Vacancy Savings

The JBC and the Executive Branch have struggled for years over how to handle vacancy savings. That's the money that builds up over time in a department's Personal Services line. The JBC considers that excess money that should return to the budgeting process for appropriation. Departments claim it's not as much as the JBC thinks, and they wind up spending it on things that legislature should, but doesn't appropriate money for.

Usually, the JBC imposes an across-the-board cut to every department's Personal Services line to sweep out accumulated vacancy savings. The amount clawed back has ranged from 0.2% to 2.5% of the department's Personal Services line. It's step six in the mysterious Option 8 method of calculating Personal Services.

Why Vacancy Savings Accumulate
Vacancy savings are the result of unfilled jobs. Say the legislature approves a new job in a department and appropriates $30,000 money to pay for it. The state's fiscal year starts July 1st, but the department department has to write a job description, publish the job, receive applications and interview candidates before actually hiring the person. That takes three months.

The legislature appropriated $30,000 to pay a year's salary, but the new employee is only going to work nine months. The department has saved $7,500 by not paying anyone for the first three months.

The same thing can happen when someone quits or retires. Retiring can generate some big savings. Let's say a 30-year veteran employee retires. The job stays open for a couple of months, then the department hires someone new, but at the bottom of the pay scale instead of the top. The department saves money from the vacancy, then saves even more by paying a lower salary to the new employee.

Departments with a lot of employees and a lot of turnover can build up considerable sums of money in their budgets. That's money we might want to appropriate for something else.

Why They Don't
Of course the departments have a different view of the situation. Take the retiring senior employee scenario. The department will acknowledge the difference between the senior salary and the starting salary, but argue that the money doesn't accumulate.

First, they'll say, they have to pay for the retiring employees unused vacation and sick leave. That will eat up part of the savings. Then, they'll point out that losing a senior employee costs them a lot of accumulated knowledge. To minimize the effect of that, they'll hire the new employee before the existing employee actually leaves to allow time for training and mentoring. All of that, they say, is more likely to leave them in the hole rather than sitting on excess cash.

Those are the general arguments. Each department has it's own specific reasons why we shouldn't try to take back vacancy savings. The general opinion among departments is that taking back vacancy savings is an arbitrary cut imposed by the JBC to free up money for other things.

Saving the Savings - Their View
This year OSPB tried to do away with the across-the-board Personal Services reductions. It argued that after years of reclaimed "vacancy savings" departments had lost so much Personal Services money that they don't have the minimum amount they need to do their jobs.

Saving the Savings - Our View
The JBC responded by imposing a 1% across-the-board reduction and waiting to see what departments came back with requests for exemptions. Applied to every department, the 1% clawback would have brought in $12 million ($7 million GF).

Negotiations
All of them asked for exemptions, via an OSPB Personal Services comeback.

Human Services said the 1% reduction would force them to hold open 31 jobs, leaving places like the Mental Health Instiute in Pueblo and the Wheat Ridge Regional Center dangeroulsy understaffed.

Corrections argued that most of the employees they lost last year were in their first five years on the job. That means the new employees hired to replace them will be earning about the same salary. And while the positions are empty, someone will be earning overtime to cover the shift. The department said it's already operating at or below minimum staffing requirements and the clawback would eliminate another 87 employees.

OSPB argued that it's Budget Balancing Package of negative supplementals already took out vacancy savings, so the additional 1% was both hurting departments and discouraging them from volunteering cuts to account for open positions.

Truce
This year the JBC relented. OSPB had some good arguments -- especially since we were reclaiming a lot of Personal Services money from the hiring freeze.

The issue isn't resolved, though. The state constitution prohibits the legislature from telling the governor how many people to hire; we just control how much is in the budget. That means truing up the Personal Services budgets with the amount actually paid as salaries will alway be a cat-and- mouse game between the legislature and the executive branch.

High Risk, Low Interest

In our search for money to balance the budget, some state senators suggested selling Colorado Water Conservation Board loans.

We have a lot of money tied up in them, but it's unlikely we could get much of the money out. The state lends the money to farmers, ranchers and local governments for water projects. They're relatively high-risk borrowers, and the state subsidizes the loans by keeping the interest rates low.

I doubt there's ever much of a market for high risk, low interest loans. Usually the higher the risk of a loan the higher the interest rate, to compensate the lender for taking the chance he won't get his money back.

In today's ultra-conservative market chances of selling the loans is even slimmer.

