Millions fly out as fast as they flow into fund

By Burt Hubbard, Rocky Mountain News (Contact)

Published December 10, 2007 at midnight

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Photo by Matt McClain © The Rocky

Kelci Peterson, 10, of Yuma, and friend, Kyla Christine, ride the Kit Carson County Carousel in Burlington, which was renovated with help from the energy impact fund.

Photo by Graphic by Michael Hall

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A little-known state fund has doled out about $400 million to cities and counties during the past five years from taxes and revenue collected largely from natural gas exploration.

The fund — administered by a state agency with no legislative oversight and originally intended to ease the impacts of drilling and mining — has instead fueled a public works spending spree across Colorado.

It's a fund state lawmakers set up 30 years ago to help energy-rich areas of the state cope with the effects of extraction and influx of workers on schools, housing, roads and landscapes.

The money also was to be used to help cushion the fall for local energy-based economies when drilling and mining activities ended.

But much of the money has not been spent for those purposes, a Rocky Mountain News investigation into the last five years of grants has found.

The revenue stream — which included $353 million in grants and $43.6 million in direct distributions — has become what one lawmaker called a "slush fund" and another referred to as "muddled and messed up."

According to the investigation:

Projects funded over the five-year period from 2002 to 2006 include 68 recreation centers, 27 museums and tourist attractions; 71 fire trucks; $6 million in downtown renovations; and $20 million for new town halls and other government buildings. The money also funded part of the salaries of 40 government interns and paid for 121 studies.

Gunnison bought a $150,000 telescope, Rocky Ford got a downtown parking lot, Conejos County received more than $300,000 to keep its tourist train solvent and Palisade built a whitewater park on the Colorado River.

Twenty-three counties with no active drilling or mining got about a fifth of the $353 million available through the grant process.

Pueblo County got more than $9 million, including funds to renovate downtown Pueblo. El Paso County received several grants based on the fact that pipelines run through the county, and Crowley County got almost $4 million because a railroad that carried coal once traversed through.

The state auditor recently found that only half the grants over the past five years went to the top 20 counties impacted by oil and gas exploration.

Another $43.6 million, distributed based on the number of energy workers living in each county, was given to cities and counties with no strings attached.

As a result, Denver got almost $300,000 for the oil company executives working in its downtown high-rises. Metro-area cities combined received $2.2 million.

"This has been such a slush fund, a cash cow," said state Sen. Chris Romer, D-Denver. "We've been giving away more cash and getting less done."

Present and past officials with the state Department of Local Affairs, which administers the grants, counter that the program has done a lot of good over the years.

"This is the last pot of money in state government that has some flexibility in it," said former DOLA Executive Director Michael Beasley. "I think it is one that has helped the last three governors meet critical needs while still being respectful for what the intent of the law is."

The money is given to cities and counties through DOLA's mineral impact fund, which was created in 1977. Each year, the fund receives half of the state's take in severance taxes and part of its mineral leasing royalties from federal lands in the state.

Cities and counties impacted by mining and drilling — even tenuously — can apply for loans or grants. The agency wastes no time spending it.

"We get that money out the door as quickly as possible," Charles Unseld, a top DOLA official, told lawmakers this summer.

The 30-year-old state law is vague about how the money can be spent, stipulating only that it be "used for the planning, construction and maintenance of public facilities and for the provision of public services."

State officials have interpreted that language broadly, creating competition among local jurisdictions for the funds.

"It was like controlling my kids in a candy store," said Beasley. "They're all really good people that have impacts."

A recent state audit took a more skeptical view, saying the department had not "taken advantage of the opportunity to use these grant funds to address the social and economic impacts of energy and mineral resource development in a cohesive manner."

In addition, the audit found that the committee overseeing the grants — made up of state and local officials — generally did not consider impacts from energy exploration as a prime reason for spreading the wealth.

Beasley said a succession of governors and DOLA officials have used the same approach to spending the money since the program began in the 1970s.

He said Gov. Roy Romer used it to fund day-care centers, while Gov. Bill Owens used it to beef up health care facilities in rural areas and improve emergency communication networks.

Some years, the amount of money distributed was relatively small. Five years ago, for example, the agency gave out $20 million in grants. But the energy boom and the meteoric rise in tax revenue saw the grants increase to $66 million the next year and $133 million last year.

