MEMORANDUM. TO: C3 Investors FROM: Politicalworks LLC and Morrison, Love & Company DATE: May 26, 2010 RE: 2010 Colorado Legislative Session Wrap-up

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1 MEMORANDUM TO: C3 Investors FROM: Politicalworks LLC and Morrison, Love & Company DATE: May 26, 2010 RE: 2010 Colorado Legislative Session Wrap-up Once again, the 2010 legislative session was dominated by the state s fiscal situation. Under the leadership of Senate President Brandon Shaffer (D-Longmont) and Speaker of the House Terrance Carroll (D-Denver), the 67 th General Assembly convened its Second Regular Session facing a budget deficit of $600 million. This specific challenge drove not only current-year solutions, but also broader, longer-term policy decisions for the state. Some of these decisions evolved into bipartisan sponsored legislation, but most turned into bitter partisan divides. In addition, Governor Ritter s January decision not to run for re-election changed the political dynamic that existed between the General Assembly and the Governor s Office. Certainly, more power was placed in the legislature s hands and the governor lost some political clout. Beyond the partisan legislation around the budget, the legislature also tackled issues dealing with education, energy policy and workers compensation; although, judging from the news coverage, one would believe that medical marijuana was the only issue of concern. Budget Shortfall and Policies The FY General Fund shortfall amounted to $600.6 million, according to the December 2009 Revenue Forecast. The legislature, along with Governor Ritter, was able to drain cash funds and implement policies that put the current budget in balance by the time of the March 2010 Revenue Forecast. Businesses were impacted by revenue-generating policies outlined in 12 bills. These bills suspended or eliminated targeted tax credits and exemptions, and added a new sales tax on electricity and fuels used in manufacturing. This package of bills worked its way through the legislature early in the session and included long committee hearings and bitter debates on the floors of both chambers. In addition, other cuts to cover the shortfall were found in corrections and education, including a $256 million in K-12 education funding.

2 HB , sponsored by Representative Jack Pommer (D-Boulder) and Senator Rollie Heath (D-Boulder), eliminated the sales and use tax exemption for direct-mail advertising. This change affected mailings like the ValuePaks that are delivered to residential mailboxes. HB was also sponsored by Representative Pommer and Senator Heath. The bill applies a sales and use tax on electricity and fuels used in manufacturing for two years. HB (Pommer/Heath) eliminated the sales and use tax exemption given for candy and soda. This bill was opposed by the business community, grocery stores and vending machine businesses. HB (Pommer/Heath) eliminated the sales and use tax exemption for standardized software. This bill was one of the more complicated of the 12 because legislators had to define what kind of software would be exempt and what kind would now be taxed. HB (Pommer/Heath) sought to collect sales and use tax on Internet sales from businesses that do not have a physical presence in the state. This bill was dubbed the Amazon.com Bill. After its passage, Amazon.com decided to pull all affiliate ties to the state, although the bill was amended to exempt affiliates. HB was sponsored by Representative Mark Ferrandino (D-Denver) and Senator Rollie Heath (D-Boulder). The bill narrowed the exemption of sales and use tax for articles that accompanied items sold for human consumption, including such things as napkins, plastic utensils, carrying bags, etc. HB (Ferrandino/Heath) suspends for three years the sales and use tax exemption for certain items used in agricultural production, including certain agricultural compounds and bull semen. HB (Ferrandino/Heath) eliminates the state income tax exemption for certain alternative fuel vehicles. HB (Ferrandino/Heath) places a cap on the amount that can be claimed under the conservation easement program for three years. HB (Ferrandino/Heath) sought to suspend the state income tax credit for the alternative minimum tax. This bill was the only one of the 12 that was not signed into law and was postponed indefinitely in its first committee. HB (Ferrandino/Heath) limits for three years the amount of state income tax deduction allowed for net operating loss. Finally, HB , sponsored by Representative Dickey Lee Hullinghorst (D-Niwot) and Senator Rollie Heath (D-Boulder), directs that a taxpayer defer for three years any claim of the enterprise zone investment income tax credit exceeding $500,000. This bill

