What’s the Deer Lakes Park Drilling Proposal Worth?

Perhaps one of the most contentious issues facing the Allegheny County Chief Executive and Council is whether or not to allow natural gas drillers access to reserves located in the Marcellus Shale formation under Deer Lakes County Park.  As expected, there is plenty of opponents citing environmental concerns, but little has been mentioned about the potential economic benefits of such a venture.  This Brief will look at the potential economic benefits to the County if it permits natural gas under the Park to be extracted.

 

Deer Lakes Park, one of nine in the Allegheny County parks system, covers 1,180 acres.  According to news reports, the plan put forth by the County Executive would permit drilling on private property roughly one quarter of a mile outside of the Park to send horizontal arms stretching beneath Park property. These arms would tap into the Marcellus Shale formation approximately one mile below the surface.  There will be no drilling rigs within the Park itself.

 

The financial details of the plan include a $3 million donation from the drilling firms to a parks improvement fund, $4.7 million in an upfront payment to the County and an 18 percent royalty payment on all gas extracted from beneath the Park for twenty years. Keep in mind that Pennsylvania law (Act 60 of 1979) sets the minimum royalty at 12.5 percent.  Depending on the contract, it can reach as high as 20 percent (see Policy Brief Volume 13, Number 27), thus 18 percent is on the upper end of the range.  While the upfront payments are self-explanatory, how much royalty money can the County expect?  To answer this question, we can look to the experience of wells in the vicinity of the Park in Frazer Township.

 

Using production reports from the Pennsylvania Department of Environmental Protection (DEP) we will examine fourteen horizontal wells spud (drilled) in Frazer Township since 2011 (from the Yute, Schiller, and Bakerstown Road properties).  Five wells actively produced for the entirety of 2012 and produced an average of over 1 million Mcf (thousand cubic feet) of gas from the Marcellus Shale formation.  In 2013 that number swelled to fourteen with production averaging slightly below one million Mcf.  Thus it is reasonable to assume that if the County were to allow a well to retrieve gas from under the Park, it would produce about 1 million Mcf annually (the production range of these fourteen wells in 2013 was approximately 500,000 to just over 2 million Mcf).

 

Royalties are paid on the basis of gas value which means the price of gas will be an important factor in determining the amount to be paid. The price most commonly used is the trading price on the New York Mercantile Exchange, also known as the Henry Hub price, usually specified at a particular day of the month.  As outlined in Act 13 of 2012, this is also the price that sets the state imposed per well impact fee.  In 2012 the average annual price was $2.7933.  At this price, a well producing 1 million Mcf would bring in more than $2.79 million.  A royalty payment of 18 percent would generate more than $500,000 for the recipient.  In 2013 the average annual price increased to $3.749 meaning that the royalty payments would rise to about $675,000 annually per well assuming the same production volume.  Of course this would be a gross payment as the gas companies are allowed to deduct transportation fees (post-production costs), but cannot deduct well fees, such as the impact fee, from royalties.

 

Newspaper reports indicate that the drillers could sink up to four wells into the Marcellus Shale formation under the Park.  The implication is that the County could realize a gross of anywhere from $2 million to $2.7 million annually if the four wells each produce an average of 1 million Mcf and the price of natural gas ranges from $2.79 to $3.75.  Obviously if production and price increase it could realize more in royalty payments—or less if prices and volume trend downward.  Only if the wells are unable to produce a significant volume will the County fail to receive a sizable royalty payment.  Reportedly, the County’s lease would run twenty years.  However, depending upon the size of the reserves under the Park, it could vary one way or another.

 

The upfront payments and royalties are of course the direct monetary benefits of entering into this lease.  But the County would gain indirectly as well.  As we outlined in a previous Brief (Volume 14, Number 13) the County and its municipalities will also gain through the impact fee collected under Act 13.  Two provisions in the Act provide money to the County through the Marcellus Shale Legacy Fund, one of which allocates money to the Commonwealth’s 67 counties based on population.  In the first two years of the impact fee, Allegheny County received the second highest amount, over $1 million in each year.  As more wells are spud and paying into the Fund, that amount may climb higher.  Another section in the Act allocates money to the counties using a formula that uses the number of spud wells in a county as a percentage of total wells in the state.  As more wells are spud in the County, this amount could increase.  In 2011, with only nine spud wells, the County realized $79,000.  In 2012 the number of spud wells rose to 22 and the County was awarded $145,000.  Another four wells should raise this total further.

