Rethinking the Fiscal Relationship Between Public Lands and Public Land Counties: County Payments 4.0

Mark N Haggerty, Headwaters Economics

In 1908, Congress authorized payments to local governments, including counties and school districts, to compensate for the non-taxable status of the newly established forest reserves within their boundaries. The original program shared revenue generated from commercial activities on public lands, e.g. timber harvesting, not anticipating the major changes in the volume and types of activities on National Forest lands, particularly in the Pacific Northwest, that have played out over the past century. Two subsequent reforms – the appropriated Payments in Lieu of Taxes (PILT) in 1976 and ‘transition’ payments made between 1990 and 2018, including payments associated with the North- west Forest Plan and the Secure Rural Schools and Community Self-Determination Act (SRS) – have yet to deliver a permanent or effective policy solution that matches county payments to local governments’ economic needs or forest management objectives. This paper analyzes three policy options: a status quo option of PILT and revenue sharing payments; reauthorization of SRS; and the creation of a new permanent trust fund at the federal level. The paper concludes that the trust option (‘County Payments 4.0’) could resolve key challenges by stabilizing and growing revenue over time, eliminating the need for cycles of conditional appropriations, and providing flexibility to address economic and forest management needs in public land counties.

Keywords: Payments in Lieu of Taxes (PILT), Secure Rural Schools and Community Self- Determination Act (SRS), natural resources, rural economic development, local government fiscal policy

n 1908, Congress authorized forms—the permanently-authorized Pay- ‘county payments’ to local gov- ments in Lieu of Taxes (PILT) in 1976 and ernments, including counties and ‘transition’ payments beginning in the 1990s school districts, to compensate for – authorized by the Northwest Forest Plan the non-taxable status of the and the Secure Rural Schools and Commu- newly-established forest reserves nity Self-Determination Act (SRS) between withinI their boundaries. This original pro- 2001 and 2018 have yet to deliver a perma- gram based payment levels on commercial nent or effective policy solution. The way activities on public lands, e.g. timber harvest- that county payments are made, including the ing, not anticipating the major changes in the certainty of payments and the source of fund- volume and types of activities on National ing, is one of the most important and under- Forest lands that have played out over the appreciated policies affecting the fiscal and past century, particularly in the Pacific economic well-being of many public land Northwest region. Two subsequent re- counties and the way that public lands are 117 COUNTY PAYMENTS 4.0

managed. Existing programs have exacer- by stabilizing and growing revenue over bated fiscal dependence on uncertain and in- time, eliminating the need for cycles of con- equitable payments in many public lands ditional appropriations, and providing flexi- counties, discouraged economic diversifica- bility to address economic and forest man- tion, and contributed to fiscal crises in the Pa- agement needs in public land counties. cific Northwest counties historically most dependent on payments. Changing Economic Geography of the Pa- A long-term county payments solu- cific Northwest tion must address two fundamental concerns: the economic challenges and opportunities In the Pacific Northwest, a sharp decline in for public lands counties in the 21st century timber employment in the 1990s played out economy, and the problems of uncertainty, across a diverse and changing economic ge- inequitable distribution, and misdirected in- ography. To explain the nature of these centives generated by previous county pay- changes and their implications, this section ments policies and their implementation. begins with a broader discussion of trends in This paper analyzes three policy options, in- the U.S. and the West’s economy, including cluding a permanent return to a revenue shar- a structural shift from goods-producing to ing model, a long-term reauthorization of service-providing jobs and increasing geo- SRS, and an endowment model that would graphic inequality among counties. create a new permanent natural resource trust The West is the fastest-growing re- at the federal level. These options are com- gion of the U.S.1 and has added jobs and pop- pared according to total payment amount, ulation at roughly twice the rate of the rest of payment equity (measured as the share of the U.S. since 1970 (U.S. Department of payments allocated to metropolitan vs. non- Commerce 2017). Personal income growth metropolitan counties), predictability of pay- among western counties also outpaced the ments, and the cost of appropriations over a rest of the nation. Most of the growth in new 35-year period. jobs (92 percent) and income are in a variety To provide context for the policy of services occupations, including high-wage analysis, this paper begins with a description earners such as doctors, lawyers, and ac- of the changing economic geography of the countants, and low-wage earners such as re- U.S. and the Pacific Northwest focused on tail and restaurant workers (U.S. Department implications for public land counties and lo- of Commerce 2017).2 The most important of cal government finance. Next, it reviews the the new services occupations are a set of history of county payment policies and how high-wage jobs in ‘innovation’ sectors in- these programs exacerbate the challenges ru- cluding software, research and development, ral counties face in succeeding in the new finance, and technology. These high-wage economy. The paper then turns to the analysis jobs function the same as a traditional mining of the three policy options and ends with a or manufacturing job by exporting ideas and discussion of the endowment model and its services to clients across the U.S. and the potential to resolve the key challenges asso- world while returning income to the county ciated with existing models of compensation

1 In this paper, the ‘West’ is defined as the 11 western states in the continental U.S.: Arizona, Colorado, California, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming. 2 For details on services industries, see North American Industry Classification System (NAICS) definitions, available here: https://www.census.gov/programs-surveys/metro-micro/about/omb-standards.html.

