An April 2016 Colorado Supreme Court decision requires Colorado to refund millions of dollars in severance taxes and to broaden the deductions that oil and gas companies can claim against their severance tax liability. This will mean cuts to the Department of Natural Resources budget, which includes funding for the Colorado Water Conservation Board (CWCB), especially over the next year.
Back-dated refunds could reach $125 million, according to Department of Revenue estimates, and will likely come in a torrent this year. At the same time, future severance tax revenues are expected to decline by 12.5 percent as a result of ongoing refund requests. Back-dated refunds will be paid out of the state’s general fund and restricted money. That restricted money includes $10 million from the CWCB’s operational account that would normally go toward the Water Supply Reserve Account (WSRA) and other grantmaking for regional water projects but is instead being tapped to help pay the refunds.
The total dollar amount invested in the WSRA changes annually depending on severance tax income—it doesn’t always receive a full $10 million—but there will likely be no money coming into the account this year. If that is the case, according to CWCB public engagement specialist Mara Mackillop, the WSRA will have just $2.3 million—its current balance—to work with for the new fiscal year, though each of the state’s river basins could have a balance in its account. “They have to use that money wisely and prioritize their projects because that’s all they get until July 1, 2017,” Mackillop says.
That is unless, of course, some of the $10 million of restricted money reserved to pay back those refunds isn’t needed. The uncertainty stems from not knowing how many refunds will be requested or how robust the general fund will be next year. “Let’s say that, unexpectedly, economic activity picks up or slows down and that translates into $100 million, plus or minus, into the general fund,” says Bill Levine, budget director with the Colorado Department of Natural Resources. “That will greatly factor into whether or not the general fund will be able to pay all of the refunds.” General fund money comes from sales and income tax. As the state’s largest fund, it goes toward K-12 education, Medicaid, corrections, and other large programs. Even under the best-case scenario, the WSRA and other programs that depend on severance tax funding might be funded at just 16 percent this year, Levine says.
The CWCB is studying a potential $10 million annual transfer from its own reserve to the WSRA. That would ensure that the fund has $10-20 million available annually, with anything above $10 million fluctuating with severance tax revenue. The proposal will include reforms to the WSRA and will have to be approved by the CWCB board and the state legislature before it’s actualized. If approved as presented, the funds would be available July 1, 2017. “Right now it’s just a conceptual plan,” Mackillop says. “If this funding plan doesn’t get approved, there’s $0 coming into the WSRA July 1 this year, and there could be nothing coming in July 1 of 2017. We don’t know what the future will look like.”