The idea is for the state to sell bonds secured with revenue from the CWCB loans. Dan Law, the executive director of the Colorado Water Resources and Power Development Authority, predicts we'd get about 50 cents on the dollar.

As an example, Law uses one of the higher-rated loans. CWCB loaned the City of Aurora $80 million for 30 years at an interest rate of 3.75%.

He estimates we could sell $47.5 million worth of bonds backed by the loan. That's if the bonds are taxable. We could get $63 million by selling tax-exempt bonds.

The bonds' tax status would depend on what we did with the money. Law says they'd likely be tax-exempt if we used the proceeds for capital projects; taxable if we used the money for operations.

The loan to Aurora is better than most in the CWCB portfolio. Most would sell as junk bonds and have to pay higher interest. At 15% interest, $80 million worth of loans would get us less than $30 million. That's assuming we could find buyers.

Selling the loans would also crimp the CWCP loan program. We use the income from current loans to make new loans. If we sold off parts of the portfolio and used the proceeds to balance the budget, that would leaves less money for future loans.

One advantage of the idea might be an environmental benefit. Subsidizing water projects makes water cheaper. That encourage people to use more of it. Weaning the state off subsidized loans for water projects would put a more realistic price on water and encourage us to conserve.

Balancing the Budget 2008-09

This year our revenue is coming in about $600 million less than we forecasted. That's throwing our budget out of balance. We can't have that, so we're making adjustments to bring it back into balance. Here's a summary of what we're doing.

The Problem
Last year we passed a budget (known as the Long Bill) that aligned the amount we were spending with the amount of revenue we expected to get from taxes. That's in the chart below as "2008-09 Long Bill."

In December, a new revenue forecast showed actual revenue coming in below what we forecast. With no change in spending, that put us out of balance -- by $587.5 million, to be exact. You can see that in the column labeled "With Dec. 2008 Revenue Forecast."

General Fund	2008-09 Long Bill	With Dec 2008 Revenue Forecast	With Dec 2008 Revenue Forecast & Balancing Package
GF Revenue
LCS Forecast	$8,114.30	$7,526.80	$7,526.80
Revenue Increases			$243.77
Total GF Revenue:	$8,114.30	$7,526.80	$7,770.57
GF Obligations
GF Appropriation (original)	$7,813.50	$7,813.50	$7,813.20
GF Changes			-$90.04
Increased Medicaid Match			-$107.70
GF Reserve	$300.80	$300.80	$155.11
GF Appropriation (new)	$8,114.30	$8,114.30	$7,770.57
Budget Balance (Revenue - Spending)	$0.00	-$587.50	$0.00

To bring the budget back into balance, we're doing two things:

• Adding to our General Fund revenue
• Cutting from our General Fund spending

You can see that in the column labeled "With Dec 2008 Revenue Forecast & Balancing Package."

Adding Revenue
Adding revenue to the General Fund has a couple of advantages. First, it reduces the number of spending cuts we have to make -- essentially pushing some of them off until next year, when we can spread them over 12 months. Second, it helps prop up our 6% spending limit.

The Arveschoug-Bird 6% spending limit says we can't increase spending from the General Fund by more than 6% from one year to the next. If we increase spending less than 6%, the limit ratchets down and we lose that amount of spending forever.

This year, we don't have enough revenue to spend the full 6%; adding some revenue help keep the limit up a bit.

This is the Revenue part of the chart at the top:

General Fund	2008-09 Long Bill	With Dec 2008 Revenue Forecast	With Dec 2008 Revenue Forecast & Balancing Package
GF Revenue
LCS Forecast	$8,114.30	$7,526.80	$7,526.80
Revenue Increases			$243.77
Total GF Revenue:	$8,114.30	$7,526.80	$7,770.57

You can see that we're adding $243.77 million in General Fund revenue.

This next chart shows where that money is coming from:

General Fund Revenue Enhancements (Summary)
Statutory Revenue Changes	Amount
Cash Fund Transfer Bill (SB09-208)	$226,556,443
Tobacco Bill (SB09-210)	$1,714,070
Cap Vendor Fee (SB09-212)	$12,800,000
Limited Gaming Fund Transfer (SB09-217)	$2,700,000
Total Revenue Increases:	$243,770,513

Cash Fund Transfers
The first line shows the amount we're transferring from cash funds into the general fund. Click here for a full list of transfers.