 

If Council and the Executive allow gas under Deer Lakes Park to be extracted there could be a substantial monetary gain to the County.  Directly, the upfront payments of $4.7 million to the County and $3 million for Park improvements and the projected $2 to $2.7 million in annual royalty payments, along with the indirect payments via the impact fee, can be quite a financial boost to the County treasury.

 

Obviously the parks are an asset for County residents through their enhancement of the quality of living and they deserve to be protected.  At the same time however, as long as the gas extraction can be done in a responsible and safe manner—and reports indicate that there will be strict environmental and safety rules in the lease proposal—taxpayers and residents should be able to benefit financially from them as well.

Marcellus Impact Fee Revenue: What’s Happening?

Act 13 of 2012 imposed an impact fee on natural gas wells in the Marcellus Shale reserve lying beneath the Commonwealth.  The levied fee is based on the price of natural gas as traded on the exchange market (and thus could fluctuate from year to year as that price changes) and the age of wells from the time they are spud—the actual start of drilling an unconventional well—through fifteen years.  The revenues are shared among the counties, municipalities, and state agencies according to provisions in Act 13.  Even counties and municipalities that do not contain any wells will receive some money.  After two years of collections, how have the counties and state agencies fared?

 

The well count is determined by the Pennsylvania Department of Environmental Protection (DEP) while the responsibility for fee collection and distribution falls to the Pennsylvania Public Utilities Commission (PUC).  According to DEP production reports, there were 4,333 wells spud in 2011 and prior years. Drilling in the Marcellus Shale formation began in 2007 but the first year of the impact fee was imposed on all wells spud up to and including 2011. Another 1,275 were spud in 2012.  In 2011 the impact fee produced $204.2 million in revenue and in 2012 just under $202.5 million was collected.

 

Act 13 was very specific as to how the money would be distributed.  Eight state agencies, such as the PUC ($1 million) and DEP ($6 million), receive $23 million off the top.  Of the remaining revenues, sixty percent is distributed to the counties and municipalities and forty percent is deposited into the Marcellus Shale Legacy Fund for statewide initiatives.

 

There are seven statewide initiatives that share in the Marcellus Legacy Fund, each on a percentage basis.  For 2011 and 2012 the Legacy Fund received $72.5 million and $71.8 million respectively.  Twenty five percent goes to the highway bridge improvement restricted account in the Motor License Fund.  This money is to be redistributed to counties to assist in the replacement of locally owned bridges.  Another 25 percent is dedicated to water and sewer projects to be split evenly between the PA Infrastructure Investment Authority and the Commonwealth Financing Authority (CFA) for the H2O PA Program.  The CFA is also to receive another 20 percent for other specific initiatives such as mine acid abatement and cleanup, green-space initiatives such as trails and parks, and watershed projects.  In 2011 this amount was approximately $14.5 million and $14.4 million in 2012.  (For more on the CFA please see Policy Brief, Volume 14 Number 8).  Furthermore the CFA must set aside 25 percent of this allocation for flood control projects.  All told the CFA received $23.6 million in 2011 and another $23.3 million in 2012 (32.5 percent of the Legacy Fund share).

 

Other statewide initiatives receiving money under the Marcellus Legacy Fund are the Environmental Stewardship Fund (ten percent), the Department of Community and Economic Development (five percent for projects related to oil and natural gas), and the final fifteen percent will be sent to the counties.  Under this last designation, the distribution is based on population (as a percent of the statewide total) with every county guaranteed a minimum amount of $25,000 (to the extent funds are available).