HJSR ISSUE 40 (2018) 118 where they are located, which in turn gener- West, non-labor income from investment-re- ates additional economic activity in other lated sources and age-related and hardship- sectors (e.g. they have multipliers that create related transfer payments accounted for 52 additional jobs in related sectors) (Moretti percent of net growth in real personal income 2012). during 2000-2016 and made up 37 percent of At the same time, employment and in- total personal income in 2016. The largest come in non-services sectors, including man- component of non-labor income is invest- ufacturing, natural resources, and agriculture, ment-related sources (dividends, interest, and have declined as a share of total employment rent) followed by age-related transfer pay- and income, and in some cases in absolute ments (e.g. Social Security and Medicare) terms in the West since 1970. The ‘great de- and hardship-related payments (e.g. Welfare coupling’ describes the fact that mechaniza- and Medicaid) (Lawson, Rasker, and Gude tion and productivity gains in the U.S. econ- 2014). omy have not resulted in more middle-in- These structural shifts away from come jobs or higher family incomes begin- goods-producing to service-providing sectors ning in the 1970s and accelerating since are associated with increasing geographic in- about 2000 (Brynjolfsson and Mcafee 2012). equality. Innovation jobs and other high- In manufacturing, for example, increases in wage services jobs tend to locate in cities productivity led to fewer, not more jobs – the around clusters of creative employees, com- U.S. manufacturing sector added more than panies, and finance (Glaeser 2011; Moretti $500 billion to Gross Domestic Product 2012). Rural areas relatively remote from cit- (GDP) between 1980 and 2016 while eight ies are not competing as well for these new million manufacturing jobs were lost. services sector jobs due to relative isolation Productivity gains also led to employment from markets (Goetz, Partridge, and Stephens losses in other sectors of the U.S. economy 2017; Rasker et al. 2009). At the same time, where jobs are more easily automated includ- rural counties tend to be more acutely af- ing agriculture, timber, mining, and retail fected by the challenges associated with trade. Coal mining in the U.S., for example, productivity gains and trade that have re- lost 160,000 jobs between 1980 and 2010 as duced employment in natural resources sec- coal production increased 40 percent nation- tors and manufacturing (Hicks and Devaraj ally (U.S. Department of Labor 2017). In tim- 2015). ber, consolidation and automation of timber The same geographic implications of mills and mechanization in timber harvesting restructuring are visible in the Pacific North- increased labor productivity and weakened west since 1990.3 The region covered by the the link between the level of timber harvests Northwest Forest Plan lost 30,000 jobs in the and employment (Oregon Office of Eco- timber industry in the 1990s. Despite these nomic Analysis 2017). losses, 1.4 million new jobs were created in Another important trend is the in- other sectors (primarily services) over the creasing importance of non-labor income. same period (Charnley 2006). The recent per- From 2000 to 2016, non-labor income in the formance of formerly timber-dependent United States grew by 55.4 percent compared counties, however, is mixed. Some rural to 23.3 percent growth in labor income. In the counties are adding people, jobs, and income,

3 The Pacific Northwest is defined as all counties in Washington, Oregon, and Idaho, and counties in Northern Cali- fornia (Del Norte, Glenn, Humboldt, Lake, Mendocino, Shasta, Siskiyou, Tehama, and Trinity) and western Mon- tana (Deer Lodge, Flathead, Granite, Lake, Lewis and Clark, Lincoln, Mineral, Missoula, Powell, Ravalli, Sanders, and Silver Bow). 119 COUNTY PAYMENTS 4.0

including those connected to cities and those Lessons from the Northwest Forest attracting workers and retirees to remote, Plan reveal that timber counties were more high-amenity landscapes (Chen and Weber complex and diverse than the stabilization 2011; Goetz et al. 2017; Johnson and model anticipated. In the new economy, a Cromartie 2006). Rural communities rela- community’s assets – such as quality educa- tively isolated from metropolitan markets tion, health care services, and a high quality have grown more slowly since 1990, how- of life – play increasingly important roles in ever their performance, while poor relative to distinguishing rural places, even for remote metropolitan counties, is similar to peer non- and resource-dependent communities (Hal- metro counties that were not historically de- seth et al. 2006; Kashdan and Nothstine pendent on timber (Rasker 2017). 2014; Kitson, Martin, and Tyler 2004; The uneven economic performance of Markey, Halseth, and Manson 2008; Power formerly timber-dependent communities is 2006). explained in large part by the trajectory they The increasing importance of a com- were on in the late-1980s (Charnley et al. munity’s amenities, infrastructure, and ser- 2006). Counties already beginning to diver- vices to economic well-being places greater sify and grow outside the timber industry be- importance on the role county governments fore the Northwest Forest Plan was adopted play in economic development activities. The in 1994 continued to grow despite the sharp next section provides more detail about the decline in a major employment sector. Rural expanded and vital role of local governments and relatively isolated communities experi- in economic development and highlights the enced the declines in timber harvest on fed- important role of fiscal policy related to nat- eral land most acutely. ural resources, including county payments.4 Interventions included in the North- west Forest Plan intended to stabilize and County Government Finance and County transition the economies of timber-dependent Payments communities generally failed to overcome the structural and geographic context. In par- Counties are the largest political subdivisions ticular, efforts to stabilize timber supply, al- of states and have responsibility to provide beit at lower levels, were not met (volumes basic public services, including public works offered for sale averaged only 54 percent of such as roads and bridges and public safety. target volumes) and overemphasized an out- Another primary responsibility of county moded supply-side development model (Kil- governments is administering state mandates, kenny and Partridge 2009) that ignored the such as organizing elections, assessing prop- effects of changes in the timber industry, in- erty, issuing licenses, and recording docu- cluding mill consolidation, productivity ments. gains, increasing trade, and reduced timber To discharge these roles and respon- demand, responsible for two-thirds of job sibilities, counties have revenue-generating losses in timber in the Northwest Forest Plan authority and receive grants and distributions region (Charnley et al. 2006). from state and federal governments. Counties

