INTRODUCTION

KEY FINDINGS

Colorado is in the midst of a political and policy pivot point of tremendous consequence that is putting Colorado‘s fiscal and economic future in serious jeopardy. This is the heart of the policy transformation that has gripped Colorado since 2005 and became more fully consummated in 2009: a deference toward the individual, the entrepreneur, the innovator and private citizens is increasingly being replaced by Governor Bill Ritter and the current Democrat legislature with a mindset of government control – the notion that for every problem there must be a government solution, and that government knows better how to spend our money and decide our future than do private citizens Studies show that Colorado‘s heretofore reform-minded direction in tort reform, health care, and education and its limits on taxes and spending have treated Colorado well. With its relatively low and predictable rates of taxation, well-educated workforce, increasingly diverse economy and attractive quality of life, Colorado can still be positioned for success, if its leaders resolve to tend to the state‘s real challenges. The bottom line: Colorado needs to institute pro-entrepreneurial policies that inspire innovation and ingenuity.

Colorado in Transition: Killing the Golden Goose? Colorado is in the midst of a political pivot point of tremendous consequence. Through 2004, Colorado‘s political leaders, both Democrat and Republican, limited government intervention in the economy and focused government expenditures on core, mutually agreeable objectives: infrastructure, law enforcement, education, and a basic safety net. Policies such as tort reform were constructed with an eye toward promoting job growth. The Taxpayers‘ Bill of Rights (TABOR) and Arveschoug-Bird spending limits provided a stable and predictable fiscal environment. Special interest politics (e.g., union advocacy) and 1

redistributionist government policies (e.g., excessive Medicaid benefits) were, as a general rule, avoided. Then a political and policy transformation began. From 2005 through 2008, lawmakers began to back off long-held, philosophically held beliefs about the role of government. A period of more interventionist government was contemplated, although not frequently embraced. For the first of these two years, then-Governor Owens continued to embrace a pro-entrepreneurial, limited government vision, and vetoed proposals for a more expansionist government. Furthermore, a challenging fiscal environment limited the ability of lawmakers to expand the role of government. By 2009 a sea change had occurred, as Governor Ritter and lawmakers raised taxes, approved massive expansions in Medicaid, expanded the size of Colorado‘s government, threw out a spending limit on the growth of the state‘s general fund, and imposed the nation‘s toughest regulations on the oil and gas industry. The one-time consensus behind smaller government, rooted in Colorado‘s sometimes libertarian mindset, now seems like a distant memory. Historically known for its sound governance and polite political discourse, Colorado is increasingly plagued by national political fault lines on issues such as taxes, spending, union rules, and regulatory environment. Where do we go from Here? Are the political and policy changes witnessed in Colorado a temporary flash or a permanent fixture? Only time will tell. Politically charged rhetoric on both sides of the aisle tends to paint a dire picture of the consequences of one‘s opponent‘s political philosophy. There is no perfect crystal ball which allows policy-makers to make conclusions about policy outcomes with perfect certainty. But what policy-makers do have is a very clear rear-view mirror. Studies show that Colorado‘s reform-minded direction in tort reform, health care, and education and its limits on taxes and spending have treated Colorado well. Chapter one of this report examines eight empirical studies which paint a generally positive picture of Colorado‘s policy environment and its impact on job growth and its quality of life. But above average performance in Colorado is not a right. There is no guarantee of future prosperity and success. Decisions have consequences. This report examines the policy transformations underway in Colorado in six crucial policy arenas. Before embracing many of the same policies which have led to fiscal and economic ruin in states such as Michigan and California, Colorado policy-makers would be wise to remember that entrepreneurs, private companies and Colorado citizens are the source of wealth and prosperity, not the government. This is the heart of the policy transformation that has gripped Colorado since 2005 and became more fully consummated in 2009: a deference toward the individual, the entrepreneur, the innovator and private citizens is increasingly being replaced by Governor Ritter and this legislature with a mindset of government control -- that for every problem 2

there must be a government solution, and that government knows better how to spend our money and decide our future than do private citizens. Moving Forward: A Recipe for Success America‘s ability to thrive and prosper has always been contingent on its ability to inspire innovation and ingenuity. Our ability to build a better future rests on our ability to attract new industries through a thriving, entrepreneurial environment. For most of the post-World War II period, aging and maturing industries that got their start in America have found it profitable to move portions of their operations abroad. As a product‘s development is commoditized, cheaper overseas labor is employed in its manufacture. Therefore, our economy is constantly in need of renewal, through innovation. Old industries increasingly challenged from abroad must be replaced by creative, new products and services. Creating a fertile policy environment that spurs innovation and minimizes unnecessary government interference in the marketplace is the challenge for lawmakers. The goals:  Low and predictable rates of taxation  A regulatory policy that minimizes interference in the marketplace, while protecting the health and safety of Coloradans through sound science  A predictable tort and workers‘ compensation environment that treats plaintiffs and defendants fairly and prevents frivolous lawsuits  Excellence in our schools, through competition, high standards and ending social promotion  Consumer-driven health care that maximizes Coloradans‘ access to affordable, quality health plans and minimizes burdens on employers  A sound infrastructure that ensures the safe, reliable transport of goods and people throughout the state In this context, the purpose of this study is to examine the current state of Colorado‘s jobs climate, analyze both the historical and recent policy developments affecting such, and identify opportunities for policy improvements. Few of the challenges facing Colorado are unique. In fact, many states face far graver challenges. While Colorado worked to face down a projected $1.4 billion, two-year revenue shortfall during its 2009 legislative session (Ed Sealover, ―Colorado‘s $19B State Budget Signed into Law,‖ Denver Business Journal, May 4, 2009), many states faced far worse budgetary challenges – in both real figures and as a percentage of their overall budget. California, for instance, faced an estimated $42 billion shortfall over the same time frame (Jim Carlton and Bobby White, ―California‘s Pain is Only Beginning,‖ The Wall Street Journal, February 11, 2009). Nor are Colorado‘s current challenges necessarily new to this state. While its current budget deficits are more challenging than many, the state has faced difficult challenges at least once

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a decade since World War II. Periods of economic uncertainty and challenge are not unusual. Certainly, the need for innovative health care solutions grows each year, the importance of better educating a workforce increasingly competing in a world market, and the challenges of an underfunded infrastructure necessitate attention. Real and major challenges are the bad news. Now for the good news. With its still relatively low and predictable rates of taxation, well-educated workforce, increasingly diverse economy and attractive quality of life, Colorado is positioned for success, if its leaders resolve to tend to the state‘s real challenges. Colorado‘s current challenges require a sober and thoughtful analysis. Crises, such as the current fiscal and economic crisis, can create momentum for improvements and reform. Yet, they can also be manipulated to validate the advancement of misdirected (and often seductive) proposals. Governor Ritter campaigned in 2006 on the ―Colorado Promise,‖ a 51-page list of principles and commitments to the Colorado voters. Within its pages are hundreds of proposals and commitments. Nary is a major policy ignored in the Colorado Promise. Any reasonable evaluation of Colorado‘s standing on fiscal or economic policy therefore includes an examination of the Colorado Promise, the policies that preceded it, and the policies that have been affected by it. Such is the goal of this paper. By subject area, we will examine historical and recent developments relating to each of the major policy areas affecting Colorado‘s ability to attract jobs and diversify its economy by promoting a sound business environment:  Taxes, Fees & Budgeting  Education and Workforce Development  Health Care Policy  Regulatory and Labor Policy  Tort Law  Transportation and Infrastructure But before probing each of these issue areas, an examination of the outside, empirical evidence regarding Colorado‘s economic standing is in order and can be found in Chapter One, ―Taking Inventory: Where Colorado Stands.‖

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EXECUTIVE SUMMARY

America‘s ability to thrive and prosper has always been contingent on her ability to inspire innovation and ingenuity. Our nation‘s ability to build a better future rests on our ability to attract new industries through a thriving, entrepreneurial environment. For most of the post-World War II period, aging and maturing industries that got their start in America have found it profitable to move portions of their operations abroad. As a product‘s development is commoditized, cheaper overseas labor is employed in its manufacture. Therefore, our economy is constantly in need of renewal, through innovation. Old industries increasingly challenged from abroad must be replaced by creative, new products and services. States compete to attract these new industries and the jobs that come with them. As far back as the 1950s, economists posited that low tax states would attract more capital and growth than high tax states. Since then, independent studies have identified a number of criteria upon which they measure the attractiveness of a state‘s business environment. Colorado has historically performed well in these measures. Until 2004, Colorado‘s leaders and constitutional protections were committed to a low and stable tax rates, a reformoriented health care, education and tort environment, and a balanced regulatory policy. But Colorado is in the midst of a political and policy pivot point of tremendous consequence that is putting Colorado‘s fiscal and economic future in serious jeopardy. The heart of this policy transformation is this: a deference toward the individual, the entrepreneur, the innovator and private citizens is increasingly being replaced by Governor Bill Ritter and the current Democrat legislature with a mindset of government control – the notion that for every problem there must be a government solution, and that government knows better how to spend our money and decide our future than do private citizens. Colorado is only one generation away from becoming another California. Without an about face from the state‘s policy-makers, the state‘s business environment will be plagued by excessive taxation, uncontrollable spending, and a regulatory, health care and tort environment downright hostile to job growth. Now more than ever, Colorado‘s leaders need to renew their efforts to attract innovation, capital and jobs to Colorado. But the recent actions of Governor Ritter and the Colorado Legislature pose the question: where will the leadership come from?

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Colorado faces a leadership vacuum. Presented with golden opportunities in recent years for much-needed reform of the state budget, improving education and enhancing the state‘s business environment, elected officials instead chose to squander political capital on measures of secondary import. Many of these distractions had their origins in political paybacks that hearken to a bygone era. Newly imposed oil and gas regulations were designed to placate environmentalists. Legislation and executive orders have been approved as political payback to unions. These ill-advised efforts subsequently provoked expensive ballot initiatives. A seemingly unconstitutional property tax hike, now approved by the Colorado Supreme Court, further diluted leaders‘ political capital. Historically known for its sound governance and polite political discourse, Colorado is increasingly plagued by national political fault lines. As a result, mounting yet still manageable fiscal and economic challenges go unresolved. Also as a result, the state is increasingly looking backward instead of looking forward. Facing competition from 49 other states and increasingly from abroad as well, Colorado needs to institute pro-entrepreneurial policies that inspire innovation and ingenuity. Taxes, Spending & Budgeting

Governor Ritter and the Democrat-controlled Legislature have advanced an accelerating number of very unfavorable fiscal and tax policies in Colorado in the past two years. These policies promote an atmosphere of uncertainty that is not conducive to job growth. Recent court decisions, ballot initiatives approved over many years, and reckless fiscal policies approved by the legislature and Governor Ritter necessitate a wholesale reexamination of the rules which govern Colorado‘s fiscal policy. Fundamental tax and spending reform are needed. Lawmakers should reaffirm the right of voters to approve all tax increases and look to wholesale Medicaid reform to ease fiscal pressures. Colorado combined state and local spending, measured on a per capita basis, rates near average among the 50 states. According to Census Bureau figures, Colorado ranked 26 th in the nation in state and local spending per capita in 2006. The biggest factor in protecting Colorado‘s tax and spending climate from outside political pressures and runaway growth has been TABOR (the Taxpayers Bill of Rights). From a business perspective, nothing has done more to preserve low and stable rates of taxation across Colorado than TABOR. The Colorado Supreme Court‘s decision to approve an increase in property tax rates without a vote of the people, however, calls into question many of TABOR‘s heretofore straightforward protections. A dark storm cloud looms over Colorado‘s fiscal horizon: the Public Employees Retirement System‘s massive shortfall. PERA has promised $53 billion in benefits to current and future retirees but only has $30 billion in assets. 6

Specific proposals policy-makers should consider include: (1) moving toward consumption-based taxes instead of income and property taxes, (2) reinstituting TABOR‘s requirement that tax hikes be approved by voters, (3) repeal of Amendment 23, (4) mitigating the property tax burden on Colorado businesses, (5) phasing out the business personal property tax, (6) work with the Obama Administration to make Colorado a leader in Medicaid reform, (7) utilize technology to mitigate sales tax compliance costs, (8) exempt air and water pollution control equipment from businessto-business sales taxes, (9) focus unemployment insurance benefits on those who cannot find work, (10) rein in tax hikes masquerading as fees, (11) fund a sound rainy day fund, (12) enact a transparency initiative to put every government expenditure on-line, (13) fundamentally reform PERA and eliminate the shortfall.

Health Care Policy

Governor Ritter has come nowhere near achieving his boldly declared intent to put a plan in place by 2010 that provides all Colorado citizens ―some level of access to primary care through health insurance.‖ While Colorado has historically invited market-oriented reforms, which have helped create affordable, private insurance options, Governor Ritter and the Democratcontrolled Legislature have recently changed direction, moving toward governmentoriented solutions that exacerbate the problems. Three specific actions of Governor Ritter and the Colorado Legislature are increasing insurance premiums for Coloradans: (1) rate-banding legislation approved in 2007, (2) new fees on insurers approved in 2008 to fund the state‘s high-risk ―Cover Colorado‖ population, and (3) a massive new hospital bed tax approved in 2009 that will, on average, cost each family of four in Colorado roughly $500 per year. Health insurance premiums are placing a growing burden on Colorado‘s employers and employees. Since 1999, employment-based health insurance premiums have increased 120 percent, compared to cumulative inflation of 44 percent and cumulative wage growth of 29 percent. Governor Ritter‘s Blue Ribbon Commission on Health Care Reform proposed a number of ideas in its final report. While some of the reforms are common-sense, others are counterproductive, would stretch government resources too thin and would inject far too much government into the market. They are also based on suspect modeling from the Lewin Group. While Governor Ritter has chosen to ignore many of the recommendations in favor of a more incremental approach, recently approved legislation moves Colorado in the wrong direction and is fiscally unsustainable. Specific proposals that policy-makers should consider include: (1) seek fundamental Medicaid reform such as is underway in Florida, (2) focus Medicaid dollars on the truly needy, (3) allow purchase of health plans across state lines, (4) repeal state mandates, particularly quality of life mandates, (5) reduce or eliminate licensing regulations to reduce unnecessary costs and barriers to entry, (6) promote the utilization of alternative treatment facilities, such as urgent-care clinics, ambulatory surgical centers, and minute clinics, and (7) promote transparency.

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Education Policy

Colorado‘s education progress has slowed but not stalled under Governor Ritter. Because he has placed less emphasis on education reform than his predecessors, education policy innovation and development has migrated to the legislative branch. By national standards, Colorado has been a leader in some reforms and a laggard in others. Colorado has been a national leader in public school choice and charter school efforts but lags many states in establishing rigorous graduation standards. Within Colorado, inner city school districts, particularly Denver Public Schools, have led the way in seeking fundamental education reform. Public schools accept far too much mediocrity and failure because they lack sufficient accountability, are rarely punished in any quantifiable sense for lack of improvement, and are insulated from challenge and competition. That, in essence, is the core challenge of public education policy. Speaking generally, the most important fundamental education reforms that can be instituted are those that increase accountability, demand higher performance, and make students and their parents first-party buyers of education. Specific proposals that policy-makers should consider include: (1) allow traditional public schools, charter schools, private schools and on-line schools to compete on an even playing field, (2) reform teachers‘ compensation, (3) set a universal, statewide set of rigorous graduation requirements for all high school students, (4) require annual testing of high school students to demonstrate proficiency of all statewide standard courses, (5) end social promotion, (6) re-institute A-F scores instead of 1-4 scores for schools, (7) reform funding formulas to reward successful schools and reverse failure, (8) institute remedial opportunities for poorly performing teachers, (9) fiscal transparency, and (10) promote the use of community colleges as a source of workforce development measures statewide and baccalaureate degrees in rural Colorado.

Regulatory and Labor Policy

Under Governor Ritter, Colorado‘s labor and regulatory policies have become a means to reward politically-connected unions and punish politically scorned industries, such as the oil and gas industry. Nowhere has the Governor‘s cavalier attitude toward jobs producers been better evidenced than in regulatory and labor policy. With regard to oil and gas drillers, Governor Ritter in 2006 stated, ―I am not comfortable with the number of permits that were granted in 2006.‖ With regard to his moves to reward unions, The Denver Post editorialized, ―When Coloradans elected Bill Ritter as governor, they thought they were getting a modern-day version of Roy Romer, a pro-business Democrat. Instead, they got Jimmy Hoffa. Ritter campaigned under the guise of a moderate ‗new Democrat‘ but now we know he‘s simply a toady to labor bosses and the old vestiges of his party – a bag man for unions and special interests.‖

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Governor Ritter‘s actions in regulatory and labor policy are the politics of division, and have increasingly divided Colorado along national political fault lines. Pay-offs to unions and crippling regulations on the oil and gas industry have consumed a considerable amount of the governor‘s political capital and distracted lawmakers from dealing with the core challenges facing the state. Specific proposals that policy-makers should consider include: (1) repeal Governor Ritter‘s executive order providing for collective bargaining for public employees, (2) reinstitute former Governor Owens‘ executive order providing for paycheck protection so public employees will not have union dues automatically withdrawn from their paychecks, and (3) repeal the recently-enacted oil and gas rules and regulations.

Civil Justice Policy
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An efficient and effective civil justice system necessitates two primary goals for lawmakers: fairness and predictability. Colorado‘s tort policy remains better than most states‘, reaping the benefits of two decades of tort reform efforts that began in the early 1980s. But at the same time Colorado‘s tort environment is plagued by the same challenges as 49 other states: far higher costs than our overseas competitors. The fairness and predictability of Colorado‘s civil justice system faces growing threats from the misguided priorities of Colorado‘s current political leadership. Specific proposals that policy-makers should consider include: (1) the selection of sound judges committed to the philosophy of judicial restraint, (2) the restoration of pre-Ritter limits on non-economic damages in general liability cases, (3) award attorneys‘ fees and costs to successful plaintiffs and defendants instead of only to successful plaintiffs, (4) mandatory disclosure of attorneys‘ fees and contingency fees in cases in which the government is a party, (5) the defeat of efforts to re-impose a hybrid tort/no-fault auto insurance policy, (6) improve the rules regarding admission of scientific evidence, (7) create a sound certificate of review process, whereby expert witnesses are used to weed out frivolous lawsuits, (8) reform of the Colorado Consumer Protection Act to limit or eliminate its applicability to business-to-business relationships.

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Transportation Policy

For most of the past several decades (the TREX I-25 project being a major exception), transportation infrastructure in Colorado has been underfunded and under-prioritized. Colorado‘s transportation system has become a blight upon its business environment. Under Governor Ritter, the number of dedicated sources for transportation funding has dropped by three with the repeal of Arveschoug-Bird and the elimination of the Senate Bill 1 (1997) and House Bill 1310 (2002) diversions. Gas tax revenues, car registration fees, and drivers license revenues remain, but with the 2009 passage of Senate Bill 228 dedicated transportation funding from the General Fund is cut. Transportation funding should be a core mission of state government. Unfortunately, policy-makers have too often chosen to focus limited resources on expanding recurring

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government programs instead of capital programs. The most important change lawmakers can make is a commitment to making transportation funding a first-tier imperative, instead of a second-tier wish list.