 

Fifteen percent of the Legacy Fund provided the Commonwealth’s 67 counties roughly $10.9 million in 2011 and $10.8 million in 2012.  Money sent to the counties under the Marcellus Legacy Fund is based on population and are restricted to rehabilitation of greenways such as trails, open spaces and community conservation projects.  In 2011, the largest amount went to Philadelphia County ($1.29 million) with Allegheny County second ($1.04 million).  In 2012, both Philadelphia and Allegheny County still received the highest allocations even though both received slightly less than their 2011 allotment.  Even small counties without wells (Fulton, Juniata and Montour) collected the minimum $25,000.

 

As mentioned above, sixty percent of the impact fee revenue is to be distributed to counties and their municipalities.  Section 2314(d), allocates 36 percent of these funds to counties based on the number of spud wells within the county as a percentage of the total wells in the state.  In a county with a spud well, municipalities with a well divide 37 percent of the 60 percent while those with no wells divide the remaining 27 percent. The amount a municipality can receive is restricted in Act 13 to “…not exceed the greater of $500,000 or 50% of the total budget for the prior fiscal year…”   This money is restricted by statute for use on any one of thirteen possible purposes ranging from road and bridge maintenance/construction to tax reductions to affordable housing and environmental projects such as conservation and beautification initiatives.  In 2011, the counties under this section shared more than $38.2 million. Bradford County received the highest allotment under this section at just under $8.4 million.  In the Pittsburgh region, Washington County received the highest share ($4.3 million) while Allegheny County picked up $79,400.

 

In 2012 the amount to be shared decreased to just less than $37 million.  But since another 1,275 wells were spud in 2012 the distribution among the counties and municipalities had changed as each county’s share of the statewide total became altered.  For example, even though Bradford claimed the most wells in 2011 (949) and 2012 (1,099), its percentage share dropped from 22 percent in 2011 to 19.6 percent in 2012.  Thus it received less money in 2012 ($7.2 million) than in 2011.  In the Pittsburgh area, Washington County still garnered the most money ($4.5 million).  However, Allegheny County claimed more in 2012 ($145,000) as its share of statewide wells increased with the number of wells climbing from nine in 2011 to 22 in 2012.

 

After the first two years, the impact fee has raised more than $405 million to be distributed to counties, municipalities, and state agencies.  The revenues for 2013 have yet to be reported (drillers are to pay the PUC before April 1st), but it should yield more than either of the two previous years.  As mentioned above the impact fee fluctuates based on the trading price of gas and the age of the well.

 

The main reason the amount collected in 2012 slipped below the 2011 figure, even though more wells were spud, is that the price of natural gas fell by 30 percent, thereby triggering a lower fee based on the schedule.  The fee for first year wells in 2012 was $45,000 compared to $50,000 in 2011.  Second year wells in 2012 (those that were first year wells in 2011) paid a fee of $35,000.   The average annual price of natural gas in 2013 came in at 34 percent greater than the 2012 price and thus first year wells in 2013, roughly 1,200 based on DEP production reports, will once again pay a first year fee of $50,000.  The second year wells (1,275, spud in 2012) will pay $40,000 and the third year wells (4,333, spud in 2011 and earlier) will have a fee of $30,000.  This of course assumes that all wells remain online and have not been deemed exempted from the fee (due to capping or low production).  Taking into account new wells and a higher gas price, a crude estimate of 2013’s impact fee revenue would be roughly $232 million, implying that counties and municipalities around the Commonwealth should receive more money in the coming year.

 

However, while the number of wells throughout the state continues to increase, they do so at a decreasing rate.  The number of wells spud in 2013 (1,200) is the lowest since before 2010.  Should this trend continue, it will begin to take a toll on fee revenue as wells age out and are not replaced. Rising gas prices could offer an offset but of course that is the big question for the fee revenue in the future.

