To close $1B budget gap, Colorado’s governor proposes Medicaid provider pay freeze, transportation fee cut and K-12 funding slowdown

Colorado Gov. Jared Polis on Friday unveiled a proposed state spending plan that would freeze reimbursement rates for most Medicaid providers, change how the state counts K-12 students and slow the rollout of a new school finance formula in order to close a state budget gap that’s now expected to exceed $1 billion.

His budget proposal for the 2025-26 fiscal year, which starts July 1, also calls for cutting transportation fees, privatizing the state’s workers’ compensation insurer and restructuring a number of cash funds in order to free up money to spend on general state services.

The budget crunch was caused by a number of factors dating back to 2023.

State lawmakers cut school and local government property taxes three times in the past 12 months, cuts that affect the state budget indirectly by increasing the state’s required contributions to K-12 funding.

Medicaid has also grown faster than state health officials expected, adding about $150 million in unexpected costs to last year’s state budget, which ended June 30. Budget officials now expect higher health care spending to continue, as Medicaid serves a growing population of elderly and disabled Coloradans.

Finally, inflation has fallen to an expected 2.5% this year, limiting how much state General Fund spending can increase under the Taxpayer’s Bill of Rights. The TABOR cap limits revenue growth based on the combined rate of inflation and population growth.

“Coloradans are excited, because when prices were going up 5%, 7% it was very frustrating,” Polis said. “Groceries, clothes, gas is at a low — these are all coming down. For the state budget, that makes it challenging, but for Coloradans and their checkbooks, it makes it better.”

Polis said despite the cuts, his $17.8 billion general fund budget request preserves the services he believes Coloradans care about the most — K-12 schools and public safety. Polis’ plan also avoids dipping into the state’s general fund reserve, restoring the rainy day fund to $2.4 billion, or 15% of general fund spending.

The proposal is the opening bid in what’s expected to be a protracted, difficult negotiation with state lawmakers over the next six months.

Rep. Shannon Bird, the Westminster Democrat who chairs the state’s Joint Budget Committee, previously suggested that she may push to dip into the reserves in order to avoid deeper cuts to social services.

And the committee’s Republicans are already pushing to protect funding for Medicaid providers, who are seeing huge increases in uncompensated care after scores of patients were incorrectly kicked off their insurance following the end of the federal health emergency during the pandemic.

Across the country, Republicans are rarely seen as defenders of the federal health program for the poor. But in Colorado, there is a growing recognition among Republican lawmakers that any cuts would fall heavily on struggling health care providers in their predominantly rural districts.

Polis’ proposal includes $44.5 million to help counties work through their re-enrollment backlogs, but it may be too little too late for some safety net clinics; one provider told the JBC last month that they face bankruptcy due to the rise in uncompensated care, while others have already closed.

Polis’ budget plan also calls for no annual increase to the state’s Medicaid provider reimbursement rate, after JBC lawmakers for years have pushed to increase it to help combat health care worker shortages. (Each 1% increase to the rate costs the state about $40 million.)

Polis also proposes reversing another $40 million in targeted increases the JBC approved for certain providers in this year’s budget, including dental and behavioral health services.

It was not immediately clear how the governor’s proposal would affect K-12 school districts, if adopted by the legislature.

Polis said the state would increase its general fund contribution to schools by $115 million, an increase of $299 per pupil that would maintain the legislature’s pledge to fully fund K-12 schools. However, he also proposed implementing just 10% of a new school finance formula next year, extending a planned phase-in period to seven years instead of six.

He also called for changing how the state counts students. Today, pupil counts are based on four-year averages of enrollment; under Polis’ plan, each school would only receive funding based on their current year enrollment. That will likely lead to less funding for school districts with declining enrollment, but could lead to more money in places with growing student populations.

For higher education, Polis said his proposal would allow colleges to limit in-state tuition increases to 2.3%, just below the rate of inflation.

Other proposed cuts and budget balancing maneuvers include:

• Privatizing Pinnacol Assurance, a state-chartered workers’ compensation insurer of last resort, an idea that has been debated at the state Capitol for more than a decade. Under the plan, Pinnacol would pay the state $100 million a year over the next five years in exchange for its restructuring under an independent board, Polis said, some of which could be used to shore up the Colorado Public Employees’ Retirement Association’s tenuous finances. Over 50,000 Colorado businesses have workers’ compensation coverage through Pinnacol, according to state budget documents, and past attempts to privatize the insurer have been rejected by legislative Democrats.
• Reducing car registration fees by $65 million. Such fees helped drive a 12.5% increase in revenue for transportation projects last budget year, but every dollar collected in certain transportation fees is a dollar of general tax dollars that has to be refunded to taxpayers under TABOR. That leaves less money in the budget to spend on social services like health care. (Some transportation fees are collected by quasi-governmental enterprises that are considered TABOR-exempt.)
• Restructuring the state’s severance tax and a number of other cash funds to free up space beneath the TABOR cap. It was not immediately clear how the change would affect programs funded through the tax on oil, gas and coal.