Policy-makers should focus their efforts on creating (or expanding) one or more dedicated funding sources for transportation, utilizing financially sound bonding to expand the transportation infrastructure, and employing technology and innovation to more efficiently manage traffic flow with existing resources. Specific proposals that policy-makers should consider include: (1) create additional dedicated funding streams for transportation projects, (2) utilize bonding for infrastructure expansion, and (3) utilize innovation and technology to improve traffic flows.

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TAKING INVENTORY: WHERE COLORADO STANDS
KEY FINDINGS

As of 2008, Colorado‘s business environment remained stronger than most states but faced growing challenges and deterioration from the policy priorities of the current administration and Democrat-controlled legislature. Colorado is only one generation away from becoming another California. Without an about face from the state‘s policy-makers, the state‘s business environment will be plagued by excessive taxation, uncontrollable spending, and a regulatory, health care and tort environment downright hostile to job growth. Governor Ritter has trumpeted alternative energies (the emerging New Energy Economy), but according to a University of Colorado study the renewable energy industry directly employs only 1,500 to 3,000 people in the state. Any ―new energy‖ jobs drawn to Colorado, therefore, are more than offset by policydriven losses in the traditional energy sector. At least seven credible studies of states‘ business environments paint generally positive but varying pictures of Colorado‘s business climate in the immediate past. CNBC, Forbes, the Small Business and Entrepreneurship Council, and the Pacific Research Institute placed Colorado among the top 10 states in the nation. Site Selection magazine and Pollina place Colorado in the bottom half of the 50 states.

Introduction Colorado‘s business environment remains stronger than most states but has begun to deteriorate in recent years and faces major challenges from the policy priorities of the current administration and legislature. The state‘s unemployment rate, which neared eight percent in the spring of 2009, was the highest it has been since the mid-1980s.

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The data make it clear Colorado is not immune from the national recession. Job growth has slowed markedly in most job sectors since 2006. Between January 2008 and April 2009, overall employment in Colorado dropped 3.5 percent, from 2.58 million to 2.52 million, according to the Colorado Department of Labor & Employment. Government employment is a notable exception. Government employment grew significantly during Governor Ritter‘s first two years in office, from 374,700 employees in February 2007 to 395,500 in April 2009, a 5.6 percent increase. Furthermore, Moodys.com offers a bleak job outlook for the Denver area for 2009 and 2010. According to 9news.com, ―The survey breaks down 14 different job sectors. The three expected to do the worst this year are construction, mining, along with transportation and warehousing. Only four out of 14 sectors are expecting to have job growth this year: education and health services, government, utilities, and information‖ (―New Survey: Jobs Outlook in Denver Not Good in 2009,‖ 9news.com, April 24, 2009). Overall, in Colorado the study projected net job losses of 2.2 percent in 2009 (USAToday.com). Seven significant studies, outlined below, analyze the state‘s business environment. Instead of a month-by-month examination of the state‘s employment picture, these studies analyze the attractiveness of the state‘s business and jobs environment compared to other states. But each must be contemplated in context: as a retrospective on where we were as of 2007 or 2008 and where we‘ve come from, not as a prospective on where we are headed. Are “Green Jobs” the Panacea for Colorado? Governor Ritter has focused his efforts on attracting ―new energy‖ jobs to Colorado, just as his predecessor, Bill Owens, focused on drawing high technology jobs to the state. Has Governor Ritter succeeded? An American Solar Energy Society (ASES) report, prepared in 2008, claimed that renewable energy and energy efficiency jobs accounted for more than 91,000 Colorado jobs in 2007. The report‘s timing, just as Governor Ritter took office, combined with its failure to gauge changes in employment in renewable energy and energy efficiency industries over time, make it impossible to draw any conclusions with regards to Governor Ritter‘s efforts. The report‘s findings contradict a University of Colorado study which found that the renewable energy industry directly employed only 1,500 to 3,000 people (―Scrambling Out from Under,‖ The Economist, May 23, 2009). Perhaps of even greater concern is the controversial nature of the ASES report‘s claims and findings. Then-Rocky Mountain News columnist Vince Carroll pointed out that the 91,000 figure would mean that nearly as many Coloradans were employed in renewable energy and energy efficiency jobs than are employed in all the major health care occupations. That conclusion is not empirically or intuitively defensible. Indeed, the largest concentration of renewable energy jobs cited by the study falls into the category ―janitors and cleaners.‖ Furthermore, ASES‘s board is populated by two members of Governor Ritter‘s staff and a number of other government employees, raising questions about the independence of the report‘s findings and conclusions.

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―Green‖ jobs produced by the private sector as a result of supply and demand may hold some promise in the future. But government dictates and subsidies, such as were approved by the Colorado Legislature in 2009 with the passage of Senate Bill 51 and House Bill 1312, put government in the role of market-maker. A study of such efforts by the government of Spain finds them to be counterproductive to the goal of increasing jobs. The study, prepared under the direction of Dr. Gabriel Calzada, an economics professor at Juan Carlos University in Madrid, found the following:
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Since 2000, Spain has spent $774,000 to create each ―green‖ job. The creation of ―green‖ jobs by the government has resulted in the destruction of nearly 113,000 jobs elsewhere in the economy, or 2.2 jobs destroyed for every ―green‖ job created. Only one in 10 of the ―green‖ jobs created were of a permanent nature. Source: Western Business Roundtable press release, ―Groundbreaking Study Puts Real-World Numbers Behind the Promise of ‗Green Jobs,‘‖ April 7, 2009.

Recent Studies of Colorado’s Business Climate A number of state-by-state analyses, many conducted annually, provide data about the recent status of Colorado‘s jobs environment. 1. One of the most frequently cited studies comes from CNBC. According to this study, Colorado ranked fifth in the nation in 2008, up from seventh in 2007, based on 10 measures. Colorado ranked 25th in the cost of doing business, 13th in the workforce measure, 11th in the economy measure, 35th in the education measure, 7th in the quality of life measure, 13th in the technology and innovation index, 35th in the transportation measure, 30th in cost of living, 5th in business friendliness, and 11th in access to capital. 2. Forbes provided a generally upbeat analysis of Colorado‘s business environment, ranking Colorado sixth in the nation in 2008, up from eighth in 2007 but down from fifth in 2006. According to the Forbes study, Colorado ranked 35th in business costs, first in labor and workforce availability, training and education, 22nd in its regulatory environment, 14th in its economic climate, first in prospects for growth, and 12th in quality of life. 3. Site Selection magazine, which has conducted annual, state-by-state business climate surveys for __ years, painted a less rosy picture. Colorado did not rank in the top 25 in 2008 in Site Selection‘s top state business climate rankings. In 2004, Colorado ranked 23rd. In its 2003 edition, Colorado ranked 21st. In 2002, Colorado ranked 20th. In 2001, it ranked 17th. And in 2000, it ranked 25th. The survey asked executives to evaluate the following 10 measures: availability of desired work-force skills, ease of permitting and regulatory procedures, state and local tax scheme, land/building prices and supply, availability of incentives, transportation infrastructure, state and local economic development strategy, flexibility of incentives programs, higher education resources and union activity.

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4. In January 2008, a Chief Executive magazine report utilized polling of business leaders (the fourth annual ―Best & Worst States‖ survey), to rank the states. Colorado ranked 13th. CEOs were asked to grade each state based on the following criteria: (1) taxation and regulation, (2) workforce quality, and (3) living environment. Colorado‘s 2008 ranking was down slightly from 2005 and 2006, when Colorado ranked tenth. 5. A fifth source of information regarding Colorado‘s overall business climate comes from the Small Business & Entrepreneurship Council. In its 2008 report, which evaluated 34 criteria, Colorado ranked 10th in the nation. Because the precise methodology of the report has varied, year-to-year comparisons are unavailable. The report examined 34 criteria to make its conclusions, including tax rates, health insurance mandates and regulations, energy costs, workers‘ compensation policies, crime rates, labor policies, regulatory and tort costs, and government size and spending levels. 6. Dr. Ronald Pollina‘s annual study of the business climates of each of the 50 states draws a mixed picture for Colorado. Pollina‘s take on America‘s future and the efforts of the federal and state governments to attract well-paying jobs is downbeat: ―After 27 years‘ experience representing corporate clients in selecting sites internationally and five years of detailed examination of all states‘ economic development efforts, Pollina Corporate has observed that current economic development trends are not promising‖ (Pollina Corporate Top 10 Pro-Business States for 2008, p.4). Using 29 factors, the study in 2008 ranked Colorado 27th in the nation, up from 33rd in 2007 but comparable to its 28th place showing in 2005. Factors evaluated included taxation, human resources, right-towork legislation, energy costs, infrastructure spending, workers‘ compensation policies and job growth/loss trends. Perhaps unique among the several studies, however, Pollina attributes one-third of each state‘s score to ―incentives and economic development agency factors.‖ Because lawmakers in Colorado have resisted most efforts to provide targeted tax incentives and economic development grants and assistance to attract specific companies and industries, Colorado scores poorly in this section of the study. Whether these incentives are truly desirable is debatable. Many economists believe that such targeted incentives are in the long run counter-productive, creating an unhealthy entanglement between corporations and government. Because Pollina makes a qualitative judgment in favor of these sometimes controversial incentives, his methodology somewhat disservices Colorado‘s score. 6. Finally, the Pacific Research Institute, in association with Forbes, provides a positive analysis of Colorado economic freedom in its ―U.S. Economic Freedom Index 2008 Report.‖ Its 3rd edition (previous version were published in 1999 and 2004), the 2008 index placed Colorado third in the nation The report provides the following definition of ―economic freedom‖: ―Economic freedom is the right of individuals to pursue their interests through voluntary exchange of private property under a rule of law. This freedom forms the foundation of market economies. Subject to a minimum level of government to provide safety and a stable legal foundation, legislative or judicial acts that inhibit this right reduce economic freedom. Government acts that advance this right increase economic freedom. This report focuses on 14

state and local government actions as they relate to economic freedom; we do not judge the wisdom, merit, or purpose of specific government programs.‖ The report‘s methodology divides 143 indicators into five data sets per state, examining tax rates, state spending, occupational licensing, environmental regulations, income redistribution, right-to-work and prevailing-wage laws, and tort reform. The five data sets are fiscal (51 indicators), regulatory (53), judicial (22), government size (7), and welfare spending (10). Colorado ranked sixth in the fiscal index, 18th in the regulatory index, 11th in the judicial index, sixth in the government size index and fourth in the welfare spending index. Colorado‘s third place ranking in 2008 represented a drop from second place in 2004 but an improvement from 1999‘s 14th place showing. Is Colorado Losing Its Competitive Edge? By many measures, therefore, Colorado‘s business environment is above average, and has been so for many years. While these studies provide insufficient data to make any empirical conclusions about Governor Ritter‘s performance thus far, recent policy changes and proposals are a significant cause for concern. Deterioration in Colorado‘s labor law, tort law, health insurance policy and regulatory and tax laws raise the question: is Colorado losing its competitive edge? Many of the policies and spending practices promoted by Governor Ritter and the current Democrat-controlled legislature bear a striking resemblance to those pursued by California: elimination of spending caps, a union-oriented labor policy, intrusive regulatory policies, and a mindset of entitlement and government dependence. Once the engine of incredible economic growth, California has fallen on tough economic times. California‘s ranking in business climate studies has steadily deteriorated over the years. Many of the studies now place California‘s business climate among the worst in the nation. The Small Business & Entrepreneurship Council‘s 2008 report ranked California 49th in the nation, CNBC ranked California 25th, Chief Executive magazine ranked California dead last, and Forbes put California at 40th. The consequences of its policy decisions are now coming home to roost. Unemployment is high. Government spending and taxation are in the midst of a viciously increasing cycle. And employers are looking out of the state to expand or relocate. To avoid California‘s fate, Colorado lawmakers must be dedicated to policies that promote an entrepreneurial spirit and attracting jobs.

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TAXES, SPENDING & BUDGETING
KEY FINDINGS

Governor Ritter and the Democrat-controlled Legislature have advanced an accelerating number of very unfavorable fiscal and tax policies in Colorado in the past two years. These policies promote an atmosphere of uncertainty that is not conducive to job growth. Recent court decisions, ballot initiatives approved over many years, and reckless fiscal policies approved by the legislature and Governor Ritter necessitate a wholesale reexamination of the rules which govern Colorado‘s fiscal policy. Fundamental tax and spending reform are needed. Lawmakers should reaffirm the right of voters to approve all tax increases and look to wholesale Medicaid reform to ease fiscal pressures. Colorado combined state and local spending, measured on a per capita basis, rates near average among the 50 states. According to Census Bureau figures, Colorado ranked 26th in the nation in state and local spending per capita in 2006. This comparative data does not account for the recent multi-billion dollar expansions in taxes, fees and government programs. The biggest factor in protecting Colorado‘s tax and spending climate from outside political pressures and runaway growth has been TABOR (the Taxpayers Bill of Rights). From a business perspective, nothing has done more to preserve low and stable rates of taxation across Colorado than TABOR. The Colorado Supreme Court‘s decision to approve an increase in property tax rates without a vote of the people, however, calls into question many of TABOR‘s heretofore straightforward protections. A dark storm cloud looms over Colorado‘s fiscal horizon: the Public Employees Retirement System‘s massive shortfall. PERA has promised $53 billion in benefits to current and future retirees but only has $30 billion in assets.

Overview

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For many years, Colorado maintained one of the most predictable and stable tax environments in the country, protected by a spending cap on general fund spending growth and a requirement that voters approve tax increases. But recent years have witnessed a sea change in tax and spending policy in Colorado. Governor Ritter and lawmakers have embraced tax increases, circumventing the requirement for voter approval, as well as massive spending hikes. The Colorado Supreme Court has apparently affirmed Governor Ritter‘s ability to raise taxes without a vote of the people as long as the increased revenue does not exceed TABOR‘s spending caps. This decision opens the door to major tax hikes and calls into question the applicability of TABOR‘s spending limitations and requirement for voter approval of any tax hikes. Colorado, therefore, has rapidly begun to follow in California‘s footsteps. Manageable fiscal challenges brought on by the current recession will turn into long-term fiscal pressures on the state‘s budget, unless lawmakers commit themselves to a government limited in size and focused in its scope. Introduction A state‘s tax and fiscal environment is an important consideration for new and expanding employers. In the previous chapter, we reviewed the existing literature regarding Colorado‘s business environment. Seven studies were identified and analyzed. In every one of them, tax rates and levels constituted a major contributing factor. As the Tax Foundation notes in its 2009 State Business Tax Climate Index, ―The modern market is characterized by mobile capital and labor.‖ The U.S. Department of Labor reports, ―Although the market is now global, the Department of Labor reports that most mass job relocations are from one U.S. state to another rather than to an overseas location‖ (U.S. Department of Labor, ―Extended Mass Layoffs in the First Quarter of 2007,‖ August 9, 2007). ―Good state tax systems levy low, flat rates on the broadest bases possible, then they treat all taxpayers the same,‖ the Tax Foundation asserts. On these measures, Colorado scores relatively well, scoring 13th in the nation in 2009, down one slot from its 12th place score in 2006. The Tax Foundation evaluates five component indexes: corporate taxes, the individual income tax, the sales tax, the unemployment tax structure and property taxes. On each index, Colorado scores relatively well: 15th on corporate taxes, 14th on individual income taxes, 12th on sales taxes, 19th on unemployment insurance taxes, and sixth on property taxes. No evaluation of a state‘s tax structure is complete without also evaluating the flip side of the coin: state spending. States in which political constituencies are frequently rewarded through the tax code (i.e., tax credits) or spending (e.g., corporate welfare) face significant budget pressures to raise taxes. Case in point is California, where lawmakers in 2009 passed the largest tax hike in history because they there were unable and/or unwilling to make budget cuts.

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On both accounts, taxation and spending, Colorado‘s fiscal soundness is being led astray by Governor Ritter and the Democrat-controlled Colorado Legislature. Colorado‘s fiscal policy is now convoluted at best. Spending mandates brought about by federal Medicaid policy and Amendment 23 are now accompanied by a mind-boggling Colorado Supreme Court decision which seems to undo TABOR and open the door to major tax hikes without voter approval. Meanwhile, Governor Ritter and legislators, who were handed a golden chance to address the fiscal challenges facing the state with 2005‘s approval of Referendum C, have squandered the opportunity. Fiscal cross-pressures are mounting. Without an about face and without the protections afforded by TABOR since 1993, Colorado jeopardizes its sound and predictable fiscal environment as it moves in the direction of greater government dependency. Where Colorado Went Right: State’s Fiscal and Tax Policy Heretofore among the Best The biggest factor in protecting Colorado‘s tax and spending climate from outside political pressures and runaway growth is TABOR (the Taxpayers Bill of Rights). Until 2009, TABOR limited the amount of new revenue lawmakers could spend each year and prohibited tax hikes without the approval of the voters. Combined with the state‘s Arveschoug-Bird amendment, which limited general fund spending growth to six percent per year, TABOR has ensured a strong fiscal position for Colorado. Colorado‘s tax and fiscal policy environment has offered a number of advantages: 1. The growth of government in Colorado has been held in check, preventing outside interests from gaining leverage over the budget (e.g., unions through benefits and corporations through various corporate welfare schemes). 2. Capital dollars, which are non-recurring expenditures, are protected from the inevitable appetite of lawmakers to grow the general fund, composed of recurring spending programs. 3. Unlike many states, Colorado‘s tax code is not riddled with politically motivated preferences (e.g., tax credits, which narrow the base). 4. The state‘s income tax rate (4.63%) is flat and equally applied to individuals and corporations. 5. Colorado is not overly reliant on any given tax (sales, income, gas, etc.) 6. Of the states that levy an income tax, Colorado‘s 4.63 percent is the lowest in the nation. 7. Colorado income and corporate tax exemptions are indexed for inflation. 8. Perhaps most importantly for purposes of attracting jobs, TABOR creates a highly predictable tax environment, as tax hikes are subject to the approval of a resistant electorate.