Other Revenue Enhancements
The second is money we get from the Master Settlement Agreement with tobacco companies. We're diverting a bit of it into the GF.

The third line shows money we're saving from a limit on the vendor fee. That fee is what we pay stores for collecting sales tax. Yes, we pay stores to collect to collect the sales tax you pay when you buy something. Normally they get to keep a little over 3% of all the tax they collect. We're reducing the amount a bit during the recession.

The final line shows money from the tax on casinos. It usually goes to things like promoting tourism and arts grants. We're taking about a quarter of it for the GF.

For a full list of other revenue enhancements, click here.

General Fund Cuts
On the other side of the equation, we cut spending. This is the spending part of the chart from the beginning of the article:

General Fund	2008 09 Long Bill	With Dec 2008 Revenue Forecast	With Dec 2008 Revenue Forecast and Balancing Package
GF Obligatons
GF Appropriation (original)	$7,813.50	$7,813.50	$7,813.20
GF Changes			-$90.04
Increased Medicaid Match			-$107.70
GF Reserve	$300.80	$300.80	$155.11
GF Appropriation (new)	$8,114.30	$8,114.30	$7,770.57

Here's a list of the spending cuts by department:

Department	JBC Changes to 2008-09 Approp
Agriculture	-$472,744
Corrections	-$5,780,572
Education	-$65,277,431
Governor	-$2,560,759
Health Care Policy	$41,230,154
Higher Education	-$30,000,000
Human Services	-$17,118,277
Judicial	-$1,773,055
Labor	$0
Law	-$790,000
Legislature	$0
Local Affairs	-$425,548
Military Affairs	-$168,551
Natural Resources	-$1,538,446
Personnel	-$594,261
Public Health	-$247,480
Public Safety	-$2,643,177
Regulatory Agencies	-$112,765
Revenue	-$1,428,538
State	$0
Transportation	$0
Treasury	-$265,096
Capital Construction Fund	$0
Controlled Maintenance	-$72,300
Total:	-$90,038,846

And that's the summary of how we're balancing the budget for FY 2008-09.

General Fund	2008 09 Long Bill	With Dec 2008 Revenue Forecast	With Dec 2008 Revenue Forecast and Balancing Package
GF Revenue
LCS Forecast	$8,114.30	$7,526.80	$7,526.80
Revenue Increases			$243.77
Total GF Revenue:	$8,114.30	$7,526.80	$7,770.57
GF Obligatons
GF Appropriation (original)	$7,813.50	$7,813.50	$7,813.20
GF Changes			-$90.04
Increased Medicaid Match			-$107.70
GF Reserve	$300.80	$300.80	$155.11
GF Appropriation (new)	$8,114.30	$8,114.30	$7,770.57
Budget Balance (Revenue - Spending)	$0.00	-$587.50	$0.00

Moving Money

Colorado's budget includes a lot of different funds. The General Fund is the big one, but we also have dozens of Cash Funds.

Here's a spreadsheet that lists the funds and the amount of money the JBC is proposing be transferred during the current year (FY 2008-09). In all, it comes to just over $182 million.

During the last recession the legislature did the same thing, only more drastically. In FY 2001-02 General Fund revenue plummeted by $1 billion. The legislature got by with just $15 million in direct cuts to spending -- they made up the rest by transferring nearly $1 billion from Cash Funds.

That's not an option this year. Back then a lot of the funds had huge balances that had built up overs years. All of the funds are leaner now, both because they got drained during the last downturn and because we're more careful about avoiding big balances.

Technically Cash Funds exist to pay for a specific service, like medical licenses. Doctors pay a fee to get a license and the money for the fee goes to administrative costs and enforcing medical regulations. It's a fee on a specific group of people to provide a service to that same group.

Big balances in Cash Funds mean people are paying higher fees than they need to. We limit balances in Cash Funds to 30% of their annual costs. That covers costs and allows for a reserve in case something goes wrong.

Covering Fewer Kids

The JBC voted to carry a bill eliminating two scheduled expansions in CHP+ (Colorado's version of SCHIP - the children's health insurance program).

The state was going to raise the eligibility level to 225% of the Federal Poverty Level this year for both children and pregnant women. We can't afford it.

The expansion could go ahead if another bill, the Hospital Provider Fee, passes.

The JBC Bill stopping the expansion is called "Delay CHP+ Eligibility Expansion." It hasn't been introduced yet.