Colorado’s budget landscape is undergoing pivotal shifts as lawmakers prepare to navigate the 2025 General Assembly session, spurred by the Legislative Council Staff’s most recent forecast, Gov. Jared Polis’ Jan. 2 budget recommendations, and mounting concerns over an estimated $750 million budget shortfall that threatens to complicate legislative priorities.
The Legislative Council Staff Dec. 2024 forecast painted a mixed economic picture. The state’s General Fund revenue for FY 2024-25 is expected to total $17.01 billion, a 1.7% decline from the prior fiscal year, driven largely by declines in corporate income tax revenue collections.
However, revenue is projected to rebound in FY 2025-26, growing by 6.7% as inflation eases and consumer spending stabilizes. Taxpayers Bill of Rights surpluses are projected at $356 million for FY 2024-25 and $844 million for FY 2025-26. Cooling inflation, which has eased faster than anticipated, is a significant factor in moderating revenue growth under TABOR caps, further constraining budget flexibility.
“State revenue subject to TABOR is expected to exceed the Referendum C cap by approximately $330 million in FY 2024-25, with refunds projected to total $356 million,” the LCS report said. These surpluses will trigger taxpayer refunds but limit available resources for state-funded programs.
Polis’ Jan. 2 budget letter, issued just days before the legislative session began, provided updated figures and policy-driven adjustments. Polis proposed $47.3 billion in total spending for FY 2024-25, including $18.9 billion from the General Fund, and $46.4 billion in total spending for FY 2025-26, with $18.0 billion from the General Fund.
These figures reflect stronger-than-anticipated income tax collections, which led Polis to revise the FY 2024-25 General Fund revenue upward by $353 million and the TABOR surplus to $709 million. “The expected surplus for FY 2024-25 has increased to $709 million, reflecting stronger income tax revenue collections compared to prior forecasts,” Polis wrote.
For FY 2025-26, Polis’ revisions project a TABOR surplus of $1.02 billion, significantly higher than the $844 million estimated in December.
Key policy proposals from the governor include an additional $131.3 million for Medicaid in FY 2024-25 to address rising caseloads and service utilization. Rising Medicaid costs, driven by an aging population and increased service utilization, add another layer of complexity to balancing the state’s budget. “The supplemental request includes an additional $131.3 million in General Fund spending for Medicaid in FY 2024-25 to reflect updated caseload growth and service utilization data,” Polis explained.
Education funding is another priority, with $35 million earmarked for implementing Colorado’s revised school finance formula and $8.3 million allocated to the “Healthy School Meals for All” program.
Polis also proposed a one-time $350 million investment in public safety initiatives under Proposition 130, approved by voters in November. This voter-mandated spending, intended to enhance law enforcement salaries, training, and survivor benefits, places additional pressure on an already constrained budget.
Infrastructure investments remain a critical focus. While the LCS forecast allocated $254.1 million for capital construction in FY 2024-25 – a decrease from FY 2023-24 levels – Polis highlighted specific projects, such as $34.9 million to replace the heating system at the state’s Fort Lyon facility. His budget also prioritizes information technology upgrades to streamline state operations and improve service delivery.
To accommodate these spending increases while maintaining fiscal discipline, Polis proposed lowering the statutory General Fund reserve requirement from 15% to 12% for FY 2024-25. This adjustment would provide flexibility for immediate needs but contrasts with the LCS forecast, which assumed adherence to the 15% reserve and noted a $193.5 million shortfall below that requirement.
The broader economic context, as outlined in the LCS report, supports these adjustments but also highlights potential risks. The Federal Reserve’s December 2024 projections indicate GDP growth of 2.8% for 2024 and 2.2% in 2025 while also predicting that the federal funds rate—the nation’s bedrock interest marker—“will decline from 4.6% at the end of 2024 to 3.4% by the end of 2027.”
The Congressional Budget Office’s recently released data also indicates slower economic growth in 2025. “According to the Congressional Budget Office, GDP growth is expected to slow from 2.3% in 2024 to 1.9% in 2025 and 1.8% annually in 2026 and 2027, as consumer spending and federal fiscal policy adjustments take effect,” the agency’s report noted. CBO also expects national labor market conditions to soften, with the unemployment rate gradually rising from 4.2% in late 2024 to 4.4% by the end of 2027.
Inflation has moderated faster than expected, offering relief to consumers and businesses, yet global uncertainties persist. CBO further projects inflation in personal consumption expenditures to fall to 2.2% in 2025 and stabilize at 2.0% by 2027.
These economic dynamics are reflected in state revenue streams. Corporate income tax collections, historically volatile, surged in FY 2022-23 but have since become less predictable, influenced by changes in federal tax policy and broader economic conditions. The LCS emphasized the need for proactive fiscal management to navigate this uncertainty, particularly as TABOR surpluses constrain budget flexibility.
Lawmakers face a challenging task in balancing these fiscal pressures with competing priorities. Sen. Jeff Bridges highlighted the difficulty of maintaining previous spending levels in light of the state’s fiscal challenges. “According to what the legislature’s desires were last year, if we were to continue those for next year, we’re still down about a billion dollars,” the Greenwood Village Democrat told the Colorado Sun.
Education, healthcare, and infrastructure will dominate the legislative agenda, with Polis’ recommendations providing a roadmap for targeted investments. However, achieving consensus will require bipartisan cooperation and disciplined fiscal management. “New programs, obviously, are going to be out of the question,” House majority leader Monica Duran, D-Wheat Ridge, told Colorado Newsline. “We need to work with the existing constraints we have and get creative.”
Polis used his State of the State address on Jan. 9 to sell Coloradans on his commitment to affordability and fiscal responsibility. “We must continue to save people money on everything from healthcare to housing while ensuring that Colorado remains a beacon of opportunity and innovation,” the second-term chief executive said.
He urged lawmakers to prioritize investments that address immediate needs without compromising long-term fiscal health, a sentiment echoed by other leaders as they navigate the demands of affordable housing, healthcare, and education amid constrained resources.