All hands are out for energy windfall

By Burt Hubbard, Rocky Mountain News (Contact)

Wednesday, December 12, 2007

Photo by Matt McClain

Gov. Bill Ritter speaking here before the annual winter conference of Colorado Counties Inc., will cast a long shadow over how the state deals with the millions coming from the energy boom.

Graphic by Michael Hall

Colorado's energy boom has grabbed the attention of state lawmakers.

Big time.

When the 2008 legislative session comes to a close in early May, legislators could be on their way to leveraging tax and royalty money from gas and oil drilling into more than $1 billion to pay for higher education, repair crumbling rural schools, prop up northwest Colorado communities in the boom's epicenter, and fix roads and bridges statewide.

"It's a very tempting source for everyone's pet projects," said Senate Minority Leader Andy McElhany, R-Colorado Springs.

Lawmakers will convene in January against the backdrop of the biggest energy bonanza in the state's history. They are saddled, however, with 30-year-old laws that govern the taxing of energy production - as well as the spending of those dollars - that never anticipated the current explosion in natural gas drilling.

Colorado now produces 6 percent of the nation's natural gas, a figure that is trending upward. And with a proven reserve of 16.6 trillion cubic feet, the state has about 8 percent of the total U.S. proven reserves.

Today's gas rush is the beginning of a window of opportunity that will be gone in a few decades as the drilling dries up and the tax revenue disappears. Proposals for taking advantage of the boom include:

* Using rising revenue from royalties on energy exploration on federal land to pay back bonds that would raise as much as $250 million for higher education building projects and $250 million for housing, schools and roads in northwest Colorado and other boom areas.

* Taking $30 million to $40 million in royalties from drilling, rentals and other income from state-owned lands to raise $500 million to fix crumbling rural schools.

* Raising the state's severance tax by 1.7 percentage points to help raise money each year to fix roads and bridges statewide.

* A potential ballot measure to cut in half the state tax credit energy companies get on the county property taxes they pay.

The outcomes of the proposals are very much up in the air.

Officials acknowledge that reaching agreement on how to share the wealth already is proving tricky.

Local governments besieged by an influx of wells and workers want a greater share of the tax money.

On the other hand, cities and counties not directly impacted by the drilling are reluctant to give up any of the millions of dollars they get every year from oil and gas taxes and royalties.

Legislators, the governor's office, local governments and special-interest groups have been holding behind-the-scenes conference calls and meetings to try to reach agreement on legislation.

Twelve months ago, few legislators were aware of the magnitude of the money flowing into the state from the boom, which took off in earnest in 2002, fueled by advances in technology. The state didn't even do forecasts until recently on how much money it would receive from federal royalties, even though the total now exceeds $100 million a year.

That's no longer the case. Today, the money is being discussed as a source to fix everything from roads to public schools to higher education to health care, as well as for initiatives dear to Gov. Bill Ritter such as building a new energy economy within the state.

"You've got a lot of pent-up demand," said House Speaker Andrew Romanoff, D-Denver. "I think a lot of people are eyeballing the severance tax and mineral lease dollars as one source of funding."

State severance taxes and royalties from drilling on federal and state lands are raising more than $350 million every year, and the amount is expected to climb as more and more wells come on line.

"You could see another $100 million (a year) in three or four years," said Sen. Gail Schwartz, D-Snowmass Village, who chaired an interim legislative committee that worked through summer and much of fall on how to best use the money.

So far, the committee's legislative centerpiece is a proposal that would overhaul the severance tax and federal mineral lease system for the first time since it was created in 1977.

"We want to create a system for the next 30 years," Schwartz said.

It would use part of the increase in the state's share of royalties from drilling on federal land to pay back bonds. That, in turn, could raise as much as $250 million for capital construction at the state's public universities and another $250 million to deal with the impacts of the energy boom on schools, roads and housing in energy impacted counties.

It also would set aside money each year from energy taxes and royalties for a permanent fund to help the state deal with the day the wells run dry.

Colorado is the only energy state in the Rocky Mountains without a protected permanent fund. Wyoming and New Mexico have multibillion-dollar funds, while Utah put one in place this year.

But not everyone is sold on revising the severance tax structure.

In early November, the association representing cities and counties in northwest Colorado passed a unanimous resolution condemning the proposal the interim committee spent its time developing.

It is now being revised in light of those objections.

"I need to make sure my counties are taken care of by way of receiving additional funds to mitigate the impacts they are facing," said Rep. Al White, R-Winter Park. "Until I can ensure they are happy, I won't be able to support anything that would divert money for other uses."

In addition, about half of the severance tax and federal mineral lease money now goes directly to cities and counties statewide in the form of grants and direct distributions.

They want to keep getting their share of the money.

"There is going to be a big table set for dinner," said Sam Mamet, executive director of the Colorado Municipal League. "We want to make sure we not only get a seat at the table, but get a nice dessert."

A separate proposal would tap into a different source of royalties to pump money into deteriorating rural schools.

Under the plan, the state would leverage $30 million to $40 million a year from exploration royalties, rentals and other income from state-owned lands to raise $500 million for rural school buildings, Romanoff said. The money now goes into the Public School Permanent Fund, which helps finance K-12 public education across the state.

"What we're trying to do in the case of K-12 capital is help these schools pay to patch themselves together in places where they can't do it on their own," Romanoff said.

School districts would need to match the state funds to the tune of about $400 million, he said.

Attempts to put a measure on the ballot to raise state severance taxes or reduce the generous tax credit given energy producers will probably also surface during the legislative session, Romanoff said.

Meanwhile, a transportation panel appointed by Ritter has recommended raising the severance tax 1.7 percentage points as part of a financing package to pay for $1.5 billion in yearly road work.

Colorado now has one of the lowest severances taxes in the Rocky Mountains, an effective rate of 1.9 percent - that is, the tax rate after all credit and deductions - compared with 2.5 percent for Utah and 5.5 percent for Wyoming.

Voters would have to approve an increase and White thinks that's a lost cause given what happened in California last year.

Voters there handily defeated a tax on oil production in the most expensive initiative campaign in California's history. The opposition hammered the proposal on the prospects of higher gasoline prices and bloated government bureaucracies.

"I need to remind you that California attempted it, and you know what California is like," White said. "I wouldn't be betting on it."

The California lesson is not lost on Ritter.

"Industry came out in a big way against it," Ritter said. "They spent $60 million defeating it."

The governor said talks with industry officials about changing the tax structure are already under way.

"I would like to get to a place where we have some consensus on how to go forward," he said.

Mamet's image of "a big table set for dinner" is apropos. By many estimates, that table could hold billions of dollars waiting to be devoured by competing diners.

The coming legislative session will go a long way toward determining which needs get fed or whether the status quo prevails.