4 County payments from the Forest Service also are distributed to local autonomous school districts. Schools in some states will be affected by changes in county payments policy and funding, but to a lesser extent than county governments due to state school equalization policy, particularly in Oregon and Washington. Gebert, Krista M., Da- vid E. Calkin, and Ervin G. Schuster. 2004. “The Secure Rural Schools Act of 2000: Does It Make Rural Schools Secure?” Journal of Education Finance 30(2):176-186. HJSR ISSUE 40 (2018) 120 in the Pacific Northwest generate revenue di- ments in economic development in the Pa- rectly through property taxes, local sales cific Northwest and the significant contribu- taxes, and a variety of charges and fees. tions of county payments to many county These sources of local revenue made up two- budgets speaks to the importance of federal thirds (66 percent) of all county government fiscal policy in public land counties. The next revenue in the Pacific Northwest in 2012 section reviews the history and status of the (U.S. Census of Governments 2012). Inter- largest county payments programs in the Pa- governmental revenue, including county pay- cific Northwest. ments programs addressed in this paper, and other distributions and grants from state and History of County Payments federal governments, make up the remaining third of county government revenue. Region- County payment programs fall into three pe- wide, county payments average three percent riods that correspond to major changes in the of total governmental revenue, but can be way payments are funded and distributed more important in some counties; county among counties. We use a version model to payments contributed a third or more of total distinguish among these periods: ‘County governmental revenue in eight counties, a Payments 1.0’ refers to the period between fifth or more in another 16 counties, and 10 1908 and 1976 during which payments were percent or more in another 22 counties (U.S. established and funded exclusively from Census of Governments 2012; U.S. Depart- commercial receipts; 2.0 begins in 1976 with ment of Agriculture 2017a; U.S. Department the addition of PILT; and 3.0 describes the of Agriculture 2017b; U.S. Department of In- period between 1990 and 2018 during which terior 2017a; U.S. Department of Interior ‘transition’ payments decoupled Forest Ser- 2017b). vice and Bureau of Land Management In the Pacific Northwest, county gov- (BLM) O&C5 payments from commodity re- ernments play a key role in local and regional ceipts and added economic diversification economic and community well-being. In ad- and collaboration as new goals for county dition to basic infrastructure and services, payment programs. The transition payments many counties provide community health and of county payments 3.0 expire in 2019, re- social services, environmental conservation, newing debate about the long-term viability parks and trail infrastructure, libraries, and and purpose of county payments programs. cultural services. Many counties also play an expanding role in economic development ac- County Payments 1.0: Compensation Linked tivities including workforce development, to Commodities, 1908-1976 business support, and marketing activities in response to changing demographics, funding, Gifford Pinchot, the first Chief Forester of and economic pressures (Berman and Salant the U.S. Forest Service, advocated for the in- 1996; Istrate 2014). Public-private partner- augural county payments program on the ra- ships and collaborations with the business tionale that sharing the proceeds from the community and nonprofits are emerging as conservation and sustainable use of public key strategies to provide services critical to lands provided for fair and sufficient pay- rural economic development (Agranoff and ments in lieu of taxes that governments could McGuire 2004; Sullivan, Ryser, and Halseth collect were the lands privately held. These 2014). The increasing role for county govern- first payments were equal to 25 percent of the

5 O&C Lands refer to the Oregon and California Railroad Grant Lands. 121 COUNTY PAYMENTS 4.0

proceeds from commercial activities on pub- O&C lands accrue to county governments us- lic lands, mainly from timber sales; hence, ing a formula based on the relative taxable the program became known as the ‘25 Per- value of land in the counties in 1915.9 cent Fund’ (see Figure 1).6 Payments were re- After World War II, payments in- stricted to funding county roads and local creased substantially as timber extracted school districts; state governments deter- from public lands helped to fuel the nation’s mined the allocation of payments between housing boom. From 1945 to 1980, payments these uses. For the entire period between averaged $391 million, reaching a high of 1908 and World War II, total payments aver- $1.2 billion in 1977 (U.S. Department of Ag- aged $10 million annually.7 riculture 2016). During this period, the BLM began sharing commercial receipts generated on the County Payments 2.0: PILT Addresses Eq- O&C Lands with counties and schools.8 The uity, Uncertainty, and Incentives, 1976-1990 O&C lands refer to BLM lands initially granted to the railroads as private land but As county payments increased in size after subsequently revested to the federal govern- World War II, weaknesses in the revenue ment and managed for timber harvests. Fifty sharing model became more noticeable. In percent of the proceeds of timber sales on

Figure 1. Key Developments and Reforms in County Payments, 1908-2016

6 Act of May 23, 1908, Pub. L. No. 60-136. 7 Unless noted otherwise, all values in this paper are adjusted for inflation to 2016 dollars. 8 O&C Lands Act, Pub. L. No. 74-405, tit. II(a) (1937). The county government share of the O&C payments is not restricted to roads but can be used for any governmental purpose. 9 Act of June 24, 1954 (68 Stat. 270). Payments are based on the “value of O&C lands assuming the same value for all lands as the average value of those lands that were assessed in 1915.” HJSR ISSUE 40 (2018) 122

1970, the Public Lands Law Review Com- received from other county payment pro- mission wrote: “Although they were origi- grams (including the Forest Service 25% nally designed to offset the tax immunity of Fund payments, but BLM O&C payments are Federal Lands, the existing revenue sharing exempt from the PILT formula) and is limited programs do not meet a standard of equity for all counties based on their population.11 and fair treatment either to state and local PILT is funded with appropriations from the governments or to the Federal taxpayers” U.S. Treasury (Corn 2008; Schuster 1995). In (1970:237). Payments proved to be too un- these ways, PILT is designed to work in con- predictable for local governments to use for cert with revenue sharing payments to im- effective annual budgeting, to engage in prove the equity and stability of compensa- long-term planning, or to pay for costly infra- tion for non-taxable federal lands. structure improvements. On a national basis, payments could rise and fall on the order of County Payments 3.0: Transition Payments 30 percent annually (Hoover 2015) with indi- Decoupled from Commodity Receipts, 1990- vidual counties experiencing even more ex- 2016 treme volatility. Payments based on the commercial Declining timber harvests after 1989 lowered values generated on public lands also were revenue sharing payments to counties—by unequally distributed among counties. Coun- more than 90 percent in some Pacific North- ties in Oregon, the leading producer of public west counties (Hoover 2015). To stabilize an- land timber, received more than a third of to- nual revenue sharing amounts, Congress be- tal revenue sharing payments while counties gan making ‘transition’ payments to counties in states with relatively lower-value commer- where declining receipts create major reve- cial logging on public land received little nue shortfalls. The first transition payments compensation by comparison, leading the were made in 1990 only to the BLM O&C Public Lands Law Review Commission to counties in Oregon, but established a frame- write: “In some cases, payments made by work that would be utilized later in larger Federal programs undercompensate, while in programs extended to Forest Service public others they overcompensate.” The report land counties as well. These first transition added that payments based on commercial payments established a ‘floor’ payment based activities created perverse incentives for on the average revenue sharing payment counties such that “pressures can be gener- amount during the five-year period 1986 to ated to institute programs that will produce 1990. The floor payment was paid from ap- revenue, though such programs might be in propriations between 1990 and 1993 (U.S. conflict with good conservation practices” Department of Interior 2016). The Northwest (1970:237). Forest Plan extended transition payments to These concerns eventually led Con- all BLM and Forest Service public land coun- gress to pass Payments in Lieu of Taxes ties covered by the Plan. The so-called ‘spot- 10 ted owl’ transition payments separated timber (PILT) in 1976. PILT is a formula-driven payment based primarily on the number of harvests from county compensation by guar- acres of eligible ‘entitlement land’ in each anteeing a minimum (floor) payment equal to county. The authorized payment based on 85 percent of the five-year average payment acreage is reduced by ‘prior year payments’ during 1986 to 1990. As part of the planned transition, the value declined to 58 percent in

