Center for Metropolitan Studies

Policy Brief Winter 2015/2016

Jeremy Weber1 and Max Harleman2 Innovative Solutions to Regional Issues

SHALE DEVELOPMENT, 1. Introduction Shale Gas Development and Public Costs IMPACT FEES, AND MUNICIPAL Pennsylvania covers large portions of two shale formations rich in natural gas, the Marcellus Shale and the Utica Shale. In the FINANCES IN PENNSYLVANIA 2000s, advancements in drilling wells horizontally and in using hydraulics to release gas trapped in shale made drilling in both Executive Summary formations economically attractive. This encouraged extensive drilling, and by 2013 the state had become the country’s second Pennsylvania has experienced wide-spread drilling for natural gas largest producer of natural gas, behind only Texas. Looking in the Marcellus and Utica Shale formations and has become the forward, the U.S. Energy Information Administration estimates country’s second largest producer of natural gas, behind only Texas. that in the coming decades the Marcellus Shale in particular will Although drilling can create jobs and income, it also brings public produce more natural gas than any other formation in the U.S. costs, especially for jurisdictions where drilling occurs. In 2012 the state introduced an Impact Fee on natural gas wells, with revenues Although drilling can create jobs and income, it also brings to be distributed to local governments to address drilling-related public costs. Each well can require hundreds of trips by tractor costs. This brief examines how municipal finances have changed trailers or semi-trucks to bring water, sand, and materials to over time based on drilling activity or proximity to it. Relative to the the well site and then to remove wastewater from the site. baseline period of 2006-2008, we find that: The traffic can degrade roads and generate dust, emissions, • Shale development contributed little to municipal revenues. and congestion while waste water mismanagement can create • Municipalities with substantial drilling (High Drilling other costs. The industry and associated economic activity municipalities) experienced: can also increase use of emergency services or the time of – A doubling of non-tax revenues due to the Impact Fee. government staff to address zoning or traffic issues. As a result, – A 30 percent increase in total expenditures, most of which the growth in drilling around the U.S. has often increased local was spent on roads. . – A more than doubling of the fund balance (financial Act 13 and the Impact Fee on Unconventional Wells reserves), indicating that roughly half of Impact Fee Prior to 2012, drilling only affected the revenues of revenue was saved. Pennsylvania’s local governments in so much as it affected Although our analysis does not permit determining if the Impact property values, earned income, or other taxable economic Fee covers the local public costs of shale development, under variables; there was no direct tax on wells or production. Then reasonable assumptions we find that in absence of the Impact Fee in February of 2012, Governor Tom Corbett signed Act 13 into revenues, the typical High Drilling municipality would exhaust its law, which revised the state’s oil and gas law and introduced initial fund balance in three years.

1 Assistant Professor, Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA 15260. Email: [email protected]. 2 Research Assistant, Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA 15260. Email: [email protected] www.metrostudies.pitt.edu

This research was supported by funds from the University of Pittsburgh Mascaro Center for Sustainable Innovation and from the Graduate School of Public and International Affairs. 1 a fee, called the “Impact Fee,” on unconventional wells, defined as wells Data and Impact Fee Reporting: that are drilled into a shale formation Our analysis draws on municipal financial data from the Pennsylvania Department below a specified depth. As suggested by of Community and . Some municipalities lack financial data the name, the Impact Fee is intended to for at least some years of our study period. All statistics presented are based on offset the public costs associated with municipalities with complete financial data for the study period. We also use municipal- shale gas development. The Fee is levied level data from the Public Utility Commission for the years 2011-2013, which includes on companies operating wells, with the the number of shale wells drilled and the Fees received in each reporting year. Although Fee varying based on the age of the well the Impact Fee was only authorized in 2012, the Fee applied retroactively. All qualifying and the annual price of natural gas. wells drilled prior to 2012, were treated as having been drilled in 2011. Fees collected for reporting year 2011 were collected and distributed with the Fees for reporting year Impact Fee Disbursement 2012. Municipalities, therefore, first received Impact Fee disbursements in calendar According to the Public Utility year 2012. Commission, the Impact Fee has generated between $200 and $225 million each year for reporting years 2011 occur through the awarding of grants 2. How Has Shale Development and to 2014. For each reporting year, roughly while others are defined based on Impact Fee Revenue Affected $25 million goes to various state agencies population. Municipal Finances? or county conservation districts. Of the remaining Fees collected in the year, 40 The remaining 60 percent of Fee revenue Classification of Municipalities percent go to the Marcellus Legacy Fund, enters the Unconventional Gas Well We focus on municipalities because which funds remediation of abandoned Fund and is disbursed to counties and they bear much of the financial burden wells and investments. municipalities. The disbursements from heavy use of roads by the drilling More than half of the Marcellus Legacy depend on the number of wells, industry. They also receive nearly Fund goes directly to state agencies and population, and highway mileage two-thirds (64 percent) of the revenues programs, with the remaining amount in the county or municipality. Local disbursed through the Unconventional disbursed directly to counties. All governments can use the funds based Gas Well Fund. And because of their counties can receive disbursements from on thirteen criteria set forth in the act, generally small budgets, Impact Fee the Legacy Fund, regardless of whether including repairing roads and bridges and revenues represent a larger share of they contain wells. Some disbursements emergency services. annual municipal revenues than they do for counties.