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Colorado’s Fiscal and Tax Policy in Jeopardy The past three years have witnessed an about-face in Colorado‘s fiscal policy. Instead of maintaining its long-standing commitment to the state‘s spending limits, lawmakers have passed legislation to repeal Arveschoug-Bird and circumvented TABOR‘s tax limitations in order to increase property taxes, approve higher car taxes, and impose a new hospital bed tax. In addition, lawmakers came close to approving a massive (and according to the Attorney General, illegal) raid on Pinnacol Assurance as a means of raising additional revenue. While the effort was eventually turned back, the near-raid contributes to a sense of unpredictability as legislators increasingly pursue new revenues through means unfathomable just years ago. 1. Repeal of Arveschoug-Bird: The repeal of Arveschoug-Bird poses a particularly troublesome development. Arveschoug-Bird limits the growth of the general fund and directs revenues in excess of the measure‘s six percent growth limits to capital programs. Lawmakers argue that Arveschoug-Bird imposes a budget straight-jacket that limits their flexibility to address pressing problems facing the state. The danger in Arveschoug-Bird‘s repeal is this: programs funded through the general fund are, by nature, recurring in nature. They get built into the budget ―base‖ and become the state equivalent to federal entitlements. Capital programs, on the other hand, are short-term, one-time expenditures. Arveschoug-Bird limited the growth of recurring programs such as Medicaid in favor of non-recurring capital expenditures. The long-term consequence of its repeal will be increasing general fund growth that both crowds out needed infrastructure improvements and puts the state budget, weighed down by more recurring programs, on a path to fiscal distress. 2. Higher property taxes: Governor Ritter‘s property tax measure, approved in 2007, ‗freezes‖ property tax rates that would have fallen under the state‘s Gallagher stipulations. As a result, when property values rise, Coloradans will face higher property tax bills. The measure was found to be unconstitutional by the trial court, but the Colorado Supreme Court approved the tax hikes. 3. Higher car registration taxes: In 2009, sensing new-found license from the Colorado Supreme Court, lawmakers approved and Governor Ritter signed legislation to increase the car registration tax by between $40 and $50 per year for most motorists and by a whopping $71 for some drivers. The measure is designed to raise $250 million in new revenues to fund transportation projects. Ironically, lawmakers approved the higher taxes the same year they repealed the very measure which helped provide a funding stream for those same transportation projects (Arveschoug-Bird). 4. Medicaid growth: In an effort to draw down additional federal Medicaid matching funds, Governor Ritter proposed and legislators approved a measure to impose new hospital bed taxes. The measure proposes hundreds of millions of dollars of new ―fees‖ on hospitals in order to draw down federal dollars and provide $1.2 billion per year to add up to 100,000 more Coloradans to the Medicaid rolls. The federal dollars drawn down by this program are hardly free. With the fiscal solvency of entitlement 19

programs such as Medicaid and Medicare in dire straights, federal monies for this program are one federal policy change away from evaporating. If and when federal monies are eliminated, Colorado lawmakers will either have to eliminate the program, significantly scale it back, cut other programs, or raise taxes to balance the budget. 5. Welfare growth: In addition to massive growth in Medicaid expenditures, lawmakers have approved massive increases in welfare payments. According to the National Association of State Budget Officers‘ (NASBO) ―Fiscal Survey of the States: December 2008‖ (page 7), in fiscal year 2009, Colorado enacted a 30 percent cost of living increase for cash benefits provided under the Temporary Assistance for Needy Families program (TANF), double the second highest increase (New Mexico at 15 percent). Colorado lawmakers and Governor Ritter also voted to restore welfare benefits to immigrants. 6. Growth in government employment: Also according to NASBO (ibid.), Colorado experienced one of the highest growth rates in full-time equivalent employees (FTEs) over the past two years, at 3.14 percent. Only seven states experienced more growth in government employment. This increase in public sector employment comes at the same time the private sector has been shedding jobs. 7. PERA’s massive shortfall: Colorado‘s Public Employees Retirement System is massively underfunded: PERA has promised $53 billion in benefits to current and future retirees but only has $30 billion in assets (Aaron Harber, Denver Post, February 4, 2009). Taxpayers are on the hook for this shortfall, yet elected officials – Governor Ritter, Treasurer Cary Kennedy and the Democrat-controlled state legislature – have chosen to ignore the problem. Put in perspective, PERA‘s $23 billion shortfall is the equivalent of the entirety of Colorado‘s general fund budget for about three years. Evaluating TABOR’s Spending Limits Given the numerous, long-term benefits afforded by TABOR‘s and Arveschoug-Bird‘s spending limits, it should serve as no surprise that the single greatest threat to Colorado‘s tax climate and fiscal future going forward is increasing pressure from various groups to dismantle TABOR. There is always a tendency to draw attention to the failures of state policy. Indeed, Colorado‘s fiscal environment is not perfect. And TABOR is not without some negative consequences. But on balance, TABOR (and, heretofore, Arveschoug-Bird) have had a tremendously positive impact on Colorado‘s tax environment by promoting fiscal discipline. The biggest criticism of TABOR and Arveschoug-Bird is a so-called ―ratchet‖ effect. Spending limits are imposed year-to-year (TABOR limits the year-to-year increase in aggregate government spending to inflation plus population growth and Arveschoug-Bird limits growth in the general fund to six percent per year), meaning that periods of revenue decline that drive down spending have the impact of re-setting the base, ratcheting down spending at the same time lawmakers are forced to spend more money on K-12 education

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under the stipulations of Amendment 23. Whether its authors intended this consequence or not, this challenge was significantly mitigated by voters‘ passage of Referendum C in 2005. A second consequence of TABOR is that lawmakers increasingly rely on higher fees – not subject to voter approval – for added revenue. The definition of a fee has been abused. Many of these so-called fees are nothing more than tax hikes in disguise. During the 2009 legislative session alone, hundreds of millions of dollars in new fees were proposed and contemplated by the legislature. One, increasing vehicle registration fees by an average $41 per vehicle per year, was passed and signed by Governor Ritter. At $250 million per year, this ―fee‖ will raise far more in new revenue than is warranted by the cost of administering the vehicle registration and licensing program. As such, it is really a tax increase. Third, under TABOR revenues contributed to a ―rainy day fund‖ are counted as expenditures. Though lawmakers universally endorse the concept of some sort of rainy day fund to provide stability in bad years, year-to-year programmatic spending pressures have precluded the development of a true rainy day fund to date. Responding to TABOR’s Critics Several groups and individuals, led by the left-leaning Bell Institute, have created a steady drumbeat of criticism of Colorado‘s fiscal policy and TABOR specifically. Many of their critiques rely on the premise that Colorado simply doesn‘t spend enough money on certain programs, such as education and health care. Two observations of their analyses are appropriate. First, per capita Colorado government spending hovers right near the national average. According to U.S. Census Bureau figures for 2006 (the latest figures available), Colorado ranked 26th in the nation in state and local spending per capita. In recent years, Colorado has been able to afford significant spending increases in spite of TABOR‘s restrictions. As noted earlier, Colorado has approved a 30 percent cost of living increase for cash benefits provided under TANF and the state has experienced one of the highest growth rates in state employment over the past two years, at 3.14 percent. Furthermore, according to the Tax Foundation, Coloradans paid $4,359 per capita in state and local taxes in 2008, 9.0 percent of per capita income. That‘s slightly lower than some past years, but within the range of the past 31 years. The highest tax burden was experienced in 1977, at 10.5 percent; the lowest was in 1981, at 8.8 percent. Second, a smaller government which spends less is clearly more conducive to a healthy economy and job growth than the alternative envisioned by the Bell Policy Institute and other left-leaning groups. The reason for this is simple, and is often lost under the evaluation of outdated Keynesian thought: a dollar raised by the government is a dollar taken out of the private economy. Wealth is created by the private sector, not by the government. Therefore, the best government is one that funds high priorities and resists the temptation to try and accomplish too much. It should raise and spend resources only on necessary activities, such as education, infrastructure, law enforcement, criminal justice and safety net programs.

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The following graph demonstrates the direct relationship between government spending as a percentage of gross domestic project and unemployment (Brian Wesbury, ―Unemployment and Stimulus,‖ The American Spectator, February 6, 2009).

Recommendations for Improvement in Colorado’s Tax and Fiscal Policy While Colorado has much to be thankful for with regard to its fiscal and tax policy, recent developments (court decisions, ballot initiatives, legislative actions) throw Colorado‘s once predictable fiscal policy into disarray. A wholesale review of Colorado‘s fiscal policy is now in order. 1. Move toward consumption-based taxes instead of income and property taxes: TABOR‘s apparent demise at the hands of a hostile Governor, Legislature and Supreme Court brings with it a silver lining: the possibility of tax reform. As lawmakers consider this possibility, they should reduce or eliminate taxes on production and the onerous and job-killing business personal property tax in favor of consumption taxes, such as the sales tax. 2. Reinstitute TABOR’s requirement that tax hikes be approved by voters: Nothing has done more to protect Colorado‘s taxpayers – both business and personal – from tax hikes than TABOR‘s constitutional requirement that tax changes be approved by the voters. Even today, almost 17 years after TABOR‘s approval, voters embrace this requirement. Through referendum, lawmakers should give voters the opportunity to overturn the Supreme Court decision that now appears to allow tax hikes without the approval of voters. 3. Repeal Amendment 23: Amendment 23, approved by voters in the fall of 2000, mandates increased annual spending on K-12 education programs, amounting to a blank check for one program at the expense of others. This entitlement reduces schools‘ incentives for improvement because lawmakers have very little leverage over schools to force necessary reforms. Lawmakers from both parties have floated the 22

idea of tying repeal of Amendment 23 to easing TABOR‘s spending restrictions for many years. Now that the Colorado Supreme Court has negated many of TABOR‘s protections against tax hikes, repealing the Amendment 23 straightjacket is in order. 4. Mitigate the property tax burden on Colorado businesses: From a business environment standpoint, many employers have raised concerns about corporations carrying an increasing percentage of the state‘s property tax burden. In 1982, voters approved the Gallagher Amendment, which (a) fixed the commercial property tax rate at 29 percent and (b) stipulated that 45 percent of the total amount of state property tax collected come from residential property and 55 percent of the property tax collected come from commercial property. As residential property values soared, the residential assessment rate dropped from 21 percent in 1982 to below eight percent by the mid-2000s. Meanwhile, commercial property continues to be taxed at the relatively high rate of 29 percent. As residential property values decline, however, the trend will reverse, and residential property tax rates will continue to climb. Calls for reallocating the property tax burden, which reached a fevered pitch just a few years ago, are subsiding. In the long run, lawmakers should explore options to ease the mandated 29 percent commercial property tax rate. 5. Phase out the business personal property tax: The business personal property tax is a job-killing relic from the 19th Century that constitutes a massive blight upon Colorado‘s business climate. A bipartisan consensus toward phasing out this onerous tax finally appeared to be at hand during the 2009 legislative session. While stopping short of a full endorsement of legislation to phase out the tax, then-Senate President Peter Groff said: "If we're able to do that [phase out the tax], I think it helps small businesses preserve jobs and maybe create some as well‖ (Denver Post, 2/03/09). Instead of repealing or phasing out the tax in 2009, however, lawmakers created yet another committee to study the tax. A 2004 legislative interim committee report found that about 84,000 Colorado businesses paid the tax, with about 54 percent of the tax‘s revenues going to school districts (Face the State, May 6, 2009). Lawmakers will have to address the impact of this tax‘s repeal on local governments by backfilling the lost revenue or authorizing some sort of revenue-neutral replacement. 6. Work with the Obama Administration to make Colorado a leader in Medicaid reform: Medicaid is placing increasing pressure on the state budget, crowding out funding for prisons, schools and roads. Governor Ritter and lawmakers have made the problem worse, unwilling to resist the temptation to add more Coloradans to the Medicaid rolls. Lawmakers should work with the Obama Administration to help implement a massive overhaul of Medicaid by making Colorado a pilot project for reform. The traditional menu of mandatory and optional services and populations dictated by Washington through a shared funding scheme between the federal and state government should be replaced with a block grant and full flexibility of Colorado lawmakers to target resources to the people most in need. Every effort should be made to encourage appropriate Medicaid populations to move off the Medicaid rolls in a timely manner. 23

7. Utilize technology to mitigate sales tax compliance costs: One of the biggest challenges in Colorado sales tax compliance results from Colorado‘s unique, local control philosophy. Colorado is one of the only three states (Idaho and New York are the other two) in which localities can define their own sales tax base, resulting in significant compliance costs for vendors and corporations. Given Colorado‘s longstanding commitment to local control and the constitutional protections it affords home-rule cities, changing this policy is unlikely. Instead, improved technology will diminish the compliance challenges and costs over time. Lawmakers should facilitate such technological solutions to mitigate the challenges posed by Colorado policy. 8. Exempt air and water pollution control equipment from business-to-business sales taxes: Colorado is one of the few states that does not exempt air and water pollution control equipment from the state sales tax for business-to-business transactions. Making this change will provide a modest level of tax relief for employers and is consistent with effort to promote clean and green technologies in Colorado. 9. Focus unemployment insurance benefits on those who cannot find work: In Colorado, unemployment insurance benefits are imposed on the employer even if the employee refuses suitable work from his or her employer. While Colorado‘s unemployment insurance law typically strikes a reasonable balance between the needs of workers and employers, this provision punishes employers who make an effort to accommodate their employees during periods of transformation or economic challenge. Further pressure on the unemployment insurance fund came in 2009, when Colorado lawmakers extended unemployment benefits to striking workers. These policies draw down unemployment benefits that should be preserved for employees who lose their jobs and have no other options. 10. Rein in tax hikes masquerading as fees: As noted earlier, lawmakers confined by TABOR‘s tax limitations have increasingly turned toward ―fees‖ as a source of new revenue. But a great many of these fees are nothing more than tax hikes in disguise. To rein in these abuses, lawmakers should consider establishing a defensible and binding definition of a fee. 11. Fund a sound rainy day fund: Because contributions to a ―rainy day fund‖ are counted as expenditures under TABOR, lawmakers should give voters the option of exempting up to $200 million per year from TABOR‘s spending restrictions in order to finance a rainy day fund and limit access to the fund to real crises after certain criteria are met (e.g., an economic downturn of sufficient magnitude). Senate Bill 228, approved by the Legislature and Governor Ritter in 2009, created a statutory reserve beginning in Fiscal Year 2013. A constitutionally protected reserve that kicks in at an earlier date would be preferable. Many Republican lawmakers and some Democrats as well have proposed creating a meaningful rainy day fund for many years. But these proposals have been rejected in favor of growing existing government programs.

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12. Enact a transparency initiative to put every government expenditure on-line: During his 2009 State of the State speech, Governor Ritter called for a new transparency initiative to put government expenditures on-line. This idea, championed by conservative groups such as Americans for Tax Reform and the Colorado-based Independence Institute, would give citizens the ability to scrutinize government expenditures. Legislators in 2009 approved House Bill 09-1288, to further develop the concept. However, neither the legislation nor Governor Ritter‘s executive order instructs the state to put each, specific expenditure/transaction online. Rather, the legislation allows for ―descriptions of revenues and expenditures‖ and ―aggregated information.‖ While HB 09-1288 is a good start, it falls short. Full transparency dictates that every single expenditure is accessible to the public, not just a list of how much money was spent on certain types of activities or by programmatic function. 13. Fundamentally reform PERA and eliminate the shortfall: Finally, but almost certainly most importantly, Colorado‘s leaders must address the PERA shortfall. Taxpayers cannot be expected to bail out public employees‘ retirement benefits. Most immediately, all new government employees should be provided defined contribution plans instead of defined benefit plans. Just as private sector employees make decisions about where to invest their retirement benefits and manage their own accounts, so too should public employees. The PERA board and the State Treasurer should propose one or more alternatives to bridge the $23 billion PERA shortfall without resorting to taxpayer-funded bailouts.

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COLORADO’S CIVIL JUSTICE ENVIRONMENT
KEY FINDINGS
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An efficient and effective civil justice system necessitates two primary goals for lawmakers: fairness and predictability. Colorado‘s tort policy remains better than most states‘, reaping the benefits of two decades of tort reform efforts that began in the early 1980s. But at the same time Colorado‘s tort environment is plagued by the same challenges as 49 other states: far higher costs than our overseas competitors. The fairness and predictability of Colorado‘s civil justice system faces growing threats from the misguided priorities of Colorado‘s current political leadership.

Overview Colorado benefits from a tort reform agenda enacted over decades, starting in the 1980s and ending in 2004. Since 2005, Democrat lawmakers (and, since 2007, Governor Ritter) have undone some of the earlier reforms and threatened to undo others, endangering Colorado‘s business climate. The state cannot continue to simply rely on legacy reforms. To compete in the 21st Century international economy, new reforms that reduce costs and promote predictability are needed. Introduction Colorado‘s civil justice system is reaping the benefits of two decades of tort reform efforts that began in the early 1980s. Studies conducted by the Pacific Research Institute and the U.S. Chamber of Commerce‘s Institute for Legal Reform place Colorado‘s tort policy environment among the best in the nation. But we cannot take a high-quality tort environment for granted. A third study, conducted by the American Justice Partnership, shows Colorado‘s tort policy environment in decline. Fairness and predictability are the hallmarks of a good tort environment. Excessive tort costs arise when rules are ambiguous, when rules are biased toward plaintiffs or defendants, when limits on awards and damages are insufficient, when judges side too often with plaintiffs, when the courts are used to accomplish policy, and from a litigious culture.

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In America, all or most of these causal factors are frequently at work, resulting in a very expensive tort system. According to the Pacific Research Institute, ―Direct tort costs as a percentage of gross domestic product (GDP) average about one percent in 11 industrialized countries with standards of living comparable to that of the United States. In contrast, direct tort costs are 2.09 percent of GDP in the United States‖ (Lawrence J. McQuillan and Hovannes Abramyan, ―U.S. Tort Liability Index 2008 Report,‖ Pacific Research Institute). Tillinghast-Towers Perin, the source of the most widely cited statistics on tort costs, put direct U.S. tort costs at $261 billion in 2005, roughly $880 per person (Ibid.). The greatest threat from lawsuit abuse may not be these direct costs, however. Lawsuit abuse stifles innovation and entrepreneurial risk, jeopardizing America‘s economic future. In fact, these indirect costs total hundreds of billions of dollars more per year, translating into a per person hidden tax of as much as $2,900 per year (Ibid.). The Pacific Research Institute‘s 2008 ―U.S. Tort Liability Index‖ documents much of the academic literature quantifying these indirect costs.

W. Kip Viscusi and Michael J. Moore examined the consequences of product-liability costs on product and process R&D and on new-product introductions by manufacturing companies. Their research concluded that 13 manufacturing industries were past a tipping point, at which additional liability burdens reduce innovation (Ibid.). Thomas J. Campbell, Daniel P. Kessler and George B. Shepherd examined the impact of liability reforms on labor productivity. The researchers concluded: ―States that changed their liability laws to decrease levels of liability experienced greater increases in aggregate productivity than states that did not.‖ States that enacted reform saw labor-productivity gains that were about two percent greater between 1972 and 1990 (Ibid.). According to authors Lawrence J. McQuillan and Hovannes Abramyan of the Pacific Research Institute, job growth in 2006 was 57 percent greater in the 10 states with the best tort systems than in the 10 states with the worst tort systems (Ibid.).

A History of Reform in Colorado Colorado leaders recognized the threats of excess tort costs much earlier than most states. In fact, Colorado pioneered some of the tort reforms as early as the 1980s. Then, former Governor Bill Owens, a state legislator at the time, and his colleagues facilitated the passage of reforms, including an end to joint and several liability, promoting arbitration, medical liability reform and caps on noneconomic damages. Reform-minded legislation continued well into the 2000‘s, with the approval of product liability reform, limits on class action lawsuits, jury service reform, and early offer of settlement.

