Direct Distribution: Severance Tax and Federal Mineral Lease Program Guidelines

State Severance Tax Direct Distribution
Federal Mineral Lease Direct Distribution – Municipalities And Counties
Federal Mineral Lease Direct Distribution – School Districts
Direct Distribution Factors
Appendix A: Direct Distribution Calendar
Appendix B: Direct Distribution Terms
Appendix C: Memorandum of Understanding Alternative Option Form (PDF download)

State Severance Tax Direct Distrubution

Prior to August 2008, severance tax funds were distributed to counties and municipalities based on the count of residents employed in mineral extraction. House Bill 08-1083 established the additional factors of mining and well permits, mineral production, population and road miles to determine how direct distribution funds are allocated to municipalities and counties. The Department of Local Affairs first implemented the changes as a result of House Bill 08-1083 for the August 2009 direct distribution. The statutory deadline for the Department of Local Affairs to distribute severance tax funds to local governments is August 31st of each year.

Local Government Severance Tax Fund

Fifty percent of the State’s receipts from the severance tax on minerals and mineral fuels are credited to the Local Government Severance Tax Fund (C.R.S. 39-29-108(2)). Under C.R.S. 39-29-110(1)(b), the Department of Local Affairs is directed to allocate 70% of these funds to local governments through discretionary grants and loans under the Energy and Mineral Impact Assistance Program. The remaining 30% is distributed directly to municipalities and counties economically and socially impacted by mineral production based on certain measurable factors determined by the General Assembly. Local governments shall use direct distribution funds from the local government severance tax fund for capital expenses and provision of services (C.R.S. 39-29-110(1)(c)(V)).

County Allocation

Three factors determine the allocation of severance tax revenue to each county pool for further distribution (C.R.S. 39-29-110(1)(c)(I)).

• The proportion of residents in the county employed in mines, crude oil, natural gas, or oil and gas operations, as reported in Colorado Employee Residence Reports, to the total employed statewide.
• The proportion of mine and well permits issued in a county to the total issued in the state.
• The proportion of mineral production within a county to the total production in the state.

Factor Weightings for County Allocation

For fiscal years 2010 and thereafter, statute directs each of the Colorado Employee Residence Reports, mining and well permits and mineral production factors to each be weighted at least 30%. The Executive Director of the Department of Local Affairs, in consultation with the Energy Impact Assistance Advisory Committee, “shall establish guidelines that set forth the factor or factors under which the remaining ten percent shall be weighted” (C.R.S. 39-29-110(1)(c)(II)(B)). By June 1st of each year the committee will consider the factor or factors for this discretionary weighting and make a recommendation to the Executive Director. After consultation with the Energy and Mineral Impact Advisory Committee, the Executive Director annually sets the weights of the Colorado Employee Residence Reports, mining and well permits and mineral production factors for the current year’s August direct distribution.

Subcounty Distribution

Once the Severance Tax direct distribution funds are divided into county pools, they are then distributed to the county government and the municipalities contained therein. Statute directs the Department of Local Affairs to distribute each county pool based on three factors (C.R.S. 39-29-110(1)(c)(III)).

• The proportion of residents in unincorporated areas or municipalities employed in mines, crude oil, natural gas, or oil and gas operations as reported in Colorado Employee Residence Reports (CERR) to the total employee residents in the county.
• The proportion of the population of unincorporated areas or municipalities to the total county population.
• The proportion of road miles in unincorporated areas or municipalities to the total road miles in the county.

Factor Weightings for Subcounty Distribution

For the allocation of each county pool to municipalities and counties, statute requires the Executive Director of the Department of Local Affairs to consult with the Energy and Mineral Impact Assistance Advisory Committee to determine how the employee residence report, population and road mile factors are weighted. The Executive Director, in consultation with the Energy and Mineral Impact Assistance Advisory Committee, will determine factor weightings by June 1st of each year. After consultation with the Energy and Mineral Impact Advisory Committee, the Executive Director annually sets the weight for the population, Colorado Employee Residence Reports and road miles factors for the current year’s direct distribution.