10 Pub. L. 94-565, 1976. 11 The population ceiling payment is reduced for smaller-population counties. 123 COUNTY PAYMENTS 4.0

2003 after which the program was meant to would stabilize local government budgets expire (Tuchmann et al. 1996). and end the need for transition payments In 2000, Congress passed the Secure funded by Congress (Hoover 2015). To help Rural Schools and Community Self-Determi- accomplish a transition away from depend- nation Act (SRS). SRS effectively extended ence on timber, SRS increased funding from transition payments nationally to address a 85 percent of historic payments to 100 per- similar decline in commercial receipts and cent. The additional 15 percent was allocated revenue sharing payments from public between two new Titles in the SRS law. lands.12 Initially authorized for six years, SRS Funds allocated to Title II supported public provided optional payments equal to 85 per- land projects recommended to the land man- cent of the highest three years of revenue agement agencies by Resource Advisory 13 sharing payments between 1986 and 1999. Councils (RACs). Title II funding opened the An important part of the negotiation possibility for new collaborative efforts to over SRS was the desire on the part of some address economic development goals on pub- counties to maintain the link between public lic lands. Title III funds could be used on spe- land management and county payments. The cial county projects including reimbursement National Association of Counties lobbied for emergency services provided on federal successfully to allow counties to elect to re- lands and funding for community fire plans tain their revenue sharing payment under and Firewise activities. SRS (Hoover 2015). Inherent to this debate Reauthorization and reforms in 2008 was a fundamental disagreement about the went further by altering the SRS funding for- nature of the transition. Some timber-depend- mula to include a per-capita personal income ent communities argued the transition was a adjustment that directed relatively higher period of adjustment that would eventually payments to counties with low per-capita per- allow the land management agencies to re- sonal income and provided a significant tem- store timber harvests to previous levels with porary increase in funding. This new goal of new environmental safeguards in place. As economic equity in county payments had the justification they pointed to the O&C Act that effect of directing larger payments to non- mandates these revested lands be used to sup- metropolitan counties with relatively poor ply a steady flow of timber to support local economic performance. The increased fund- economies (Association of O&C Counties ing level also returned payments close to his- 2018). toric highs. (On a national level, only pay- Another view was that SRS intended ments in the years 1977 to 1980 exceeded the to enable counties to move away from timber FY 2008 payment levels in real terms). toward a more diverse economy. A more diverse economy would, in theory, generate new sources of governmental revenue that

12 Secure Rural Schools and Community Self-Determination Act of 2000, Pub. L. No. 106-393. 13 Under Section 102(a) and 103(a), states eligible to receive Forest Service and/or BLM revenue sharing payments can elect to receive either (1) the Twenty-Five Percent (Forest Service) or Fifty Percent (BLM) Payment or (2) the ‘full payment amount,’ calculated as the average of the three highest yearly revenue sharing payments from FY 1986 to FY 1999. The SRS payment was tied to the average of the three highest historical payments to each state as a means of further reducing the volatility of timber receipts at the county level. Under the 2000 version of the SRS Act, funding for payments to states and counties is derived from revenues, fees, penalties, or miscellaneous receipts received by the federal government from activities of the Forest Service on National Forest land, and the Bureau of Land Management on revested and reconveyed grant lands (lands returned to federal ownership). Pub. L. No. 106-393, §§102(b)(3), 103(b)(2). To the extent of any shortfall, payments are derived from Treasury funds not otherwise appropriated. HJSR ISSUE 40 (2018) 124

Status at the Time of Writing solving these challenges. This section describes the ways in which the recent history The expiration of SRS in FY 2018 effectively of county payments has worked against ef- ends transition payments and returns to forts to enhance county fiscal health, eco- County Payments version 2.0 – that is, PILT nomic development, and federal land man- and revenue sharing payments made under agement. the Forest Service Act of 1908 and BLM Local decisions to utilize county pay- O&C Act of 1937. It also creates an oppor- ments to maintain low tax rates have led to tunity to advance a new approach. One option reliance on federal payments to maintain an- is to reauthorize SRS. Since the four year au- nual government budgets. For example, the thorization in 2008, SRS has been extended Oregon counties that historically received the multiple times at one or two year intervals at largest revenue sharing payments maintained declining amounts. The requirement to se- among the lowest property tax rates and the cure authorization and appropriation on a re- lowest local revenue per capita of all counties curring basis does not appear to be a long- in the state (Oregon Secretary of State 2016). term solution. Another option is to revert to State taxation and expenditure limita- revenue sharing payments permanently. The tions (TELs) have exacerbated reliance on President’s FY 2019 proposed budget would county payments by making it more difficult not reauthorize SRS and would limit appro- to raise local tax revenue to replace declining priations for PILT. If the budget proposal is county payments (Mullins and Wallin 2004; accepted by Congress, total payments to Stallmann et al. 2017). TELs typically restrict counties and schools in the Pacific Northwest budget and tax levy increases to the rate of will decline by half from $260 million in FY inflation with some provisions for new 2015 to $131 million in FY 2019. The cuts growth. For example, Oregon’s Measures 5 would hit rural counties and schools hardest, and 50 passed in 1990 and 1997 limited prop- with payments falling by greater than 80 per- erty tax rates, lowered property assessed val- cent in several counties and metropolitan ues, and limited growth in assessed values counties receiving a larger proportion of total (Oregon Department of Revenue 2009). Tax payments – undoing the redistribution of pay- increases require voter approval at the local ments from metropolitan to non-metropolitan level. These limitations on local revenue au- counties achieved by SRS (Headwaters Eco- thority and capacity entrench a model of ane- nomics 2018).14 mic local taxation. Efforts to increase local tax levies have failed, resulting in fiscal stress Implications of Ending Transition Payments and deep cuts to services (Johnson 2017). to Counties Other states have limited local revenue authority in similar although typically less strin- The expiration of transition payments has re- gent ways. Notably, Idaho limits growth in newed the issues of equity, uncertainty, and revenue received from property taxes to three incentives associated with revenue sharing percent annual growth without voter ap- payments. Changes in the regional economy proval, with some allowances for new con- and new taxation and expenditure limitations struction and annexation (importantly, new on local governments since transition pay- industrial property is not exempt from the ments began in 1990 add new urgency to re- revenue limits) (Idaho State Tax Commission 2017).

