The state owes Colorado residents $67 million in tax refunds that should have been paid out years earlier, a costly mistake lawmakers are now working to fix, having discovered the problem after the governor has already signed the next fiscal year’s spending plan.

Lawmakers said they only learned about the problem a few days ago and they’re frustrated with the state controller, who made the error, and other officials who didn’t raise the issue as they were crafting the state budget.

The legislators are now exploring two solutions, one of which effectively rolls the dice with the hope that some of the spending would come in below budget, freeing up some money to pay for the costly mistake.

Gov. Jared Polis signed the state’s $40.6 billion budget on Monday. Lawmakers often joke that the day the governor signs the budget, it would no longer be balanced as the state constitution requires.

But the mistake lawmakers just uncovered means the budget they passed was never balanced to begin with.

The mistake arose out of an interpretation on funding for the state’s reinsurance program.

The state’s annual financial audit — dated June 30, 2023 and published in February — actually discussed the problem, which started with legislation passed in 2020. Senate Bill 215 created the Health Insurance

Affordability Enterprise, which pays for the state’s reinsurance program. That’s the kind of insurance for insurance companies to cover those extraordinarily large health insurance claims — consider $1 million or more — using fees paid to the state and placed into an “enterprise.”

An “enterprise” is a type of state-run business and the revenue that goes into that enterprise, which is paid for by insurance companies, is outside of TABOR revenue calculations.

However, other revenues go into the enterprise and that caused the problem that Joint Budget Committee members have been dealing with since last Friday.

Sen. Barbara Kirkmeyer, R-Weld County, the panel’s ranking Republican, said she is annoyed that nobody — the Division of Insurance, which runs the enterprise, the state controller, or the state auditor — flagged the JBC that this looming problem was about to hit the state budget.

Kirkmeyer said someone knew about the problem as early as last October, when the audit was being put together.

She said she was told some of the delay was due to the auditor seeking the opinion of the Colorado Attorney General, but nobody bothered to raise a red flag in the meantime.

“That’s ridiculous,” she told Colorado Politics.

Here’s how the problem arose. Since 1913, the state has collected a premium tax from insurance companies, calculated on the gross amount of all insurance premiums collected. In 2023, that was $533 million, the audit said. SB 215 directed a portion of those premium taxes into the enterprise fund for the reinsurance program — between $9 million and $17 million per year for the past five years, a total of $66.9 million.

According to an April 26 memo from JBC analyst Eric Kurtz, the state controller treated the premium taxes transferred to the fund as exempt from TABOR.

However, the state auditor and the Attorney General recently agreed that the money should have counted as TABOR revenue and would count toward TABOR surplus calculations.

That means taxpayers are, in fact, in line for about $66.9 million in TABOR refunds.

That money will have to be paid to Coloradans next year.

The problem is where to get the $33.9 million to pay the TABOR refund owed from those premium tax payments in the program’s first three years.

An April 29 communication from JBC Director Craig Harper shows that it could come from the state’s general fund reserve.

But that would put the state reserve $30 million below the 15% requirement for 2024-2025.

And that doesn’t sit well with Kirkmeyer.

“I’m a no,” She told Colorado Politics on Thursday. “I was told during (last November’s) special session that using reserves for things like this, for backfilling local governments, was fiscally irresponsible. Well, to use it to backfill a state auditor’s mistake or a state controller’s mistake or a (Division of Insurance’s) mistake is fiscally irresponsible, as well,” she said.

Kirkmeyer said she believes the answer to why the JBC wasn’t notified about the problem until April 26 should come from the state controller or the Division of Insurance. Kirkmeyer speculated there would have been conversations between the controller, the auditor, and the Division of Insurance going back to last year.

And all that took place before the audit came out in February, she said.

Fortunately, the JBC found out before the session ends next week, so while time is short, there is enough time to push through a bill to fix the problem, lawmakers said.

The first solution is to halt the premium tax transfer, the approach in House Bill 1470, which was introduced Wednesday night and which flew through House Appropriations on a unanimous vote on Thursday morning. It is now awaiting debate in the full House.

That proposed solution will cover $33 million for 2023-24 and 2024-25 by requiring those transfers to be returned to the general fund and then made available for TABOR refunds.

But that still means lawmakers need to find another $33.9 million to cover the first three years of those transfers, which also must be refunded.

Harper told the JBC Wednesday it would be difficult to find a spending area to cut, given the amount needed.

However, the problem might resolve itself through the June revenue forecast, and on this, the JBC appears willing to roll the dice. Harper said virtually every general fund line item, except for what’s contained in the state budget, would change with that forecast.

That could leave room for the state’s general fund revenues to cover the last $33.9 million.

JBC Chair Rep. Shannon Bird, D-Westminster, said these “reversions” mean funds could be returned to the state by the end of the fiscal year because of higher-than-necessary estimates in some spending areas, such as Medicaid enrollments. In fact, such reversions in Medicaid have happened in the past.

Bird said she is also okay with tapping the general fund reserve in the meantime, which doesn’t require any action but would at least cover $33.9 million.