Colorado’s budget hole is now $1.2 billion, as Medicaid costs climb
Colorado’s looming budget shortfall just keeps getting worse.
In a letter to the Joint Budget Committee this week, state officials said Colorado will need to spend an additional $73 million on Medicaid this budget year, which ends June 30, as demand for health services continues to surge beyond the administration’s expectations.
Costs are expected to continue to rise next budget year, when the state now expects to spend $86 million more than previous estimates.
Add that to the latest figures provided to the Joint Budget Committee last week, and lawmakers may need to cut as much as $1.2 billion to balance next year’s budget — a 20% jump from the $1 billion hole that state budget writers thought they were facing a few months ago.
Taken together, the two reports mark the most complete accounting of the budget deficit since the quarterly revenue forecasts in September. During the most recent forecasts in December, legislative analysts pegged the shortfall at $672 million — but that figure didn’t include at least one major expense: the $350 million voters required the legislature to spend on law enforcement through Proposition 130.
Since then, the legislature also approved an additional $85 million in spending during midyear budget adjustments, known as supplementals. Most of that will go to K-12 schools. Enrollment was higher than expected when lawmakers approved the budget last spring, while local property tax collections were lower, thanks to tax relief bills passed by the legislature.
But the rise in Medicaid costs, which have continued unabated since last spring, remain the single biggest driver of the state’s budget woes. Medicaid is the federal health insurance program for low-income families, and while the state is only on the hook for a share of the cost, the price tag has grown to around a third of Colorado’s $16 billion state operating budget.
Health care costs have been increasing faster than the state revenue cap under the Taxpayer’s Bill of Rights for decades. But the recent spike in costs, coupled with the end of federal stimulus dollars during the pandemic, have culminated in this year’s budget crunch.
Mark Ferrandino, the governor’s budget director, wrote in a letter to the JBC that patients are using more long-term care, such as nursing homes, than they have in the past. Higher use of long-term care, coupled with rising costs, caused the state to overspend its Medicaid budget last fiscal year, which ended June 30, 2024, in a trend that’s now expected to continue through at least 2026.
Two other factors contributed to the latest budget overruns: newly negotiated behavioral health care rates and rising enrollment and costs associated with caring for those with developmental disabilities.
To address the rise in costs, Gov. Jared Polis offered a number of cuts to the Health Care Policy and Financing Department, including a major restructuring of nursing home provider fees, that would exempt them from the state revenue cap. But it’s not yet clear if the JBC, which writes the bulk of the state budget on behalf of the legislature, will be receptive to Polis’ suggestions.
Last week, legislative budget staff warned lawmakers that the budget problems they face are likely to continue for years to come.
When budget writers talk about next year’s shortfall, they’re referring to what would happen if the state continued “business as usual” in the 2025-26 spending plan. That means covering the growing costs of health care and K-12, as well as giving typical inflationary raises to higher education, state workers and Medicaid providers.
Next budget year, which starts July 1, the rising costs of Medicaid alone would wipe out the entire $304 million the state has to spend on inflationary increases.
If lawmakers don’t change the state’s financial trajectory with ongoing cuts, Colorado would deplete its $2.1 billion reserve entirely by 2029. And that’s if the economy keeps growing.
If the country descends into a moderate recession, the state could run out of money to pay its bills during the 2026-27 budget year, according to JBC staff.
“The take-home message that I’ll give you is that you need a soft landing that’s going to get to a path that the state can actually sustain,” Craig Harper, the JBC’s nonpartisan staff director, told lawmakers.