Figure 1: Municipal Map of Total Qualifying Wells Drilled Up To 2013

2 Figure 2: Municipalities by Group

In line with the geography of the All reported statistics are based on the • Impact Fee Revenue as a Share Marcellus Shale, drilling activity varies median, which is the value at which half of Total Revenue: To measure across the state, with no wells drilled of municipalities (of a given group) have a the importance of Impact Fees in municipalities in the southeast and greater value and half have a lower value. for municipal budgets, for each much drilling in the northeast and The Magnitude and Importance municipality we divide its average the southwest (Figure 1). We divide of Impact Fee Revenues annual disbursement over its average municipalities into four groups based • Impact Fee Disbursements Per Capita: annual municipal revenues for the on drilling activity or proximity to it: High The typical municipality in the High 2009-2011 period. For the typical Drilling, Low Drilling, Near Drilling, and Far Drilling group received $130 in Impact High Drilling municipality, Impact Fee Drilling (Table 1 and Figure 2). We divide Fee disbursements per capita per revenue represented 31.6 percent of the 2006-2013 period into three periods: reporting year, significantly more than the municipality’s average total revenue 2006-2008 (prior to large-scale drilling), the Low Drilling group, which received in the years immediately preceding 2009-2011 (much drilling, without Impact only $11 per capita, or the Near Drilling the Impact Fee (2009-2011). The Fees), and 2012-2013 (much drilling, with Group, which received even less percentage was much lower for the Impact Fees). (Figure 3). Low and Near Drilling groups, at 3.8 and 0.1 percent (Figure 3).

Table 1: Classification of Municipalities Number of Municipalities Why Report Median Values? Definition: Total (With Any With Complete Group Although commonly used, the mean “Municipalities that...” Financial Data) Financial Data (or the average) can be very sensitive ..have more than the median 225 201 to observations with extreme values. High Drilling number of wells drilled, among Thus, the inclusion or exclusion of one municipalities with wells or two municipalities with extreme ..have less than the median 203 180 values can substantially change the Low Drilling number of wells drilled, among mean value. In contrast, extreme municipalities with wells values have little, if any, effect on ..have no wells but are in 1,147 965 Near Drilling the median, making it a reliable counties with a shale well measure of the experience of the ..are in counties without a 972 882 Far Drilling typical municipality. shale well All 2,547 2,228

www.metrostudies.pitt.edu 3 Total Revenues Over Time than half of the typical municipality’s • Road Expenditures Per Capita: • Total Revenues Per Capita: During the revenue. Road expenditures increased by 30.3 2012-13 period, the typical municipality • Non-Tax Revenues Per Capita: The percent for the High Drilling group in the High Drilling group experienced increase in total revenues primarily compared to 3.1 percent for the Low a 67.4 percent increase in revenues reflects an increase in non-tax Drilling municipalities. In contrast, road per capita over the 2006-08 value revenues, which includes Impact Fee expenditures decreased for Near and (from $352 to $590) (Table 2). By revenue. Non-tax revenues in the Far Drilling municipalities. contrast, municipalities in the other typical High Drilling municipality more • Non-Road Expenditures Per Capita: For three groups, for which the Impact Fee than doubled from the 2006-08 period High Drilling municipalities, non-road represented a small or zero percent of to the 2012-13 period. In contrast, Low, expenditures per capita increased total revenues, experienced a relatively Near, and Far Drilling municipalities much less, at 15.1 percent. Low Drilling small or even negative growth in per experienced low or negative growth municipalities saw a small increase capita revenues over the same period. in non-tax revenues. (6.7 percent), while spending declined Municipalities in the Low Drilling group, in Near and Far Drilling municipalities. for example, only experienced a 4.1 Expenditures Over Time percent increase. • Total Expenditures Per Capita: In Fund Balances Per Capita Over Time • Tax Revenues Per Capita: The typical 2012-13, average annual expenditures Municipal fund balances reflect the High and Low Drilling municipality per capita increased by 30.8 percent accumulated savings of municipalities experienced a modest increase in tax over the 2006-08 baseline for the High as measure by the end of the year value revenues per capita in the 2012-2013 Drilling group (from $333 to $436) of cash and financial investments. The period relative to the 2006-08 period. (Table 3). In contrast, the Low Drilling typical municipality in the High Drilling Municipalities in both groups saw a group only experienced an increase of group experienced a 138.5 percent 17 to 18 percent increase. Note that 4.5 percent, and the Near Drilling group increase in its fund balance per capita tax revenues represent a little less showed a small decline. in the 2012-13 period over the 2006-08