Marcellus Royalty Payments Rising Rapidly

From all accounts natural gas drilling in the Marcellus Shale formation has been an economic boon for Pennsylvania.  While the exact overall impact may be up for debate, what is not debatable is the benefit for owners of the land and/or mineral rights where wells are located.  This is evidenced by the increase in royalty income shown on state income tax returns.  As we first reported in a 2011 report (Report #11-05), the number of tax returns containing rental and royalty claims has increased greatly since drilling began in 2007 and “offers the clearest and most conclusive evidence of the potential financial impact arising from Marcellus Shale drilling activity.”

 

 

From 2006, (pre-drilling) until 2010, the most recent data available, the overall number of income tax returns in Pennsylvania showing rent and royalty income claimed under the section “rents, royalties, patents, and copyrights” climbed by 19 percent.  For those counties with Marcellus activity, the increase was 29 percent but only 10 percent for those without.  For the counties with the greatest activity, mostly in the northern tier of the state, the rise in returns has been the largest.  Susquehanna (up 192 percent), Sullivan (180 percent), Wyoming (165 percent), Bradford (145 percent) and Tioga (129 percent) had the biggest gains while the rest of the top ten counties in terms of jumps in returns with royalties, posted a gain of at least 45 percent.  While the number of returns provides a good indication, it is not definitive proof.  It is also instructive to look at the amounts of royalties claimed on these income tax returns.

 

As expected the amount of rents and royalties income reported on Pennsylvania tax returns has also jumped significantly.  Statewide royalty income rose 61 percent from 2006 to 2010 with an increase of 119 percent in counties with Marcellus Shale drilling activity.  Rent and royalty income in counties with no Marcellus activity moved up by a comparatively slow 34 percent.  Northern tier counties Susquehanna, Sullivan, and Tioga each had huge jumps of more than one thousand percent.  In Susquehanna the amount claimed in 2006 was $8 million and by 2010 it had topped $133 million-a gain of over 1,500 percent.  In fact the top ten counties in terms of growth, seven in the northern tier and Greene, Washington, and Butler counties in the Pittsburgh area, all reported rent and royalty income increases of at least 200 percent. 

 

In our 2011 report we examined the seven county Pittsburgh metro area which, from 2006 to 2008, had an average increase of 50 percent in this taxable income category.  The updated data, now covering the 2010 tax year, shows the average rise to be 107 percent led by Washington County’s increase of 289 percent (up from 113 in the original study) and Butler County’s increase of 201 percent (up from 57).  The smallest increase in the Pittsburgh metro belongs to Allegheny County, now at 41 percent (up from 17). In short, royalties are rising rapidly.

 

While the data show a substantial jump in rent and royalty taxable income, what exactly is included in rents and royalties and how are they calculated?

 

Land owners fortunate to own property above the Marcellus Shale formation have been able to collect lease payments for their acreage as well as royalty payments on the gas extracted from that property.  Royalties represent a share paid to the owner of the mineral rights to extract and sell the mineral.  According to the president of the National Association of Royalty Owners, Pennsylvania Chapter (NARO-PA), the lease payments and royalty payments due to a particular land owner are negotiated in individual contracts.  However, Pennsylvania law (Act 60 of 1979) stipulates a minimum royalty payment of 12.5 percent of the value of gas “…removed or recovered from the subject real property”.  The NARO-PA president notes that the typical royalty percentage was typically not above 12.5 percent in the beginning, but as the boom progressed the royalty share has ranged up to 20 percent, depending on the individual contract. 

 

The royalty payment of course depends upon the quantity produced in a time period, and the price at which the gas is sold.  NARO-PA notes the most commonly used price is the trading price on the New York Mercantile Exchange (NYMEX), usually at some price point specified at a particular day of the month.  The royalty owners are typically paid on a monthly basis, unless otherwise specified in the contract.  Gas companies are allowed to deduct transportation fees (post-production costs) from royalty checks, but cannot deduct well fees, such as the impact fee, from the royalties. 

