Downside budget scenario projects Colorado $1.58 billion short of reserve target

A downside budget scenario presented to Colorado lawmakers projects the state could fall $1.58 billion short of its statutory reserve target in fiscal year 2027-28, driven largely by Medicaid growth and other required spending.

The Legislative Council forecast presented to the Joint Budget Committee would leave reserves at an estimated 6.4% of appropriations, compared with the 15% required under current law. The scenario is illustrative, not an adopted budget or a list of planned cuts.

The committee took no action on the scenario or on the Medicaid spending assumption behind it. Legislative Council Chief Economist Greg Sabetsky described the figures as placeholder assumptions that lawmakers would revise through future budget decisions.

Pressure is already visible in the current budget. Legislative Council staff estimated that fiscal year 2025-26 ended with about $213 million in overexpenditures, primarily tied to Medicaid, before all reversions were counted. That would leave the year-end balance about $141 million below the 13% reserve requirement, although reversions could improve the final figure.

For fiscal year 2026-27, current law was projected to leave the state about $125 million above the 13% reserve requirement. Adding an anticipated $443 million supplemental appropriation for the Colorado Department of Health Care Policy and Financing would instead leave the reserve about $376 million below the requirement.

The pressure comes despite a relatively strong revenue outlook. Legislative Council projected general-fund revenue growth of 9.5% in fiscal year 2026-27 and Taxpayer’s Bill of Rights surpluses of roughly $800 million that year, $575 million the following year and $650 million in the out-year. Staff said expenditure growth, rather than weaker projected revenue, was driving the worsening budget picture.

What the scenario includes

The Legislative Council’s fiscal year 2027-28 scenario assumed an $860 million increase over the current-law Medicaid appropriation. It also included:

• $175 million for school finance, based on a projected $210 million increase in the total-program obligation and a $45 million increase in local share;
• additional state costs for the Supplemental Nutrition Assistance Program if Colorado’s payment-error rate requires the state to cover 15% of benefits;
• an inflationary increase for higher education;
• $32 million for projects already funded for fiscal year 2026-27;
• $283 million for controlled maintenance of state facilities; and
• $197 million added to the statutory reserve requirement.

The Office of State Planning and Budgeting presented a similar warning, estimating an approximately $1.6 billion gap relative to a 15% reserve under its Medicaid-growth assumptions. Director Mark Ferrandino said holding Medicaid growth to the rate of Taxpayer’s Bill of Rights revenue growth would reduce the gap by about $915 million. Keeping the reserve requirement at 13% instead of 15% would reduce it by another $311 million, but the combined scenario would still leave an estimated $330 million gap.

Ferrandino said utilization, rather than caseload, was driving the major Medicaid cost increase. He said the forecast also did not include all effects of federal changes expected later in the year, including work requirements that could remove an estimated 100,000 people from Medicaid rolls and reduce expenses by $50 million to $100 million. The state could also lose about $105 million in hospital provider-fee revenue in the first year.

Options lawmakers discussed

Sen. Bridges asked whether Colorado could give Medicaid a fixed-dollar allocation or limit its growth to available revenue, similar to approaches used in some other states. Ferrandino identified possible policy tools including growth targets, changes to provider payment rates or benefits, and managed care. He said long-term care, behavioral health and pharmacy would require decisions about benefits and long-term growth.

The scenario also assumes new costs for schools, nutrition assistance and facility maintenance without an increase or cut in provider rates. Ferrandino said the Office of State Planning and Budgeting was modeling a proposal under which the state would cover 60% of future Supplemental Nutrition Assistance Program costs and counties would cover 40%, but the allocation remained under discussion.

The Office of State Planning and Budgeting assigned a 40% probability to a recession over the next 12 months, which could weaken revenue while increasing pressure on programs competing for general-fund dollars. Lawmakers have not yet decided which services or benefits could change or whether to alter reserve requirements.