14 Headwaters Economics estimates. To see a data visualization of the county-by-county change in payments, see https://headwaterseconomics.org/county-payments/policy-options/presidents-budget-cuts-county-payments/. 125 COUNTY PAYMENTS 4.0

These local and state policies and Forest Payments and County Services practices entrench dependence on annual (2009:40) found that: payments through PILT, SRS, and revenue sharing programs. Dependence on uncertain In 1995, Alcan Cable, an industrial receipts and federal appropriations has fiscal manufacturer, located in Douglas and economic implications for counties. County. By 2008, the value of Alcan The National Association of Counties Cable’s plant and 200 new homes to reports that the expiration of SRS and limits house employees resulted in only on PILT’s appropriation (as proposed by the $63,000 of county taxes for public ser- Trump Administration) will require sharp vices. A typical Deputy Sheriff now budget cuts in many counties (Shuffield costs Douglas County $75,320 per 2017). Testimony from several county com- year, or 20 percent more than public missioners to a Senate Committee in May revenues generated from this extensive 2017 illustrated the revenue and budget im- development. Contrast that with a me- pacts of declining county payments (U.S. dium-sized saw mill cutting 60 million Senate Committee on Energy and Natural board feet of timber per year purchased Resources 2017). Cuts to critical services, in- from federal O&C forests. At about cluding education, public safety, road infra- $300 per thousand board feet, the cost structure, and libraries, can have implications to the mill of that timber was $18 mil- for rural communities because of the in- lion. One-half of those revenues, or $9 creased importance of local government ser- million, was shared with O&C coun- vices, partnerships, and initiatives for eco- ties as discretionary revenues. Of that nomic development. For example, Idaho and $9 million, Douglas County received Clearwater counties in Idaho could lose more $2,254,500, over 35 times the property than half their federal payments, a decline of taxes generated by the Alcan plus- more than $7 million and $1.1 million, re- homes development. spectively. The two counties together lost population between 2011 and 2015 (the latest This dynamic prompted Jackson County, Or- year for which data are available) and have egon Commissioner and Task Force member more than 500 fewer jobs in 2015 as com- C.W. Smith to remark: “Most of these coun- pared to 2007, before the start of the Great ties can’t build themselves or develop them- Recession. Declining enrollment at Clearwa- selves into solvency. Every new resident is a ter County’s schools and reduced budgets negative on the budget” (Oregon Governor’s jeopardize gifted and talented programs, Task Force on Federal Forest Payments and shop, art, and music classes. The school dis- County Services 2009:40). As a result, coun- trict is now on a four-day week and cannot ties overemphasize activities that could in- support day-long kindergarten classes. Re- crease commercial receipts on federal public taining and attracting families and businesses land and discount alternatives that generate becomes increasingly difficult without robust less revenue but could diversify and grow community services and school programs economies. For example, concerns about lost (Haggerty 2017). revenue potential associated with assigning Another implication of over-reliance on conservation to timber lands were the basis of federal payments is to discourage economic opposition from the Association of O&C development in other sectors outside of com- Counties to expanding the Cascade-Siskiyou mercial timber in public land counties. The National Monument (Cevagske 2017). Oregon Governor’s Task Force on Federal HJSR ISSUE 40 (2018) 126