 

With this information, we can estimate the total royalties paid in Pennsylvania from Marcellus Shale production from 2008 through 2012.  In 2008, the amount of gas taken from the Marcellus Shale was reported to be 9.8 million mcf (thousand cubic feet).  The average price of natural gas that year using the NYMEX was $8.899 per mcf.  Thus the revenues from the Shale gas should have been approximately $86.95 million.  Using 12.5 percent for royalties, royalty payments would have been around $10.9 million to the owners of Shale mineral rights.  To keep this in perspective the Bureau of Economic Analysis (BEA) notes that in 2008 the amount of personal income in Pennsylvania was about $513 billion.  Thus these royalty payments account for about 0.002 percent of state personal income. 

 

However, as more wells were drilled, production expanded greatly over the next few years so that in 2012 more than 2.065 billion mcf of natural gas was extracted from the Shale.  However, the average price in 2012 had fallen, in part to the increased supply, to $2.83.  The estimated gas revenues for 2012 are in excess of $5.85 billion.  Again using 12.5 percent as the royalty percentage gives an estimated $731 million in royalties for 2012.  Thus royalty income paid to owners of land/mineral rights in Pennsylvania skyrocketed by more than 6,600 percent thanks to Marcellus Shale. The BEA’s estimate of personal income for 2012 was just above $556.7 billion, so royalty payments from Marcellus Shale accounts for about 0.13 percent of that income.  While this is still a very small portion of the total, it has certainly grown over the last five years, reflecting the massive rise in royalty payments.  Indeed, NARO uses 18 percent as the royalty share resulting in an estimate of $1.2 billion in royalty payments.  And while the state income as a whole is not boosted significantly in percentage terms, royalty incomes in the counties where drilling and production activity are heaviest are certainly having a measurable effect on the county’s total income.

 

The Marcellus Shale gas boom has produced major economic benefits to the Commonwealth of Pennsylvania. Beyond the growth in drilling related jobs and the jobs created in several supply and related industries, accommodations for out of state workers, restaurants and retail with the incomes associated, land owners who have lease and/or royalty payments are doing well indeed.

2012 Drilling Fee Revenue Slips Below 2011 Collections

On April 1st, drillers operating in Pennsylvania’s Marcellus Shale formation were required to pay their annual well fees to the Commonwealth.  As discussed in Policy Briefs Volume 12, Numbers 11, 21 and 51, Act 13 of 2012 gave counties with unconventional (Shale) drilling within their borders the option of charging a fee on each well.  All counties have in fact done so.  Revenue from this new fee, collected in 2012, provided $206 million to be shared among state agencies, counties, and municipalities.  However, in 2013 fee revenue slipped to $198 million.  Is the revenue reduction a one-time event, or the start of a trend?

 

 

The fee as outlined in Act 13 is based in part on the market price of natural gas and is structured so that, over time, the charge on wells drilled in earlier years decreases.  There is also a distinction made for vertical wells in the Marcellus Shale formation which are only charged twenty percent of the fee since they are deemed less intrusive than multi-bore horizontal wells.  The Public Utility Commission (PUC) recognized 4,449 total wells in the formation with 4,031 wells being designated as horizontal wells subject to the $50,000 fee (the remainder was classified as vertical).  As 2012 dawned, these wells graduated into year two of the fee structure while any wells drilled in 2012 entered the first year in the system.

 

To understand why the fee revenue for 2012 is lower than 2011, we need to examine the two most important factors in this determination-the price of natural gas and the drilling activity that actually took place in 2012.

 

The fee structure takes into account the spot price of natural gas as traded on the market.  In 2011, the annual average price came in at just over $4.00 triggering the $50,000 per well fee.  But the price had fallen by more than 30 percent in 2012 to $2.79.  At this price, any well drilled (spud) in 2012 (their year one) will be charged $45,000.  Also, the second year wells will see their fee reduced by $15,000 to $35,000.  Therefore the wells that had generated $206 million in 2011 generated approximately $144 million in 2012. The other $54 million or so is coming from new well fees.  So as a result of the lower price there has been a reduction in the fee amount per well-both new and existing. The advent of extraction in the Marcellus Shale formation has increased the supply of natural gas, putting downward pressure on the trading price, helping to trigger the lower fees.  Through the first quarter of 2013 the price has begun to rise, reaching an average of $3.61 and could boost per well fees in 2013. Bear in mind that fees will fall again for older wells due to the aging provision. 

