State Receipt, Disbursement, Volatility (and Near Term Forecasts) for State Severance Tax and Federal Mineral Lease Proceeds to Local Governments

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1 State Receipt, Disbursement, Volatility (and Near Term Forecasts) for State Severance Tax and Federal Mineral Lease Proceeds to Local Governments

2 Outline Who We Are State Disbursement of Severance Tax and FML to Local Governments Energy and Mineral Impact Assistance Grants Direct Distribution Near Term Forecasts Volatility of Severance Tax Resources

3 Department BAA DPT of Local Affairs DLG DOH DOLA is the agency charged with assisting local governments across the State through four Divisions and a number programs. Division of Local Government Division of Property Taxation Division of Housing Board of Assessment Appeals Kah-Wai Lin

4 Division of Local Government DLG works across all of our work units to holistically provide support for local government priorities across Colorado Financial Assistance State Demography Office Community Development Office Regional Field Services Local Government Technical Assistance Financial Assistance Field Team Community Development Demography Technical Assistance

5 State Severance Tax Colorado Energy Office* Total State Severance Tax Revenue SB *** 50% State Trust Fund Department of Natural Resources 50% Local Impact Fund Department of Local Affairs 50% Perpetual Fund 50% Operational Account 70% Local Government Grant Projects 30% Direct Distribution CDPHE Small Communities Water and Wastewater Grants** *Annual $1.5 million from total gross receipts to Innovative Energy Fund through July ** Up to $10 million after $50 million to Perpetual Fund (CRS (2)(a)(III)). ***SB the first $20M to general fund upon effective date of bill.

6 Federal Mineral Lease Proceeds 49% to Colorado 51% to Federal Government NonBonus Includes Rents and Royalties (Non-Oil Shale) Bonus (Non-Oil Shale) Oil Shale 48.3% State Public School Fund FY15 Cap: $76.0M Spillover Oil Shale Trust Fund 10% Colorado Water Conservation Board FY15 Cap: $17.7M 1.7% Higher Education Federal Mineral Lease Revenue Fund Cap: $50M Spillover 50% Higher Education Maintenance and Reserve Fund School District Direct Distribution (Dept. of Local Affairs) FY15 Cap: $4.1M SB * 40% Local Impact Program (Dept. of Local Affairs) 50% DD to Counties, Towns, FML Districts 50% Grants to Local Governments 50% Local Government Permanent Fund *$3.25M transferred from DOLA to DPS in FY15 and FY16 for grant program in Division of Fire Prevention and Control.

7 Energy and Mineral Impact Assistance Fund Program

8 Energy and Mineral Impact Competitive Grant Awards by Project Type July 2012 December 2014 ($150,632,084) Road / Street 26% Sewer 12% Public Safety 10% Public Facilities 17% Planning and Community Development 10% Water 17% Alternative Fuels & Alternative Energy 2% Broadband 1% Community Recreation Drainage 1% 2% Health and Human Services 2%

9 Direct Distribution of Severance Tax Direct Distribution Grants and Loans County Pool Allocation Based on the statewide share of the following factors: Colorado Employee Residence Reports (CERR) Mining and Well Permits Mineral Production Subcounty Distribution: Distribution of the county pool to county/municipalities based on countywide share of the following factors: Colorado Employee Residence Reports (CERR) Population Road Miles

10 Direct Distribution of Severance Tax County Pool Factor * Colorado Employee Residence Reports 40% 40% 40% Mining and Mineral Permits 30% 30% 30% Mineral Production 30% 30% 30% * Each factor must be 30%, with remaining 10% at discretion of Executive Director. Subcounty Pool Factor Population 34% 34% 34% Colorado Employee Residence Reports 33% 33% 33% Road Miles 33% 33% 33%

11 Direct Distribution of FML Proceeds Direct Distribution Grants and Loans County Pool Allocation Based on the statewide share of the following factors: Colorado Employee Residence Reports (CERR) Federal Mineral Lease Generated Subcounty Distribution: Distribution of the county pool to county/municipalities based on countywide share of the following factors: Colorado Employee Residence Reports (CERR) Population Road Miles

12 Direct Distribution of FML Proceeds County Pool Factor Colorado Employee Residence Reports* 35% 35% 35% FML Revenue Generated 65% 65% 65% *35% maximum (C.R.S (5.4)(c)) Subcounty Pool Factor Population 34% 34% 34% Colorado Employee Residence Reports 33% 33% 33% Road Miles 33% 33% 33%