The uncertainty – and promise – of More fundamentally, a reliance on sustained continued appropriations or of renewed tim- commercial timber harvests to fund county ber receipts from increased harvest keeps payments perpetuates the disconnect between some local officials focused on these solu- the narrow fiscal goals of federal land man- tions instead of exploring alternatives agement (maximize timber harvest) and the (Mortensen 2012), a dynamic that mirrors the broader and changing economic values of ‘flickering’ of extractive industries, such as public lands including the emerging restora- mines opening and closing with commodity tion economy (BenDor et al. 2015; Hibbard cycles (Freudenberg 1992). Flickering can and Lurie 2013). discourage communities from recognizing These outcomes are consistent with a and accepting economic transition (Haggerty large body of academic literature focused on et al. 2018) and from making efforts to adapt the challenges associated with translating re- to the changing economy. Rhetoric from source wealth into long-run economic growth members of Congress and the current Admin- and community well-being. In short, access istration that promises to restore a sustained to resource endowments does not automati- yield management regime to National Forest cally lead to economic prosperity or decline. and the BLM O&C timber lands – including Instead, policy choices, including fiscal poli- proposals to mandate annual harvest levels, cies, affect the long-term outcomes of re- increase the scale of categorical exclusions source extraction (Haggerty and Haggerty for timber projects, and limit judicial review 2015). Fiscal policies that invest revenue of federal decisions, among other strategies – from resource extraction into long-term sav- maintains the hope for some counties that ings, community infrastructure, and eco- changes to federal policy will resolve economic development activities in resource re- nomic and fiscal challenges at home. gions can diversify economies and lead to a Increasing receipts on public lands virtuous cycle of growth from the initial re- may not be a viable long-term solution for a source endowment (Gunton 2003). Alterna- variety of reasons. The Forest Service tively, fiscal policies that lead to an over-re- stresses that generating receipts sufficient to liance on annual revenue from volatile re- meet the needs and expectations of counties source sources, for example, by spending re- year over year is unrealistic under variable source revenue on annual budgets and to market conditions and budget realities (Tid- maintain low taxes on other sectors of the well 2014). The recent agreement in Con- economy, can discourage economic diversifi- gress on a fire funding fix, forest manage- cation and lead to slower long-term growth – ment reform, and a two-year extension of a resource curse (Morrison-Saunders et al. SRS as part of a major budget agreement left 2016; Taylor, Hufford, and Bilbrey 2016). out the most aggressive efforts to increase the The experiences of counties in the Pa- pace and scale of timber harvest, which may cific Northwest and lessons drawn from long- indicate that the land management agencies term study of resource-dependent communi- likely do not have the social license to in- ties suggest what could be done to improve crease and sustain cuts at historic levels. the way counties are compensated for non- Smaller efforts, including sharing a portion of taxable federal land. Historic approaches that receipts from stewardship contracts, would based compensation on volatile commercial not increase payments materially. Steward- receipts and uncertain discretionary appropri- ship receipts would add less than $6 million ations have undermined fiscal health in pub- annually to revenue sharing payments (Rural lic land counties, limited economic develop- Voices for Conservation Coalition 2017). ment opportunities, and influenced forest 127 COUNTY PAYMENTS 4.0 management decisions. During a Senate primary funding model for county payments hearing in May 2017, Senator Murkowski (R- over time. AK) argued for an end to the “annual cycle of These policy options, including the begging” for SRS and PILT appropriations, endowment model, are analyzed on several suggesting the possibility of a new path for metrics: total size of the payment to local county payments. She cited the importance of governments, payment equity (measured as timber management reform for forest health the share of payments distributed to metro- and to sustain rural employment opportuni- politan and non-metropolitan counties), and ties, but added that timber harvests alone are the cost to the U.S. Treasury. The endowment unlikely to provide a fiscal solution. For this, model can be evaluated based on the size of she recommended considering new ideas. the fund required to replace other funding The next section provides a policy analysis of sources, the time (in years) to build up an en- three possible paths: revenue sharing, contin- dowment of sufficient size, and the total cost ued appropriations, and a hybrid approach to the U.S. Treasury to establish the endow- that would use commercial receipts to build ment. an endowment as the funding source for reauthorization of SRS. Revenue Sharing

Analysis of County Payment Scenarios The President’s FY 2019 budget request (U.S. Office of Management and Budget This section analyzes several policy options 2018) does not recommend reauthorizing for Forest Service, BLM O&C, and PILT SRS, meaning eligible public land counties payments, including: will receive a revenue sharing payment from the Forest Service 25% Fund and a BLM • Option 1: Returning to a revenue O&C 50% Revenue Sharing payment. The sharing model and funding PILT at budget proposal estimates that revenue shar- the full authorized payment amount. ing payments for the two programs in FY • Option 2: Returning to a revenue 2019 will be valued at $75 million, a decline sharing model and limiting PILT from the actual FY 2017 revenue sharing funding to a level below the full au- payments of $78 million. Revenue sharing thorized payment amount. payments are made on a seven-year rolling • Option 3: Implementing a long-term average basis, attenuating annual change as- reauthorization of SRS and funding sociated with increasing or declining com- PILT at the full authorized payment modity receipts. For this analysis, revenue amount. sharing payments are estimated to average $80 million for the 35-year analysis period. Without additional reform, these policy options would be funded annually with a SRS Reauthorization combination of commercial receipts and discretionary appropriations. Alternatively, a SRS expires again in FY 2019, but efforts to new endowment model would create a per- reauthorize the payments are expected to manent trust that would be funded with an- continue and include recommendations for a nual commercial receipts. Distributions from permanent authorization and mandatory the endowment would replace commercial funding. This paper assumes a permanent au- receipts and appropriations to become the thorization and annual appropriations fixed at the FY 2015 level for the analysis period. HJSR ISSUE 40 (2018) 128

PILT (e.g. the value of forgone revenue sharing payments or some other payment level). Dur- The President’s Budget requests a $397 mil- ing this period, distributions from the perma- lion appropriation for PILT in FY 2019, nent trust would go first to the Treasury to equal to the most recent ten-year average of offset the cost of appropriations. PILT payments. The request is lower than the Congress also could make a one-time actual FY 2017 payment of $465 million, and payment to capitalize the permanent trust. A lower than the authorized payment for FY capital payment would reduce the time before 2018 of $530 million. The higher FY 2018 distributions from the trust grew to sufficient PILT payment reflects lower prior-year pay- size to eliminate the need for continued an- ments to counties for FY 2016. In that year, nual appropriations to fund county payments. SRS was not paid and counties received only a revenue sharing payment.15 If PILT is Comparison of County Payment Options in funded below the authorized amount, appro- the Pacific Northwest priated payments are reduced proportionally for all eligible jurisdictions. Tables 1 and 2 show that Option 2 (a The PILT formula is calculated under return to a revenue sharing model and limited each of the policy options to estimate the total PILT funding) would result in the lowest total payment to counties and schools, payment payments to Pacific Northwest counties equity, and the total cost of appropriations ($130 million), the least-equitable payments from the U.S. Treasury. among metropolitan and non-metropolitan counties (metro counties would receive 37% Endowment Model of the total payment), and the lowest costs to the U.S. Treasury ($96 million annually). The The Endowment Model option would create change in the distribution of payments among a new permanent trust funded with annual metro and non-metro counties is the result of commercial receipts, including the Forest two factors. First, a return to revenue sharing Service 25% Fund receipts and BLM O&C payments ends the equity-based components 50% Revenue Sharing receipts. The principal of the SRS formula (including the per-capita balance of the permanent trust would be held personal income adjustment), increasing the in perpetuity and invested to earn income. At inequity of payments overall. Second, lower the end of each fiscal year, the permanent prior-year payments from the Forest Service trust would make distributions that would (BLM O&C payments are exempt from the benefit public land counties. Initially, distri- PILT prior-year payment calculation) effec- butions from the permanent trust would be tively shift a larger share of the total PILT au- smaller than the value of commercial receipts thorization to metropolitan counties less af- deposited into the permanent trust. During fected by the formula’s population limit. this period, Congress would authorize appropriations to make up the difference between the value of distributions from the permanent trust and an authorized county payment level