The gold rush is clearly on.

Last year, the DOLA program gave out more money than Great Outdoors Colorado, the public school construction fund, the state historical fund and the two largest private foundations in Colorado combined.

Beasley said no one expected the amount of money in the fund to grow so fast.

"No one forecast that," he said. "The legislature didn't."

The result has been an explosion in projects receiving money, many with little or no connection to oil and gas exploration.

The top 16 counties in energy and mining production got only 55 percent of the impact funds, according to an analysis by the Colorado Legislative Council, while the rest of the state's 64 counties got the remaining 45 percent.

The Rocky's inquiry found that 23 counties with no active drilling and mining received 20 percent of the $353 million in grants distributed over the past five years.

Yuma County Commissioner Dean Wingfield said his county, which does have energy production, got $250,000 for a new jail and other grants for fire equipment, ambulances and hospital services, none of which were related to oil and gas impacts.

"It's just free money to them," Wingfield said of the receiving agencies.

Crowley County used its $3.6 million for a county office building, a new Sugar City town hall and a campaign to boost tourism.

Affluent Jefferson, El Paso and Douglas counties along the Front Range received a combined $5.8 million in grants simply because gas pipelines cross their borders.

About $300,000 of the Jefferson County money was used to help build a Young AmeriTowne center in Lakewood to teach fifth- and sixth-graders about free enterprise.

El Paso County spent $400,000 to spruce up Manitou Springs and another $245,000 for a well for a residential water district.

Pueblo County received more than $9 million in grants over the past five years even though there has been no mining or oil and gas production in the county.

DOLA justified the grants because the city of Pueblo is home to a steel mill and gas pipelines crisscross the county.

The money paid for part of the development of the Arkansas Riverwalk in downtown Pueblo, to replace boilers at the city's convention center and to build an aquatic playground.

An historic carousel in Burlington received a $155,000 grant in 2005 and the Nordic ski training facility in Steamboat Springs got $600,000 in 2002.

The carousel has figured large in legislative hearings as an example of what's wrong with the DOLA grant program.

"We can't go back to business as usual, funding carousels in non-mining areas," said state Sen. Josh Penry, R-Fruita.

Beasley, however, defended both projects.

He said leaders on the eastern plains identified the historic carousel as an economic development project to give the area, beset by drought and other natural disasters, a financial shot in the arm. They also raised private funds for the project.

As for Steamboat's Nordic Center, Beasley said, "They were trying to attract and retain that Olympic (training) sector of their economy."

But even as millions of dollars in energy tax money has been funneled into recreation centers, tourist attractions and economic development projects, cities and counties at the epicenter of the gas boom say they've had little help with battered roads, overcrowded schools and lack of adequate housing.

Chris Romer estimated that northwest Colorado needs an immediate infusion of at least $100 million to deal with the fallout from the surge in gas drilling.

The DOLA program, however, generally put a $300,000 limit on grants in 1999, later raising it to $500,000, and required cities and counties to match the money. That precludes use of the money for, to cite one example, expensive road repair projects, which can run into the millions.

La Plata County in southwest Colorado needs an estimated $45 million for road projects to keep pace in areas impacted by oil and gas development, said Karla Distel, La Plata's finance director.

Distel said the county has trouble finding matching funds even for small projects.

According to DOLA records, only about a fifth of the $350 million has gone to road projects over the past five years.

That could change. Legislators and public officials turned their attention to how the DOLA money has been spent during hearings this past summer.

"We wouldn't be here today if the grant program had been utilized for its intended purposes to address impacts," said Mesa County Commissioner Craig Meis, co-chairman of a legislative advisory committee on the severance tax.

As a result of legislative scrutiny, DOLA is revamping the program to concentrate more financial resources on parts of the state most impacted by drilling.

The agency also will drop the $500,000 grant limit and allow multimillion dollar grants for road programs. In addition, it is considering eliminating the matching funds requirements.

Still, some legislators think it may be too little, too late and want the money leveraged to pump $100 million or more into the areas hardest hit by the boom.

"Taking a $500,000 grant and turning it into a $5 million grant is a drop in the bucket," Romer told the agency during the hearings. "There is no fiscal discipline in anything we're talking about."

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