 

And of course the amount of money collected is also dependent upon the number of wells spud.  As mentioned above 4,449 total wells had been spud through the end of 2011.  In 2012, the PUC has documented 1,357 new wells.  This is a thirty percent drop from 2011 when 1,937 wells were spud.  In fact, 2011 represents the high water mark for activity.  In 2010 there were 1,454 wells spud and only 763 in 2009.  Thus it appears as though the increase in the supply in natural gas and the resulting drop in price has also curtailed new drilling in the Commonwealth. 

 

Where are the wells concentrated?  It has been suggested that the Marcellus formation is producing both wet and dry gas.  Wet gas, primarily found in the western Pennsylvania counties (as well as in Ohio and West Virginia), contains other compounds such as ethane that can be separated (cracked) and sold for other uses.  Dry gas, found mostly in the north/central counties is more limited in use.  The lower price of gas makes the wet gas more desirable as money can be made on the other compounds as well. 

 

Through 2011 there were 37 counties that contained wells linked to Marcellus Shale.  Two more counties, Crawford and Mercer, added wells in 2012 for a total of 39.  However as noted above, there were fewer wells drilled in 2012 than in 2011.  In fact twenty-two counties saw a decrease in drilling activity including northern tier stalwarts Bradford (-60 percent), Tioga (-53 percent) and Lycoming (-29 percent).  Only three of these counties were located in western Pennsylvania-Greene (-4 percent), Indiana (-91 percent) and Westmoreland (-35 percent).    Thirteen counties had an increase in drilling activity with only Sullivan (42 percent) not in the western part of the state.  The remaining four (Bedford, Huntingdon, Luzerne, and Wayne), not only did not have any change in activity they did not have any wells spud in either 2011 or 2012.

 

However, a drop in new wells being spud does not necessarily translate into a decrease in production.  State law requires that drilling companies report their output to the Department of Environmental Protection.  While this data is raw, it does allow us to approximate overall production statewide as well as within each county.  Total Marcellus Shale drilling production in Pennsylvania for 2011 was reported to be 1.070 billion mcf (thousand cubic feet).  Production in 2012 was reported at 2.065 billion mcf-an increase of 93 percent.  Thus even though fewer new wells came online in 2012, overall production from this formation nearly doubled. 

 

At the county level, of the 34 counties that produced gas from Marcellus Shale formation from 2011 to 2012, only four counties reported a decrease in production:  Cambria, Cameron, Potter, and Warren with the latter the only western county.  And with the exception of Potter (73), the other three don’t have many wells within their borders-Cambria (7), Cameron (14), and Warren (3).  In fact eleven counties reported output levels that had doubled from 2011. 

 

Even though there were fewer wells drilled in 2012 than 2011 or 2010, there remain a large number of permits issued that have yet to be used, which suggests that drilling in the Marcellus Shale formation will continue for quite some time. Bear in mind that the amount received by the state and then distributed to the counties and municipalities will vary from year to year as market conditions change.  Thus it would be unwise for any level of government to view the amount of revenues from Act 13 as set in stone.

Employment Growth in the Region Cools

The recently released January employment data for the Pittsburgh metropolitan statistical area (MSA) were not very encouraging.  After a reasonably strong 2011 and first half of 2012, data from the region’s employers show quite a slowdown in job additions for the latter half of 2012 with 2013 starting off just as sluggish. 

 

 Household data seems to confirm the slowing, as the area’s unemployment rate increased more than one-half of a percentage point from the same time last year. There was positive news in the form of a 2.5 percent jump in the labor force since January 2013 perhaps signaling more confidence among job seekers that the region has plenty of jobs to be filled.  But is this confidence warranted?

