The billion-dollar question: What if?

By Laura Frank, Rocky Mountain News (Contact)

Monday, December 10, 2007

Photo by Matt McClain

Playing the role of a doctor, Andrew Norman, 10, takes the temperature of Kyle Bene, 10, with a temperature strip.

Graphic by Michael Hall

Missed opportunity?

What would Colorado do with an extra billion dollars — or two billion?

That's likely what the state would have right now if it had taken the same path three decades ago as its energy-rich neighbors, a Rocky Mountain News analysis shows.

If Colorado had imposed a more typical tax rate on oil and gas extraction and invested half those taxes in a permanent fund similar to those in New Mexico or Wyoming, it could now be sitting on more than $2 billion.

Conceivably, the investment income from that pot of money alone would have equaled what the state now collects in severance taxes from booming oil and gas operations.

Instead, Colorado has about $20 million left in its so-called permanent fund, about a tenth of what it earns in severance taxes each year.

"It's malfeasance not to parlay this nonrenewable resource into a permanent funding stream," said a frustrated state Sen. Josh Penry, R-Fruita. "It's Economics 101 that every other state has figured out."

Penry is a member of an interim legislative committee trying to rework Colorado's oil and gas revenue laws.

Wyoming's $4 billion severance tax trust fund earns enough interest to cover a quarter of the state's annual budget. The state also plans to send 70 percent of its high school graduates to college on scholarship using energy money.

New Mexico has $4.7 billion in its fund — enough to build roads and bridges and invest in economic development to create more jobs.

Colorado, which did not give its permanent fund constitutional protection, as the other states did, has raided it repeatedly.

Extracting any of that money now to feed a permanent fund is unlikely, Penry said.

"The severance tax has become so intertwined with operations of state and local governments," he said. "We probably could afford to siphon off some of that money, but I don't think this legislature would do that."

But it is not too late for Colorado, Penry added. He and others believe the state could have its own billion-dollar trust fund within a decade or so by taking another path.

Colorado is on the verge of a reaping a windfall in federal mineral lease royalties — the state's share of the money that oil and gas companies pay the federal government when they drill on public land, where production is booming.

The Legislative Council, the research arm of the General Assembly, predicts that Colorado will be bringing in an extra $100 million a year in federal mineral lease money just four years from now.

That estimate does not include ramped-up drilling on the Roan Plateau or the major announcement by Exxon-Mobil that it will quadruple production in northwestern Colorado and eventually could produce a billion cubic feet of gas a day.

Right now, Colorado's $139 million in annual lease royalties go to schools, local governments and water project loans.

Under legislation expected to be proposed next session, however, the Colorado Water Conservation Board, which gets 10 percent of the lease money, would be capped at $10 million a year. The rest would go into a permanent fund.

"So if we achieve an investment rate of return of even a modest level, it is entirely possible that Colorado could build a permanent fund of $1 billion in 10 to 12 years," Penry said. "And if production grows faster than these conservative estimates show, we might hit that $1 billion mark sooner.

"What more important thing could we do that would benefit Colorado forever?"

Not everyone is convinced it can be done right now.

If you think a permanent fund would be good medicine for Colorado, then think of the state's current budget as a patient on the emergency room operating table, said state Sen. Chris Romer, D-Denver, son of former Gov. Roy Romer.

"Look, before we can move the patient, we need to get out of the emergency room," Romer said.

The state needs immediate funding for too many emergencies, Romer said, checking off a list of needs that starts with crumbling school buildings, a looming health care crisis and mounting transportation woes, and ends with Nobel laureates leaving for better-funded universities in other states.

"Yes, we have dire needs," countered state Sen. Gail Schwartz, D-Snowmass Village, who has written legislation to create a truly permanent fund. "But I think we cannot afford not to start a permanent fund."

In the past, state leaders did not realize the value of the state's resources, Schwartz said.

"This is a new day," she said. "This is a stable industry with a sizable investment in infrastructure. This is something we can literally go to the bank on."

Nervous industry officials are biting their nails as the process unfolds. If Colorado had created a truly permanent trust fund with the millions it already has collected from the industry, the conversation taking place now would be much different, they say.

Jay P. Still, executive vice president of Pioneer Natural Resources' Western Division and chairman of the Colorado Oil and Gas Association, wonders if the conversation would even be happening at all.

"My guess is it probably wouldn't," Still said. "It's obvious the state is looking for sources of revenue in a lot of places. If you look at higher education, more for schools, infrastructure, roads and bridges, they're really looking for a source of revenue, and there's a lot money that's being looked at."

How we did it

The Rocky Mountain News wanted to see how much money Colorado might have accumulated in a permanent trust fund if it had enacted tax policies similar to its neighbors' when it began collecting severance taxes in 1978.

Since each state has its own complex energy tax system, we looked at the "effective" tax rates for other energy-rich Western states, which takes into account the severance, property and other taxes imposed on the industry in each state.

There are several ways to calculate the effective tax rate. We looked at two: one from state government averaging 8 percent among the states, another from industry analysts averaging 10 percent.

In both scenarios, Colorado's effective rate was about 6 percent. In our calculation, we raised that to 9 percent, the midpoint of the two rate scenarios, and equal that of neighboring New Mexico.

We then calculated how a permanent fund would have grown under the same conditions as New Mexico's fund, which, like many other states' energy trust funds, receives a portion of energy tax revenue every year.

Until 1989, New Mexico invested in bonds, earning about 6 percent per year. It then switched to a broader investment mix and has averaged 9 percent annually. We applied these returns to our hypothetical Colorado fund.

We showed our analysis to experts in the industry and environmental and governmental affairs. All agreed that the assumptions were valid, although it is impossible, of course, to know for sure how much Colorado might have earned.

Based on those assumptions, however, our calculations found that Colorado might have accumulated a trust fund amounting to about $2 billion.