The state of Colorado’s West Slope Basins are critical headwaters of the Colorado River and play a vital role in supporting Colorado’s local economy and natural environment. However, balancing the multi-sectoral water demands in the West Slope Basins is an increasing challenge for water managers. Internal variability - irreducible uncertainty stemming from interactions across non-linear processes within the hydroclimate system - complicates future vulnerability assessments. Climate change may exacerbate drought vulnerability in the West Slope Basins, with significant streamflow declines possible by mid-century. In this work, we introduce a novel multi-site Hidden Markov Model (HMM)-based synthetic streamflow generator to create an ensemble of streamflows for all six West Slope Basins that better characterizes the region’s hydroclimate and drought extremes. We capture the effects of climate change by perturbing the HMM to generate a climate-adjusted ensemble of streamflows that reflects plausible changes in climate. We then route both ensembles of streamflows through StateMod, the state of Colorado’s water allocation model, to evaluate spatially compounding drought impacts across the West Slope basins. Our results illustrate how drought events emerging from the system’s stationary internal variability in the absence of climate change can have significant impacts that exceed extreme conditions in the historical record. Further, we find that even relatively modest levels of plausible climate changes can cause a regime shift where extreme drought impacts become routine. These results can inform future Colorado River planning efforts, and our methodology can be expanded to other snow-dominated regions that face persistent droughts.