15 The last SRS payment authorized for FY 2015 was paid to counties during FY 2016. These payments are reported to the Department of Interior as prior-year payments for the PILT FY 2018 payment introducing a two-year lag between when Forest Service payments declined and when counties are eligible for a higher PILT payment. 129 COUNTY PAYMENTS 4.0

Table 1. Average annual payments from selected county payments programs and cost of appropriations Policy Option PILT Pay- Forest Service BLM O&C Total Payment Appropriation ment Payment Payment Cost Option 1: No SRS, $131,016,000 $15,914,999 $18,180,795 $165,111,894 $131,016,000 Full PILT Option 2: No SRS, $96,443,367 $15,914,999 $18,180,795 $130,539,162 $96,443,367 Limited PILT Option 3: SRS, $90,871,329 $133,733,900 $35,556,001 $260,171,230 $226,075,436 Full PILT

Table 2. Share of projected payments made to metropolitan and non-metropolitan counties16 Policy Option Payment to Met- Payment to Non- Metro Share of To- Non-Metro Share ropolitan Coun- Metropolitan tal Payment of Total Payment ties Counties Option 1: No SRS, $58,921,037 $106,190,857 36% 64% Full PILT

Option 2: NO SRS, $48,075,410 $82,463,751 37% 63% Limited PILT

Option 3: SRS, Full $71,333,217 $188,838,014 27% 73% PILT

Table 3. Endowment Model treasury cost and timing Endowment Options Size of Endowment Re- Years to Build Endow- Avg. Annual Treasury quired ment w/Receipts Cost Compared to Options 1 & 3 Option 1 with Endow- $852,394,855 20 $17,689.482 ment Option 3 with Endow- $4,232,497,536 68 -$33,307,223 ment

By comparison, reauthorizing SRS cost of appropriations by $95 million com- would provide relatively higher ($260 mil- pared to a revenue sharing model with PILT lion) and more equitable payments (metro funded at the full authorized amount. counties would receive 27% of the total pay- Table 3 compares several options for ment) relative to the revenue sharing options, how the Endowment Model could be pur- but at higher cost to the U.S. Treasury ($226 sued. Column two is an estimate of how large million annually). The cost of the SRS reau- the permanent trust balance would have to be thorization is offset somewhat by a lower for distributions to replace the appropriated PILT authorization, but still increases the funding level (in this case, equal to forgone revenue sharing payments or equal to the

16 Metropolitan and micropolitan statistical areas are geographic entities defined by the U.S. Office of Management and Budget (OMB). A metropolitan area contains a core urban area of 50,000 or more population. A micropolitan area contains an urban core of at least 10,000, but less than 50,000, population. All other areas are classified as rural. COUNTY PAYMENTS130 4.0

value of an SRS reauthorization), or alterna- Discussion: Endowing Public Land Coun- tively the size of a capital payment that would ties eliminate the need for annual appropriations. Column three estimates the time required to This analysis describes how a new option for build a permanent trust to the required size county payments – an endowment model – using only commercial receipts. Column 4 could resolve the problems inherent to previ- compares the average annual cost of building ous iterations of county payment policies and the permanent trust with commercial receipts address the specific challenges and opportu- to the annual cost of SRS and PILT appropri- nities associated with the changing economy ations over the same period. and economic geography of the West. The Compared to Options 1 and 3, the En- endowment model idea is based on the expe- dowment Model is more expensive in the rience of U.S. states and many countries short term (in the first 10 years), particularly around the world in managing natural re- if a large, one-time capitalization payment is source revenue and has several advantages made. However, over time the endowment over current county payment models. First, it model costs less (eventually eliminating the still utilizes commercial receipts as the long- need for annual appropriations) and would term funding source for county payments, but increase county payments predictably year stabilizes these revenues over time to guaran- over year at no cost to the U.S. Treasury after tee predictable and increasing payments year the permanent trust reaches sufficient size. over year. Second, an endowment would not An endowment could replace revenue shar- require discretionary appropriations from ing payments in 20 years at a cost of $350 Congress after an initial period as the perma- million. After 20 years, county payments nent trust increases in value. Third, decou- would increase and PILT authorizations de- pling county payments from annual commer- crease annually. Replacing SRS appropria- cial receipts would allow forest management tions with distributions from a permanent reform to move forward without a revenue trust would take 68 years, or could be done mandate, shifting the focus to management immediately with an initial payment into the strategies intended to restore forest health endowment of $4.2 billion. Compared to a and leverage economic development strate- permanent authorization of SRS at FY 2015 gies sensitive to the various needs of different levels, the Endowment Model could cost $33 types of public land counties. million less each year on average as distributions from the permanent trust increase in Permanent Trusts in States and Other Na- amount and lower the annual cost of appro- tions priations. After 68 years, payments to counties would increase and PILT authorizations Utilizing permanent trusts to stabilize reve- decrease annually. nue and build an endowment from the extrac- The way distributions from the en- tion of natural resources is not a new idea. dowment are allocated among counties – Trusts are utilized by nearly every U.S. state based on their relative contributions of com- with significant natural resource wealth. For mercial receipts or based on the SRS formula, example, Alaska, Louisiana, New Mexico, for example – also could resolve equity con- North Dakota, Oklahoma, Texas, and Wyo- cerns associated with annual revenue sharing ming have state land and severance taxes payments. trust funds with a combined value of more than $100 billion (Alaska Permanent Fund Corporation 2009; Williams 2008; Wyoming 131HJSR ISSUE 40 (2018)

