Colorado’s budget deficit is now forecast to be smaller than the $1 billion hole originally predicted

Colorado’s state budget deficit next year is forecast to be about $250 million smaller than previously anticipated, economic prognosticators told state lawmakers Thursday, news that will make carrying out a fiscal trapeze act slightly easier. 

Nonpartisan Legislative Council Staff and the Governor’s Office of State Planning and Budgeting, which presented their quarterly budget and economic forecasts Thursday to the Joint Budget Committee, said the state budget hole is more like $750 million, if not lower. That’s down from the roughly $1 billion hole originally estimated for the fiscal year that begins July 1 if the JBC maintained its current spending plans.

The deficit is being caused by a number of factors, including decreasing inflation leaving less for spending growth under Colorado’s Taxpayer’s Bill of Rights, which caps the annual amount the government can spend. Also weighing on the budget are repeated tax cuts, a cooling job market and growing spending on education and health care, namely Medicaid.

The reason for the reduction in the predicted deficit is that economists now believe the state will collect less revenue subject to the TABOR cap, which is calculated by annual increases in inflation and population growth, next fiscal year. There was also a higher than expected increase in population growth.

“The bottom line for the budget is that the forecast shows more available space than it had in September,” Greg Sobetski, chief economist for Legislative Council Staff, said of the latest forecast.

JBC Chair Jeff Bridges, a Democratic state senator from Greenwood Village, welcomed the revised forecast.

“We’re no longer a billion down,” he said. “Thanks to this forecast, we’re about two-thirds of a billion down.”

The bad news is that Sobetski and the OSPB warned that expected tax revenue in the current fiscal year, which ends June 30, has dropped enough that it might not exceed the TABOR cap. That would cut into the existing budget. 

“I think this is one of the hardest-to-forecast forecasts because of the uncertainty of changes at the federal level that will impact the state,” said OSPH Director Mark Ferrandino, referring to the incoming Trump administration.

That TABOR cap issue is not expected to arise in the next fiscal year or the one after it. In years where the cap is exceeded, the state’s 4.4% income tax rate is reduced proportionately.

Also weighing on the budget is Proposition 130, a ballot measure approved by voters in November that requires the legislature to set aside $350 million for law enforcement recruitment, retainment and benefits. The initiative did not specify, however, when the money must be spent.

A final complicating factor is that the legislature is forecast to set aside an additional $194 million for the current fiscal year to meet a reserve requirement in state law. Lawmakers, however, could ultimately waive or reduce that burden.

The big takeaway is that the 2025-26 fiscal year budget deficit is still forecast to be large enough that the JBC is expected to have to make cuts to existing state spending plans.

“We are a little less worse off than we were before,” Ferrandino said. 

The JBC has been preparing their colleagues and lobbyists for the consequences.

“‘There will be blood’ is my new motto for this session,” Bridges said last month, warning of cuts.

Bridges made the comment after state Rep. Shannon Bird, the JBC’s vice chair, reiterated a frequent plea for state officials to explain the effects of cutting programs in their departments. Bird, a Democratic state representative from Westminster, said she hoped to make budget cuts “with a scalpel” to minimize the pain to Coloradans.

“As much as I would like to just cut with a scalpel, when we’re cutting as much as we are cutting out of this budget, there will be hatchets, there will be blood, there will be losses,” replied Bridges, a Democratic state senator from Greenwood Village. “I feel like lobbyists in particular and many of our colleagues have not gotten that — but this is going to be a bad year.”

Gov. Jared Polis, in a written statement, acknowledged the pinch Thursday.

“Colorado’s budget environment remains tight, and the reality is that the legislature must make difficult decisions to deliver a balanced budget,” he said.

The legislature reconvenes Jan. 8, and the state budget is expected to be one of the focuses of next year’s lawmaking term.

Colorado Sun staff writer Brian Eason contributed to this report.