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By mid-2005, Colorado was almost universally recognized as a national leader for its persistent civil justice reforms:

The Pacific Research Institute ranked Colorado first in the nation for its civil justice policies, based on 28 variables (Ibid.). In 2008, the U.S. Chamber of Commerce‘s Institute for Legal Reform (―The 2008 State Liability Systems Ranking Study‖) placed Colorado ninth in the nation, based on survey work by Harris Interactive. The results were based on interviews with a nationally representative sample of 957 in-house general counsel or other senior litigators at companies with annual revenues of at least $100 million (U.S. Chamber of Commerce Institute for Legal Reform, ―2008 State Liability Systems Ranking Study‖). American Justice Partnership‘s annual litigation report ranked Colorado tenth in the nation in 2007 (―Dire States: Our Annual Guide to State Litigation. A Review of the Legal Climates in all 50 States,‖ Directorship, June/July 2008)

Colorado’s Tort Environment in Jeopardy The fairness and predictability of Colorado‘s civil justice system faces growing threats. AJP‘s 2008 study warns: ―Colorado saw its ranking fall sharply from 10th last year to 22nd this year. The state‘s liability climate, once one of the best, is now only neutral, and unfolding events further threaten its position. Anti-reform lawmakers and Governor Bill Ritter are moving forward with legislation that will tilt the courts in favor of plaintiffs. . . . Watch for Colorado‘s liability climate to further degrade and become hostile to growth and job development.‖ American Justice Partnership, which evaluates policy-makers in real time, examined trendlines instead of relying only on existing empirical analysis. The study noted a number of recent developments demonstrating that Governor Ritter and lawmakers are moving Colorado in an anti-reform direction.

Governor Ritter in 2007 signed into law a measure increasing the limit on noneconomic damages in general liability cases. Also in 2007, Ritter signed legislation instructing judges in employment claims to award attorneys‘ fees and costs to prevailing plaintiffs, but not to prevailing defendants. Legal reform advocates are playing defense against a bill relaxing medical malpractice caps. Ritter is making judicial appointments that reflect a bias toward the plaintiffs‘ bar. The Colorado Supreme Court has demonstrated a willingness to expand tort liability.

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Proposals for Reform Colorado‘s civil justice policies have led the nation for several decades, thanks to reformminded policy-makers. But Governor Ritter and current legislative leaders, who have a cozy relationship with trial lawyer groups, have begun to undo some of the reforms. Many of their most ambitious efforts have failed thus far, but Colorado employers cannot take prior achievements for granted. Going forward, the most important improvements Colorado should pursue: 1. The selection of sound judges: Ensuring fairness and predictability in civil justice necessitates good laws and good interpreters of the law. Outcome-based judicial decisions (rendering verdicts based on what the judge thinks the outcome should be instead of what the law says it should be) significantly jeopardize the stability and predictability of the tort environment. Instead of activist judges, the Governor should work to appoint judges committed to the philosophy of judicial restraint. 2. The restoration of pre-Ritter limits on non-economic damages in general liability cases: Governor Ritter and lawmakers raised limits on non-economic damages. While Colorado is still better positioned than many states with higher or non-existent limits, Colorado‘s tort environment would be best served by reinstating the pre-Ritter limits on non-economic damages. 3. Awarding attorneys’ fees and costs to successful plaintiffs and defendants instead of only to successful plaintiffs: Rewarding successful plaintiffs but not successful defendants creates an inherent bias toward filing more lawsuits. Why shouldn‘t plaintiffs who file meritless suits be punished? This is simply a matter of fairness and equality. If defendants who lose must pay plaintiffs legal fees, so too should plaintiffs be forced to pay defendants‘ fees in cases in which the defendant prevails. 4. Mandatory disclosure of attorneys’ fees and contingency fees in cases in which the government is a party: When taxpayer dollars are at stake, citizens have a right to know how much money lawyers are making. This is simply a matter of transparency that would help curb lawsuit abuse directly affecting the taxpayers. 5. The defeat of efforts to re-impose a hybrid tort/no-fault auto insurance policy: Colorado‘s current tort-based auto insurance system may not be the pinnacle of success, but it beats the former hybrid tort/no-fault system. Improvements to the current auto insurance system should be contemplated, but going back to the old system would be counterproductive to policy-holders. 6. Improvement in rules regarding admission of scientific evidence: To curb lawsuits based on junk science, the Colorado Legislature should improve the vetting process by which scientific evidence is approved for the court‘s consideration. Colorado‘s peer review process is substandard. Lawmakers should look to the

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federally approved Daubert standard, referring to the 1993 U.S. Supreme Court decision which required more peer review and empirical testing for evidence to be admitted into federal court. 7. A sound certificate of review process: In conjunction with new rules regarding the admission of evidence, a certificate of review process utilizing expert witnesses to weed out frivolous lawsuits through a court-approved screening process should be contemplated. 8. Reform of the Colorado Consumer Protection Act: The Colorado Consumer Protection Act was originally designed to protect consumers from unscrupulous and/or negligent businesses. Over time, the Colorado courts have expanded the CCPA‘s application to include business-to-business relationships. While Colorado‘s Attorneys General have generally practiced restraint thus far, the potential for abuse exists, creating significant unease and unpredictability about the future of Colorado‘s tort environment. Lawmakers should remove the ambiguity about the CCPA‘s scope by restoring the measure‘s original intent and either limiting application only to business-consumer relationships or limiting its scope to specific types of business-to-business relationships.

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HEALTH CARE RX FOR COLORADO
KEY FINDINGS

Governor Ritter has come nowhere near achieving his boldly declared intent to put a plan in place by 2010 that provides all Colorado citizens ―some level of access to primary care through health insurance.‖ While Colorado has historically invited market-oriented reforms, which have helped create affordable, private insurance options, Governor Ritter and the Democrat-controlled Legislature have recently changed direction, moving toward government-oriented solutions that exacerbate the problems. Governor Ritter and the Democrat-controlled Colorado Legislature have increased insurance premiums for Coloradans by approving (1) rate-banding legislation approved in 2007, (2) new fees on insurers approved in 2008 to fund the state‘s high-risk ―Cover Colorado‖ population, and (3) a massive new hospital bed tax approved in 2009 that will, on average, cost each family of four in Colorado roughly $500 per year. Health insurance premiums are placing a growing burden on Colorado‘s employers and employees. Since 1999, employmentbased health insurance premiums have increased 120 percent, compared to cumulative inflation of 44 percent and cumulative wage growth of 29 percent. Governor Ritter‘s Blue Ribbon Commission on Health Care Reform proposed a number of ideas in its final report. While some of the reforms are common-sense, others are counterproductive, would stretch government resources too thin and would inject far too much government into the market. They are also based on suspect modeling from the Lewin Group. While Governor Ritter has chosen to ignore many of the recommendations in favor of a more incremental approach, recently approved legislation moves Colorado in the wrong direction and is fiscally unsustainable.

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Overview After experimenting with some positive, forward-thinking health insurance reforms earlier in the decade, Colorado has moved decisively in the wrong direction since 2007. Recent changes in health insurance policy are fiscally unsustainable, rely on a federally financed ―matching‖ scheme, and move more and more people out of the private insurance market. Instead of addressing the core failures of health policy -- namely a third-party payer system and government-imposed mandates that drive up costs -- recent legislative actions repeat mistakes made in other states and do little more than throw more money at an ailing system. Introduction No issue intertwines federal and state policy together more than health care. And perhaps no other policy is more misunderstood. While the importance of sound health care policy to average Coloradans cannot be understated, the implications for Colorado‘s business climate are frequently overlooked. New taxes, mandates or misguided health care policies pose a real threat to employers and employees alike. In 2008 alone, employer health insurance premiums increased 5.0 percent, double the rate of inflation (Henry J. Kaiser Family Foundation, ―Employee Health Benefits: 2008 Annual Survey,‖ September 2008). Since 1999, employment-based health insurance premiums have increased 120 percent, compared to cumulative inflation of 44 percent and cumulative wage growth of 29 percent during the same period, according to the Henry J. Kaiser Family Foundation. Confronted with these increasing costs of employing workers, employers have only two options: (1) raise prices of the goods or services they sell, or (2) cut wage or benefit costs. Employers have every incentive to look out for good employees. As a result, many are searching for innovative ways to offer benefits, such as high deductible plans and health savings accounts. In an interview with the Associated Press shortly after his 2006 election, Governor Ritter defended his promise to provide health insurance to 760,000 uninsured Coloradans by 2010 and promised to do it without raising taxes (Steven K. Paulson, ―Ritter: Health Insurance for All,‖ The Denver Post, December 7, 2006). He has reneged on both those promises. Not only has he imposed hospital bed taxes and levied new fees on insurers, but he has abandoned plans for a state-based universal insurance in favor of a more incremental approach and deference to federal efforts. The Status of Health Care Policy in Colorado Colorado until recently had a history of innovative, market-oriented health care reforms. In 2003, the legislature passed and former Governor Owens signed legislation allowing insurers to provide affordable health insurance plans free from most of the expensive mandates and regulations burdening the health insurance market. The state has relatively strong limits on medical malpractice awards, reducing jackpot lawsuits against doctors. And Colorado ranks fourth in the nation in the percentage (7.1% in January 2008 or nearly 218,000 people) of its under-65 population enrolled in consumer directed health savings account plans (America‘s Health Insurance Plans, ―January 2008 Census Shows 6.1 Million People Covered by HSA/High-Deductible Health Plans,‖ April 2008). 32

These reforms, coupled with policy-makers‘ wise choice to steer clear of costly and counterproductive ideas adopted in several other states -- such as guaranteed issue, strict community rating and trying to spread Medicaid benefits too thin – made Colorado‘s health insurance market among the more robust nationally. The average Colorado health insurance premium in the individual market is still more affordable here than the average nationally ($2,537 per person per year in Colorado versus $2,613 nationally), but Colorado‘s premiums in the small group market exceed the national average significantly ($4,344 per person in Colorado versus $3,732 nationally) (America‘s Health Insurance Plans Center for Policy and Research, ―Health Insurance: Overview and Economic Impact in the States,‖ 2007). The recent actions of Governor Ritter and the legislature impose direct costs on insurers, however, that will raise premiums for Colorado individuals and businesses. 1. The 2007 passage of legislation (HB 07-1355) took away insurers‘ ability to provide rate discounts of up to 25 percent to healthy small business groups. In an attempt to reduce premiums for groups with employees with chronic or serious health conditions, the legislation took away two rating factors – health status and claims experience – that can be used by insurers in setting premiums. Some insurance carriers estimate the legislation will ultimately lead to some small businesses facing premium increases as much as 40 percent (Steve Porter, ―New Health Insurance Law Causing Confusion,‖ Northern Colorado Business Report, December 4, 2008). 2. The Ritter Administration also increased fees on insurance companies by $13 million in 2009 and $30 million in 2010 with the approval of House Bill 1390, which uses the new revenues to provide funding for Cover Colorado, the state‘s high-risk insurance fund. 3. Governor Ritter won passage of legislation imposing a massive, new hospital bed tax in order to expand Medicaid to an additional 100,000 Coloradans. An oversight committee is charged with determining the exact amount of the tax. But with total revenues estimated at $600 million, the average cost of a hospital stay will increase by thousands of dollars. To come up with $600 million, the average family of four in Colorado would have to pay nearly $500 per year. Seizing on Coloradans‘ desire for access to affordable, quality health insurance plans, Governor Ritter campaigned to make basic health care available and accessible to all Coloradans. His ―Colorado Promise‖ contained encouraging language regarding ―competition,‖ ―personal responsibility,‖ and making Medicaid ―more efficient and effective.‖ After his election, Governor Ritter convened the ―Blue Ribbon Commission for Health Care Reform,‖ as instructed by legislation approved in 2006. Governor Ritter has rejected the Colorado Promise‘s commitment to competition, personal responsibility and efficiency in favor of greater government dependency, higher taxation and massive Medicaid expansions. The commission‘s recommendations are further described and explored later in this chapter.

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Principles for Reform Identifying useful principles for health care reform is guided by some basic understandings and assumptions. 1. Consumers should be incentivized to make quality and cost conscious decisions. The huge bulk of health insurance purchases in Colorado (and America) operate in a distorted market: they occur in a third-party payer system. Instead of consumers purchasing services directly from providers, consumers obtain services from providers but those services are paid for by a third party (i.e., either an insurer or the government). As a result, consumers‘ health care purchases often lack the price sensitivity of other private transactions. When advocates of government solutions decry the failures of the ―free market,‖ they neglect to note these distortions within the health care purchasing market. Real health care reform must seek to implement a consumer-driven, first-party payer approach wherever possible. 2. Tax parity is a must. Current tax policy produces enormous inequities and inefficiencies by punishing individuals who don‘t obtain their health insurance through their employer. Federal and state tax policy should either eliminate the employment based tax exclusion, allow individuals who purchase health insurance and health services outside their employer to deduct those costs or receive a tax credit of comparable value, or a combination thereof. 3. Policies should maximize the number of people in the private health insurance market. In fact, a reasonable goal should be to move everyone into the private market. Through Medicaid expansions, the federal and state governments have moved more and more people out of the private market and into the public market. The wisdom of these efforts can be debated and is discussed later. But the unquestioned result of these efforts is that risk within the private market is dispersed within an ever narrower pool of individuals as new Medicaid beneficiaries move from the private market to public programs. The result: higher premiums for those in the private market, resulting in even greater clamoring for government assistance. Government policies should seek to disperse risk over the greatest number possible. Even beneficiaries of government assistance should obtain their insurance through the private market. 4. Transparency: quality and cost information must be made more accessible to consumers. While the potential for excessive government interference in the health care market is significant (and has been witnessed in many ways), the government does have a role in ensuring consumers‘ access to sufficient price and quality transparency. Medical providers are among the few professions who do not publicly list the cost of their services. Consumers can only obtain such information by asking. Providers should be required to make the costs of their services publicly accessible. Additionally, more and more groups are evaluating providers‘ quality (e.g. measuring death rates at hospitals, etc.). Through on-line directories and access, the state could facilitate greater access and awareness of providers‘ quality. Health care providers should not be insulated from market controls.

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5. Cost shifting and cost differentials should be minimized, and at some point eliminated. Medicaid and Medicare reimburse providers at less than the market rate. Large employers are able to leverage their size to negotiate lower rates for their beneficiaries. But uninsured walk-ins and participants in the individual and small group markets frequently face much higher costs for the same procedures. In what other market do providers charge different prices for the same goods or services to different people? These cost differentials should be minimized. The temptation by the government to reduce reimbursement rates for Medicaid and Medicare serves only one purpose: to raise rates on those in the private market. Providers must recoup their costs somewhere. Such cost shifting distorts the market. Myths vs. Realities Before engaging in a discussion of proposed reforms, it is important to dispel a number of myths regarding health care and health insurance. Many of these myths are frequently cited as facts within the political class and among leaders of both political parties. 1. Most uninsured people lack the means to obtain health insurance. In fact, many uninsured people choose not to obtain insurance. They take a calculated risk. Understanding who the uninsured really are is crucial to any attempt to successfully reduce their numbers. In a white paper, the Council for Affordable Health Insurance usefully categorizes four different types of uninsured individuals: a. “The Invincibles” are individuals who don‘t expect to have any serious medical conditions and take a calculated risk. They are typically young, healthy people between the ages of 18 and 30. They are the largest demographic of the uninsured. More of these individuals would likely seek insurance if they had access to inexpensive, high-deductible, limited benefit policies (i.e., catastrophic insurance plans). b. “The Uninsurables” pose the greatest challenge from a public policy perspective. They are truly the neediest and are usually uninsured against their choice. Often they have a pre-existing condition and lack access to employment based coverage. Colorado utilizes a high-risk pool known as Cover Colorado to assist this population. c. “The Temporarily Uninsured” are individuals who go without health insurance, usually due to loss of employment or financial hardship, for less than six months. According to government statistics, nearly half of the uninsured go without coverage for less than six months. Health care policies such as insurance plan portability, HSAs, and ―gap‖ or ―bridge‖ policies can help this population. d. “The Uninsured by Choice” are eligible for a current public program but choose not to enroll. Perhaps one-quarter of all the 45 million uninsured Americans fit this category. Additionally, millions of uninsured Americans with good incomes – 300 percent of the poverty level or more – do not purchase coverage. 35

