Impact fee revenues dip in 2019

Summary:  The Pennsylvania Public Utility Commission (PUC) recently issued a news release detailing the 2020 distribution of impact fee revenue collected from 2019 activity.  While the amounts distributed are less than last year, owing to lower natural gas prices and aging wells, the funds will help the counties and municipalities receiving them.

___________________________________________________________________________

In Pennsylvania, the impact fee is a tax imposed on unconventional gas wells. Act 13 of 2012 instituted the impact fee, in part, to compensate local governments for the degradation of infrastructure stemming from natural gas extraction and its related activities. The fee is based on the average annual trading price of natural gas and the age of the gas well. Over the past nine years, from 2011 to 2019, a total of $1.9 billion in impact fee revenue has been distributed to local governments throughout the state.

The impact fee revenue totaled $200 million for 2019. The dissemination of the revenue as required by Act 13 is as follows: $109 million has gone to county and municipal governments directly affected by drilling; the Marcellus Shale Legacy Fund received $72 million, which funds environmental, highway, water and sewer projects, rehabilitation of greenways, and other projects throughout Pennsylvania; and state agencies have received $18.3 million as stipulated by Act 13.

The 2019 amount is $42.6 million lower than 2018—the highest year since the impact fee was imposed—due in large part to the decrease in the average price of natural gas. In 2019 the average trading price of natural gas was $2.63 per thousand cubic feet (Mcf) versus 2018’s $3.09 per Mcf—a drop of 15 percent.  

The age of the well is also a determinant.  The fee matrix (see Policy Brief, Vol. 12, No. 11) looks at both the natural gas price and age of the wells to set that year’s impact fee for each well.  Wells are charged the most in the first three years, when they are presumably most productive.  That fee then drops by about half for years four through 10 and then by half again for years 11 through 15.  While no well has yet reached 11 years of age (the first year is set at 2011), those drilled from 2011 through 2015—8,790 of the 10,155 eligible wells in 2019—are at least four years old and their impact fees have been reduced as per the Act 13 matrix. 

All counties receive impact fee money from the Marcellus Shale Legacy Fund. The minimum is $25,000 per county based on the fund balance. Three counties—Fulton, Juniata, and Montour—received only the minimum from the Marcellus Shale Legacy Fund in 2019 and were not entitled to any other impact fee funds.

While Philadelphia County has no wells it still received a total of $1.3 million in 2019 impact fees based on its population.

Among all counties, Washington County received the most revenue from the impact fee. It garnered $6.6 million in 2019 a 21 percent decrease from 2018. In the rest of Pittsburgh’s seven-county Metropolitan Statistical Area (MSA), Allegheny County’s   $1.5 million was down 17 percent from 2018; Armstrong County’s $520,478 was down 15 percent; Beaver County’s  $634,058 was lower by 13 percent;  Butler County’s  $2.1 million was 31 percent lower; Fayette County, at $1 million, was lower by 13 percent and Westmoreland County’s  $1.1 million was off by 27 percent.

Statewide, the number of impact fee-eligible wells increased by 595, going from 9,560 in 2018 to 10,155 in 2019.  Washington County has the highest fee-eligible well count (1,745) in the commonwealth with 90 new wells in 2019. Butler County ranked seventh statewide (533). Every county in the Pittsburgh MSA posted an increase in wells in 2019 except Westmoreland County where the number decreased by six wells to stand at 234.

Allegheny County added 20 wells for a total of 150. Armstrong County raised their count by 14 to total 126 wells.  Beaver County added 21 wells to 134. Butler County added 33 to reach 533.  Fayette County’s number rose by 29 to 253.

The PUC provides guidelines as to how counties and municipalities who receive impact fee money from the Unconventional Gas Well Fund can spend it. The money must be allocated to one or more of 13 designated categories.  They include public infrastructure construction; emergency preparedness/public safety, environmental programs; social services and a capital reserve fund. All counties and municipalities that receive impact fees from this fund must submit a report indicating which of the 13 categories funds were spent. There is no requirement that revenues are to be spent in the calendar year received but can be placed in the capital reserve fund to be used in any of the eligible categories at a later date.

Municipalities also receive funds from the impact fee if they have a well within their borders or are in a county with wells.  Amwell Township in Washington County stands out in the Pittsburgh MSA because it ranked fourth in the state for highest municipal distribution ($793,670). It also ranked seventh in the state for municipal well counts (175).

