Sustaining rural Colorado

Keeping rural Colorado sustainable should include protecting local government severance taxes

Senate President Pro Tem Jerry Sonnenberg, R-Sterling, and Minority Leader Lucia Guzman, D-Denver, deserve credit for forcing a slightly different conversation to occur in the statehouse.  If next year’s budget is going to take money away from hospitals and schools to make things balance, then what are people willing to give up to keep that from happening.

SB 17-267 starts that conversation – and if it makes it past the Senate, then House Majority Leader KC Becker, D-Boulder, and Rep. Jon Becker, R-Fort Morgan, are the House sponsors that will take it from there. SB 17-267 is complicated legislation with many moving parts under the title “Concerning the sustainability of rural Colorado.” The main focus of the bill is the willingness of some Republicans to relent on allowing the hospital provider fee (HPF) program to operate as an enterprise without saying it is illegal unless approved by voters. Currently, the fee revenue counts toward the state fiscal year revenue limit. In the next fiscal year, the hospital provider fee collections will be reduced by 50% in order to prevent a TABOR refund. Since those fees are matched by federal dollars, the impact to Colorado hospitals is doubled and rural hospitals get hit the hardest. As an apparent trade-off for this refined perspective on the HPF, the bill includes other significant policy elements:

  • Requirement that all state departments present budget requests in FY 2018-2019 representing a 2% overall reduction from FY 2017-2018.
  • Authorizes lease-purchase agreements on state buildings to generate $1.35 billion, costing no more than $100 million to lease back the buildings over 20 years. $1.2 billion is designated for state highway projects, and $150 million is designated for capital construction needs. 25% of the transportation revenue must be allocated for projects within counties with under 50,000 people.
  • Transfers from the general fund to state highway projects (SB 228 money) is eliminated and revenue is instead directed to rural schools.
  • The annual state revenue limit, as adjusted by Referendum C (the “Ref C cap”), is reduced by an amount that appears to be a calculation slightly less than the HPF contribution to the current TABOR base.

The bill is likely a trial balloon to gauge reactions to various elements and to show that there is a willingness to fund rural hospitals under certain conditions. Yet, there is one key piece missing, if the goal is to take a complete approach to sustaining rural Colorado.

Severance tax authorized in 1978

Colorado municipalities that are either in the middle of or the shadow of energy extraction activities in the state are mostly rural in nature. They often have the highest needs and the lowest locally generated revenue to address them. Recognizing this, the Colorado General Assembly – in a simpler, pre-TABOR time – adopted a statewide severance tax.

In part, the severance tax was established to compensate the state and political subdivisions for the lost wealth of energy extraction. Colorado law refers the severance tax as “a potential source of revenue,” for which a “portion be made available to local governments to offset the impacts” created by energy extraction.

There have been significant boom and bust cycles, many of which have mirrored the state’s overall economy. However, both the Department of Natural Resources (DNR) and Department of Local Affairs (DOLA) have been able to build programs that have fulfilled statutory intent of the severance tax. DOLA, in particular, was able to smooth some of the peaks and valleys by not expending every last dollar in the Energy Mineral Impact Fund, the grant fund where 70% of DOLA’s half of severance tax revenues are deposited.  Instead, the fund carried a balance to ensure funds were available in down years.

Keeping the General Fund sustainable comes at a cost to rural Colorado

More recently, one of the ways the state preserved existing programs during the recession years was to backfill the state General Fund with revenues, almost exclusively from the Energy Impact Fund (which also included federal mineral lease revenue). In total, nearly $400 million dollars has been diverted from energy impacted communities. If kept in the fund, those dollars would have been matched approximately 3:1, meaning the lost economic impact (i.e. wages, jobs, materials) to mostly rural areas was over $1 billion.  This occurred when those areas suffered some of the highest unemployment in the state.

In 2015, additional severance tax revenue was proposed to backfill the state General Fund in order to supply revenue for TABOR refunds. Exceptionally high severance tax revenue collections the prior year were blamed for driving the state to have to issue TABOR refunds – just like the hospital provider fee has been blamed the past two years.

The bottom line is still that severance tax revenues are being used as a resource for purposes much different than the legislature declared 39 years ago.  A different approach is needed.

Debruce severance taxes to protect, respect legislative intent

The General Assembly should take action this session to allow Colorado voters the option to decide if prior legislative intent for severance tax purpose and use should be respected and upheld. This should be done as an amendment to SB 267.

The General Assembly can and should consider referring a question on severance taxes to voters that would allow the state to retain the revenue and exempt it from TABOR calculations – known as “debrucing” – and couple it with language that would remove the debruced status of the revenue if the state ever used it for purposes other than those already in statute.

For local governments currently and historically impacted by energy extraction, this would ensure that revenues would continue to be available to mitigate the impacts and help communities continue to survive as Colorado’s natural resources extraction declines and even disappears from some areas.  For the state (and also to the benefit of municipalities, counties, and their citizens), vital water infrastructure programs in DNR, as well as Tier I and Tier II programs, would be able to have better certainty of annual funding as prioritized by the General Assembly.

Debrucing impacts on the state budget

Outside of the direct beneficiaries of severance tax revenue, there are also impacts on the state budget worth consideration.  The debruced revenue would mean reductions in state revenue equivalent to the amount of severance tax collections, not including interest and earnings, each year. That creates a subsequent and equal reduction in the TABOR refund obligation in years that such obligation exists. Therefore, General Fund revenue would be freed up to address other needs.

With the volatile severance tax revenue no longer calculated in the state’s revenue limit, the General Assembly would likely be able to expect more predictability of the state’s overall budget picture and perhaps have existing revenue to appropriate for education, transportation, and other critical issues that face the state without a tax increase.

A conversation starter

Protecting the sustainability of rural Colorado should include a conversation about protecting severance taxes. Additional issues and interested parties would need to be considered and consulted, but the choice is clear – either there is an interest in ensuring that revenue collected to assist impacted communities and fund state water and environmental programs is sustained or we are comfortable with using those revenues to backfill the state budget every time the going gets tough.

CML will work with the sponsors of SB 267 to ensure that any legislation promoting the sustainability of rural Colorado includes asking voters to protect the one source of revenue specifically designed for that purpose.

CO Oil_Gas

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