Alternative Subcounty Distributions

The subcounty factor weightings determined by the Executive Director shall be uniform across the state, except that C.R.S. 39-29-110(1)(c)(IV)
allows for two instances for an alternative subcounty distribution.

• Memorandum of Understanding. The Executive Director may accept a memorandum of understanding (MOU) between a county and all of the municipalities contained therein directing an alternative distribution of the county pool. Any MOU from a county government and all municipalities therein must be presented to the Executive Director for review by June 30th preceding each August direct distribution. Therefore, an MOU in effect for multiple years must be annually signed and submitted to the Executive Director. Each MOU shall be signed by the chief elected official of each local government. The Energy and Mineral Impact Assistance Advisory Committee will review any MOUs submitted and make a recommendation to the Executive Director during the month of July. Any MOU shall prescribe one of the following:
  • An alternate weighting of the three factors: Colorado Employee Residence Reports, population and road miles, or;
  • Specific percentages of the county pool to be allocated among each municipality and the county, as established by a locally defined method.
• Executive Director Alternative Distribution. After consultation with the Energy and Mineral Impact Assistance Advisory Committee, the Executive Director of the Department of Local Affairs may establish an alternative weighting of the employee, population and road miles factors for a specific county pool, “in order to more fairly distribute the gross receipts among the county and all municipalities contained therein” (C.R.S. 39-29-110(1)(c)(IV)(B)). The Executive Director will set any alternative distribution weightings and notify affected local governments prior to the August 31st distribution.

Federal Mineral Lease Direct Distribution – Municipalities And Counties

Under the Federal Mineral Leasing Act, approximately 49% of those rentals and royalties from mineral production on federal lands are returned back to the state of origin for planning, construction and maintenance of public facilities in areas socially and economically impacted by the mineral leasing development that occurs on federal lands. The General Assembly has determined that a portion of the state’s share of these federal royalty payments are to be directly distributed back to those counties, municipalities and school districts impacted by mineral production on federal lands. Under Senate Bill 08-218, the General Assembly established that certain measurable criteria quantify the impacts of mineral leasing development, and directs the Department of Local Affairs to use these factors to annually allocate federal mineral lease revenues to local governments. The annual distribution of federal mineral lease revenue shall occur by August 31st.

County Allocation

Two factors determine the allocation of federal mineral lease revenue to each county pool for further distribution (C.R.S. 34-63-102(5.4)(c)(I)).

• The proportion of residents in the county employed in mineral extraction as reported in Colorado Employee Residence Reports to the total employed statewide.
• The proportion of the moneys credited to the mineral leasing fund generated in the county to the total generated statewide.

Factor Weightings for County Allocation

For the county pool allocation, statute requires the Executive Director to establish guidelines to determine the weighting of the employee residence report and federal mineral lease revenue generated factors, but gives discretion provided that the employee residence report factor is not weighted more than 35%. Statute also requires that these guidelines weigh the employee residence report and federal mineral lease revenue generated factors “in a manner that most accurately estimates the absolute and relative impacts of production of energy resources on federal lands”. The Executive Director, in consultation with the Energy and Mineral Impact Assistance Advisory Committee, will determine factor weightings by June 1st of each year. After consultation with the Energy and Mineral Impact Advisory Committee, the Executive Director annually sets the factor weights for the Colorado Employee Residence Reports and the county proportion of federal mineral lease revenue generated for the annual direct distribution.

Subcounty Distribution

Once the county pool allocation of federal mineral lease revenue is determined by the Department of Local Affairs using statutory criteria, statute further establishes a process to determine how the county pools are distributed to counties and municipalities. Three factors determine the subcounty allocation to each municipality and the county government (C.R.S. 34-63-102(5.4)(c)(II)).

