While the state’s economy continues to dig its way out of the worst recession since the Great Depression, state revenues are not growing fast enough to keep up with increasing demands for state services caused, in part, by the severe recession.

That was made clear Monday when state economists presented their quarterly revenue and economic forecasts to the legislature’s Joint Budget Committee. While they projected shortfalls for this fiscal year and next, they also indicated that Colorado’s economy is showing signs of a slow but steady recovery.

Legislative Council Staff economists estimate the state will have sufficient revenue to cover the current General Fund appropriations but will need $181.5 million more to fully fund the 4 percent reserve required by state law. Another $67.2 million is needed to make up for federal Medicaid funds that are projected to come in lower than was estimated last session. This means the legislature and governor will have to cover a projected $248.7 million shortfall in the current fiscal year (through June 30, 2011).

Gov. Bill Ritter submitted a proposal in August that addresses $59.6 million of this shortfall. If the legislature decides to reduce the reserve to 2 percent from the current 4 percent, something it did in 2009, the projected shortfall would total $50.3 million after taking into account the governor’s plan. Without a reduction in the reserve amount, the remaining shortfall would total $189.1 million.

The shortfall is caused in part by a projected drop in General Fund revenues of $71.7 million since the June forecast. Legislative economists project lower revenues from both the state sales tax and personal income tax. These decreases are caused by continued high unemployment, slow wage growth and lower expectations for capital gains and small business income.

The council staff’s estimates for fiscal year 2011-12, however, show the potential for a $1 billion shortfall. Three factors drive this projection.

First, the staff projects that revenues next year will fall $202 million short of the level needed to cover current appropriations and fund the 4 percent reserve. Second, it calculates that $457.7 in federal recovery act funds in the current budget, used for Medicaid, higher education and child welfare, will not be available for next year’s budget. In addition, $89.2 million in Amendment 35 tobacco tax revenue used to fund Medicaid this year may not be available next year either. Third, it projects that just keeping pace with inflation and growth in the demand for state services will cost $300 million more than this year’s appropriations. Combined, these factors result in a potential $1.1 billion shortfall over current projections for General Fund revenues.

The council staff projects that General Fund revenues will grow by 1.3 percent in fiscal year 2011-12, compared with 8.9 percent growth this fiscal year. While consumer spending is expected to grow, the expiration of temporary sales tax measures will limit growth in sales tax revenues for fiscal year 2011-12.

Economists in the Governor’s Office of State Planning and Budgeting (OSPB) project lower General Fund revenues and a larger shortfall in the current fiscal year than their legislative counterparts. They estimate the state will receive $6.8 billion in General Fund revenues in fiscal year 2010-11, $222 million less than the legislature’s projection. This would result in a shortfall of $256.0 million. This includes a 2 percent reserve fund and is $206 million higher than what the legislature projects.

The governor’s economists did not lay out a comparable estimate for the shortfall facing the state in fiscal year 2011-12. However, their estimate of $279.3 million in additional General Fund revenue in fiscal year 2011-12 is not very much compared to the expected increase in caseloads and the loss of federal recovery act funds.

The legislature and governor often use the most pessimistic of the two forecasts when developing their budget balancing plans. If that remains the case, the OSPB projections will be the target they shoot for in the current year, and the council staff’s estimate will be used when they begin writing next year’s budget