Taxpayers Association 2015). Trusts also are forward-looking fiscal tool that would help common internationally, led by Norway’s the country do better if and when the oil price massive sovereign wealth fund created from rose again. The trust was designed to buffer oil revenue and valued at more than $950 bil- the economy from the annual uncertainty in lion (Johnson 2007). oil revenue and build a lasting endowment The most relevant models for a fed- from oil wealth to benefit future generations. eral public land endowment are the numerous The fund was set up in 1990 but no money state trusts funded with royalties and fees was available to invest into the fund until generated from commercial activities on 1996 when oil prices began to recover. To- state-owned land, including timber harvests. day, Norway’s trust fund is worth about $900 Beginning in 1803 with Ohio’s statehood, the billion (Rosalsky 2014). federal government transferred to new states The U.S. has one example of a perma- a portion of the public domain not yet nent trust at the federal level that benefits claimed by homesteaders, granted to rail- public land counties. The U.S. Endowment roads, or reserved for other purposes (Souder for Forestry and Communities was estab- and Fairfax 1996). In most western states, the lished as part of the Softwood Lumber Agree- federal government transferred two sections ment between Canada and the U.S. in 2006. in each township. The lands were intended to The agreement established the Endowment generate revenue for local schools and other with $200 million; proceeds from the Endow- purposes. Initially, states often sold lands and ment are used to fund educational and chari- spent the proceeds of sales as they came in. table activities in public land communities in The unsustainability of this practice soon led the U.S. (Owen 2016). states to hold “trust lands” in perpetuity and If a new endowment is established to to establish permanent trust funds that would fund county payments, best management receive the proceeds from the management of practices can be gleaned from these exam- trust lands. The principal balance of these ples. For example, to guard against raiding, funds is invested to earn income, effectively Congress could authorize an independent en- replacing an exhaustible resource endow- tity to establish and manage the Trust as it did ment with a perpetual financial endowment when it created the U.S. Endowment for For- that funds public schools and other state in- estry and Communities. Congress can also stitutions. mandate best practices already utilized else- Norway’s experience also offers a where – for example, asset management strat- useful example. Oil production began in Nor- egies that are in accordance with the Prudent way’s North Sea waters in 1971. Price spikes Expert Rule (Employee Retirement Income in oil in 1979 and 1980 generated significant Security Act of 1974), inflation-proofing the revenue to the government, and the govern- trust (Rodell 2018), and oversight by the In- ment spent that money on an annual basis. spectors General of the U.S. Departments of Norway’s economy grew rapidly with rising Agriculture and Interior. wages, spending, and borrowing in the public and private sector. When prices subsequently Missed Opportunity for County Payments collapsed in 1986, the economy’s dependence on annual oil revenue quickly precipi- The total value of timber harvests from all tated a fiscal crisis. In 1990, while the coun- Forest Service land since 1908 is about $80 try was still suffering high unemployment billion (in 2016 dollars) (U.S. Department of and persistent cuts in government spending, Agriculture 2016). Had Congress followed Norway established its permanent trust as a the example of the states and established an COUNTY PAYMENTS132 4.0 endowment in 1908 instead of annual reve- funding a permanent trust would stabilize and nue sharing payments, it would distribute grow revenue over time, eliminate the need $3.2 billion today to counties and schools, for annual Congressional appropriations, and three times larger than the maximum revenue provide flexibility to address economic and sharing payment made in 1977 and 213 times forest management solutions appropriate to larger than actual payments made in FY 2017 the needs of diverse public land counties in (Headwaters Economics 2014). Had Con- the Pacific Northwest. The endowment gress established an endowment in 1977 in- model also could begin to articulate an inte- stead of PILT, it would be worth $12.3 billion grated public lands policy that better aligns today and distribute payments equal to $308 land management, economic development, million. Had Congress established an endow- and county payments to benefit Pacific ment in 2000 instead of SRS, it would be Northwest communities. worth $1.3 billion today and distribute $33 million. ______Commercial receipts from federal lands remain at relatively low levels. Estab- Mark Haggerty is an economic geographer at lishing a permanent trust today only with Headwaters Economics in Bozeman, Montana. funding from commercial receipts would take Mark specializes in economic and fiscal analysis time to build a significant endowment (68 of natural resource development, public lands, years to replace SRS). With Congress consid- and rural economies. Mark has extensive real- ering forest management reform and new world practice gained through service on local uses – and revenue streams – on public land, planning boards, problem solving with county establishing an endowment today creates the commissioners, collaborative groups, and legis- framework to capture future receipts if they lators, and research in academic and policy are- rise and build a sizeable endowment more nas. Mark has also provided expert testimony to quickly. local governments, state legislatures and the U.S. Congress. Conclusion ______The way that county payments are made, including the certainty of payments and the References source of funding, is one of the most im- Agranoff, Robert, and Michael McGuire. 2004. portant and under-appreciated policies affect- Collaborative Public Management: New ing the fiscal and economic well-being of Strategies for Local Governments. Washing- many public land counties and how public ton, DC: Georgetown University Press. lands are managed. The current models – rev- Alaska Permanent Fund Corporation. 2009. “An enue-sharing payments and discretionary ap- Alaskan’s Guide to the Permanent Fund.” propriations from Congress – have failed to Retrieved April 3, 2018 provide predictable and fair compensation to (https://3zi9ys20feru1cmlnv3u4tep-wpen- counties. This failure has exacerbated fiscal gine.netdna-ssl.com/wp-content/up- crises in rural communities and left them un- loads/2017/11/APFC-An-Alaskans-Guide- prepared to meet the economic challenges to-the-Permanent-Fund.pdf). and opportunities for public lands counties in Association of O&C Counties. 2018. “Sus- the 21st century economy. Remaking the fis- tained-Yield Forestry.” Retrieved April 3, cal relationship between public lands and 2018 (http://www.oandc.org/o-c-lands/sus- public land counties by establishing and tained-yield-forestry/). 133HJSR ISSUE 40 (2018)

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