• The proportion of residents in the unincorporated areas or municipalities employed in mineral extraction to the total employed in the county.
• The proportion of the population of unincorporated areas or municipalities to the total county population.
• The proportion of road miles in unincorporated areas or municipalities to the total road miles in the county.

Factor Weightings for Subcounty Distribution

For the subcounty pool distribution, statute requires the Executive Director of the Department of Local Affairs to consult with the Energy and Mineral Impact Assistance Advisory Committee to determine how the employee residence report, population and road mile factors are weighted “in a manner that most accurately estimates the absolute and relative impacts of production of energy resources on federal lands”. The Executive Director, in consultation with the Energy and Mineral Impact Assistance Advisory Committee, will determine factor weightings by June 1st of each year. After consultation with the Energy and Mineral Impact Advisory Committee, the Executive Director annually sets the factor weights for population, Colorado Employee Residence Reports and road miles for the current year’s August direct distribution.

Alternative Subcounty Distributions

The subcounty factor weightings determined by the Executive Director shall be uniform across the state, except that C.R.S. 34-63-102(5.4)(c)(IV) allows for two instances for an alternative subcounty distribution.

• Memorandum of Understanding. The Executive Director may accept a memorandum of understanding (MOU) between a county and all of the municipalities contained therein directing an alternative distribution of the county pool. Any MOU from a county government and all municipalities therein must be presented to the Executive Director for review by June 30th preceding each August direct distribution. Therefore, an MOU in effect for multiple years must be annually signed and submitted to the Executive Director. Each MOU shall be signed by the chief elected official of each local government. The Energy and Mineral Impact Assistance Advisory Committee will review any MOUs submitted and make a recommendation to the Executive Director during the month of July. Any MOU shall prescribe one of the following:
  • An alternate weighting of the three factors: Colorado Employee Residence Reports, population and road miles, or;
  • Specific percentages of the county pool to be allocated among each municipality and the county, as established by a locally defined formula.
• Executive Director Alternative Allocation. After consultation with the Energy and Mineral Impact Assistance Advisory Committee, the Executive Director of the Department of Local Affairs may establish an alternative weighting of the employee, population and road miles factors for a specific county pool, “in order to more fairly distribute the gross receipts among the county and all municipalities contained therein” (C.R.S. 34-63-102(5.4)(c)(IV)(B)). The Executive Director will set any alternative distribution weightings and notify affected local governments prior to the August 31st distribution.

Federal Mineral Lease Direct Distribution – School Districts

Senate Bill 08-218 (C.R.S. 34-63-102(5.4)(e)) directs that beginning with the 2009 direct distribution, the Department of Local Affairs shall annually distribute 1.7% of the federal mineral lease revenue, up to a maximum cap which inflates at 4% per year. The statute directs the Executive Director of the Department of Local Affairs to distribute to school districts at the same time as the annual federal mineral lease distributions to counties, by August 31st.

County Allocation

Pursuant to C.R.S. 34-63-102 (5.4)(e)(III), the allocation of county pools for the school district allocation shall be determined in the same proportion as the county pools for the municipality and county federal mineral lease allocation. Therefore, the county pools for the school district distributions are determined based on the same two factors and weightings.

• The proportion of residents in the county employed in mineral extraction as reported in Colorado Employee Residence Reports to the total employed statewide. (C.R.S. 34-63-102(5.4)(c)(I)(B))
• The proportion of the total federal mineral lease revenue generated in the state determine the allocation of moneys for each county allocation. (C.R.S. 34-63-102(5.4)(c)(I)(A))

The factor weights for Colorado Employee Residence Reports and the county proportion of federal mineral lease revenue generated are statutorily required to be the same as set for the county and municipal direct distribution. (C.R.S. 34-63-102(5.4)(e))

Subcounty Distribution

In the event of more than one school district in a county, “the distribution to each school district shall be the percentage that the most recent funded pupil count...bears to the most recent total funded pupil count for all pupils attributable to the county”. (C.R.S. 34-63-102 (5.4)(e)(III))

