The state government owes Colorado taxpayers an extra $34 million in refunds it should have sent out years ago, legislative budget staff told lawmakers Friday, blowing a hole in the state’s budget with just days left in the 2024 legislative session.
The error was first uncovered by a state audit released in February. State officials had planned to come up with a solution by June, but after conferring with the Colorado Attorney General’s Office, Joint Budget Committee staff members say the matter can’t wait until after the session.
“We really don’t have any choice,” JBC Director Craig Harper told the budget writing committee Friday. “That’s an under-refund from prior years and will need to be refunded at the earliest available opportunity.”
The problem dates back to a 2020 law, Senate Bill 215, which created the Health Insurance Affordability Enterprise and charged a new fee on health insurance premiums. The fee pays for a state reinsurance program and provides subsidies to reduce the cost of health insurance across the state.
The fee generates over $100 million annually and is exempt from the state revenue cap under the Taxpayer’s Bill of Rights.
Here’s the problem: The enterprise also gets money from the state general fund, through a long-standing tax on insurance premiums. The government can’t just move tax dollars from the general fund to an enterprise and call it a TABOR-exempt fee, according to the state auditor. But that’s exactly what the state comptroller has been doing since the program was created.
(TABOR generally limits state revenue to the combined rate of inflation and population growth each year. Anything beyond that limit has to be refunded to taxpayers the following year.)
Gov. Jared Polis on Monday signed the state budget bill for next fiscal year, which starts July 1. But factor in the unpaid TABOR refunds that would have to go out in early 2025, and the spending plan is already out of balance.
That leaves lawmakers until the start of next week to come up with a plan to refund the money and rebalance the budget. It takes a minimum of three days to pass legislation, and the legislative session ends May 8.
“The timing on this is really unfortunate,” Harper said.
In a memo to lawmakers, JBC staff recommended two courses of action.
One, dip into the rainy day fund to pay for the TABOR refunds – a move that would require legislation to temporarily reduce the reserve below what’s required by state law, 15% of general fund spending.
Two, amend the budget for the current year and next year to stop sending insurance premium taxes to the enterprise. That would cover the cost of $33 million in additional TABOR refunds expected over the next two years. It would also buy time for the administration to figure out how to pay for the program in the future. Mark Ferrandino, Polis’ budget director, told the JBC that one option is to raise the health insurance fee, which is exempt from TABOR.
The JBC on Wednesday voted to sponsor a bill preventing the future transfers. But lawmakers are torn on tapping the rainy day fund to cover the refunds they already owe.
Sen. Rachel Zenzinger, an Arvada Democrat and the JBC’s vice chair, said she was willing to do so, calling it the sort of unexpected expense that the reserves are designed to cover.
“We do have a healthy reserve,” Zenzinger said Wednesday. “The reserve is supposed to protect us against any unforeseen events.”
Reducing the $2.4 billion reserve by around $30 million would leave the state 14.8% of general fund spending in the fund, 0.2 percentage points shy of what the law currently requires.
But the Legislature’s Democratic majority has long fought to protect the general fund reserves so the state has money set aside to cover public services during the next recession. JBC member Sen. Jeff Bridges, a Greenwood Village Democrat, said he remained uneasy about tapping the reserve. At least one Republican on the six-member panel doesn’t want to, either.
Sen. Barbara Kirkmeyer, a Brighton Republican, said she was criticized by Democrats during the November special session for proposing that the state dip into the rainy day fund to pay for property tax relief.
“I was told I was being fiscally irresponsible, so God forbid I should do that again,” Kirkmeyer said at Friday’s meeting.
If lawmakers won’t look to the reserves, Harper said they have few options, none of them appealing.
They can cut spending from a budget that has already been signed into law. They can cut general fund spending on K-12 and dip into the State Education Fund to cover the costs. Or they can cut the money lawmakers have available to pay for the dozens of pieces of legislation still pending at the statehouse – a list that includes major Democratic priorities such as housing.
“That’s a large cut to find at this point in the process,” Harper said Wednesday.
