Federal uncertainty clouds Colorado's economic forecast

Bloomberg News

Potential federal policy changes and increased chances of a recession are confronting Colorado lawmakers as they work on a fiscal 2026 budget, and its more than $1 billion shortfall. 

State officials hedged their revised economic forecasts, presented to the legislature's Joint Budget Committee on Monday, noting several unknowns, particularly from actions the federal government may or may not take. 

"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 — all of those … are giving significant risk in this forecast," Mark Ferrandino, Office of State Planning and Budgeting executive director, told the committee.

The forecast does not include the proposed extension of 2017's U.S. Tax Cuts and Jobs Act or potential federal spending cuts to Medicaid and other programs, according to Bryce Cooke, the office's deputy director for tax and economic development, who said the risk of a recession next year was revised to 40% from 25%. 

Democratic Gov. Jared Polis said Colorado is already being impacted by the Trump administration's on-again, off-again tariffs against major U.S. trading partners.

"The president's devastating tariffs are creating market chaos, hurting business investment, and damaging our economy, all while increasing fear over rising inflation and an economic recession," he said in a statement. "This economic forecast shows that Trump's tariff tax is bad for Coloradans and businesses."

The Legislative Council, which said its forecast "is shaped by the rapidly changing federal policy environment," projected the state would end fiscal 2025 with a general fund reserve falling $127 million below a 15% statutory reserve requirement, while revenue is expected to decrease by 1.5% to just under $17 billion. The governor's budget office projected general fund revenue would total $17.22 billion.

For fiscal 2026, which begins July 1, general fund revenue was forecast by the Legislative Council to increase 5.3% to $17.89 billion, just slightly under a $17.97 billion estimate from the governor's budget office, which projected the TABOR (Taxpayers Bill of Rights) surplus will shrink to $302 million in fiscal 2025 from fiscal 2024's $1.4 billion, and will reach $643 million in fiscal 2026.

TABOR, a 1992 amendment to the state constitution, generally limits the amount of revenue governments in the state can retain and spend.

The budget shortfall includes an additional $350 million Colorado must come up with to recruit, train, and retain local police officers under Proposition 130, which was passed by voters in November.

In January, Polis submitted an amended proposed $46.4 billion all-funds fiscal 2026 budget to the legislature that includes $18 billion in general fund spending and a one-time transfer of $350 million from the general fund reserve that would be paid back in seven annual installments of $50 million.