Recession risk grows, adding uncertainty to Colorado budget crunch

The good news is Colorado’s economy is still growing — but state forecasters are increasingly unsure how long that will last.

Under new revenue forecasts released Monday, legislative economists told state lawmakers that unemployment is ticking up while consumer spending and economic growth are slowing amid widespread uncertainty over how major federal policy changes under the Trump administration will play out in the coming months.

“Downside risks (to the economy) are both more probable and more severe,” said Greg Sobetski, the chief economist for Colorado Legislative Council staff. “I think what we’ve learned is that the economy is responding in a negative way towards a lot of that uncertainty.”

Economists with the governor’s Office of State Planning and Budgeting went a step further, putting the odds of a recession within the next year at 40%.

Despite the deteriorating economic outlook, Colorado’s state budget picture remained largely unchanged in the pivotal March forecasts, which form the building blocks of the government’s annual spending plan.

Legislative economists and the governor’s budget analysts briefed the Joint Budget Committee on the forecasts Monday afternoon, setting the stage for a grueling final week of cuts before the spending bill has to be introduced in the state Senate.

The six-member budget panel has been going line-by-line through state agency budgets for weeks, making millions of dollars worth of cuts to grant programs and state government operations. But lawmakers traditionally put off the biggest decisions until this week.

In the coming days, they’ll have to decide how much to pay Medicaid providers, public school districts, and colleges and universities. They’ll also have to decide whether to fund the pay raises and health benefits owed to state workers under their latest collective bargaining agreement.

But in contrast to recent years, when lawmakers negotiated which public services they wanted to expand, their task in 2025 is just the opposite. Lawmakers this week will decide which of their recent expansions they can afford to keep in the face of health care costs that are increasing far faster than the state constitution allows the budget to grow.

A shifting budget picture

Both forecasts expect the state to have slightly more money available to spend in the 2025-26 budget, which starts July 1.

Under estimates from Colorado Legislative Council staff, the state would have about $16 million more available in next year’s budget than previously expected, while the governor’s budget office forecasts show a $79 million bump in breathing room.

The JBC traditionally uses the more conservative of the two estimates to set the budget.

Under the legislative estimates, lawmakers would still face a shortfall of nearly $1.2 billion in next year’s spending plan, roughly the same target they’ve been anticipating for weeks. The latest shortfall estimate includes some — but not all — of the cuts the JBC has already made.

The factors that add up to that shortfall, however, have changed significantly.

Legislative forecasters now say the state will collect $52 million less from sales and income taxes in the current budget year than previously expected. Next year’s forecast was reduced by $298 million.

Further complicating matters, the state’s severance tax collections turned negative in February, after oil and gas companies claimed a record $110 million that month in ad valorem tax credits — a state tax break that allows the industry to offset the taxes it pays at the local level.

Generally, lower tax collections will mean smaller refunds under the Taxpayer’s Bill of Rights, which limits state revenue to the combined rate of population growth and inflation.

Under the legislative staff forecast, the TABOR surplus in the current budget year, which ends June 30, would be so small — $108 million — that the state won’t have enough to cover the cost of a state homestead property tax exemption for seniors and disabled military veterans. That would leave the state general fund on the hook for an extra $104 million in payments to local governments.

A surplus that small would also mean no TABOR refunds for taxpayers in 2026.

Under another forecast, from the governor’s Office of State Planning and Budgeting, the TABOR surplus would be $300 million, enough to cover the property tax break with about $90 million left over for taxpayer refunds.

In the 2025-26 budget year, both forecasts expect TABOR refunds to bounce back — though not quite to the heights of recent years. Legislative staff anticipate the state to collect $617 million more than allowed by the TABOR cap, while the governor’s budget staff expect a TABOR overrun of $643 million.

Any refunds owed next budget year would go out in 2027.

Uncertainty clouds budget

Both forecasts agreed on a key takeaway: The budget picture is far murkier than usual.

Tariffs and federal funding cuts pose a real threat to the economy, forecasters said, while federal tax changes could cut either way.

Meanwhile, federal funding accounts for about 30% of what the state spends, with most of that going toward Medicaid and other safety net programs, such as food stamps. So even if the economy continued to grow, further cuts to federal spending could upend the state’s budget all on their own.

“This is probably one of the harder forecasts, given the uncertainty with federal policy, as well as uncertainty on tax policy and fiscal policy at the federal level,” Mark Ferrandino, the governor’s budget director, said. “All of those changing are giving significant risks to this forecast.”