Colorado hospitals will lose more than a half-billion dollars, schools will get $50 million less for classrooms and taxpayers won’t see TABOR refunds in 2018 as state lawmakers shuffled money in a state budget bill that left little to cheer.

The cost-saving maneuvers made room for modest salary increases for state employees and larger pay hikes for judges, lawmakers and elected officials, as well as more money to address problems in youth prisons and child welfare in the fiscal year that begins July 1.

State Rep. Millie Hamner called the cuts to the hospitals a “really tough decision,” but a necessary one, as lawmakers struggled to close a $400 million shortfall.

“I know this is going to have a very negative effect on our hospitals,” said Hamner, a Dillon Democrat and top budget writer.

The state hospital association warned that hospitals may close without the money, calling it “a death knell for rural communities and devastating to our state.”

The Joint Budget Committee completed most of its work in a marathon session Wednesday that stretched to 11 p.m. as lawmakers huddled in private to make the last-minute decisions. They put the final touches on the $28 billion spending plan Thursday ahead of the bill’s debut next week.

“It is really painful on K-12 education and hospitals — those are two things that concern me greatly,” said Rep. Bob Rankin, a Carbondale Republican and budget writer.

NEW: For the second straight year, #COleg budget writers eliminate TABOR refunds by cutting hospital provider fee collections #copolitics — John Frank ☀️ (@ByJohnFrank) March 23, 2017

How lawmakers closed the budget hole

The budget bill is expected to amplify the contentious debate this session about state spending as lawmakers push forward a separate measure to increase the statewide sales taxes to pump money into road construction and transportation projects.

The spending plan for fiscal year 2017-2018 represents an estimated 4.2 percent increase in spending from the current year. But the new revenues in the $11 billion general fund did not meet required spending and existing priorities, putting lawmakers in the hole to start.

To make ends meet, the three Republican and three Democratic budget writers adopted the more optimistic financial outlook from legislative economists that allowed for $143 million in additional spending, rather than take the more conservative forecast from the governor’s office.

The panel also sidestepped the $124 million deficit in the current fiscal year by seeking a change to state law that lowers the required reserve for the second straight year. The reserve fund would return to 6.5 percent next year.

Even then, budget writers needed to raid other accounts to find money to balance the budget, taking $26 million from a state employee reserve fund and $46 million from severance tax collections on oil and gas production.

A scheduled tax cut July 1 for recreational marijuana went up in smoke after the committee reversed its decision a year ago to lower the tax from 10 percent to 8 percent.

The severance tax money will hurt local governments that rely on those dollars to pay for local projects, a move that led the Colorado Municipal League to express concern about the budget bill.

Another $50 million will not transfer to school districts next year, which will increase the so-called negative factor in public education to around $880 million.

On Wednesday, the balancing act had been expected to be even more difficult. Budget writers initially voted to withhold another $25 million from schools, and had planned to take an additional $78 million from employee reserves, severance tax collections and state marijuana sales taxes to make ends meet.

“The fact that we can get this close is really good news,” Rankin said.

A sticking point: Pay hikes for state employees and lawmakers

One of the final points of negotiation for budget writers focused on the size of pay hikes for state workers. Gov. John Hickenlooper proposed a 2.5 percent across-the-board salary hike, but the budget writers lowered it to 1.75 percent with an additional 0.75 percent in potential merit pay increases.

However, certain state employees will get a larger boost. Colorado State Patrol troopers will receive a 7 percent salary hike plus possible merit pay, while judicial branch officers will get a 5.7 percent pay bump.

The increase in judicial pay will trigger a salary hike for the governor, treasurer, attorney general, secretary of state and state lawmakers, effective in 2019, because their compensation increases were linked under a 2015 law.

Tough optics: #COleg budget cuts hospitals, schools and more, while lawmakers, judges, electeds get largest pay hikes #copolitics #cogov — John Frank ☀️ (@ByJohnFrank) March 23, 2017

Major initiatives from the governor left unfunded

In the final negotiations, the governor’s office received a $6.7 million earmark for its top legislative priorities. Hickenlooper’s administration also received $4.7 million to hire 60 new employees to address safety and security concerns at the troubled Division of Youth Corrections, as well as additional money for child welfare case workers.

But the committee rejected Hickenlooper’s requests to spend $18 million in marijuana tax collections to develop as many as 2,400 affordable housing units statewide for homeless individuals and other at risk populations.

Another top administration priority left on the cutting room floor: $3 million for film incentives that the state’s economic development chief considers vital to maintaining the industry’s presence in Colorado.

The committee made both moves this week as the Democratic governor simultaneously met with reporters to tout their importance in the budget bill.

Hickenlooper proposed his own drastic measures to balance the spending plan, but the lawmakers managed to avoid one of his most controversial proposals: a reduction in the property tax exemption for seniors aged 65 and older.

But it resulted in deeper cuts to hospitals, who bear the brunt of the state’s budget crunch for the second consecutive year.

Why hospitals take the biggest hit

The reason is a complication in how hospitals are reimbursed for uncompensated care.

Under the current system, Colorado hospitals pay fees to the state based on patient stays and the money is leveraged for nearly a dollar-for-dollar match from the federal government. Then the total amount is distributed back to hospitals based on a formula that sends the largest proportions to urban and rural hospitals that treat the most Medicaid patients.

The catch is this: The hospital provider fees count toward the state’s revenue under the Taxpayer’s Bill of Rights, helping to push the state above the caps and requiring TABOR refunds.

Like the current year, the budget committee approved a reduction in the fee collections by $264 million — which then put the state under its spending limits and eliminated the need for a refund, which was projected to range from $23 to $526 for single filers.

But for hospitals, the reduction in the fees adds up to $528 million less for operating expenses after the federal government matches the dollars.

Beyond no refunds, it means a $500M+ hit to Colorado hospitals & may lead to closures in rural areas #copolitics #coleg https://t.co/9O6AVntTG6 — John Frank ☀️ (@ByJohnFrank) March 23, 2017

“While the Colorado Hospital Association and its member hospitals and health systems are sensitive to the budget crisis, Colorado’s hospitals — especially those in rural parts of the state —play a crucial role, not just as caregivers, but as employers, economic engines and community partners,” said Steven Summer, the association’s president and CEO. “A budget cut that eliminates these partners will be a death knell for rural communities and devastating to our state.”

The cuts may put pressures on lawmakers to consider exempting the hospital provider fee collections from counting toward the TABOR limit.

For the prior two legislative sessions, Republican legislative leaders rejected repeated Democratic efforts to reclassify the fee money, but GOP lawmakers are expected to revisit the question as the new budget cuts come into focus.

Editor’s note: This story was updated from its original version to reflect the latest version of the budget bill being drafted.