Forward Township located in Allegheny County had 63 wells and received the highest distribution ($241,936) in the county. The City of Pittsburgh does not have any wells.  Nonetheless, it received an allocation of $47,544 in 2019 impact fees.

The impact fee distributions are beneficial to local governments and this year they will be especially welcomed as an infusion for the government coffers hit by lower tax revenue due to the coronavirus’s impact. It is important to emphasize that the economic impact of this industry goes far beyond the payment of the impact fee. It has added direct jobs at the drilling companies themselves as well as jobs created at industries providing support and equipment to the drillers.   Indeed, the state government must avoid any temptation to over-tax the gas industry that is providing so much to the state’s economy currently and to its potential for future growth.

Time to tighten Act 13 reporting

Summary: In February 2012, Act 13 was adopted not only to establish an impact fee for drillers in Pennsylvania’s shale formations, but also to set up rules governing both the allocation of the fee revenue to local and state government as well as to specify how the money can be used by the municipalities and counties receiving the funds.  All are required to report to the Pennsylvania Public Utility Commission how Act 13 proceeds have been spent.  However, not all municipalities are diligent in meeting those reporting requirements.

______________________________________________________________________

From 2011 to 2016 municipalities in the seven-county Pittsburgh Metropolitan Statistical Area (MSA)—Allegheny, Armstrong, Beaver, Butler, Fayette, Washington and Westmoreland counties— received $104,623,116 from the impact fee collections. While “fracking” has received plenty of attention, little attention has been paid to local accountability regarding Act 13 revenue usage. This Brief will look at municipalities in the Pittsburgh MSA.

Municipalities receiving impact fee revenue must submit annually paperwork to the Pennsylvania Public Utility Commission (PUC) demonstrating how the payments have been used in the 13 legislatively designated categories.

They are: 1) Construction, reconstruction, maintenance and repair of roadways, bridges and public infrastructure;

2) Water, storm water and sewer systems;

3) Emergency preparedness and public safety, including law enforcement and fire services, as well as hazardous material response, 911 and equipment;

4) Environmental programs, including trails, parks and recreation, open space, flood plain management, conservation districts and agricultural preservation;

5) Preservation and reclamation of surface and subsurface waters and water supplies;

6) Tax reductions, including homestead exclusions;

7) Housing projects to increase safe and affordable housing;

8) Records management, geographic information systems and information technology;

9) Social services;

10) Judicial services;

11) Career and technical centers for training of oil and gas industry workers;

12) Local or regional planning initiatives under the Pennsylvania Municipalities Planning Code;

13) Placed in the municipality’s capital reserve fund that can later be used in the aforementioned categories.

It’s important to note that municipalities are not obligated to spend Act 13 funds in the year they are received. The municipality’s capital reserve fund can act as a savings account for the assets to be used at a later date.

Within the Pittsburgh MSA the most popular categories for municipal fund use have been capital reserve fund and public infrastructure/construction.

Municipalities in Allegheny County, that did report, placed 39 percent of their Act 13 revenue in their capital reserve funds from 2011 to 2016. Over the same period, Allegheny County municipalities spent 30 percent of their impact fee allocation on public infrastructure and construction.

Act 13 mandates municipalities submit a yearly report to the PUC disclosing expenditures. This basic form requires the municipality to indicate the dollar amount spent or allocated for future use within the 13 categories.  Yet many municipalities have failed to meet the reporting requirement. Under Act 13 regulations if a municipality fails to submit the annual Municipal Approved Budget Report, the municipality will be limited to a maximum of $500,000 in annual future distributions from the Unconventional Gas Well fund. But within the Pittsburgh MSA, a penalty has never been assessed because none of the municipalities failing to report ever received more than $500,000 a year from Act 13 fees and, presumably, never expected to get as much as $500,000.

In 2016, 45 municipalities out of a total of 130 in Allegheny County failed to report their Act 13 details to the PUC. This has improved since 2012 when 95 municipalities failed to do so. The best year for reporting was 2015 when just 31 municipalities did not report.

For example, since the impact fee was established, the City of Pittsburgh has disclosed the use of its shale dollars one time, in 2013. Brentwood Borough, McKeesport City, Pleasant Hills Borough and Sewickley Borough have never reported how their impact money was used.