 

The employer payroll survey (which reports data unadjusted for seasonality) shows the MSA adding ten thousand total private jobs in January 2013 over the January 2012 level-a modest one percent increase.  By comparison January 2012 had 21,300 more jobs than its year earlier level which, in turn, had more than 24,500 jobs above the January 2010 reading. By looking at the levels compared to twelve months earlier, any seasonal effects are eliminated.  As mentioned, the growth in total private jobs was much stronger in 2011 and the beginning of 2012.  On average, the 2011 monthly year over year gains to total private jobs was 23,100.  The first half of 2012 averaged 22,100 more jobs compared to a year before, while the second half average fell to less than 13,200.  Nonetheless, despite the reduction by half in the rate of employment growth, it is a moderately positive sign that no month in the last two years had decreases in private sector jobs.

 

As was pointed out in previous Briefs, the Pittsburgh MSA has a major advantage created by the presence of the Marcellus Shale formation and is benefitting from a gas drilling boom. The number of jobs in the mining and logging sector surged in 2011 rising year over year by an average of 28 percent.  In the first quarter of 2012 the growth continued to top 22 percent before falling below 20 percent in April and then below nine percent from September through the close of the year.  This coincides with the fall in the average annual price of natural gas (as calculated for the State’s well impact fee) as it went from an average of just over $4.00/million BTUs in 2011 before falling to $2.79 in 2012-a decrease of 30 percent.  As the price falls, fewer wells will be drilled and growth will slow.  Even though it is very early in 2013, the average annual price has crept up to $3.40 and perhaps drilling activity may start to pick up. Another possibility to consider is that perhaps the pace of drilling new wells has already reached its apex in the region and additional drilling will be at a somewhat slower pace going forward. 

 

Other industries related to natural gas drilling seemed to follow suit, most specifically manufacturing and construction.  After years of decline, the manufacturing sector started to see positive year over year gains beginning in the second half of 2010.  While these gains were slight, anywhere from one to two percent from late 2010 through mid-2012, they turned negative in December 2012 and again in January 2013.  The construction sector followed a similar pattern of strong growth at the end of 2011 and through the first half of 2012 before weakening in the latter months of 2012 before posting a loss in January 2013. 

 

But these are relatively small sectors in the MSA and their slowdown cost the region around 2,500 jobs which is just a quarter of the cool down in the jobs market.  Marcellus Shale exploration and drilling propped up the region’s economy during the national recession and subsequent sluggish recovery, but it may be settling into more sustainable levels of activity.

 

Another sector that showed considerable slowing includes professional and business services.  This sector averaged a 7,700 monthly year over year increase to jobs for 2011.  That figure dropped to 5,200 in 2012 due to much slower gains in late 2012-the final quarter average was only 2,400.  While January 2013 had a year over year increase of 3,700, the torrid pace of 2011 through the first half of 2012 has not been sustained. 

 

So where is the good news? 

 

Keep in mind that the area gained more than 10,000 total private jobs year over year in January 2013 to settle in at more than 1.02 million-the highest January total since at least 1990 (as far back as the data go).  While the fast pace set coming out of the recession may have cooled off, the region is still moving forward.  And as we showed in a previous Policy Brief (Volume 13, Number 2) other sectors such as professional and technical services are emerging with substantial gains.  Likewise, the region’s healthcare subsector continues to grow albeit at a slower pace. Notwithstanding the moderately good performance of late, the region’s leaders cannot rest as there is plenty of work to be done to make the area more inviting to employers.

Marcellus Impact Fee Payments Roll In

According to Act 13 of 2012, which sets the Marcellus Shale impact fee on drillers, the payment for the impact fee was due to the Pennsylvania Public Utility Commission (PUC) by September 1, 2012 for any well spud from 2007 through 2011.  In mid-September, the PUC published a list of drillers, the number of wells they owned, how much money was due, as well as how much was paid. The thirty-seven counties opting to impose the fee, along with their municipalities, should start to see their share of the fee revenue roll in soon. 

 

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Pittsburgh Area Jobs Grew in June

Private sector employment grew in June at a respectable pace as measured by the change from June 2011. Jobs increased by 19,000 over the period, a rise of nearly two percent. Still, the latest monthly and quarterly gains are well below the torrid pace of 30,000 plus gains set in the fourth quarter of last year.

