At the dawn of the next Colorado budget cycle, it behooves state legislators to ask: Just what exactly is in store for the Centennial State down the economic road? The answer to that question is the key to funding a realistic budget. 

Colorado’s economy was growing at one of the nation’s fastest clips in the mid-2010s.  It has powerful economic engines on several fronts, a luxury many states do not share: a strong agriculture industry; a hub for aerospace and military; a world-class sports and tourism sector; bustling recreation, and a tech and finance base that has expanded over the last 15 years as its lifestyle attractiveness drew high-income industry employers and workers. 

The previous economic success of the state may have given the impression Colorado’s tax revenue growth can be taken for granted. 

This is not the case, unfortunately. Colorado’s state government is staring down a major budget shortfall for the second year in a row, and for the second year in a row some of the gaps can be explained by optimistic revenue forecasting. Unless policymakers change how they forecast the future — to say nothing of their spending — it may not be the last budget gap. 

The Centennial State’s current budget challenges appear to be a combination of forecasting based on overly high expectations, and higher-than-necessary spending. The state’s fiscal picture cannot be tied to a single legislative action, a one-time revenue dip, or an unexpected spending spike. 

In March, the governor’s budget staff and legislative forecasters told the bipartisan Joint Budget Committee that Colorado faced a $1.2 billion shortfall. 

That estimate assumed healthy General Fund revenue growth of 5.1% in FY 2026 and 5.0% in FY 2027, which were average growth rates compared to the last 27 years of historical performance.  

In the Denver metro area, though, certain economic indicators are slowing down, according to a summer CSI analysis. 

“The Denver MSA has passed from a destination metro to an average city in terms of growth indicators like jobs, retail sales, and population growth,” the report reads. “This shows up when the perspective is relative to competitor cities and compared to national averages. Denver MSA’s share of national jobs is no longer growing, and its employment is not growing as fast as some competing cities. Denver MSA’s share of national retail sales boomed in the 2010s but has softened recently. The softening at the Denver MSA level has left a sizable gap in the City of Denver MSA’s would-be revenue. Among similar metro areas, Denver MSA’s retail sales have dropped the farthest. Meanwhile, consumer prices have risen faster than the national average and regional competitors.” 

This does not reflect as a whole on the state of Colorado, but the Denver metro area’s population makes up half the state’s.  

The national outlook also colors Colorado’s economic fortunes. U.S. economic forecasts have been revised downward. Historically, Colorado’s economic fortunes follow the same tack as the nation’s. 

Despite these signs, the state’s budget continues to be built assuming robust revenue growth. 

This is a clear danger area, according to CSI forecasts.

CSI economists adjusted revenue expectations to reflect actual economic conditions, including slowing job creation and a rising unemployment rate. As a result, the FY 2026 revenue outlook falls. A modest downturn turns the $1.2 billion hole into nearly $4 billion. 

This year, the same dynamic appears in the state’s November revenue report. Over the course of just one year, Colorado’s projected revenue for FY 2025 and FY 2026 fell by $3.4 billion, only to rebound when September forecasts swung positive again. The state keeps lurching between too-high and too-low expectations. 

Revenue is cyclical. It rises and falls with the business cycle. Colorado, like every state, rides the national economic tide. The state Office of Legislative Council staff’s latest GDP projections for 2026 have already fallen to 1.4%, down from the 2.0% expected just a year earlier. Yet, Colorado’s anticipated General Fund revenue for FY 2027 and FY 2028 now sits $800 million above the historical trendline, and more than $1.4 billion above where a downturn-adjusted estimate would place it. 

This forecast is capable of creating spending the state cannot sustain. The governor’s FY 2026–27 request proposes an additional $2.7 billion in total spending, including $426 million in new General Fund obligations.

This expansion assumes the economy churns along uninterrupted through FY 2027. 

If it doesn’t, however, the situation looks very different. If revenue falls even 5% below trend, the state will face a $2.1 billion budget hole. 

It is also important to understand the state’s spending patterns. Over the last 15 years, Colorado’s General Fund spending has risen 134%. Total spending from all sources rose 127% over the same period. Meanwhile, the state’s population grew 19%, and inflation rose 48%. 

Three categories have driven this growth, which together make up over 75% of General Fund spending: health care, higher education and K-12 education. 

Higher education has seen an enormous rise in spending, with spending up 288% from the General Fund and up 138% from all sources. As with health care spending, spending on higher education has grown much faster than population and inflation. 

Health care General Fund spending has increased 333% since 2010, and higher education spending is up 288%, which dwarfs spending growth from any other category. 

Consumers and business leaders are closely monitoring the U.S. and Colorado economies.  

There are legitimate warning signs that economic growth won’t be robust. Colorado’s current unemployment rate sits above its 12-month moving average, which historically comes before a recession. Job growth is forecast to be 0.8%, well below the national average. 

Even a return to average rates would create a hole in the budget. 

The September forecast was based on even more optimistic assumptions than the spring and summer forecasts. It places revenue above the long-term trendline. CSI’s analysis shows that if revenue simply returns to trend, it will create an $800 million gap. 

Policymakers have a chance to reset the pattern in this current budget cycle.  

A Colorado budgeting framework should avoid surprises, emergency cuts and economic whiplash. 

To do this, policymakers should anchor forecasts to long-run economic trends, both Colorado-specific and national. With revenue historically rising and falling around a trendline, budgeting above trend during a slowing economy should be closely monitored. Using the trend-line baseline, as CSI’s November report recommends, instantly reduces exposure to downside risk. 

The proposed budget assumes revenue will continue to expand into FY 2027. Should revenue collections weaken, then spending more money now creates a bigger budget hole in the future – a situation that is becoming increasingly likely. 

Policymakers could consider identifying $800 million in budget reductions. This number is the gap between trend revenue and projected revenue for FY 2027.

If legislators are diligent about closing it now, they can set up the state for greater success next year. 

Kelly Caufield is executive director for the Common Sense Institute. CSI’s mission is to examine the fiscal impacts of policies, initiatives and proposed laws so that Coloradans are educated and informed on issues impacting their lives.