3 started later in the session and finally passed both chambers on the last day of session. It is now on Governor Ritter s desk awaiting his signature. This package of bills helped to balance the current year budget, along with cuts to departments and the draining of certain cash funds. If we assume that all of the negative supplementals under current law are permanent, then revenue available for spending in the General Fund is higher in FY than in FY However, there will still be a significant budget shortfall in FY for two reasons, with FY being the real challenge: One, the negative supplemental appropriations, or cuts to departments, during the current fiscal year were one-time in nature. Two, the current revenue figures do not account for expenditure pressures from rising caseloads, inflation, constitutional requirements (TABOR and Amendment 23) and reductions in federal stimulus dollars (ARRA). Because of these factors, the state could again be facing up to a $600 million shortfall over the next two fiscal years. This looming cliff effect, as well as additional cuts to K-12 education, will likely dominate the discussions for the upcoming 2011 session. Workers Compensation There were many bills introduced this year that dealt with workers compensation. These bills were the result of the 2009 summer interim committee on Pinnacol Assurance, the state s workers compensation authority and provider of last resort. This interim committee was formed after an attempt during the 2009 legislative session to use $500 million from Pinnacol Assurance s reserve fund to balance the state budget. The committee referred legislation to the full General Assembly that dealt not only with Pinnacol Assurance, but the workers compensation system as a whole. Many of these bills turned into contentious battles. For instance, HB , sponsored by Representative Sal Pace (D-Pueblo) and Senator Morgan Carroll (D-Aurora), limited the use of surveillance on employees who have filed workers compensation claims. The bill severely limited an insurance company s ability to prove fraud in insurance claims and imposed severe penalties on companies for violating the provisions of the bill. HB 1012 worked its way through the House on mostly party-line votes, with adamant opposition from the insurance industry and business groups. Once in the Senate, however, it faced a larger challenge. The bill ran into opposition from a key moderate Democrat, Senator Linda Newell (D-Littleton), in the Senate Judiciary committee. After laying the bill over for several weeks and trying to amend it, the bill was eventually postponed indefinitely in committee. SB was sponsored by Senator Morgan Carroll and Representative Joe Miklosi (D- Denver). The bill sought to reduce conflicts of interest in workers compensation cases. Again, the insurance industry and business groups strongly opposed this bill. In spite of

4 the opposition and attempts to amend, the bill passed through the legislature in the final days of session and is awaiting the Governor Ritter s signature. Further, SB10-012, sponsored by Senator Lois Tochtrop (D-Thornton) and Representative Sal Pace (D-Pueblo), increased penalties for violations of workers compensation laws. The bill increased the maximum penalty from $500 to $1,000. It also lowers the standard for when benefits are wrongfully withheld by an insurer from acting willingly to knowingly.. Once again, this bill was opposed by both the insurance industry and business groups. The bill passed both houses in the final days of the session and is awaiting the Governor Ritter s signature. In addition, HB , requiring brochures with specific information on the claims process to be sent to workers filing a new claim, and SB10-013, requiring data to be collected on the closure of claims, both passed without opposition from the industry or the business community. HB introduced by Representative Sue Ryden (D-Aurora) was the most onerous of the workers compensation interim bills. It set the reserve fund for Pinnacol at an arbitrary level in statute and mandated the commissioner of insurance take the lowest actuarial estimate to set premiums regardless of the economic or industry circumstances. The bill was delayed and then defeated quickly in its first committee hearing in the House. Energy Policy Legislation The 2010 legislature tackled energy policy as well. Some of the bills in this arena were contentious and some of them were bipartisan. The highest profile bill was HB This bill was sponsored by Representatives Judy Solano (D-Brighton) and Ellen Roberts (R-Durango) in the House and Senators Bruce Whitehead (D-Hesperus) and Senator Josh Penry (R-Grand Junction) in the Senate. Its purpose was to develop rules to comply with the EPA s new federal standards that uniquely fit the needs of Colorado. The bill encourages the use of natural gas for energy, the replacement of older coal-based power plants with natural gas power plants and incentivizes coal plants to be retrofitted with clean-coal technology. HB 1365 had bipartisan support and sponsorship. It passed through the legislature with the support of utilities, the business community, and gas companies. There was, however, opposition from the coal and railroad industries. The bill was signed into law by Governor Ritter on April 19. HB was another bill with bipartisan support. Sponsored by Representative Andy Kerr (D-Lakewood) and Senator Chris Romer (D-Denver), the bill exempts from property tax independently owned residential solar electric generation facilities. This exemption is already allowed for commercial buildings; this bill simply extends it to