June’s good year over year growth reflects strong gains in professional and technical service (3,500), leisure and hospitality (4,500), and trucking (1,900, an almost 10 percent 12 month rise). Education and health services rose a solid 3,800 but that is well below the very strong gains from last fall when 12 month gains topped 13,000.

On a less positive note, construction employment fell by 2,700 compared to June 2011 while manufacturing managed a tiny 300 gain. Mining and logging slowed to 1,100 from the nearly 2,000 yearly rise posted in June 2011.

Overall, the June 2012 jobs numbers are good but with the Marcellus drilling activity slowing from the year ago blistering pace, the trucking, technical and hospitality sectors could begin to be negatively affected.

All told, the Pittsburgh area has profited from the gas drilling and the fact that there was no major collapse of the housing sector as happened in so much of the then fast growing regions of the country.

County Wants to be Right on Rights

Though there has been a lot of talk about how Marcellus Shale drilling could be a boon for the County, specifically for the County’s coffers if drilling rights were leased on airport land, County officials likely have little firsthand knowledge on what the County owns, if anything, in the way of mineral rights-gas, oil, coal, etc.

That could change if action is taken on a motion that would instruct the County manager’s office to "…determine what mineral rights Allegheny County owns on any parcels within the County and the feasibility and economic value of conveying those mineral rights to other parties for development".

A similar motion was introduced into Council last June but no action was taken on it after it was referred to the Committee on Economic Development and Housing.

It could turn out that the County owns mineral rights under some valuable property in the area. It is doubtful that even if the County owned mineral rights in the middle of, say, a County park, that there would be extraction due to strenuous objections. Recall the 2008 proposal to extract coal in a section of South Park.

Conversely, it could be possible that someone other than the County owns the mineral rights under government structures, that of related County agencies, or perhaps under some of the shiniest new economic development projects carried out in recent years. Could there be drilling next to the County Courthouse in the near future? Or how about digging near the Convention Center?

The proponent of the study wants to use proceeds to reduce the increased property tax burden, which the proponent incorrectly assigns to the new assessments. How about the 21% millage hike passed by Council at the end of 2011? Besides, the County is limited to a 5% windfall that requires a vote of Council. Otherwise, there is no net increase in revenue from the assessment.

The proponent’s comment points out once again how ignorant even County officials are about the assessment process.

More on State Tax Collections

A previous blog dealt with the data on 2011 tax collections of the 50 states available from the Census and sales taxes. When it comes to income taxes, last year close to $300 billion was collected in combined individual and corporate net income taxes. Seven states do not tax individual income; two tax only interest and dividends. Three of those states-Nevada, Texas, and Washington-tax neither individual nor corporate net income tax.

Pennsylvania runs close to the national average on the share attributed to individual and corporate net income taxes. Nationally, $259 billion (86%) came from individuals and $40 billion (14%) came from corporate net income. Pennsylvania collected $11.8 billion with $9.8 billion from individuals and $2 billion from corporate net income, an 83-17 split.

In 2011, Pennsylvania was classified with 14 other states as having no severance tax. Since Act 13 created an unconventional gas drilling fee that will be levied on Marcellus Shale wells, the state will likely be categorized by the Census as still not having a severance tax proper.

Last year $14.6 billion was collected in severance taxes. Close to $10 billion-70%–came from four states (Alaska, Texas, North Dakota, and Wyoming).

Counties Vote to Impose Gas Well Fee

When Act 13, the Unconventional Gas Well Impact Fee Act, was signed into law on February 14th, it gave counties with such wells the option of imposing an impact fee.  The counties, thirty-seven in all, had sixty days or until April 16th to adopt the fee. As that deadline passed all had chosen to opt in, as have fourteen counties who as of yet don’t have any of these wells within their borders. While the basics of Act 13 were outlined in a previous Policy Brief (Volume 12, Number 11), now that the counties have opted to enact the fee, we can take a more in-depth look at how much fee revenue will be collected in this first year and how it will be distributed among the various recipients.

 

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