to the state compared to last year, some of which are already mandated by rising health care costs and state constitutional mandates related to education spending.

The total budget is $16.9 billion. But, most of it come with strings attached that require the funds to be spent for a particular purpose. The General Fund, which the legislature has more control over, is $7.1 billion, less than half of the total, but this too is highly constrained.

The General Fund

The Governor's general fund budget breaks down as follows:

K-12 Education 42%
Health Care 21%
Higher Education 10%
Corrections 9%
Human Services 9%
Judicial 4%
Other 4%

Amendment 23, the brain child of State Treasurer-Elect Cary Kennedy, sets a floor on K-12 education spending. While this is a large chunk of the state general fund budget, it remains the case that Colorado funds a larger share of K-12 education at the local level through property taxes than many states. About half of property taxes collected in Colorado also go towards K-12 education, although the proportion varies widely from school district to school district in the state. Districts with large property tax bases get almost no state funding. District will little valuable real estate are heavily reliant upon state funding.

Health care spending (public health is a separate line item) is mostly through Medicaid and related programs and is mostly federally mandated (or, at least, subject to strong federal matching incentives). Anyone eligible for the program can enroll in Medicaid, and the number of people the program serves is expected to grow by 5% in the coming fiscal year to about 450,000. The state also has only limited control over how much providers are reimbursed. Medicaid reimbursement levels are currently set at levels so low that the overwhelming majority of physicians in the state no longer accept new Medicaid patients.

Higher education spending, because it is not subject to federal or state constitutional mandates, bore the brunt of TABOR driven state spending cuts in the recent Colorado recession. Governor Owen's budget proposal still leaves higher education 4% short of its funding levels prior to those cuts. Recent "creative accounting" designed to circumvent TABOR has removed college and university tuition from state spending limits. This means that higher education budget cuts can be partially offset with tuition hikes. But, tuition hikes are still subject to considerable state regulation.

Corrections spending (i.e. prisons) is largely determined by Colorado's criminal code and decisions made on a decentralized basis by judges and prosecutors. This currently has Colorado on track to increase the number of people it has in prison by 1,370 in the coming year. Because Colorado has "determinate sentencing" prison officials have only a modest ability to release prisoners early to control overcrowding, by being generous in awarding "good time" to marginally well behaved prisoners, and by resorting to strategies like "double bunking." The state has to pay for the cost of delay in transferring prisoners from local jails to state prisons, but can use these delays to defer prison construction when state prisons are overcrowded. This year's budget debate will focus on how much to spend on private prisons to make up a shortfall of state prison beds.

Human services spending includes welfare programs, prisons for juveniles, and many mental health services. While more flexible than many big budget line items, federal grants for welfare programs and the state's children's code, which controls punishments for juvenile crime, place significant limits on how much this budget line item can be adjusted.

The judicial branch budget involves three main parts -- judges, support staff and probation services. Judges can't be fired or have their pay cut. Probation loads are a function of the same criminal code and decentralized decision making of judges and prosecutors that drives the corrections budget. Support staff was stripped to the bone by TABOR imposed cuts during the recent recession and is now recovering.

While the remaining 4% of the general fund that goes to other programs is small, less than $400 million dollars, this will be the focus of much of the budget debate, as these dollars (e.g. dollars spent to enforce state regulatory programs) have great policy impact, but only minor fiscal impact, which gives legislators greater flexibility in setting policy through the budget.

Special Funds

Where does non-general fund money go? Most of it comes from specific grants, earmarked tax funds and user's fees.

About $1 billion is earmarked for K-12 education. A substantial chunk of this is No Child Left Behind Act federal funding.

About $1.7 billion is earmarked for higher education, largely in the form of tuition and research grant money.

About $2.1 billion is earmarked for health care, mostly in the form of a Medicaid matching grant.

About $1.3 billion is earmarked for Human Services, mostly in the form of the federal welfare dollars such as funds for TANF (temporary aid to needy families).

About $1 billion is earmarked for roads, mostly from gas taxes.

Most of the rest of the earmarked monies come from user's fees like driver's license charges, court fees, license fees, and corporate filing fees.

Neither the Secretary of State's office, nor the state department of transportation, receive anything from the state's general fund.

The only state departments that receive a majority of their revenues from the state general fund are the corrections department, K-12 education, the judicial branch and the state legislature.

Cross Posted at Colorado Confidential.