Source: The Council for Affordable Health Insurance‘s Issues & Answers, ―Small Steps to Big Reform,‖ No. 146, August 2007. 2. Cost-shifting due to uncompensated care is a primary driver of higher health care costs. Advocates of mandated health insurance coverage claim that requiring health insurance coverage would reduce health care costs by reducing or eliminating uncompensated care. That claim is wrong, as the Blue Ribbon Commission‘s Report for Health Care Reform in Colorado (the ―208 Commission Report,‖ named after Senate Bill 208, the bill that created the commission) demonstrated. According to the 208 Commission Report, the amount of uncompensated care provided in Colorado amounts to an estimated two to three percent of overall health care costs in the State. In addition, the head of the Congressional Budget Office testified before the Senate Finance Committee last December that on a national level, ―… [T]he effect of uncompensated care on private sector payment rates appears to be limited … .‖ Uncompensated care does impact medical costs in the private sector, but the effect of mandated coverage must also be contemplated: it would force younger and healthier individuals to purchase insurance, whether they want to or not, effectively instating a subsidy to older and less healthy consumers of health care. 3. The U.S. health system is inefficient. This is both true and false. Many critics of the inefficiency of the U.S. health care system advocate a single-payer health care system as an alternative. Economists and health care advocates have been debating the merits of single-payer health care for decades. Single-payer health care systems, such as are found throughout Western Europe and Canada, frequently result in lower, aggregate expenditures on health care. However, they do so by rationing services, refusing certain treatments and imposing lengthy delays for many others. When politicians and/or bureaucrats have to make decisions about which procedures get funded within a certain budget cap, something has to give. Believing that single-payer health care is more efficient than the private market requires one to believe that government can deliver the same amount of services in the same time with the same quality as a private market. Studies have been produced on both sides of the argument, but the simple fact is government-run programs never deliver the same services at the same quality and in the same amount of time. The bottom line: the U.S. health care system, for the reasons discussed earlier, is riddled with inefficiencies due to its distorted third-party payer system. Yet, even so, it is arguably still more efficient than single-payer systems (see, for instance, Richard G.A. Feachem, Neelam K. Sekhri and Karen I. White, ―Getting More for Their Dollar: a Comparison of the NHS with California‘s Kaiser Permanente,‖ British Journal of Medicine, No. 324, January 19, 2002, pages 135-143, which found that California‘s Kaiser Permanente system was more efficient than the British system.) And both systems – our current system and single-payer systems – are far more inefficient than would be a true, consumer-driven market. 4. Preventive care programs save money. Some preventive care programs save money. Childhood immunizations are a good example. But many, in fact, increase overall expenditures. National Center for Policy Analysis notes the reason for this: ―[M]ost preventive care consists of screening for early detection of diseases that are less expensive to treat if caught early.‖ This is not to argue against preventive care 36

programs. From the patient‘s perspective, they make sense. But many do not reduce aggregate health care spending. (Gorman and Jensen, executive summary) A Recap: What’s Wrong Currently 1. Third party payers distort the market: As discussed earlier, a third-party payment structure, as is the case for most Americans, is inherently inefficient, since consumers have little or no incentive to shop around for affordable care. 2. Too much first dollar coverage results in overutilization: A common feature of employment based and government provided insurance (third-party payment plans) is first dollar coverage. Many health insurance plans act less like insurance, and more like pre-payment plans. Nearly every prescription and every procedure incurred throughout the year is covered by the ―insurance,‖ and consumers pay minimal outof-pocket costs. The result of this first dollar coverage is overutilization. 3. Uneven tax treatment: As discussed, the federal and state tax codes provide generous tax exclusions to employers and employees for employment based health insurance. Individuals, on the other hand, receive far fewer tax benefits, meaning they pay more to obtain the same services. 4. Uneven reimbursement rates: Medicaid and Medicare, the primary sources of government provided care, reimburse medical providers at below market rates. This is nothing more than a tax on people who obtain their care through the private market. Not only do they pay taxes to directly subsidize these programs, they indirectly subsidize these programs through cost shifting -- by paying higher rates for the same services through cost shifting. 5. Lack of portability: A common symptom of employment based health insurance is the lack of portability of health insurance plans. Employees lose their health insurance when they transfer jobs. In 1986, Congress passed and President Reagan signed the Consolidated Omnibus Budget Reconciliation Act (COBRA), which gave employees the right to buy in to their existing group health insurance plan for a period of time after leaving their place of employment. This move provided some element of temporary portability; however, as long as most Americans continue to receive their insurance through their place of employment, lack of portability will continue to be a challenge. 6. Defensive medicine: Defensive medicine is the practice by which health care providers order procedures, many expensive and probably unnecessary, in an effort to eliminate or reduce their risk of a medical malpractice claim. While defensive medicine plagues the American market, resulting in additional costs of as much as five to nine percent (Daniel Kessler and Mark McClellan, "Do Doctors Practice Defensive Medicine?" Quarterly Journal of Economics, May 1996: 353-390), Colorado‘s medical liability caps have helped rein malpractice insurance premiums and excessive awards and, according to a 2004 report by the Pew Charitable Trusts Project, improved doctor morale and investments in new technologies (American Legislative

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Exchange Council and Council for Affordable Health Insurance, ―2009 State Legislators‘ Guide to Health Insurance Solutions,‖ page 41). 7. The individual and small group markets face much higher costs for many procedures: As discussed, individuals and members of small groups face significantly higher premiums than members of large groups (employees of large companies). The National Federation of Independent Businesses reports that health insurance costs for small companies have risen 129 percent over the last eight years, with employees in the nation‘s smallest firms paying an average of 18 percent more for the same benefits as those in the largest firms (Deborah L. Cohen, ―Health Care Debate May Hinge on Pooling,‖ Reuters, August 11, 2008). 8. Government is grabbing a bigger and bigger share of the market, reducing the private market pools: Well-intentioned politicians frequently make matters worse, by moving more and more of the population into Medicaid. Not only do they spread existing government resources thin, but by moving people out of the private market, they reduce the size of the private insurance pool. As a result, private plans disperse risk over a smaller and smaller population, and rates go up for the remaining participants. 9. Lack of access to affordable health insurance for individuals: While the number of uninsured Coloradans is a real problem (as of 2007, Colorado‘s rate of uninsured was higher than average), it is important for policy-makers to be mindful of the different groups of uninsured. Some individuals choose to remain uninsured, and may always do so. Public policy efforts aimed at reducing the number of uninsured need to focus on (a) allowing access to affordable, catastrophic plans and (b) focusing public resources on the so-called ―uninsurable.‖ 10. Health care costs continue to rise: Rising health care costs are somewhat a function of the market, as people demand more and more services and better care. Many people are willing to pay for it. However, certain public policies have contributed to cost increases, including state-imposed mandates and provider regulatory and licensing barriers to entry. 11. Lack of a true national market for health care: Individuals who do not receive health care through their job are limited in their ability to shop around for the best price on health care. A Coloradan who is self-employed has to purchase a policy with mandated coverage for various diseases and treatments, whether they need the coverage or not, thus driving up the cost of their policy. If Colorado were to allow its citizens to purchase policies offered in other states, consumers could shop around and potentially purchase more affordable policies with fewer mandates. 12. Recently enacted rate banding legislation substantially increases premiums for some small businesses: In 2007, the legislature passed and Governor Ritter signed HB 07-1355, which took away insurers‘ ability to provide rate discounts of up to 25 percent to healthy small business groups. In an attempt to reduce premiums for groups with employees with chronic or serious health conditions, the legislation took away two rating factors – health status and claims experience – that can be used

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by insurers in setting premiums. Some insurance carriers estimate the legislation will ultimately lead to some small businesses facing premium increases as much as 40 percent (Steve Porter, ―New Health Insurance Law Causing Confusion,‖ Northern Colorado Business Report, December 4, 2008). What’s Right Currently It is often tempting for policy-makers to focus on what‘s wrong and neglect what is going right. In fact, while Colorado is not exempt from the health care challenges facing the rest of the country, it has implemented a number of positive reforms. 1. Colorado has historically focused its Medicaid dollars: One of the most frequent errors of policy-makers is to spread public assistance dollars too thin. Colorado, largely in reaction to the budget limits imposed by TABOR and Arveschoug-Bird, has historically focused its Medicaid dollars. Federal Medicaid law dictates certain ―mandatory‖ services and populations, while listing other ―optional‖ populations and services. Colorado has chosen not to provide a lengthy list of these ―optional‖ services. Governor Ritter and the current Democrat legislature have begun a new, troubling trend in this arena, but Colorado still does a better job than most states in focusing its resources on truly, needy populations. As of 2007, Colorado‘s average annual Medicaid payment per enrollee was $4,595, 19th in the nation. 2. Colorado law provides for mandate-lite insurance: Over the years, the Democrat-controlled legislature has imposed a number of mandates on insurance policies, forcing consumers to purchase Cadillac-style policies, even if they only need a Chevy. In 2003, in an attempt to mitigate the impact of these excessive mandates, the legislature passed and former Governor Owens signed legislation allowing insurers to offer mandate-lite policies. As of January 1, 2004, therefore, insurers in Colorado have the option of providing affordable insurance plans free of these burdensome mandates. Further progress was made in 2009 with the passage of legislation (HB 09-1143) allowing HMOs to offer bare-bones, mandate-lite policies to the uninsured. 3. Medical malpractice limits: Colorado currently imposes a cap of $300,000 on non-economic losses in medical malpractice cases. Not only does this limit reduce jackpot justice awards, but by providing some level of predictability in the tort environment it reduces defensive medicine practices around the margins. 4. Coloradans generally have access to more affordable options than many other states: Among the large group and individual markets, Colorado has a fairly robust insurance market. Premiums are at or below the national average. Ninety-nine percent of Colorado‘s large employers offered health insurance to their employees in 2007, according to the group America‘s Health Insurance Plans. And at $2,537, the cost of purchasing a plan in the individual market was slightly below the national average of $2,613, according to the same group. Colorado‘s greatest challenge has been the small group market. The average premium to purchase a plan in the small group market in Colorado was $4,344, significantly above the national average of 39

$3,732. These above average small group premiums pose a considerable threat to Colorado‘s business climate. 5. Colorado has a successful risk pool: States have struggled with the challenge of how to help the uninsurable – typically those with pre-existing conditions. These are the individuals in greatest need of assistance. The Colorado Legislature created a nonprofit organization, known as Cover Colorado, to act as a high-risk pool to assist this population. National Center for Policy Analysis notes that, ―In Colorado, a 40year-old woman can choose from a number of comprehensive health insurance policies that cost less than $100 a month. Adding two children costs about $50 to $100 a month. The most this woman would have to pay for health insurance, regardless of health status, would be $425 a month under Cover Colorado, the state‘s risk pool, or insurance plan, for the uninsurable‖ (National Center for Policy Analysis, ―State Health Care Reform: Key Questions and Answers,‖ NCPA Policy Report No. 311, April 2008). Cover Colorado relies on public and private contributions to subsidize premiums for its population. Compared to similar attempts at creating an insurer of last resort in other states, Cover Colorado has been successful. Evaluating Recent Developments and Proposals from Governor Ritter and the Legislature Both during his campaign for governor and in his first State of the State address, Governor Ritter committed to insuring all Coloradans by 2010. According to the Colorado Promise: ―Quite simply, our health care system is broken, and this crisis will not be fixed by tinkering around the edges and making only small incremental changes. Solving this crisis is central to fulfilling the Colorado Promise.‖ Lately, however, Governor Ritter has sounded a more measured tone, scaling back his rhetoric and taking a more incremental approach that awaits action at the federal level (see, for example, The Longmont Times-Call, 2/3/09). After his election, Governor Ritter convened the Blue Ribbon Commission on Health Care Reform, which proposed a number of steps:
      

Mandating that all Coloradans obtain health insurance. Providing sliding-scale subsidies to low-income workers below 400 percent of the poverty level. Expanding Medicaid and the Children‘s Health Insurance Plus (CHP+) programs. Increasing Medicaid reimbursement rates. Increasing access to cost and quality information. Establishing a panel (unelected and unaccountable) to periodically review what the government will accept as a minimum health insurance policy. Creation of an ―authority‖ to ―fundamentally realign incentives‖ in the state‘s health care system by regulating provider payments and determining acceptable treatments, including ―clinically, ethically, and culturally appropriate end-of-life care.‖

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(Sources: ―Blue Ribbon Commission for Health Care Reform Final Report‖ and Linda Gorman and R. Allan Jensen, ―State Health Care Reform: Key Questions and Answers,‖ National Center for Policy Analysis Policy Report No. 311, April 2008) While some of the reforms are common-sense, others are counterproductive, would stretch government resources too thin and would inject far too much government into the market. Many of the commission‘s findings also rely on modeling from the Lewin Group that has been called into question. The National Center for Policy Analysis notes that the Lewin Group model makes assumptions that implicitly bias its results toward finding that central planning will lower costs: ―For example, the Lewin Group systematically overstates the cost of private insurance relative to public programs. It assumes that single-payer programs will have the same administrative costs as Medicare – about 1.8 percent of benefits. This ignores growing evidence that Medicare‘s overhead costs are much higher. For example, it ignores the administrative costs of supplemental policies required to fill the gaps in Medicare coverage. The Lewin Group also overstates private insurance administrative expenses. Lewin bases its assumptions about physician administrative costs on a survey of just 335 physician practices self-selected from a statistically unrepresentative sample. It assumes millions of dollars in savings on building occupancy costs and on furniture and equipment from centralized purchasing and volume discounts. Lewin also assumes benefits for physician support staff will fall 12.5 percent under single-payer, and the cost of administrative duties by medical assistants and registered nurses will drop 66 percent. It is unlikely that moving to a single-payer system will reduce patient record keeping or the amount of office space needed to save patients. These assumptions likely produce inflated estimates of cost savings. Similar assumptions plague Lewin‘s treatment of hospital cost reductions under single-payer. It assumes that hospital costs for data processing are reduced by 36 percent. It also estimates patient accounting, credit and collection, and admitting costs will be reduced by 50 percent, 90 percent and 40 percent, respectively. For reasons that are unclear, the model assumes that medical records costs will be reduced by 10 percent. Depreciation and amortization are assumed to be reduced 23 percent. Apparently, when government runs things capital does not depreciate and interest costs are no longer a consideration. Social work services are assumed to fall 50 percent under a government plan. Finally, maintenance and repairs and plant operations are each assumed to fall 23 percent. Apparently, repairs will be less frequent when a single payer controls operations.‖ One of the commission‘s recommendations has been acted upon: Governor Ritter and the Democrat-controlled legislature have approved expansions of the state‘s Medicaid system. In his 2009 State of the State address, Ritter bragged that the state was ―enrolling 30,000 more uninsured kids and 10,000 more working parents in Child Health Plan-Plus (SCHIP) 41

and Medicaid.‖ Unfortunately, the consequences of these expansions of government programs are rarely considered but are very real. Data indicate that as SCHIP has expanded, six out of 10 new enrollees dropped private insurance to participate in the subsidized public program (Jonathan Gruber and Kosali Simon, ―Crowd-Out Ten Years Later: Have Recent Public Insurance Expansions Crowded Out Private Health Insurance?‖ National Bureau of Economic Research, Working Paper No. 12858, January 2007, page 28). Hawaii is a prime example of a state that promised to insure all ―uninsured‖ children but found that it set the bar for eligibility in its program so low that families which could afford private insurance dropped their coverage in order to take advantage of a ―free‖ state program. The result was skyrocketing (and unsustainable) costs. In February 2009, Governor Ritter proposed new fees on hospitals in order to expand statebased revenues to draw down additional federal matching dollars (Denver Post, February 26, 2009). This scheme, already underway in a number of other states, highlights the fundamental need for Medicaid reform at the federal level. States have few incentives to make wise health care decisions, because when a state expands Medicaid to new services and new populations, the federal government picks up much of the cost. Meanwhile, the longterm repercussions – more third-party payments and further reductions in the private insurance pools – put even more pressure on federal and state treasuries while hurting the private insurance pool. Some hospitals that treat high numbers of Medicaid beneficiaries have cheered the plan, while others have denounced or expressed nervousness over the proposed fees (see, for example, The Colorado Springs Business Journal, January 16, 2009). Meanwhile, a group of liberal legislators led by Rep. John Kefalas, has been pushing for creation of a single-payer, universal health care program in Colorado. Specific Proposals for Reform in Colorado Fundamental health care reform, necessary by most accounts, is nearly impossible without some level of action and cooperation from the federal government. Federal tax law encourages third-party payments, through expansive Medicaid and Medicare programs and the employment-based tax exclusion. Nonetheless, states across the country have made real progress in spite of these federallyimposed impediments. Colorado should re-establish its leadership in the pursuit of marketbased reforms that guarantee every Coloradan access to affordable, quality health insurance. Colorado lawmakers should also work with Congress and other federal officials to promote market-oriented and cost-cutting reforms, such as allowing for creation of association health plans that would permit small businesses and organizations to pool their purchasing power and spread out risk, much as the way union plans, fortune 500 plans and the Federal Employees Health Benefits Plan have been able to. 1. Seek fundamental Medicaid reform such as is underway in Florida: President Obama has called for entitlement reform and health care reform. Colorado should seek to become the lead partner in his efforts and work with federal officials to create a pilot project for Medicaid reform, consisting of a block grant, flexibility from strict mandatory and optional service requirements, and the ability to turn Medicaid consumers into first-party payers. 42

One model to consider comes from Florida. There, the Legislature and Governor Jeb Bush in 2005 approved legislation to implement ―Empowered Care.‖ The program necessitated several federally-approved waivers of Medicaid regulations. Empowered Care attempts to turn Medicaid into a consumer-driven program, by allowing Medicaid recipients to choose care from private providers. Each recipient gets a set amount of money each month, adjusted for health risks, to enroll in a private health plan. The aid is accompanied by counseling. Recipients also receive ―enhanced benefit accounts,‖ much like HSAs, with which they can purchase additional services. Empowered Care turns Medicaid beneficiaries into costconscious, responsible first-party payers and moves them into the private market. Thus far, the number of private insurers has increased in the affected areas and expenditures for some populations have come in as much as eight percent below budget. (Editorial, ―Medicaid in Florida: ‗Empowered Care‘ May Provide Lessons,‖ Carolina Journal, Vol. 17, No. 8, August 2008.) Colorado need not replicate every element of Empowered Care. Even a scaled back approach, in which Medicaid recipients are allowed to opt out of one-size-fits-all government plans and instead take the value of their payments to purchase private, catastrophic insurance would be a positive step forward. While the details of any plan would have to undergo a thorough analysis, the important goal to strive towards is turning Medicaid recipients into true consumers of medical care by allowing them to recognize gain for making cost-conscious decisions about how to spend their Medicaid dollars. Essentially, reform must eliminate the paradox of a provider and a patient who are each distanced from concerns about cost. 2. Focus Medicaid dollars on the truly needy: The importance of not spreading public subsidies too thin is of utmost importance, for the good of the state treasury and for the well-being of the private insurance pools. Government subsidies should be focused at populations truly in need. Governor Ritter and the Colorado Legislature should resist the temptation to grow Medicaid populations. These expansions might be politically popular, but they are frequently bad policy. 3. Allow purchase of plans across state lines: Currently, Colorado individuals can only purchase health insurance plans licensed in Colorado. Meanwhile, large employers who self insure can pool their resources across multiple states and escape burdensome state laws. Colorado individuals and small groups should enjoy the same opportunity. Colorado law should permit its residents to purchase health insurance plans across state lines. 4. Repeal state mandates, particularly quality of life mandates: Colorado currently imposes at least 49 mandates on insurance policies in Colorado, requiring coverage for conditions from birthing centers to hospice care (Victoria Craig Bunce and J.P. Wieske, ―Health Insurance Mandates in the States 2008,‖ Council for Affordable Health Insurance). Each of these mandates, while well intentioned, drives up the overall cost of monthly insurance premiums. Legislation approved in 2003 gave insurers the ability to provide an affordable, mandate-lite health insurance policy, but insurers should not have to choose either/or. Health insurance mandates 43

should be repealed, starting with the quality of life mandates. The legislature took a good step in 2009 with passage of Rep. Spencer Swalm‘s HB 1143, which authorizes HMOs to sell limited benefit health plans to uninsured Coloradans who make too much money to qualify for Medicaid. 5. Reduce or eliminate licensing regulations to reduce unnecessary costs and barriers to entry: Health care professional licensing regulations are frequently used to maximize business for one profession at the expense of others. Regulations that require doctors to perform work that nurses can just as easily and safely provide, for instance, drives up costs for patients. The Legislature should review licensing policies to ensure that the maximum number of occupations possible that can safely perform any procedure are approved to do so. Legislators should also be alert to the potential self-interest of medical professional organizations that may lie behind licensing proposals brought before the Legislature. 6. Promote the utilization of alternative treatment facilities, such as urgent-care clinics, ambulatory surgical centers, and minute clinics: Urgent care clinics and minute clinics, often found in large retail stores, can provide an affordable alternative to emergency room visits or even the doctor‘s office. Urgent care clinics are staffed by physicians, offer short wait times, and charge $60 to $200, depending on the procedure – a fraction of the typical $1,000 plus emergency room visit. Some offer discounts to the uninsured. Minute clinics are typically run by nurse practitioners who prescribe medicine for minor illnesses and provide vaccinations. Legislators should resist efforts to over-regulate these affordable alternatives. They should reward Medicaid recipients who choose these alternatives over emergency room visits. 7. Promote transparency: Health care will never operate in a true market until consumers are better equipped to make decisions about their health care purchases. Currently, obtaining price and quality information about specific providers is difficult. Medical care purchases are unique in that they are some of the only transactions in which prices are not typically known until after a procedure is complete. This should not be. While government intervention is frequently counterproductive, governments can serve a useful role in promoting market-based decisions by requiring providers to publicly list their prices. Additionally, more and more private and nonprofit research is available regarding providers‘ outcomes. Government agencies can help broadcast this research through on-line programs, so consumers can gauge the quality of various providers. Health care providers should not be insulated from cost and quality pressures. (See, for example, Mark Vargus, San Diego Economy Examiner, March 1, 2009; Steve Sternberg and Anthony DeBarros, ―Hospital Death Rates Unveiled,‖ USA Today, August 20, 2008; or Michael Porter and Elizabeth Olmsted Teisberg, Redefining Health Care: Creating Value-based Competition on Results, Harvard Business School, 2006.)