Meanwhile, municipalities in other counties had lower rates of reporting non-compliance.  In 2016, four municipalities out of 57 in Butler; Washington, five municipalities out of 66; Armstrong, eight municipalities out of 45; Fayette, nine municipalities out of 43; Westmoreland, 18 municipalities out of 65.

Since Act 13 passed, the mandate that municipalities report annually how they spend their impact fee allocations has been obeyed by the vast majority of municipalities in the seven counties of the Pittsburgh MSA. Overall, municipalities within the MSA have improved their reporting from 2011 to 2016.

Allegheny County municipalities received a total of $2,797,742 from 2011 to 2016 compared to Washington County’s municipalities’ $55,412,444. Clearly, municipalities in Washington County have a substantial amount of fees to lose if they fail to comply with reporting and thus are more motivated to report fund usage than municipalities in Allegheny County. Washington County’s municipalities have received the largest amount of fees in the MSA, followed by those in Butler, Fayette, Westmoreland, Armstrong, Allegheny and Beaver counties.

However, municipal accountability should not be contingent upon the dollar amount received but upon the principle of financial accountability and transparency.

Governments must be responsible for all actions including accounting for where all revenues are spent. Municipalities receiving Act 13 funds, regardless of the amount, are required to report the use and should do so. It’s not a municipal choice but an obligation.

The Legislature should revisit Act 13 and amend it to penalize municipalities that fail to report how impact fee revenues are used by withholding all future allocations regardless of the amount they would have received until they are in compliance by submitting reports for all past years when no reports were filed.

Failure to correct this loophole leaves open too much opportunity for funds to be used as municipalities wish as opposed to the uses designated by law.

Shale Gas Impact Fees Jumped in 2017

Summary: Impact fees from drilling in Pennsylvania’s shale formations jumped in 2017 by 21 percent over 2016.  The impact fees, authorized by Act 13 of 2012, are distributed not only to select state agencies and to municipalities and counties hosting such wells, but to all counties across the commonwealth.  Thus far more than $1.43 billion has been collected.

 _____________________________________________________________________

In late June the Pennsylvania Public Utility Commission (PUC) reported that $209,557,300 in impact fee revenues was collected from owners of unconventional natural gas wells in 2017.  The 2017 figure represents a jump of 21 percent over 2016’s collections.  It reverses a three-year trend of declining revenues from the 2013 peak of $225.75 million. The 2016 tally of $173.26 million represents the lowest point in the seven-year history of the impact fee.  To date more than $1.43 billion in impact fees have been paid.

Act 13 of 2012 authorized an impact fee to be assessed on all unconventional wells (those drilled in the shale formations using the hydraulic fracturing method) drilled in the state (retroactively covering 2011 as the first year).  The fee follows a schedule based on two factors:  the trading price of natural gas on the New York Mercantile Exchange (the spot price representing dollars per million Btu) and the age of the well.  Older wells will presumably produce less gas over time as the pool of gas is expended so the fee schedule lowers the amount they pay as they age.

One of the reasons impact fee revenues slid from 2014 through 2016 was a glut of natural gas due to a rise in production from Marcellus and Utica shale formations. The resulting over supply contributed to the drop in the market price that fell from an average yearly price of $4.13 in 2014 to $2.62 in 2016, a drop of 37 percent.  This plunge in gas price led to a decline in the number of new wells being drilled.  In 2014 there were 1,371 wells started, the second highest behind 2011 (1,956).  In 2016 only 504 wells were started—a decline of 63 percent since 2014.  Thus the number of aging wells outweighed newer wells, which would presumably pay a higher impact fee, as the pace of drilling had fallen off.

However, 2017 saw the gas price move up to an average yearly price of $3.02, 15 percent over 2016’s average. The rise in gas price encouraged a major rise in new wells with 810 drilled in 2017, a 61 percent surge compared to 2016. In total, there were 8,518 unconventional wells representing an increase of 4.9 percent over the total reported for 2016.

It is too early to tell if this uptick in prices, drilling activity, and the subsequent jump in the impact fee collection, is the start of a new trend, but it is certainly welcome news to those who benefit from this revenue stream.