5 residential solar. The bill met with very little opposition and sailed through both houses. It is now on Governor Ritter s desk awaiting his signature. HB was another bill tackling renewable energy. This bill increases the renewable energy standard from 20 percent to 30 percent by The bill also stipulates that 5 percent of the mandated renewable energy be from retail distributed generation. HB 1001 faced bitter debate on the Senate floor that went into the late hours of the night. It also faced Republican opposition in the House. However, the legislature passed the bill and it was signed by Governor Ritter. Economic Development Several pieces of legislation passed that will hamper Colorado s ability to grow out of the recession. HB was most notable, as it prohibits the inclusion of agricultural land in urban renewal developments which use Tax Increment Financing. This change will harm efforts for growth on the edges of metropolitan areas and will harm many renewable energy projects that, by their nature, must locate outside of populated areas. In addition, HB introduced by Representative Sal Pace (D-Pueblo) began as a requirement for users of tax credits to pay a fee and file a report with the Office of Economic Development to justify the use of the credits or face losing the credits retroactively. The bill was amended to order a study and report of the issue and was finally killed in the Senate. However, the same afternoon the bill died in the Senate, Governor Ritter signed the exact same study and report concept into an Executive Order thereby continuing the uncertainty and unease about the state s commitment to a stable tax structure and economic growth. Other Legislation of Interest There were a couple of other bills worth noting that made their way through the legislature this session. One was HB , sponsored by Representative Mark Ferrandino (D-Denver) and Senator Chris Romer (D-Denver). This bill places a cap on the percentage that payday lending business are permitted to charge their customers to 45 percent per year. This bill turned into one of the most contentious bills of the session. Proponents argued that the bill protected consumers and stopped predatory lending practices. Opponents argued that the cap was so low that payday lending businesses would not be able to make a profit and stay in business. Several Democrats joined with the Republicans in opposition to the bill. The bill passed the legislature by the narrowest of margins and only passed the Senate by one vote. SB was another bill that garnered much attention. This bill had bipartisan sponsorship through Senators Michael Johnston (D-Denver) and Nancy Spence (R-

6 Centennial) in the Senate and Representatives Christine Scanlan (D-Dillon) and Carole Murray (R-Castle Rock) in the House. The bill seeks to evaluate teacher effectiveness by tying it partly to student performance. SB 191 is also an effort to win federal Race to the Top dollars for the state in the second round of awards. While this bill had bipartisan support in the legislature, it was fought bitterly every step of the way by the Colorado Education Association, the state s largest teachers union. The bill was introduced late in the session and worked its way quickly through the process, despite the opposition. Governor Ritter has said he will sign the bill and it is currently awaiting his signature. Unemployment Insurance The issue of the insolvency of the Unemployment Insurance Trust Fund was marked by the lack of legislation. The UI fund went insolvent and began borrowing funds from the federal government in January 2010 in order to pay benefits. The level of the fund and the table for setting rates is currently in statute and does not accommodate growth of the state s economy and number of jobs, nor can it respond in a timely manner to a foreseen downturn as we saw in the second half of C3 worked with the Colorado Department of Labor and Employment to address the issues of solvency, repayment of the federal loans and the modernization of the premium setting system, but the Department has not yet produced data for alternative plans. Employers will see their new rates for 2011 in late November of 2010 but those figures will not address repayment of the federal loans or the rebuilding of the fund. Governor s 30-Day Clock Governor Ritter now has until June 11, 2010, 30 days from Sine Die, to take action on all of the bills on his desk. He can sign, veto or allow bills to become law without his signature by June 12, We will continue to monitor Governor Ritter s action and keep you updated. Business Wrap-Up With the exception of the two- to three-year repeal of the various tax credit and deductions, most of the significant anti-business legislation was defeated or dramatically amended. However, the fact that various efforts were introduced to reform workers compensation and amend long-standing regulatory practices or efforts to cut corporate tax deductions and credits even further created a level of instability that makes strategic investment difficult. As we move forward, we will continue to help policy makers understand that a predictable and stable regulatory and tax structure will reap real benefits and continue to grow Colorado s economy. Upcoming Year

7 Unlike last summer, there will be no interim committees in order to continue to save money for the state. This break may decrease the number of bills introduced next session, but it will also push the discussions of many issues into the regular legislative session. This summer will also be full of fundraisers and other campaign events as all 65 members of the House and 17 Senate races are up for election in November. The 2010 elections will determine who serves as Colorado s next governor, U.S. senator and which political party will control Colorado s state House and Senate. These outcomes are critical for both parties, particularly for next session, as new congressional and legislative boundaries will be drawn after the 2010 Census. If you have any questions or would like any additional information, please do not hesitate to contact us. Travis Berry travisberry@politicalworks.net Virginia Morrison Love VAMLove@aol.com Rachel Lee rlee@politicalworks.net