44

EDUCATION
KEY FINDINGS

Colorado‘s education progress has slowed but not stalled under Governor Ritter. Because he has placed less emphasis on education reform than his predecessors, education policy innovation and development has migrated to the legislative branch. By national standards, Colorado has been a leader in some reforms and a laggard in others. Colorado has been a national leader in public school choice and charter school efforts but lags many states in establishing rigorous graduation standards. Within Colorado, inner city school districts, particularly Denver Public Schools, have led the way in seeking fundamental education reform. Public schools accept far too much mediocrity and failure because they lack sufficient accountability, are rarely punished in any quantifiable sense for lack of improvement, and are insulated from challenge and competition. That, in essence, is the core challenge of public education policy. Speaking generally, the most important fundamental education reforms that can be instituted are those that increase accountability, demand higher performance, and make students and their parents first-party buyers of education.

Overview Governor Ritter has not chosen to expend significant political capital on reforming education. As a result, reforms have slowed and education policy-making has migrated increasingly away from the executive branch and toward the legislature. There, leaders such as former Senate President Peter Groff, Senate Minority Leader Josh Penry, Senator Chris Romer, Speaker Terrance Carroll and former Representative Rob Witwer have demonstrated reform-oriented leadership. While Colorado‘s education policy continues to generally move in the right direction, much more needs to be done if the state is going to be able to meet the challenge of international, 21st Century competition.

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Introduction Ask just about any Governor in the nation what their most important enduring policy objective is, and you are likely to hear education reform repeated often. School performance has a tremendous impact on a state‘s competitiveness, its quality of life, and communities‘ property values. Families want to live near quality schools. As former Florida Governor Jeb Bush‘s chief education advocate noted, ―A well-educated citizenry is the foundation of selfsufficient families, health communities, and a dynamic economy‖ (Patricia Levesque, ―Better Schools: The Education Legacy of Governor Jeb Bush,‖ The Journal of the James Madison Institute, Spring 2007). Governor Ritter‘s stated campaign priorities seemed aligned with this consensus. The first chapter of his 2006 ―Colorado Promise‖ campaign document featured education. He devoted four pages to a discussion of K-12 and another three to higher education. The Colorado Promise notes that ―education is the foundation of any strong economy and any competitive workforce.‖ The language of the Colorado Promise is laced with bold-sounding themes:  Investing in our schools and students  Fostering high quality educators & inspiring a new generation of teachers  Making sure children arrive at school ready to learn  Improving student achievement  Getting our parents involved  Improving higher education while also keeping it affordable While several Colorado Promise proposals are sensible, the Colorado Promise is far from a bold blueprint for education reform. By most measures, America‘s public education system – Colorado included – is barely adequate, at best. Too many of Colorado‘s schools are failing our kids. While former Governors Romer and Owens expended considerable political capital to increase accountability, raise standards, and promote reform, Governor Ritter has pursued only modest, incremental changes. His Colorado Promise was devoid of any talk regarding charter schools or school choice. The Nature of the Challenge Public schools accept far too much mediocrity and failure because they lack sufficient accountability, are rarely held accountable in any quantifiable sense for lack of improvement, and are insulated from challenge and competition. That, in essence, is the core challenge of public education policy. In a market (such as with a business and a customer), money follows value and performance. A dissatisfied customer takes his or her money elsewhere. But in public education, money typically flows irrespective of performance. Additionally, resources (money) flow from a third party payer (the government) instead of from the customer (a student and her parents). In short, too often, schools do not have to earn their customers‘ business. Speaking generally, the most important fundamental education reforms that can be instituted are those that increase accountability, demand higher performance, and make students and 46

their parents first-party buyers of education. And once students and parents become first party buyers of education, value conscious consumers will help ensure the other reforms fall into place. Money will no longer be divorced from performance. Money will flow through students, instead of directly to institutions, and schools will have to earn their business. Education Policy Goals For purposes of this discussion, education policy goals are measurable and specific outputs. Many lawmakers claim as a goal increasing funding for public education. In reality, funding is an input which may or may not affect outputs. Rather, here we attempt to identify what we are trying to achieve instead of how to achieve it. Lawmakers of both parties largely agree on several goals.

Reduce the high school drop-out rate: During his 2007 State of the State speech, Governor Ritter listed a laudable goal: ―cut the drop-out rate in half within 10 years.‖ Currently, roughly 25 percent of Colorado‘s kids do not graduate from high school. When kids drop out of school, they almost certainly resign themselves to lower paying jobs. Ensure that each 3rd grader can read at a satisfactory level before being promoted to fourth grade: Third grade is often referred to as the ―gateway‖ year because kids then are expected to be able to read independently. By fourth grade, they are expected to read to learn. Premature promotion of children to higher grade levels may temporarily help their self-esteem, but it can also relegate them to a lifetime of hardship. Increase the number of students who take rigorous coursework in core academic subjects to prepare them for college and the workforce: Colorado is not sufficiently preparing high schoolers for college. Whether it is English, history, or particularly math or science, Colorado needs to generate more graduates who excel in core subjects. This starts with rigorous coursework at the high school and even middle school level. Colorado‘s competitiveness in the international economy is at stake. Maximize the number of high school graduates who go on to college: Posthigh school education promotes a better trained and better educated citizenry conducive to the growth of well-paying jobs. Many of the business climate studies evaluated in chapter two point to the availability of a well-educated workforce as an important criteria. College is not a necessity for everyone. People can excel at many careers with only a high school education. But promoting college education is an important goal.

Where Colorado Stands: Input Measures The most important and frequently cited measure of education inputs is funding. Total education spending, spending per pupil, and average teacher salaries are all, in varying forms, measures of funding. These measures tend to support the conclusion that Colorado‘s education expenditures are at or slightly below the national average, depending on the 47

measure. It is important to note that the relationship of inputs to outputs is often inconclusive. For instance, the relationship of funding to performance is highly debatable. For instance, Washington, D.C. for years has ranked among the highest in per pupil spending according to the National Center for Education Statistics‘ Digest of Education Statistics, yet ranked dead last (51st) in math and reading proficiency for 4th and 8th graders. Indiana, on the other hand, ranks 38th in per pupil funding but scores well above average in most measures of achievement.

Per pupil expenditures: In 2006-07, Colorado spent $6.37 billion on public elementary and secondary education. Per pupil, that translated into $8,035, up from $6,873 in inflation adjusted dollars for 1996-97 and $7,049 in 1986-87 (U.S. Department of Education, National Center for Education Statistics; Digest of Education Statistics, 2007; Revenues and Expenditures for Public Elementary and Secondary Schools, various years, as compiled by the American Legislative Exchange Council). Colorado‘s $8,035 per pupil expenditure places it 36th in the nation (American Legislative Exchange Council). While Colorado increased per pupil expenditures by nearly 17 percent in real, inflation-adjusted figures between 1996-97 and 2006-07, 34 states increased spending at a faster rate than Colorado. Pupil-teacher ratio: Colorado‘s pupil-teacher ratio has hovered at, or near, 17.0 since the beginning of the decade. Currently at 16.9, Colorado ranks 43rd in the nation (U.S. Department of Education, National Center for Education Statistics; Statistics of Public Elementary and Secondary Schools, various years, and Common Core of Data Surveys, as compiled by the American Legislative Exchange Council). Colorado‘s highest pupil-teacher ratio (since 1986) occurred in the 1993-94 school year, at 18.6. Teacher salaries: In 2006-07, the average teacher salary in Colorado was $45,616, 23rd in the nation (U.S. Department of Education, National Center for Education Statistics; Digest of Education Statistics; Common Core of Data various years, as compiled by the American Legislative Exchange Council). While Colorado ranks slightly above average in average teacher salaries, the ratio of teacher salaries to salaries in other professions was lower.

Where Colorado Stands: Output Measures Outputs provide empirical measures of success and failure. Policy-makers look to a number of data points:

NAEP (National Assessment of Educational Progress) scores: NAEP scores are a useful state-to-state benchmark. The test is administered in grades 4, 8 and 12. In 2007, Colorado‘s average mathematics score (Grade 8) was 286, 12th in the nation. Unfortunately, however, only 38 percent of students scored at or above average. The 286 score was up slightly from 281 in 2005 and 283 in 2003. Amongst fourth graders, Colorado ranked lower. Its 240 score placed it 26th in the nation. Colorado fourth graders scored 239 in 2005 and 235 in 2003.

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In reading, Colorado eighth graders scored a 266 in 2007, 17th in the nation, little changed from 2005‘s 265 and 2003‘s 268. Colorado‘s 4th graders scored 224 in 2007, 18th in the nation, unchanged from both 2003 and 2005.

CSAPs (Colorado Student Assessment Program) scores: The CSAP provides valuable year-to-year, school-by-school proficiency data. Administered annually since 1999 to students in grades three through ten, the test allows parents and students to evaluate each school‘s trendline in reading, writing and arithmetic and compare any school to the statewide average. The test has become a valuable benchmark for Colorado parents, even affecting property values. Statewide data show mixed results. In the key measure of third grade reading proficiency, for instance, the percentage of students scoring at proficient or above increased from 66.1 in 1998 to 74.3 in 2003. Scores then deteriorated, only to rebound somewhat, reaching 70.3 percent in 2008 and preliminarily reaching 73 percent in 2009. Among eighth graders, the percentage of students scoring unsatisfactorily in math has declined from 29.8 in 2000 to 22.8 in 2008, but the percentage of students scoring at proficient or above has only increased from 24.8 to 26.5.

Advanced Placement course test scores: Each year, the College Board publishes the ―Advanced Placement Report to the Nation,‖ providing comparative state by state data. In 2008, 19.0 percent of Colorado students scored a 3 or higher on an Advanced Placement exam at some point during high school, well above (ninth in the nation) the national average of 15.2 percent. Colorado‘s 2008 performance was a marked improvement over 2003, when just 14.6 percent of Colorado high school students achieved a 3 or higher on an Advanced Placement course. ACT (American Collegiate Testing Company) scores: In Colorado, every high school junior takes the ACT (one of just a handful of states requiring such testing), providing useful and quantifiable comparative data over time. In 2008, the average composite ACT score in Colorado was 20.5, up from 20.1 in 2003 but down from 21.6 in 1998. Colorado‘s rank among the states was 43rd, a poor performance on initial examination but likely attributable to the fact that Colorado tests all high school juniors, whereas the pool of test takers in other states is more limited (i.e., primarily students who are considering applying for college). SAT (Scholastic Aptitude Test) scores: Colorado‘s average SAT scores perform noticeably better. The average composite score in 2008 was 1134 (16th in the nation), up from 1079 in 1998 (23rd in the nation). In Colorado in 2008, only 21 percent of high school students took the SAT. Colorado‘s 5.10 percent improvement over the 1998-2008 period ranked first in the nation. Graduation rates: In 2007, Colorado‘s graduation rate was 75.0 percent, up from 74.1 percent the year before, according to the Colorado Department of Education. Legislation approved in 2005 makes comparative data for previous years difficult. Prior to passage of the legislation, students bound for a GED program were treated as transfers and did not affect the graduation rate. Under the new formula, students

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who opt for a GED program remain in the ―membership base‖ (or graduation rate denominator) and thereby reduce the graduation rate for their graduating class. However, Colorado‘s graduation rate has been mostly static for the past decade. Under the old formula, graduation rates increased from 79.9 percent in 1999 to 80.1 percent in 2005 after a peak in 2003 of 83.6 percent. In 2006, the latest year for which data is available, Colorado‘s graduation rate was slightly higher (1.8 percentage points) than the national average, according to the National Center for Higher Education Management Systems. However, comparing graduation rates, state by state or even within Colorado, is problematic. Each state has different graduation requirements and within Colorado different districts have different graduation requirements. Colorado Initiatives Significant education reforms have been pursued in many states, particularly over the past 10 years. Enhanced graduation standards, a proliferation of charter schools, school choice and vouchers, on-line schools, pay for performance, and testing and accountability measures are the most common efforts. Most of these reforms are designed to leverage and integrate results (outputs) to resources (inputs). By national standards, Colorado has been a leader in some reforms and a laggard in others. Colorado has led the nation in public school choice and charter school efforts but lags many states in establishing rigorous graduation standards. Within Colorado, inner city school districts, particularly Denver Public Schools, have led the way in seeking fundamental education reform.

Universal public school choice: Colorado is truly a national leader in the area of public school choice. Thanks to the Public Schools of Choice Act, approved in 1990, students in Colorado can attend any public school in the state, even outside of their school district, provided the school has the space. Charter schools: Colorado has been a pioneer in the development of charter schools, passing the Charter Schools Act in 1993. Any individual, group of individuals or group can submit an application to its district to establish a charter school. Originally, the school district had sole authority to approve or deny the application. Legislation approved in 2004 created a charter school institute, which has authority to approve charter school applications separate from the district, but only if the Colorado Board of Education finds that the district has not been ―fair and equitable‖ toward charter schools (The Heritage Foundation, Colorado School Choice Backgrounder, 2005). In 1999, then-Governor Bill Owens signed legislation requiring school districts to fund charter schools at 95 percent of per-pupil revenue, up from the previous 80 percent minimum threshold. In 2002, Governor Owens signed legislation to allow charter schools to provide on-line programs (Ibid.). According to the Colorado League of Charter Schools, there are currently 150 charter schools in operation throughout Colorado enrolling 62,000 students with another 40,000 on a waiting list to get into a charter school. Nearly eight percent of K-12 public school enrollees in Colorado are currently in a charter school. 50

School testing: Colorado began administering its landmark school testing program, the CSAP, in 1997. Students in grades three through ten are tested annually. For additional information about CSAP, see above. Alliance for Choice in Education (ACE) scholarships: In February 2000, ACE (a charitable, nonprofit organization) launched a private school scholarship program that allows low-income Denver students to attend private schools. ACE pays for half the tuition cost at private schools, up to $2,000 per year for elementary and middle school students and up to $3,000 per year for high school students. ACE currently has more than 1,000 enrollees. According to the Alliance, more than threequarters of the ACE-sponsored high school graduates go on to college. Higher education vouchers: In 2004, Colorado became the first state in the nation to voucherize in-state tuition, offering each high school graduate a voucher worth $2,400 for use at any public college or university or $1,200 at participating private colleges. Teacher compensation reforms: Denver Public Schools, the Douglas County School District, Adams County School District 14 and Eagle County Schools are some of the districts within Colorado that have begun to experiment with pay for performance models. Yet, Eagle County Schools is the only district in the state to completely dispose of the rigid salary schedule, which pays teachers first and foremost according to education level and length of service (Benjamin DeGrow, ―Denver‘s ProComp and Teacher Compensation Reform in Colorado,‖ Independence Institute, June 2007). Still, pay for performance and merit pay proposals underway in several jurisdictions have received national attention for breaking with the most rigid salary models by rewarding teachers for student achievement growth, for filling hard-to-fill job specialties and/or for teaching in the most challenging learning environments. The most notable program is Denver‘s ProComp, a $25 million per year tax increase approved by Denver voters in 2005 to provide additional pay to teachers who meet certain success-oriented criteria. Graduation standards: In 2008, the legislature passed and the Governor signed the Colorado Achievement Plan for Kids, to develop guidelines that would stipulate much more rigorous standards for students from preschool through high school. The new law aims to ensure that each high school graduate is prepared to either enter the workforce or enter college. A Colorado Commission on Higher Education report released in December 2008 found that about one-third of Colorado‘s high school graduates are unprepared for college level work and require remedial courses in their freshman year (Denver Post, December 12, 2008). SB 08-212 directs the Department of Education, the Department of Higher Education and local school districts to develop standards over a three-year period, ending in 2011. This new law has the potential to be the most consequential change to Colorado‘s K-12 education program in many years. Waivers from heavy-handed regulation: In 2008, then-Senate President Peter Groff won approval for legislation allowing schools to obtain waivers from stiff state 51

and district-imposed regulations. Denver‘s Bruce Randolph School was the first to obtain a waiver, in late 2007. By 2008, the school‘s test scores, the worst in the state as recently as 2005, had improved. Denver‘s Manual High School and Montclair Elementary are now seeking the same autonomy under Groff‘s bill. (Dan Haley, ―Moving Schools Forward,‖ The Denver Post, April 5, 2009.) Proposals for Reform Education could reasonably be called the civil rights issue of our age. Equality of results cannot and should not be the goal – various societal factors are likely to preclude different populations from behaving equally. But equal access to a quality education should be a primary goal for policy-makers. Colorado has already made strides toward equal access trough the development of charter schools and public school choice. But more must be done. In viewing education access as a sort of civil right, policy-makers must reject any proposal to dumb education down to the lowest common denominator. Rather, education policy should demand rigor and challenge every student. The following proposals are designed to challenge the status quo and promote needed reforms.

Allow traditional public schools, charter schools, private schools and on-line schools to compete on an even playing field: Currently, parents who send their kids to public schools get a direct, dollar-for-dollar subsidy from the treasury. The government pays the entire cost of schooling their children. Parents who send their kids to alternative programs, on the other hand, frequently face a punishing doubletax. Not only do they pay taxes to send other children to school, but if they send their kids to private schools, they pay out of pocket for tuition and other expenses. Current state law does provide some deductions for out-of-pocket education expenses. But to truly equalize the market, create even competition, and end the double financial hit on parents who send their kids to private schools, the state should provide a dollar-for-dollar tax credit for all K-12 education expenses. Traditional public schools, charter schools, on-line programs and private schools should operate on even footing, so as to create a truly competitive market. Undoubtedly, this proposal would create a significant cost to the state government. Over time, more parents would choose to send their children to alternative education programs. Policy-makers will have to make difficult adjustments to the budget to accommodate these tax credits. But our children‘s education is too important to be treated as a second-tier priority. Colorado‘s ability to compete in the 21st Century is at stake. Should policy-makers reject a proposal to provide equal public financial support to all types of education institutions, alternative mechanisms to equalize treatment should be considered, such as income tax credits to corporations and individuals who provide scholarships for students to attend private schools.

