The state of Colorado is facing a significant budget challenge, with Governor Jared Polis’s office projecting a $848.9 million shortfall for the upcoming 2026-2027 fiscal year. The governor’s proposed budget, submitted to the state’s Joint Budget Committee (JBC), outlines a plan to close this gap through a combination of controversial spending reductions in Medicaid and a one-time cash infusion from the proposed privatization of Pinnacol Assurance.

This shortfall is compounded by a more immediate revenue problem in the current 2025-2026 fiscal year, where a recent federal tax law change has unexpectedly reduced state income tax collections by an estimated $1.2 billion.

The largest and most contentious part of the governor’s plan involves significantly slowing the spending growth of Health First Colorado, the state’s Medicaid program. While the program’s expenses are projected to grow by 11.9%, or $631.4 million, due to rising healthcare costs and increased caseloads, the governor’s budget proposes to fund only a 5.6% increase, or $297.7 million. This leaves a funding gap of $333.7 million that must be covered by “slowing the growth,” which translates to program and service reductions. The Department of Health Care Policy and Financing (HCPF), which administers Medicaid, has already identified 15 program areas for cuts or changes to meet this reduced budget. These changes are projected to impact over 40,000 Coloradans, including proposals to cap weekly hours for in-home caregivers for some clients with disabilities and adjust eligibility requirements for children’s support services.

To generate a large, one-time revenue stream, the budget proposes the full privatization, or “spinoff,” of Pinnacol Assurance. Pinnacol is a quasi-governmental entity that serves as Colorado’s largest provider of workers’ compensation insurance. The governor’s Office of State Planning and Budgeting (OSPB) estimates that “demutualizing” Pinnacol and spinning it off as a private company would result in a $400 million payment to the state’s general fund. This one-time revenue would be used to help close the budget shortfall and fund other state priorities, including a proposed tax credit for senior homeowners. This proposal, however, faces significant skepticism from the bipartisan six-member Joint Budget Committee, whose members have raised serious questions about the legality of the move, the accuracy of the $400 million valuation, and the long-term wisdom of selling the asset.

Despite the shortfalls, the governor’s proposal does include targeted spending increases in key areas, primarily K-12 and preschool education. The budget continues the effort to “buy down” the Budget Stabilization Factor, the long-standing deficit in K-12 education funding, by increasing per-pupil funding. The plan also allocates an additional $14.3 million to the state’s Universal Preschool (UPK) program to help stabilize its funding. However, the budget also includes a technical change in how student enrollment is counted. By shifting from a four-year average to a three-year average, this change is estimated to reduce state funding to schools by approximately $30 million from what it would have been under the previous formula.

Governor Polis’s proposal is just the first step in the budget process. The Joint Budget Committee will now spend the next several months analyzing the proposal and hearing from state departments. The JBC will then draft its own version of the state budget, known as the “Long Bill,” which will be debated and must be passed by the full legislature in the spring of 2026.