Figure 3. The Size and Importance of Impact Fee Revenues

$150 45% $130 40% $125 35% 31.6% $100 30% 25% $75 20% $50 15% 10% $25 $11 3.8% 5% $1 0.1% $0 0.0% $ Per Capita Per Municipality Per Year Per Municipality Per Capita $ Per $0 0% Revenues of Pre-drilling Percent High Low Near Far Drilling Activity or Proximity

Municipal Impact Fee Per Capita Impact Fee as a Percent of Pre-drilling Revenues

Note: The Impact Fee Per Capita is based on the median municipality (per group) for the average annual disbursement for reporting years 2011-2013. The Impact Fee as a Percent of Pre-Drilling Revenues is based on the median municipality’s average annual disbursement relative to its average annual revenues for the 2006-08 period.

4 Table 2: Median Total Revenues Per Capita Percent Change Percent Change Total Revenue Per Capita 2006-2008 2009-2011 2012-2013 (’06-’08 to ’09-’11) (’06-’08 to ’12-’13) High Drilling $352 $358 $590  1.6%  67. 4 % Low Drilling $301 $296 $314  -1.7%  4.1% Near Drilling $405 $405 $421  -0.1%  3.9% Far Drilling $541 $502 $502  -7.2%  -7.1% Per Capita 2006-2008 2009-2011 2012-2013 High Drilling $147 $153 $173  4.3%  17.8% Low Drilling $126 $130 $147  3.3%  17.1 % Near Drilling $165 $168 $183  1.8%  10.9% Far Drilling $236 $227 $235  -3.8%  -0.6% Non-Tax Revenue Per Capita 2006-2008 2009-2011 2012-2013 High Drilling $188 $191 $382  1.3%  102.5% Low Drilling $161 $156 $166  -3.1%  2.6% Near Drilling $216 $208 $201  -3.4%  -6.9% Far Drilling $276 $240 $235  -13.1%  -14.8%

Table 3: Median Expenditures Per Capita Percent Change Percent Change Total Expenditures Per Capita 2006-2008 2009-2011 2012-2013 (’06-’08 to ’09-’11) (’06-’08 to ’12-’13) High Drilling $333 $343 $436  3.0%  30.8% Low Drilling $289 $297 $302  3.0%  4.5% Near Drilling $398 $403 $393  1.4%  -1.2% Far Drilling $519 $502 $468  -3.2%  -9.7% Road Expenditures Per Capita 2006-2008 2009-2011 2012-2013 High Drilling $163 $164 $212  0.7%  30.3% Low Drilling $148 $148 $152  0.6%  3.1% Near Drilling $111 $110 $110  -0.8%  -0.4% Far Drilling $108 $101 $95  -6.1%  -11.8% Non-Road Expenditures Per Capita 2006-2008 2009-2011 2012-2013 High Drilling $153 $159 $177  4.0%  15.1% Low Drilling $130 $141 $138  8.7%  6.7% Near Drilling $262 $265 $260  1.3%  -0.8% Far Drilling $399 $382 $365  -4.3%  -8.5%

www.metrostudies.pitt.edu 5 Table 4: Median Fund Balance Per Capita Percent Change Percent Change Fund Balance Per Capita 2006-2008 2009-2011 2012-2013 (’06-’08 to ’09-’11) (’06-’08 to ’12-’13) High Drilling $151 $184 $360  21.9%  138.5% Low Drilling $174 $175 $207  0.4%  19.0% Near Drilling $211 $222 $261  5.3%  23.7% Far Drilling $347 $323 $327  -7.1%  -5.9%

baseline, indicating that municipalities 3. Do Growing Fund Balances Mean That less than a year and a half. Many plausible saved part of the Impact Fee revenue Municipalities Have Too Much Money? uses of Fee revenue (repaving roads), (Table 4). The increase in the fund balance One interpretation of the increase in fund however, take months or years to plan. from $151 to $360 per capita, represents balances in High Drilling municipalities In addition, if municipal managers were about 1.6 years of Impact Fee revenue for is that Impact Fee revenue exceeds the uncertain that the Fee disbursements the typical High Drilling municipality. local public costs of shale development. would continue, they may have stockpiled Low and Near Drilling municipalities Several reasons make this interpretation revenues for leaner years ahead. experienced a roughly 20 percent unlikely. Municipalities only began increase in their fund balance. The lack of receiving Fee revenues in the second 4. Municipal Finances in Absence of an increase in non-tax revenues for these half of 2012. For fund balances to have Impact Fee Revenue two groups indicates that the increased remained constant, municipalities would The increased spending by High Drilling savings reflects greater tax revenues, less have had to spend revenues from three municipalities is plausibly a conservative spending, or a combination of the two. reporting years (2011, 2012, and 2013) in estimate of the municipal costs