Direct Distribution Factors

Colorado Employee Residence Reports

Both federal mineral lease and severance tax direct distributions use a count of municipal and county residents employed in mineral extraction as one of the factors to determine the allocations to and within counties. For both distributions, the county pools are in part, determined by the number of employees residing in the county as a proportion of the total number in the state. Similarly, both severance tax and federal mineral lease distributions use the proportion of employees reported in a municipality or unincorporated area as a proportion of the total number residing in the county to determine the subcounty distribution. For the Severance Tax distribution, statute directs the Department of Local Affairs to require certain reporting parties, reporting withholding of income or filing declarations under the Severance Tax statute, to annually report the municipal or unincorporated county residences of employees. The Department of Revenue provides a list of these reporting parties to the Department of Local Affairs pursuant to a 2009 memorandum of understanding and House Bill 09-1148. The employee residence reporting by these parties is required pursuant to C.R.S. 39-29-110(1)(d)(I). For the federal mineral lease direct distribution, C.R.S. 34-63-102 directs the Department of Local Affairs to use the same employee residence count determined through the employee residence reporting process in the severance tax statute.

Reporting Process

The Colorado Employee Residence Reports are made available to reporting parties in February of each year. Reporting parties are statutorily required to file their reports on or by April 30th. Reporting parties file their reports electronically through the CERR Filing Portal located on DOLA’s Direct Distribution website.

Penalties

Pursuant to C.R.S. 39-29-110(1)(d)(II)(C), in the event of failure to report, DOLA shall send each reporting party written notice of failure to file a Colorado Employee Residence Report. If the party fails to file the report within forty-five days of receipt of the notice, there shall be levied and collected a penalty for the failure in the amount of fifty dollars for each day, or portion thereof, during the failure period. DOLA assesses and collects the penalty fee from those reporting parties who fail to file. Collected penalties are added to the severance tax direct distribution funds the following year.

DOLA Employee Address Data Analysis

After the Department of Local Affairs receives Colorado Employee Residence Reports electronically submitted by reporting parties, the department will validate, analyze and “mark up” initial Reporting Party data submissions in order to present a clean, auditable data set to Local Governments for review and challenges. This includes proactively identifying and proposing resolutions for improper or incomplete addresses, jurisdictions, place names, job titles, and/or other potential ambiguities in the reporting party submitted data.

Local Government Review and Appeals

Beginning mid-June, Local Governments may download an excel file with all employee address attributions to determine if any of the associated addresses require a Challenge. Local governments are encouraged to review the data based upon their knowledge of industry employees residing in their jurisdiction. Challenges must be submitted through the Local Government Challenge Portal, located on DOLA’s Direct Distribution website, by mid-July, and must include supporting documentation, such as appropriate maps, property tax records, or letters of agreement from both the county and the municipality. DOLA staff will review the challenges and “cure” such inaccuracies as can be determined.

County of Origin Federal Mineral Lease Revenue

Statute directs the Department of Local Affairs to allocate federal mineral lease revenue to county pools in part based on “the proportion of the total amount of moneys credited to the mineral leasing fund that is derived from each of the respective counties”. Pursuant to a 2009 memorandum of understanding between the Department of Local Affairs and the State Treasurer, the State Treasurer provides the Department of Local Affairs with electronic data from the Mineral Management Service on a quarterly basis. The data include revenue deposited into the Colorado Mineral Leasing Fund and the county of origin of the revenue. The data are analyzed by the Department of Local Affairs staff on a quarterly basis and the fiscal year’s information is aggregated to determine this factor for each August distribution.

