Legislators Monday got some modest good news about the 2010-11 budget but some sobering forecasts about 2011-12.

The good news is that the 2010-11 budget, which goes into effect July 1, probably won’t need further major cuts beyond a $75 million adjustment by Gov. Bill Ritter in order to keep the state’s reserve at legal levels.

Legislative economist Natalie Mullis
Natalie Mullis, legislative chief economist, briefed lawmakers June 21 on state quarterly revenue forecasts.

Ritter said Monday afternoon that he hopes K-12 funding and higher education can be spared from the $75 million trim, but said, “Nothing is off the table.”

The governor said, “I’m very hopeful” schools can be spared further cuts but added, “Where K-12 education becomes vulnerable again is if Medicaid is not extended.”

To help ease state budget woes, the federal government has been picking up a larger share of Medicaid costs than normal, but that ends in December. A proposal to extend the higher payments is facing tough going in Congress, particularly in the Senate. If the program isn’t extended, Colorado would have to scramble to come up with $245 million or make cuts to cover that amount.

“We’re watching the Medicaid situation closely over the summer,” Ritter said, adding he hopes things will become clearer before Congress’ August recess.

Ritter also said, “It’s our hope we don’t have to do anything to impact higher education again.” The $75 million is about 1 percent of the state’s general fund. Ritter promised a package of recommendations in August.

The bad news is that the 2011 legislature may need to make about $1 billion in cuts to the 2011-12 budget, depending on future levels of federal support for Medicaid; on inflation; on growth in the numbers of prison inmates, sick people, school kids and college students; and on how lawmakers decide to replace one-time sources of money that were used to balance the 2010-11 budget, such as federal stimulus funds.

“We have a pretty tough budget year ahead of us,” said Natalie Mullis, the legislature’s chief economist.

“It looks like we will another rough year in 2011-12,” agreed Lisa Esgar, deputy director of the executive branch’s Office of State Planning and Budgeting.

Because state support for K-12 schools and higher education spending consumes nearly 40 percent of total state spending and more than half of the tax-supported general fund, any cuts are expected to fall heavily on education.

Some legislative leaders previously estimated that K-12 and higher ed could see cuts of $300 million each in 2011-12.

The two revenue forecasts released Monday offer no detailed hints of what education cuts might look like – it’s much too early in the game for that.

Here’s the overview of the budget situation:

2009-10: The state will end the year on June 30 in the black, but the reserve will be $51.7 million less than the required $132.6 million. (The OSPB estimates the reserve shortfall at $74.5 million.) The shortfall doesn’t have to be covered before the end of the year and can be rolled into 2010-11.

2010-11: Sufficient revenues are expected to cover the spending approved by the 2010 legislature, but again the reserve will fall short of required levels. Legislative Council staff estimate about $37 million will be needed to return the reserve to an acceptable level. (OSPB projects a higher number.)

2011-12: In addition to another $61.4 million reserve shortfall, lawmakers will have to replace (or cut) $617 million in one-time funds and cover (or ignore) an estimated $300 million in caseload increases. That makes up the $1 billion.

Some observers think the shortfall could be larger noting, for instance, that school districts’ local revenue likely will decline for 2011-12, putting pressure on the state to cover the difference.

The $1 billion figure didn’t come as a major shock. “This wound up not surprising us a great deal,” Ritter said. Informal estimates in that ballpark were circulating during the closing days of the 2010 session, which adjourned May 12.

But, Monday’s release of the formal quarterly revenue forecasts by legislative staff and OSPB mark a key point in the 2011-12 budget process and begin to focus the issue for legislators.

Gov. Bill Ritter
Gov. Bill Ritter discussed the state budget situation during a news conference June 21.

Executive branch departments already are refining their 2011-12 requests, another set of forecasts will be issued in late September and Ritter has to submit his 2011-12 budget to the Joint Budget Committee by Nov. 1. The panel will hold budget hearings in November and December, and another set of forecasts in late December will update the situation just before the 2011 session convenes.

The national recession began affecting state government in 2009-10 budget year, which is about to end. Lawmakers last spring had to make significant mid-year adjustments in spending, including a $130 million cut in K-12 support. Creation of a balanced 2010-11 budget required significant cuts and revenue shifts.

Overall, there have been $3.5 billion in state budget cuts and adjustment over three fiscal years, Ritter noted.

Total program spending for K-12 schools was about $5.4 billion in 2008-09 and was supposed to rise to nearly $5.7 billion this year, before the midyear adjustments trimmed it back to just under $5.6 billion.

Using a narrow interpretation of the Amendment 23 school-funding formula, the legislature approved about $5.4 billion in total program funding for 2010-11. Full A23 funding would have been about $5.8 billion. The 2010 school finance law recommends the same $5.4 billion figure for 2011-12, although that can be changed by the 2011 legislature.

(Total program funding is the amount of state aid and local revenues used for basic classroom and administrative operations. It doesn’t include additional state aid for such things as transportation and special programs, some federal programs and district revenues from bond issues.)

School districts have responded with layoffs, wage freezes and other cuts of a magnitude Colorado schools haven’t seen in years. (See the One-Stop Budget Cuts Info Center for details.)

Spending at state colleges and universities was maintained at just under $2 billion for 2010-11 – but only with the help of significant federal stimulus support and 9 percent tuition increases for resident undergraduate students. Higher ed is seen as particularly vulnerable to cuts in 2011-12. Senate Bill 10-003, the major flexibility legislation passed last spring, requires colleges to prepare reports on how they would handle a 50 percent cut in state support. Those are due next autumn.

Both forecasts found some some signs of economic hope.

“Both Colorado and the national economy are embarking on a very delicate recovery,” said Kate Watkins, a legislative economist, during the morning JBC meeting where the forecasts were unveiled.

“While the economy is recovering, it is very slow,” Ritter said. “We do believe the economy will recover” in time for the 2012-13 budget year – long after Ritter has left office.

(Both forecasts provide a wealth of information about tax revenues and  the economy of the state and its regions. See below for links to the full forecasts.)

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