Act 13 specifies how the impact fee will be distributed.  State agencies get the first $10.5 million off the top.  These agencies include the PUC; Department of Environmental Protection; the Fish and Boat Commission; the Emergency Management Agency; Office of the State Fire Commissioner and the Department of Transportation.  Also another $7.75 million is given to the State Conservation Commission for county conservation districts.  For the 2017 distribution, that leaves $114.78 million for counties and municipalities with the remaining $76.52 million for the Marcellus shale legacy fund (section 2315.a1 of Act 13).

From the legacy fund, $15.3 million is allocated to the Commonwealth Financing Authority (CFA), an agency whose purpose and impacts we questioned in Policy Brief Vol. 14, No. 8.  Since 2012, the CFA has reaped $87.7 million in impact fee money.  Other components of the legacy fund go to county rehabilitation of greenways ($11.48 million); highway bridge improvements ($19.13 million); water and sewer projects ($19.13 million); a hazardous sites cleanup fund ($3.2 million) and an environmental stewardship fund ($7.65 million).  Since inception, the Marcellus shale legacy fund has collected more than $515 million to be distributed among these causes.

All counties across the commonwealth receive money from the Marcellus shale legacy fund, whether or not they host any unconventional wells, from the county rehabilitation of greenways fund (section 2315.a1.5).  The amount received is based on the county’s share of statewide population.  For example, Philadelphia County has a population of 1.57 million or 12.26 percent of the state’s population and thus receives the largest share of greenways monies ($1.39 million).  In fact, since the implementation of Act 13, Philadelphia County has received over $9.3 million.

However, a minimum amount of $25,000 is given to counties with small populations (for example, Fulton, Juniata and Montour Counties).  None of these counties sit atop the Marcellus shale formation and thus do no host a well yet benefit from the legacy fund, and by extension, the impact fee, having received $175,000 each over the time period.  As mentioned above, all 67 counties split $11.48 million in 2017 and since the beginning have shared $65.8 million.

The focal point of the impact fee is to tax the drilling industry and then return the money to those communities that are most impacted by the activity.  Thus those counties and municipalities impacted the most split the largest share of the money ($114.78 million) as outlined by Act 13 (section 2314.d).  Of this amount, more than $39.52 million in 2017 was allocated to counties hosting unconventional wells, with the rest dedicated to municipalities hosting, or being in proximity to, such wells.

For those counties hosting an unconventional well, their allocation is determined by the number of wells they host.  For example, the county with the most unconventional wells in 2017 was Washington County (1,528) and as a result collected the largest amount of money ($7.09 million) from this section of Act 13.  The runner-up is Susquehanna County (1,274 wells), earning $5.91 million.  As two of the top counties with wells, Washington has collected more than $38.85 million over the years while Susquehanna has collected more than $35.53 million.  Allegheny County, with only 125 eligible wells, a fraction of the total, has received $2.15 million over time.  As largely rural counties, Washington’s population is 207,981 and Susquehanna’s is just 40,862.  These totals are quite significant and most likely larger than if the state would switch to a severance tax instead and the money was allocated from Harrisburg at the whim of those viewing the shale industry as a cash cow for their own pet projects.

And of course that was the intent of Act 13—to place a fee (tax) on those drilling in the Marcellus and Utica shale formations using the technique of hydraulic fracturing (unconventional wells).  The money would then bypass the political machinations of Harrisburg and send the money directly to those counties and communities most impacted by the activity surrounding the drilling and to those state agencies that would also be impacted from the activity.  The money distributed even has strings attached as to how it can be spent such as on public infrastructure construction, storm water/sewer systems, emergency preparedness/public safety and environmental programs, among others.

Yet the clamoring for a severance tax continues.  But what those favoring a severance tax fail to consider is that not only do drillers pay the impact fee, they also pay the assorted business taxes levied by the commonwealth and pay royalties to leaseholders.  According to the Marcellus Shale Coalition president in a recent op-ed, that has amounted to $4.5 billion to date on top of the impact fees total of $1.43 billion.  The latest proposal from Harrisburg will leave in place the impact fee and couple it with a severance tax amounting to double taxation on the industry.

A severance tax has the potential to curtail production causing a reduction in these payments as drilling will likely be reduced or shifted to neighboring states that are also above the Marcellus and Utica shale formations.  The impact fee has struck a balance between holding drillers accountable for their activities and generating much needed revenues to those counties and municipalities most affected.