Mineral Production

Statute directs the Department of Local Affairs to allocate State severance tax revenue to county pools in part based on “the proportion of the overall quantity of mineral production within a county to the total overall quantity of production in the state”. Within the Department of Natural Resources, oil and gas production information by county is available from the Colorado Oil and Gas Conservation Commission, and coal production information by county is available from the Division of Reclamation Mining and Safety. Metals mining production assessment information is available from the Division of Property Taxation in the Department of Local Affairs. Because production data are only available in differing units of measure depending on the mineral type, the Department of Local Affairs staff, with consultation of the Executive Director and the Energy and Mineral Impact Assistance Advisory Committee, converts all types of production into a common index. The department calculates the index using the same methodology presented to the 2007 Interim Committee to Study the Allocation of Severance Tax and Federal Mineral Lease Revenues and its working group. For calculation of a production factor, the Department of Local Affairs uses the most recently available calendar year’s data available and provided by the Department of Natural Resources by the first week of July pursuant to a 2009 memorandum of understanding. Production assessment information for metals will be provided from the Division of Property Taxation for the most recently available tax collection year.

Mining and Well Permits

Statute directs the Department of Local Affairs to allocate severance tax revenue to county pools in part based on “the proportion of the mine and well permits issued in a county to the total number of such permits issued in the state”. The Colorado Department of Natural Resources has permit data available by county. Within the Department of Natural Resources, oil and gas permit figures from the Colorado Oil and Gas Conservation Commission and mine data are available from the Division of Reclamation Mining and Safety. Permit information for mines and wells is converted into a common index with consultation from the Executive Director and the Energy and Mineral Impact Assistance Advisory Committee. The department calculates the index using the same methodology presented to the 2007 Interim Committee to Study the Allocation of Severance Tax and Federal Mineral Lease Revenues and its working group. For calculation of the permit factor, the Department of Local Affairs uses the most recently available calendar year’s data available and provided by the Department of Natural Resources by the first week of July.

Population

Statute directs the Department of Local Affairs to allocate federal mineral lease and severance tax revenue at the subcounty level in part based on population. For the direct distribution of both federal mineral lease (C.R.S. 34-63-102(5.4)(c)(II)(B)) and severance tax (C.R.S. 39-29-110(1)(c)(III)(B)) funds are in part allocated based on, “the proportion of the population in any such county’s unincorporated area or in any such municipality within the county to the total population in the county”. For this factor, the statute directs the Department of Local Affairs to use the population data “reported in the most recently published population estimate from the State Demographer appointed by the Executive Director of the Department of Local Affairs”. Depending on when the State Demographer publishes the annual population estimates, the most recently available data may be from the previous calendar year than is available for other factors.

Road Miles

Statute directs the Department of Local Affairs to distribute Federal Mineral Lease and State Severance Tax revenue at the subcounty level in part based on road miles. For the direct distribution of both federal mineral lease (C.R.S. 34-63-102(5.4)(c)(II)(C)) and severance tax (C.R.S. 39-29-110(1)(c)(III)(C)), “the proportion of road miles in any such county’s unincorporated area or in any such municipality within the county to the total road miles in the county”. For this factor, statute directs the Department of Local Affairs to use the road mile data “certified by the Department of Transportation to the State Treasurer pursuant to Sections 43-4-207 (2) (d) and 43-4-208 (3), C.R.S.”. Pursuant to a memorandum of understanding between the Department of Local Affairs and the State Treasurer, the State Treasurer annually provides road miles to the Department of Local Affairs by August 10th.

Pupil Count

Statute directs the Department of Local Affairs to allocate federal mineral lease for school districts into county pools based on Colorado Employee Residence Report information and the county of origin of federal mineral lease revenue generate. The statute then directs the department to allocate funds to school districts within each county pool based on the most recent pupil count as determined by the Public School Finance Act of 1994, or C.R.S. 22-54-101, et seq. Pursuant to a 2009 memorandum of understanding between the Department of Local Affairs and the Department of Education, the Department of Education annually provides school district pupil counts by county to the Department of Local Affairs.

Appendix A: Direct Distribution Calendar
Appendix B: Direct Distribution Terms