Reform teachers’ compensation: Current teacher compensation practices accept far too much mediocrity and do little to reward good teachers. Tenure stifles hard work. Salary schedules accept mediocrity, failure and success just the same. And the

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best, most experienced, teachers are too often rewarded with the easiest learning environments. Instead, the system should pay good and experienced teachers more to teach in the toughest learning environments and for teaching the most needed subjects. Teachers should be truly paid according to performance. Creating a market for more good teachers requires eliminating the salary schedules that govern teacher contracts in nearly every school district in Colorado. Denver Public Schools, the Douglas County School District, Adams County School District 14 and Eagle County Schools are some of the districts within Colorado that have begun to experiment with pay for performance models. Yet Eagle County is the only Colorado school district to completely eliminate the single salary schedule (Benjamin DeGrow, ―Denver‘s ProComp and Teacher Compensation Reform in Colorado,‖ Independence Institute, June 2007). Most pay for performance and merit pay proposals in Colorado, while a step in the right direction, provide only incremental incentives for teachers. Even Denver‘s widely acclaimed ProComp plan provides too few benefits to successful teachers to dramatically alter teacher incentives. Truly reforming teacher compensation necessitates a rejection of the Colorado Education Association‘s platform: the group rejects ―merit pay plans that pit employee against employee for a limited amount of money that is distributed through subjective criteria.‖ Each teacher‘s compensation should be adjusted annually based on his or her performance. Student performance and year-to-year improvement on standardized tests should be among the top considerations in reviewing teacher salaries.

Set a universal, statewide set of rigorous graduation requirements for all high school students: Every Colorado high school student should be prepared for college or workforce entry upon graduation. In 2008, the legislature passed and Governor Ritter signed a measure directing the state Board of Education to create statewide graduation standards. But the bill was lacking in universal enforcement. Each district has to adopt the standards for them to be effective. While some district-by-district autonomy is acceptable, a uniform set of rigorous statewide standards in core subject areas is a must, if Colorado is to compete in the 21st Century economy. Florida, for instance, approved statewide high school graduation standards that require 16 core academic credits and eight elective credits in order to graduate with a high school diploma. Core requirements consist of four credits of each of English and math; three credits each of social studies and science; one credit of fine arts; and one credit in physical education and health. Colorado legislators, the Governor, the Board of Education and school districts should work together to develop universal standards. Curriculum should be upgraded to meet the standards and statewide testing should help ensure proficiency in the standards. Require annual testing of high school students to demonstrate proficiency of all statewide standard courses: CSAPs have helped benchmark the proficiency of Colorado‘s students and schools and increase education accountability. But approval 53

of rigorous high school graduation requirements, as proposed above, should be accompanied by a new testing regime at the high school level that replaces the CSAP (only at the high school level). Each student should be tested at the end of each year in their respective coursework. For example, at the end of the freshman year, each student should be tested in algebra to ensure proficiency. A student who chooses to take chemistry as one of her elective science requirements should be tested in chemistry at the end of the year. New York State‘s Regents‘ exams, administered annually students to ensure proficiency and accompanied by a certificate of proficiency to the student, are a model Colorado could adopt.

End social promotion: In many circles, advancing an underperforming student is viewed as a net benefit. The short-term impact of preserving self esteem is valued more greatly than the long-term potential consequences of inability to comprehend more advanced learning matter. Such social promotion has a particularly profound impact in the lower grades, when kids are advanced from third to fourth grade even though they cannot sufficiently read. While some level of discretion should be afforded to teachers, parents and school administrators, state policy should stipulate that no third grader should be promoted to fourth grade if he or she cannot read. By the end of the third grade, students no longer learn to read; they need to be able to read to learn. Re-institute A-F scores instead of 1-4: The CSAP originally prescribed a score of A through F for each educational institution. Several years ago, the A through F scale was replaced with a 1 through 4 score. The original letter grades were easier for parents to understand. While a number-based score might be less stigmatizing for poorly performing schools, the grading system should always err on simplicity. Lawmakers should re-adopt the letter grade scoring system for educational institutions. Reform funding formulas to reward successful schools and reverse failure: Amendment 23‘s negative impact on the state budget is well known. But a less well understood but just as consequential impact of the measure is the entitlement mindset it has fostered among the education system. All schools, even poorly performing schools, expect additional year-to-year funding, due to Amendment 23. Instead of raising the bar, Amendment 23 has helped create a harmful entitlement mentality among too many schools. Additional funding doesn‘t have to be earned, as it goes, because Amendment 23 guarantees a funding stream. Instead, lawmakers should contemplate a wholly revised funding mechanism, in which well-performing schools and improving schools are rewarded. Students at repeatedly poorly performing schools should be offered a scholarship, through which they can obtain education at another institution, even a private institution.

Institute remedial opportunities for poorly performing teachers: Teachers have difficult jobs. Many succeed in the face of extraordinarily difficult circumstances. They should be rewarded appropriately. But what happens when a teacher repeatedly performs below average and shows no signs of improvements? Lawmakers should consider testing teachers in the subjects they teach in order to 54

make sure they have sufficient comprehension in the subjects they teach. And teachers in need of remedial assistance should be placed on probation for one year and afforded opportunities to improve.

Fiscal transparency: Lawmakers in 2009 considered Senate Bill 57, which would have required local districts to post every expenditure on-line. The bill passed the Senate but was defeated in the House. Parents and citizens deserve to know how districts are spending taxpayer dollars. This simple act of transparency, which can be accomplished at minimal cost and is already being exercised in some districts, would create much needed accountability and provide parents the information they need to become effective first-party purchasers of education services for their children. Promote the use of community colleges as a source of workforce development measures statewide and baccalaureate degrees in rural Colorado: Community colleges already serve an important role in adapting Colorado‘s workforce to changing times. Many workers seek additional coursework and many unemployed individuals seek to advance their skills through community colleges. Policy-makers should focus additional workforce development monies on community colleges and enhance private-public workforce development efforts through community colleges. Governor Ritter and legislators made progress on this front, approving a number of such initiatives in recent years. More integration between community colleges and workforce development efforts is a must. Also, while Colorado‘s three-tiered higher education system – universities, state colleges, and community colleges – serves most of the state well, some rural areas many need additional, local opportunities to seek baccalaureate degrees. The state should look to on-line programs and local community colleges in rural areas to offer additional baccalaureate programs.

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TRANSPORTATION & INFRASTRUCTURE
KEY FINDINGS

For most of the past several decades (the TREX I-25 project being a major exception), transportation infrastructure in Colorado has been underfunded and under-prioritized. Colorado‘s transportation system has become a blight upon its business environment. Under Governor Ritter, the number of dedicated sources for transportation funding has dropped by three with the repeal of Arveschoug-Bird and the elimination of the Senate Bill 1 (1997) and House Bill 1310 (2002) diversions. Gas tax revenues, car registration fees, and drivers‘ license revenues remain, but with the 2009 passage of Senate Bill 228 dedicated transportation funding from the General Fund is cut. Transportation funding should be a core mission of state government. Unfortunately, policy-makers have too often chosen to focus limited resources on expanding recurring government programs instead of capital programs. The most important change lawmakers can make is a commitment to making transportation funding a first-tier imperative, instead of a second-tier wish list. Lawmakers should designate as much of the federal ―stimulus‖ dollars toward transportation. Policy-makers should focus their efforts on creating (or expanding) one or more dedicated funding sources for transportation, utilizing financially sound bonding to expand the transportation infrastructure, employing technology and innovation to more efficiently manage traffic flow with existing resources, and streamlining the planning and permitting process for road expansions.

Overview Nearly every political leader in Colorado seems to agree that Colorado‘s transportation infrastructure is gravely underfunded. The funding shortfall was well documented by Governor Ritter‘s blue ribbon commission on transportation funding. But Governor Ritter 56

and lawmakers have not made transportation funding a priority. An increase in the car registration fee (brought about by the approval of Senate Bill 108 in 2009) to help fund roads has been offset by the repeal of Arveschoug-Bird and the repeal of the Senate Bill 97001 and House Bill 02-1310 diversions. With their repeal, the number of dedicated transportation revenue streams dropped by three. An aggressive plan to increase resources for Colorado roads is needed now more than ever. Introduction A quality transportation system facilitates the flow of goods and people smoothly, safely and quickly from one point to another within a state‘s boundaries. Many, though not all, studies of a states‘ business environments consider transportation as one measure. Colorado has a number of built-in disadvantages. The state‘s ability to attract international commerce is limited by its lack of deep water ports. Situated at the top of the continent, the state has no rivers that can sustain ships of commerce. Also, situated at the east of the mountain region and at the western terminus of the Great Plains, Colorado is surrounded by lightly populated states. Compared to states on the East Coast, Colorado is regionally handicapped by a lack of much smaller population base. Colorado must therefore focus its attention on attracting air traffic and ensuring a sound surface road system. For most of the past several decades, transportation infrastructure has been underfunded and under-prioritized. An exception occurred under former Governor Bill Owens, particularly in his first term, when he focused political capital on an expansion of I-25 and various other highways across the state. Governor Ritter made funding transportation infrastructure a major thrust of his campaign in his Colorado Promise. But he has done little to affect change in transportation policy, instead setting up a task force to study options for increasing transportation funding. Since the commission made its report, the Governor has employed a one step forward, two step back approach to transportation funding. The legislature approved and Governor Ritter signed an increase in vehicle registration fees. But at almost the same time, lawmakers repealed Arveschoug-Bird and the Senate Bill 97-001 and House Bill 02-1310 transportation funding diversions, which ensured at least some general fund spending for infrastructure and capital projects during good revenue years. Meanwhile, the Senate Bill 228 scheme approved to replace Arveschoug-Bird provides no guaranteed transportation funding and, even if it delivers on its promised funding, carries a five-year expiration date. The bottom line: Colorado‘s transportation system is a blight upon its business environment. Instead of funding transportation only with left-overs, a commitment to prioritizing transportation funding by Colorado lawmakers is a must. Recent Developments in Colorado Transportation Policy

Transportation Expansion Project (TREX): In 1998, with frustration over traffic boiling and in the midst of a population boom, then gubernatorial candidate Bill 57

Owens seized upon the transportation issue during his campaign. In 1999, after taking office, Owens joined forces with former Denver Mayor Wellington Webb and went to the ballot with two proposed bond measures valued at $1.67 billion to secure funding for a massive expansion of Interstate 25, Interstate 225 and 19 miles of light rail from the Denver Tech Center to downtown Denver. Voters overwhelmingly approved the measures. By 2006, TREX concluded nearly two years ahead of schedule and more than three percent under budget. TREX is considered one of the most successful of its type in national history.

FasTracks: FasTracks is a 12-year light rail project funded by a combination of federal, private and regional resources, in and around Denver. The project was made possible by a 2004 vote of the electorate within the eight-county Regional Transportation District (RTD) to approve a sales tax increase. Unlike TREX, FasTracks has been plagued by cost over-runs and policy conflicts, involving eminent domain and contracting concerns. By early 2009, RTD said that overall costs, originally projected at $4.7 billion, would swell to well over $6 billion. Voters took a considerable risk in approving FasTracks funding, as its ability to alleviate congestion is questionable. Colorado Transportation Finance and Implementation Panel’s “A Report to Colorado”: In 2006, Governor Ritter made transportation funding a component of his Colorado Promise to the voters, noting that ―congestion in urban areas costs each of us $1,500 annually in lost productivity and time‖ and that ―additionally, poor road conditions cost motorists $264 a year in operating and repair expenses.‖ The Colorado Promise makes only vague, non-specific commitments, including ensuring available funds are spent efficiently, seeking adequate funding to maintain existing infrastructure and investigating additional funding mechanisms. Instead, the document proposes and now-Governor Ritter put in place a Colorado Transportation Finance and Implementation Panel. The group was appointed in March 2007 and completed its effort, ―A Report to Colorado,‖ in January 2008. The report focused almost exclusively on Colorado‘s transportation funding gap. The panel projected the cost of sustaining the current road system between 2007 and 2030 to be $125 billion, versus projected revenues of only $74 billion. The commission‘s vision budget – what the commission believes the state needs to spend to fund a quality transportation infrastructure – was placed at $178 billion. The panel made the following proposals: 1. Maintain existing infrastructure as the first priority. Address deteriorating components of the highway system, including bridges and shoulders. 2. Address safety and congestion through large corridor reconstruction projects. 3. Increase access to jobs, health services and recreation by expanding transit, including more options for the elderly and people with disabilities, more lines in rural areas and inter-regional transit to connect communities around the state. 58

4. Make non-motorized travel options safer and more convenient by adding more pedestrian and bike paths. 5. Promote environmental stewardship to mitigate the impacts of maintenance and construction. 6. Allocate dollars to local governments to invest in roads and transit, recognizing that both are part of the broader transportation network. The panel evaluated 39 different ideas to increase revenues and ended up recommending five primary revenue sources for lawmakers‘ consideration: 1. Increase the highway maintenance fee by $100 to generate $500 million per year. 2. Increase motor fuel taxes by 13 cents per gallon to generate $351 million per year. 3. Impose a new visitor fee of $6 per day to generate $240 million per year. 4. Increase sales and use taxes of 0.35%, to generate $312 million per year. 5. Increase severance taxes by 1.7%, to generate $96 million per year.

Vehicle registration fee increase: During the 2009 legislative session, lawmakers approved an increase in the vehicle registration fee to raise an additional $250 million per year. While the revenues generated from this fee increase are earmarked for transportation projects, the passage of SB 228 strips transportation funding from other areas of the budget, negating any positive revenue impacts from the fee increase. Arveschoug-Bird repeal: In 2009, lawmakers passed Senate Bill 228, repealing Arveschoug-Bird and the Senate Bill 97-001 and House Bill 02-1310 funding diversions. Arveschoug-Bird had previously limited general fund spending growth to six percent per year and forced lawmakers to utilize revenues above the limit for capital projects, such as transportation. Arveschoug-Bird was one of only a handful of dedicated revenue streams for capital/infrastructure spending in Colorado.

Senate Bill 228: Selling Snake Oil? Governor Ritter and Democrats in the legislature hailed the passage of Senate Bill 228 as a mechanism to create a new, more stable source of transportation funding. The bill‘s apologists employed a number of untrue claims in their advocacy of the bill.
 

Myth: SB 228 provides a net increase in transportation revenue. Reality: Coupled with the passage of Senate Bill 108, SB 228 uses smoke and mirrors to increase car registration fees to fund transportation but simultaneously diverts general fund expenditures away from transportation. The net impact of the two bills is nearly impossible to ascertain. The two bills employ a four-step process to accomplish the scheme: (1) increase car registration fees and direct the revenues to transportation, (2) eliminate three existing sources of general fund revenue for

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transportation projects (Arveschoug-Bird spending limits and the SB 97-001 and HB 02-1310 diversions), (3) create a new, statutory (easily changed year to year) general fund pot of money designated for transportation projects that totals $50 million less than the current general fund transportation commitments, and (4) put an expiration date on the new general fund revenues after five years that amounts to a multi-billion dollar reduction in transportation funding between 2015 and 2035.
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Myth: SB 228 will create a more stable source of transportation revenue. Reality: This remains to be seen. According to the bill‘s own fiscal note analysis, ―Under current law, General Fund appropriations are limited to the lesser of a 6 percent increase from the previous year‘s appropriation level and 5 percent of Colorado personal income. SB 09-228 sets the limit equal to 5 percent of Colorado personal income.‖

Using the fiscal analyses of SB 228 and SB 108, the Colorado Department of Transportation‘s ―2035 Statewide Transportation Plan,‖ published in March 2008, and historical information about the amount of money diverted to transportation through Arveschoug-Bird and the SB 97-001 and HB 02-1310 diversions, the following table projects the annual net impact on transportation funding for the next 20 years: Fiscal Year 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 Cumulative SB 108 Impact $206 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >$250 million >+ 5.0 billion SB 228 Addition None + $160 million + $160 million + $160 million + $160 million + $160 million $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 + $800 million SB 228 Subtraction None
- $308 million annual average - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million - $308 million

Net Impact + $206 million

- $6 billion

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SB 108 impact utilizes fiscal note estimated impact for 2009-10 and 2010-11 Higher volumes of vehicle registrations and higher vehicle sales values in future years would tend to drive the $250 million per year figure higher in the out years. SB 228 impact assumes that Colorado personal income growth resumes its 18-year average of 12.4 percent in 2010-11. The following conclusions can therefore be drawn:

SB 108 creates new, dedicated transportation revenues of at least $5 billion and perhaps much more. Should annual revenues generated from the legislation increase by four percent per year, for instance, total revenues between 2009 and 2029 would be more than $7.1 billion instead of $5 billion. SB 228‘s repeal of existing transportation dollar diversions in the state budget has the impact of reducing transportation funding by roughly $6 billion between 2009 and 2029 (over pre-SB 228 law). This estimate is based on CDOT‘s projection that seven percent of $123 billion in forecast statewide transportation revenues between 2008 and 2035 would have been generated from the general fund‘s SB 1 and HB 1310 diversions (Colorado Department of Transportation, ―2035 Statewide Transportation Plan,‖ March 20, 2008, page 34). SB 228 creates a new transportation diversion for five years, but its initial start date is contingent upon Colorado personal income growth reaching five percent in a calendar year. Once initiated, the total diversion to the transportation fund will be as high as two percent of the general fund per year. Assuming an average general fund budget of $8 billion over the five-year period, annual average transfers would be as much as $160 million. The new SB 228 transportation diversion expires after five years. Therefore, maximum new transportation revenues over the five years (from SB 228) will be about $800 million. The net combined annual impact of the passage of SB 108 and SB 228 is therefore difficult to ascertain.

