JBC stress test shows structural deficit; staff warns reserve could be exhausted without major changes

Director Craig Harper presented a 'Budget Stress Test' memo on Feb. 17 that modeled baseline and recession scenarios and examined the state’s near‑ and medium‑term fiscal outlook.

Harper said the model incorporates current decisions, the December Legislative Council forecast and a set of plausible sensitivities. He told the Committee the state's near‑term balancing relies heavily on a set of one‑time measures—Pinnacle receipts, $249.8 million in cash transfers, Reserve draws and prospective TABOR refund adjustments—that together comprise more than $1 billion of non‑recurring resources across FY25–27.

Why it matters: Harper said business as usual ‘‘is not working’’ and the stress test shows that without structural policy changes the general fund reserve would be exhausted in the medium term. Under a baseline that includes the governor’s request and one‑time items, the model shows reserves falling and long‑term obligations exceeding revenue. Under a moderate recession (modeled as a 6.6% revenue drop in FY26‑27), the reserve would be depleted much sooner.

Medicaid growth and sensitivity: Harper highlighted Medicaid as a major driver of fiscal pressure. He reviewed a baseline assumption for Medicaid growth (inflation + population + 2%) that yields about 5.6–5.8% annual growth, and an alternate scenario based on a 10‑year compound annual growth rate of 9.6% (attributed in the meeting to Mr. Kurtz). Using that higher growth rate materially worsened the outlook and accelerated reserve depletion.

Harper urged the Committee to consider broad reductions across the 'big six' general‑fund areas (Medicaid, K‑12, higher education, human services, corrections and judicial) and to address employee compensation common policies as part of structural balancing. He also noted tradeoffs and limits: deep compensation cuts can increase costs through overtime and contracting if agencies cannot staff essential facilities.

Next steps: Harper provided a schedule for figure‑setting presentations (Medicaid March 6; behavioral health March 9; higher education March 10; K‑12 March 10–11; human services Feb. 24 & 27; corrections March 5; judicial March 12) and said staff will refine modeling as new revenue forecasts and supplemental decisions arrive.