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.

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Who understands severance tax?

Hint: It’s not the Denver Post

Who understands severance tax? Municipalities around the state understand severance tax.

The Denver Post – based on the editorial in this past Sunday’s newspaper – most definitely does not understand severance tax, as evidenced by its promotion of a dangerous proposal for the state to eliminate energy impact grants to municipalities and counties.

Many communities around the state, whether they have active drilling or mining occurring within or around them at this moment, have experienced the impacts of natural resource extraction from within or around their borders. They understand that even when the truck traffic thins out, the employees leave the restaurants and community centers, and the wells are shut in that the impacts do not go away. They know that communities suffer and some all but disappear.

Municipal leaders understand energy impacts. Municipal leaders understand state statutes that express legislative intent that the state be compensated for the depletion of natural resources from Colorado, and that impacted communities should receive a designated portion of that money to help mitigate the impacts. They understand that roads, bridges, water and wastewater infrastructure, public safety, and economic development potential are all part of the impacts.

In fact, the Post only suggests that money be diverted away from energy impacted communities and toward the General Assembly to “set aside for infrastructure,” even while acknowledging the fact that the state has diverted nearly $400 million in severance tax for local governments to backfill the state’s own budget and never to be seen again. Those diverted local government severance tax dollars were transferred from a fund that is actually set aside for infrastructure. Had the legislature left those dollars alone, the impact of the money would have been over $1 billion in infrastructure projects and accompanying wages right in the midst of the Great Recession.

It is as if the Denver Post thinks that mayors sit in town hall waiting for a golden goose from Denver to deliver a wad of cash so that they can “snip the ribbons on new recreation centers.” It will no doubt be quite a party in Salida when the water treatment upgrades are finished, just like the blowout they will have in Rangely when the wastewater treatment plant work is complete. Every project gets significant scrutiny from the Energy Impact Advisory Committee and, ultimately, Department of Local Affairs (DOLA) Director Irv Halter. Matching requirements ensure every applicant has skin in the game. I encourage the Denver Post – or anyone who wants to see how DOLA’s impressive program is administered – to get more details from DOLA’s website.

Sadly, the Post misses the point entirely. Colorado Oil & Gas Association President & CEO Dan Haley actually said it best in a recent blog that the problem lies in the collective unwillingness at the Statehouse to “take on the complex Gordian knot of amendments such as TABOR, Gallagher and 23, that have tied up the state’s budget and stressed out lawmakers for decades.” The League wholeheartedly agrees. Regardless of who one agrees with at the capitol on what is to blame, the State of Colorado and its leaders must get the state’s fiscal house in order. The myopic, year-to-year approach to adopting a balanced budget creates a new bogeyman every year. (Two years ago – severance tax. Last year – hospital provider fee. This year – the Gallagher Amendment) Like some sort of modern-day Sisyphus, we will do it all again this year, as even more of the severance tax is proposed to backfill the state’s general fund.

The state’s budget constraints are a far larger matter. Regarding severance taxes, the right thing to do is to protect them and ensure they continue to be used for statewide infrastructure, just like the Post calls for. For now, the Colorado Municipal League will work with House and Senate leaders on a better approach – one that ensures that severance taxes reach their intended recipients (which, by the way, also include critical state water and environmental programs in the Department of Natural Resources.)

Legislators from rural Colorado, where most of the impacts occurred or are still occurring, will be asked to be part of the solution to protect communities that support and rely on a healthy, well-balanced economy. Legislators from more populated areas of the state will be asked to do their part to ensure that the needs of all Colorado’s communities are met and that we do not abandon those towns that help contribute so much to Colorado’s  diverse economy and rich history.

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Fiscal Fair Play: Road & Bridge Mill Levy

Revenue slated for municipal roads often redirected into county budgets

When the concept of fiscal fair play is discussed at the local government level, one of the main issues that arises is “double taxation.” This occurs, for example, when residents of municipalities are taxed at both the county and municipal level in order to provide the same public services.

This occurs most clearly with local transportation funding, where counties have the authority create a special, countywide “road and bridge mill levy” collected from property taxers from taxpayers in municipalities and those in unincorporated areas. Decades ago, the state recognized that municipal taxpayers could be taxed twice if a county diverted all road & bridge revenue to projects in unincorporated areas, which would require the municipality to tax residents once again to fund municipal road and bridge needs.

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With its recognition of double taxation, the legislature directed that half of the road & bridge mill levy revenue collected from within a municipality should be returned to the municipality. Yet, as Colorado’s cities and towns struggle to fund street and bridge repairs – one of the top fiscal issues facing municipalities – this important source of transportation dollars has faced often dramatic reductions.

The legislature left open a loophole for counties to unilaterally reduce the shareback to municipalities by reducing the mill levy. Counties are then able to backfill their county road and bridge funds with other revenue, such as specific ownership taxes, while using the “saved” revenue for other purposes. While technically legal, it is patently unfair – and it is time for the legislature to once again intervene.

Real dollars

A 2014 CML review of 55 Colorado county road and bridge mill levies over the previous decade showed 34 counties have decreased their road and bridge mill levies when comparing the levies in 2014 from their respective high points between 2004 and 2014.  Only seven mill levies were higher in 2014 than during the previous nine years.

Some of the decreases have been dramatic. Jefferson County cut its mill levy in half, which slashed $11.3 million from municipal budgets. The El Paso County road and bridge levy today is just 20 percent of what it was in 2005. In real dollars, the loss to municipalities in El Paso County totals nearly $5 million. Moffat County and Montrose County have simply eliminated the road and bridge mill levy altogether.

The diversions occur without municipalities being consulted and having a voice in the decision or whether and to what extent municipal revenue should be pledged by the county to other purposes. Ironically, this is the same argument used by counties against urban renewal projects, which occur after significant municipal investment (with no risk to county coffers) leads toward anticipated revenue. In the case of road and bridge, the examples a show that actual dollars are being collected from municipal taxpayers and diverted to other purposes right now, in spite of legislative intent.

Time to close the loophole, restore fairness

The decisions made by counties to reduce their road and bridge mill levies are made without any say in the decision by affected municipalities or even giving municipalities a seat at the table to talk about the impacts of such decisions. As a result, taxpayers in municipalities are on the hook to ante up again if they want to see potholes filled, streets maintained, and bridges remain safe.

This unequal treatment, allowed by a loophole in the law, should be rectified by the General Assembly in the same spirit it clamored to create fairness in the urban renewal process in 2015.  The refrain then was that one level of local government should not be able to make decisions with the taxes of another level of local government without consent or remuneration.

On this concept, the legislature and governor have spoken. To that end, the Colorado Municipal League will support legislation set to be introduced this week that will restore the equity originally envisioned by the General Assembly decades ago. It will ensure property taxes remitted by taxpayers in incorporated areas make it back to the municipality for their road and bridge needs.

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