Colorado’s Shortcomings The Colorado Transportation Finance and Implementation Panel identified the real shortcoming in Colorado transportation policy-making: increasing utilization of an aging infrastructure with insufficient revenues to maintain the infrastructure, let alone significantly expand it. According to the panel, 28.5 billion miles were driven on Colorado‘s state highways in 2006, a 60 percent increase from 1990. Yet fuel tax revenues are not keeping pace. Growing fuel efficiency means that fewer gallons of fuel are being purchased from fuel taxes (22 cents per gallon for gasoline and 20.5 cents per gallon for diesel), lowering revenues. Meanwhile, construction cost inflation has averaged 6.4 percent per year since 1992. 61

Specific Proposals Transportation funding should be a core mission of state government. Unfortunately, policy-makers have too often chosen to focus limited resources on expanding recurring government programs instead of capital programs. The most important change lawmakers can make is a commitment to making transportation funding a first-tier imperative, instead of a second-tier wish list. There are no magic solutions to solving Colorado‘s transportation challenges. Unlike other policy challenges which can be addressed through innovative ideas, more funding is a must when it comes to transportation. Lawmakers can reprioritize funding, create new revenue streams or bond capital projects. Innovative projects and efficiencies can better use existing roads, but additional dedicated transportation funding is a must. 1. Create additional dedicated funding streams for transportation: Ideally, lawmakers will prioritize each program annually, weighing the needs of each accordingly. However, capital programs such as transportation are frequently the losers in such a scheme. Recurring government programs with powerful constituencies, such as Medicaid and education, grow faster than inflation. As a result, non-recurring programs that have broad but less organized constituencies, including transportation, lose out. This undisciplined budgeting necessitates dedicated revenues for transportation and infrastructure. Lawmakers should identify one or more new or existing specific revenue streams for transportation. Designating a portion of the state‘s severance tax revenues to transportation is one possibility. Dedicating the portion of sales tax revenue attributable to the sales of cars, tires, car batteries, replacement parts, repairs, etc. is another common-sense possibility. If transportation funding is truly a priority, the state should take a portion of revenues received off the top, instead of relegating transportation funding to simple table scraps. 2. Utilize bonding for infrastructure expansion: Bonding should be judiciously utilized for capital expansion programs. Much as it often makes sense to borrow money in order to purchase a home, borrowing money to build roads is often financially sound, especially when interest rates are low. Lawmakers should consider bonding long-prioritized but never funded transportation projects through a referral to the voters. 3. Utilize innovation and technology to improve traffic flows: New technology is making it possible to manage more traffic efficiently with existing resources. Sequencing street lights is one example. Another example is high occupancy toll (HOT) lanes, which are already in use along Interstate 25 heading north from Denver into Adams County. With HOT lanes, drivers who are not carpooling have the option of utilizing the high occupancy vehicle (HOV) lanes, but they must pay a toll. The price of the toll varies based on the time of day and traffic demand. As traffic increases, the price goes up. During lighter traffic, the price goes down. Every effort should be made to utilize innovation and technology that allows the state to maximize the efficient flow of traffic. 62

4. Streamline the planning and permitting process for road expansions: Colorado can make better use of its transportation dollars by reining in paperwork and bureaucracy. According to the Federal Highway Administration (FHWA), getting approval to move forward with a major, federally-funded highway project that requires an Environmental Impact Statement (EIS) takes from nine to 19 years (Congressional Research Service, ―Background on NEPA Implementation for Highway Projects: Streamlining the Process,‖ Report RL32024, August 6, 2003). Also according to the FHWA, the time to prepare an EIS increased from a mean of 2.2 years in the 1970s to a mean of 5.0 years in the 1990s (Ibid.). Many of these obligations and delays are federally-imposed, but others can be remedied at the state level. As noted in the Congressional Research Service report, ―Federal and state transportation officials and transportation engineering organizations contacted by GAO identified the timely resolution of environmental issues as providing the greatest opportunity for reducing the time it takes to complete highway projects‖ (Ibid.).

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REGULATORY & LABOR POLICY
KEY FINDINGS

Under Governor Ritter, Colorado‘s labor and regulatory policies have become a means to reward politically-connected unions and punish politically scorned industries, such as the oil and gas industry. Nowhere has the Governor‘s cavalier attitude toward jobs producers been better evidenced than in regulatory and labor policy. With regard to oil and gas drillers, Governor Ritter in 2006 stated, ―I am not comfortable with the number of permits that were granted in 2006.‖ With regard to his moves to reward unions, The Denver Post editorialized, ―When Coloradans elected Bill Ritter as governor, they thought they were getting a modernday version of Roy Romer, a pro-business Democrat. Instead, they got Jimmy Hoffa. Ritter campaigned under the guise of a moderate ‗new Democrat‘ but now we know he‘s simply a toady to labor bosses and the old vestiges of his party – a bag man for unions and special interests.‖ Governor Ritter‘s actions in regulatory and labor policy are the politics of division, and have increasingly divided Colorado along national political fault lines. Pay-offs to unions and crippling regulations on the oil and gas industry have consumed a considerable amount of the governor‘s political capital and distracted lawmakers from dealing with the core challenges facing the state.

Introduction Colorado has historically maintained a regulatory environment focused on ensuring the public safety while minimizing unnecessary intervention in the marketplace and a labor policy designed to strike an appropriate balance between the needs and interests of employers and employees. Increasingly, however, Governor Ritter has pursued an interventionist regulatory policy and lop-sided labor policy designed to achieve certain political goals by punishing certain industries and constituencies and rewarding unions. Private sector job losses are the near certain result. 64

Overview While states generally spend less than one percent of their budgets on regulation (The Journal of State Government, ―Trends in State Regulatory Power: Balancing Regulation and Deregulation,‖ Summer 2004), their regulatory powers and the impacts they have on their states‘ business climates are significant:

States have sole regulatory power over corporate chartering, insurance, workers‘ compensation and business licensing (Ibid.). States share regulatory power with the federal government (mainly along interstate/intrastate lines) on telecommunications, utilities, transportation and consumer and financial matters (Ibid.). States are responsible for implementing federal regulation in areas of environmental law and occupational safety (Ibid.). States have significant regulatory say over labor relations.

Recent decades have witnessed federal pre-emption in most realms of economic regulation: airlines (1978), railroads (1980), and trucking (1994). Feds have also pre-empted states from regulating prices and entry into financial industries (e.g., states can no longer charter S&Ls, they no longer have oversight over mutual funds and then cannot inhibit interstate banking). In Colorado, the bulk of regulatory activity takes place within the Public Utilities Commission, the Secretary of State‘s Office, the Department of Regulatory Agencies, the Department of Natural Resources and in the state legislature. The PUC, housed within the Department of Regulatory Agencies, has regulatory authority over intrastate telecommunications services, most utilities and railroads and motor carrier services for hire. The Department of Regulatory Agencies oversees regulation and licensing of financial services, banking, insurance, real estate, and securities and enforces the state‘s civil rights and consumer protection laws. The Secretary of State‘s Office oversees several activities, including corporate licensing and trademarks, and provides rulemaking and guidance for state agencies under the Uniform Electronic Transactions Act (UETA). The Department of Natural Resources oversees parks, land management, wildlife, water resources and mining, oil and gas. The state legislature and the Governor provide regulatory policy. Colorado regulatory policy has been mixed in recent years. In the area of economic regulation, lawmakers have generally continued to open the door to competition. For instance, lawmakers deregulated the taxi industry in 2008, eliminating a major economic barrier to entry. Lawmakers also repealed the state‘s blue laws as it relates to the sale of alcohol. In the area of social and environmental regulation and labor relations, however, lawmakers have punished the state‘s oil and gas industry with stiff new regulations and rewarded 65

politically powerful labor unions. The revised composition of the Colorado Oil and Gas Conservation Commission, and its recently approved rules, are the single greatest regulatory development in years in Colorado and appear singularly designed to punish a specific industry or group of companies. Many rural communities face significant job losses as a result. Meanwhile, labor policy has become increasingly tilted toward large unions and against the individual, posing a significant threat to private businesses and their workers. Recent Developments Colorado‘s once predictable and stable regulatory and labor environments have experienced significant turmoil since Bill Ritter‘s election as Governor. Two series of events define these developments. 1. First, upon winning election, Governor Ritter and Democrats in the legislature embarked on a campaign to reward labor unions with new powers and abilities to recruit new members. Within weeks of Governor Ritter taking office, the Colorado Legislature approved HB 1072, which would have eliminated one of two votes needed for unions to negotiate all-union shops (Denver Post, February 10, 2007). The bill‘s passage angered Colorado employers. Unions expected Governor Ritter to sign the bill, noting that he had pledged to support such an effort during the campaign. Governor Ritter then vetoed the bill, stating that he supported the sentiment of the bill but vetoed it because of the surrounding rhetoric (Denver Post, February 10, 2007). Later in 2007, Governor Ritter assuaged union leaders by signing two executive orders empowering unions. The first gave state workers collective bargaining rights. The second repealed an executive order by former Governor Owens imposing ―paycheck protection,‖ which had prevented unions from automatically confiscating the dues of state workers for union dues. The combined effect of the two executive orders allowed unions to recruit tens of thousands of new members in Colorado and makes it possible for them to extract millions of dollars in new dues to support Democrat political efforts. Additional efforts to reward unions have ensued since 2007. In 2009, for example, legislators approved a measure (HB 1170) to require employers to provide unemployment insurance benefits to locked-out employees. The decisions of Governor Ritter and the current Democrat legislature favor the collective interests of unions over the individual rights of workers and employers. Colorado for decades had tilted more toward the latter and less toward the former. But Governor Ritter‘s election turned Colorado policy on its head. The policies that emanate from this collectivist, pro-union philosophy are evidenced in the extreme in states such as California and Michigan. The business environment suffers, and jobs gradually leave the state for friendlier environs. 2. Second, on the regulatory front, Governor Ritter, with the approval of the legislature, has approved the nation‘s toughest regulation on oil and gas drilling. 66

Governor Ritter‘s mindset toward drillers was evidenced early on: ―I think what we have to do is pay attention to impact. And if we pay careful attention to impact, that could cause us to drill less. I am not comfortable with the number of permits that were granted in 2006, and how, if you look at that compared to 2005, which was a fairly significant increase over 2004, we‘ve been granting permits very, very actively‖ (National Public Radio, January 28, 2007). The bottom line: Governor Ritter came to office bent on reducing drilling and, consequently, the number of jobs in the oil and gas industry in Colorado. His philosophy contradicts the goals of job growth and energy independence. Apologists for Ritter who claim that the new rules will have little or no impact on drilling activity in Colorado are belied by the Governor‘s own, revealing words. Governor Ritter put in place a plan to curb drilling early. In 2007, legislation was approved (HB 1298 and HB 1341) changing the composition of the Colorado Oil and Gas Conservation Commission to include more representatives of the environmental community. The commission imposed new rules requiring companies to file a Form 34 when they apply for a permit to drill. The new paper work imposes significant delays and costs on drillers. The commission also gave standing to residents within 500 feet of drilling locations to call hearings and challenge the applications (Rocky Mountain News, ―Weld Fears New Rules on Oil, Gas,‖ February 15, 2008). The new rules also empower the state‘s Division of Wildlife to impose a four-month moratorium on drilling during the winter feeding season for mule deer, antelope, elk and other wildlife (Pueblo Chieftain, February 23, 2008). The Governor has also stacked his Department of Natural Resources with antidrilling advocates. For instance, Bob Randall, the Federal Lands Coordinator, was a principle architect of the new rules. Prior to joining DNR, Randall was with Western Resource Advocates, an environmental activist group. Randall was a contributor to ―Drilling Down,‖ a report from the Natural Resources Defense Council that decries claimed insufficiency of environmental laws on oil and gas operations. While Colorado‘s economy is diverse, many communities will suffer significant job loss and economic and fiscal deterioration from the new rules. Oil, gas and related energy is a $23 billion industry in Colorado and the industry pays hundreds of millions of dollars a year in property and mineral severance taxes (Pueblo Chieftain, February 23, 2008). In Weld County, the oil and gas industry directly employed 2,187 in 2006 and another 4,000 to 6,000 in support of production (Rocky Mountain News, ―Weld Fears New Rules on Oil, Gas,‖ February 15, 2008). Also in 2006, ―[T]he industry paid $93 million in property tax and $3.68 million in severance tax, accounting for 40 percent of the county‘s tax revenues‖ (Ibid.). In Southern Colorado, the energy industry provided 1,200 jobs in the Trinidad area as of 2007 and an estimated 80 percent of all the property taxes paid in Las Animas County (Pueblo Chieftain, February 23, 2008).

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What effects are the new rules having? The answer is not entirely clear, as the rules just went into effect on April 1, 2009. The number of active rigs in certain areas of the state has already dropped considerably, but some of the decline must be attributable to the decrease in energy prices. Furthermore, it is possible that companies increased the number of permits in advance of the imposition of the rules. According to Baker Hughes, an international energy consulting firm, the number of active rigs in Colorado in April 2009 (52) represented a 57.7 percent drop from April 2008 (123 active rigs) and a 52.3 percent drop from April 2007 (109 active rigs). Much of this decline is a natural function of falling energy prices. But Colorado‘s rig count drop represented a much steeper decline than the nation as a whole. Across the nation, the one-year decline in active rigs was 45.6 percent versus April 2008 and 43.1 percent versus April 2007. A further indication that the new drilling rules will have a significant impact on drilling in Colorado comes from the number of drilling permits. In the months leading up to the implementation of the new rules, permit requests sky-rocketed, topping off at a record 1,470 applications in March 2009, according to the Associated Press (Denver Post, May 9, 2009). Permit applications slowed to a trickle in April. Between April 1 and the first week of May 2009, only 34 drilling permit applications were filed (Ibid.). The full impact of the new rules cannot yet be determined. More than national average decline in drilling activity in Colorado, coupled with the sharp drop-off in drilling permit applications, raises considerable concern that short-term unease with the new rules could turn into long-term distress and significant rules-driven job losses. Specific Proposals On November 4, 2007, the Denver Post published an editorial denouncing Governor Ritter‘s early agenda, particularly as it related to labor policy: ―When Coloradans elected Bill Ritter as governor, they thought they were getting a modern-day version of Roy Romer, a pro-business Democrat. Instead, they got Jimmy Hoffa. Ritter campaigned under the guise of a moderate ‗new Democrat‘ but now we know he's simply a toady to labor bosses and the old vestiges of his party — a bag man for unions and special interests. The governor on Friday unveiled his plan to drive up the cost of doing business in Colorado by forcing collective bargaining on thousands of state employees.‖ The same conclusions could be drawn with regard to the Governor‘s anti-drilling mindset. In order to punish an industry out of favor in the Governor‘s Office, and under the guise of

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protecting the environment and advancing a new energy economy, Ritter has set out to cripple a golden goose of the Colorado economy. These are the politics of division. Rewarding certain political constituencies and punishing others that are out of favor is not an appropriate goal of lawmakers. Regulatory and labor policy should protect public safety but whenever possible err on the side of protecting individual rights and never in rewarding certain industries at the expense of others. 1. Reverse the job-killing oil and gas regulations: These rules are designed to reward a political constituency (the environmentalists) at the expense of the wellbeing of the public and to reward the renewable energy industry and the expense of the traditional energy industry. The rules are inconsistent with government neutrality in the marketplace, with job and economic growth, and with energy independence. The rules should be repealed.

2. Repeal the executive orders imposing collective bargaining of state employees and allowing confiscation of government workers’ income for union dues: These executive orders are purely a pay-off to labor union bosses and they sacrifice protection of taxpayer dollars and the rights of individual government employees. They should be repealed via an act of the Governor or through statutory change. 3. Tighten up laws regarding government condemnation of private property: Private property rights are a foundation of America‘s free enterprise system. The U.S. Supreme Court‘s 2005 Kelo decision, which sanctioned the use of eminent domain by the government against one private property holder in order to transfer the property to another private holder, highlighted abuses. Colorado municipalities have exploited lax standards regarding eminent domain in the past (for some examples, see Dana Berliner, Public Power, Private Gain, Castle Coalition, April 2003). Colorado lawmakers have taken two significant steps to rein in abuses: (1) amending the state Urban Renewal Law in 1999 to strengthen the rights of property owners within areas targeted for ―blight‖ designations (Ibid.) and (2) passing HB 06-1411, which amended the public use definition to ―not include the taking of private property for transfer to a private entity for the purpose of economic development or enhancement of tax revenue‖ and stating that ―private property may otherwise be taken solely for the purpose of furthering a public use.‖ These statutory changes significantly improved Colorado law and reduced the potential for abuse. Yet one more major reform is needed: prohibiting the condemnation of private property for economic development (―50 State Report Card: Tracking Eminent Domain Reform Legislation Since Kelo,‖ Castle Coalition, August 2007). 4. Establish a regulatory citizens advocate within Colorado government: While protecting private property rights and repealing excessive oil and gas regulations and labor initiatives are outcome-based regulatory objectives, lawmakers should look to reform the regulatory process as well, establishing a regulatory review chieftain within the state government whose job is to rein in unnecessary regulations and provide citizens a friendly voice to raise concerns about proposed regulations. This person could be housed within the Governor‘s Office of State Planning and Budgeting or the Department of Regulatory Agencies. Establishing an entity or 69

individual within the federal government to review regulatory proposals (Office of Information and Regulatory Affairs) has helped rein in some regulatory abuses. Too often, regulators regulate simply for the sake of regulating, without considering the consequences. Proposed legislation and rules should be scrutinized for its benefits and costs. Tasking a specific individual to account for the hidden costs associated with regulation will help prevent the imposition of onerous regulations. 5. Impose a cost-benefit analysis on all proposed regulatory legislation and regulatory measures: In conjunction with creation of a regulatory citizens advocate to ensure a balanced approach to regulatory policy-making in Colorado, the state should impose a cost-benefit analysis on all regulatory proposals (legislative and rule-making). Before lawmakers and regulators impose new rules on employers and citizens, they should weigh both the costs and the benefits. 6. Establish an ombudsman to protect private property rights: Utah provides a model for how a state can create an advocate within state government against private property rights. ―In Utah, the property rights ombudsman (established in Utah Code Title 13, Chapter 43) is appointed to receive and investigate complaints made by individuals against government property rights abuses and to achieve equitable settlements. . . . The ombudsman has several means available to try and resolve property rights disputes. The first and simplest is conciliation -- calling local or state officials to discuss a potential dispute and trying to find an objective resolution. Next is mediation; the ombudsman can meet with the parties to assist them in evaluating relevant laws and facts to reach a consensus. The ombudsman can also provide an advisory legal opinion to resolve a dispute in accordance with prevailing law. Finally, the ombudsman has the discretion to order arbitration at the request of the property owner and require the government entity to participate‖ (Leonard, Gilroy, ―States Should Establish Ombudsmen to Protect Private Property Rights,‖ Reason Foundation, April 17, 2008). 7. Deregulate video franchising laws to encourage competitive entry: In nearly every Colorado community, consumers have access to only one cable provider. Cumbersome video franchise laws, dictated municipality by municipality, create a very high barrier to entry for potential market entrants. Colorado should open up the cable market to competition by following Texas‘ lead. There, the state enacted a statewide franchising law that streamlines the franchising process and removes barriers to entry. The law strips municipalities of their franchising authority and vests it in the state public utility commission (Jerry Brito & Jerry Ellig, ―Vido Killed the Franchise Star: The Consumer Cost of Cable Franchising and Proposed Policy Alternatives,‖ Journal on Telecommunications & High Technology Law, December 18, 2006). 8. Enact licensure laws only for necessary professions: Colorado has the fewest licenses occupations (11) of all 50 states (of the profession‘s the organization tracks), according to the Mercatus Center‘s Freedom in the 50 States study (William P. Ruger and Jason Sorens, Freedom in the 50 States, Mercatus Center, February 2009). While licensure of certain occupations may be necessary for public safety reasons, frequently licensure laws are used as a barrier to entry that limits competition. When 70

considering proposals for additional licensure regulations, lawmakers should follow the ―if it ain‘t broke, don‘t fix it‖ axiom, only approving measures that meet a wellreasoned public necessity test.

Americans for Prosperity Colorado P.O. Box 88003 Colorado Springs, CO 80908 (719) 494-0797 www.americansforprosperity.org/colorado

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