Figure 4. Estimated Fund Balance for High Drilling Municipalities in Absence of Impact Fee Revenues

200

150

100

50

0

-50

-100

Fund Balace ($ per capita) Balace Fund -150

-200 0 1 2 3 4 5

Years of Shale Development (Year 1 is the first year of development)

Note: The fund balance in Year 0 is the median fund balance of High Drilling municipalities in the 2006-08 period.

6 associated with drilling. Act 13 did not 5. Summary Sources Consulted have a “use it or lose it” requirement. As Shale development in Pennsylvania Abramzon, Shmuel, Constantine Samaras, Aimee Curtright, such, if municipalities did not have good has contributed little to the revenues Aviva Litovitz, and Nicholas Burger. 2014. “Estimating the consumptive use costs of shale natural gas extraction on uses for the revenues, they could save of municipalities outside of the state’s them or use them to lower tax rates. Pennsylvania roadways.” Journal of Infrastructure System Impact Fee. For municipalities in areas 20 (3). In per capita terms, we estimate how with substantial drilling, Fee revenue Energy Information Administration. Natural Gas. http:// drilling would have affected finances supported a 15.1 percent increase in non- www.eia.gov/naturalgas/. in the High Drilling group in absence of road spending and a 30.3 increase in road the Impact Fee. The 2006-08 to 2012-13 spending. For these municipalities, the General Assembly of the Commonwealth of Pennsylvania. increase in expenditures is taken as Fee also led to a 138.5 percent increase 2012. “Act of Feb. 14, 2012, P.L. 87, No. 13.” Pennsylvania General Assembly. www.legis.state.pa.us/WU01/LI/LI/US/ an estimate of the additional annual in fund balances. We estimate that in HTM/2012/0/0013..HTM. expenditures needed to maintain the absence of the Fee, municipalities in High municipality’s level of public goods and Drilling areas would have exhausted their Gordalla, Birgit C., Ulrich Ewers, and Fritz H. Frimmel. 2013. “Hydraulic fracturing: a toxicological threat for groundwater services in the face of drilling ($103). We pre-drilling fund balances in less than and drinking-water?” Environmental Earth Sciences assume that tax revenue increases by the three years. This highlights the value of 3875-3893. observed change over the same periods a revenue-sharing policy to prevent local ($26) and that non-tax revenue does not residents from bearing the public costs of McKenzie, Lisa M., Roxana Z. Witter, Lee S. Newman, and John L. Adgate. 2012. “Human health risk assessment of change. Adding the change in revenue shale development. air emissions from development of unconventional natural and expenditure to the 2006-2008 levels gas resources.” Science of the Total Environment 424: results in $378 in revenue and $436 in Accessing the Data: The data used in 79 - 87. expenditures, leading to an annual deficit this analysis is available for download Pennsylvania Public Utility Commission. n.d. Act 13 of $58 ($436-378). at www.metrostudies.pitt.edu/Projects/ (Impact Fee). www.puc.state.pa.us/filing_resources/ issues_laws_regulations/act_13_impact_fee_.aspx. The typical High Drilling municipality Shale-Development-and-Municipal- Finances. had a fund balance of $151 per capita Raimi, Daniel and Richard G. Newell. 2014. “Shale Public in the 2006-08 period. Three years of Finance; Local government revenues and costs associated Recommended Citation: shale development – and the associated with oil and gas development.” Duke University Energy Weber, J.G. and M. Harleman, (2015), Initiative. annual deficits – would consume the “Shale Development, Impact Fees, and fund balance in less than three years. Municipal Finances in Pennsylvania”, Afterwards, municipalities would need to Center for Metropolitan Studies Policy increase or borrow more money to Brief, Winter 2015/2016. maintain spending (Figure 4). If, however, the Impact Fee displaced voluntary road investments by well operators, the consumption of the fund balance would happen more slowly.

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A research center that is part of the University of Pittsburgh’s Graduate School of Public and International Affairs, the Center for Metropolitan Studies facilitates activities that connect the University of Pittsburgh and our students to the resolution of important issues confronting our region, our state, and our country. The Center houses a variety of initiatives that address a wide range of public concerns including the Congress of Neighboring Communities (CONNECT), the Metropolitan Power Diffusion Index, the Interactive Bibliography on Metropolitan Regionalism, the National Database on Innovations in Regional Governance, model practices in Pennsylvania local and regional government, and research on multi-jurisdictional issues.

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