13 Direct Distribution of FML Proceeds, School Districts Direct Distribution County Pool Allocation Based on the statewide share of the following factors: Colorado Employee Residence Reports (CERR) Federal Mineral Lease Generated Subcounty Distribution: Distribution of the county pool to school districts based on countywide share of: Pupil Count

14 State Severance Tax Forecasts FY14-15 FY15-16 FY16-17 Legislative Council $342.6 $125.2 $225.2 Office of State Planning and Budgeting % Change 27.5% -63.4% 79.9% $369.1 $141.8 $187.3 % Change 37.4% -61.6% 32.1% Sources: Focus Colorado: Economic and Revenue Forecast, March 18, 2015, Colorado Legislative Council Staff Economics Section Governor s Revenue and Economic Forecast, March 2015, Office of State Planning and Budgeting

15 Federal Mineral Lease Proceeds Forecasts FY14-15 FY15-16 FY16-17 Legislative Council $173.2 $168.0 $174.6 % Change -0.2% -3.2% 3.9% Office of State Planning and Budgeting $163.2 $156.8 $165.8 % Change -6% -3.9% 5.7% Sources: Focus Colorado: Economic and Revenue Forecast, March 18, 2015, Colorado Legislative Council Staff Economics Section Governor s Revenue and Economic Forecast, March 2015, Office of State Planning and Budgeting

16 Why Is Severance Tax So Variable? Severance Tax is collected on the production of coal, metals, and oil & gas. Oil and gas provides most severance tax revenue and is the source of most of the variability. Coal and metals provide far less severance tax revenue. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Severance Tax Revenue By Type FY09-10 FY10-11 FY11-12 FY12-13 FY13-14 Oil & Gas Coal Metals

17 Why Is Severance Tax So Variable? 120% Annual Percent Change in Severance Tax Collections 100% 80% 60% 40% 20% 0% -20% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17-40% -60% -80% -100% State Fiscal Year Sources: Colorado Department of Revenue Annual Reports, Severance Tax Collections Office of State Planning and Budgeting, March 2015 Forecast

18 Why Is Severance Tax So Variable? Production Quantity - Small Well Exemptions Quantity Govt Owned production *Oil or Gas Price - Processing and Manufacturing (TPM) Costs * Tax Rate - Property Tax Credit

19 Production Value and AV Property Tax Revenue Why Is Severance Tax So Variable? The lag in administration of property taxes produces the gap between current production value (blue line) and the property taxes owed on production in that same year, which is based on production value two years prior (white line). $2,500 $2,000 $1,500 $1,000 $500 $0 Example Oil and Gas Production, Assessed Value and Property Tax Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Production Value AV Prop Tax Rev on mills $80 $70 $60 $50 $40 $30 $20 $10 $0

20 Why Is Severance Tax So Variable? Variability in gross severance tax revenue is triggered by swings in natural gas and oil prices, with the property tax credit from production two years ago. This results in a volatile tax rate on a volatile tax base Production Production Production Production Production Production Production Severance Tax Severance Tax Severance Tax Severance Tax Severance Tax Severance Tax Severance Tax Property Tax Property Tax Property Tax Property Tax Property Tax Property Tax Property Tax

21 What Variability Means for Local Governments Energy Impact Grant cycles smooth the peaks and valleys. Use caution when budgeting uses of Direct Distributions. o Recommended Budget Practices, National Advisory Council on State and Local Budgeting o Principle 2, Element 4.4a: Evaluate the use of unpredictable revenues. o

22 What Variability Means for Local Governments o Consider how significant variation has potential to affect financial outlook and impact on services. o Take into account unpredictable nature. o Identify expected degree of volatility. o Decide in advance tentative actions to be taken in the event of revenue higher or lower than expected. o Define how unpredictable revenues may be used. o Contingency planning becomes increasingly necessary as size of revenue source increases. o Publicly discuss in budget decision making.

23 Resources dola.colorado.gov o DOLA Regional Managers dola.colorado.gov/impact o Annual Reports and Funding Decisions o Program Guidelines dola.colorado.gov/directdistribution o Program Guidelines o Payment Detail dlg.helpdesk@state.co.us

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