SHALE DEVELOPMENT, IMPACT FEES, AND MUNICIPAL FINANCES IN PENNSYLVANIAExecutive Summary

Pennsylvania has experienced wide-spread drilling for natural gas in the Marcellus and Utica Shale formations and has become the country’s second largest producer of natural gas, behind only Texas. Although drilling can create jobs and income, it also brings public costs, especially for jurisdictions where drilling occurs. In 2012 the state introduced an Impact Fee on natural gas wells, with revenues to be distributed to local governments to address drilling-related costs. This brief examines how municipal finances have changed over time based on drilling activity or proximity to it. Relative to the baseline period of 2006-2008, we find that:

• Shale development contributed little to municipal tax revenues. • Municipalities with substantial drilling (High Drilling

municipalities) experienced:– A doubling of non-tax revenues due to the Impact Fee. – A 30 percent increase in total expenditures, most of which

was spent on roads.– A more than doubling of the fund balance (financial

reserves), indicating that roughly half of Impact Fee revenue was saved.

Although our analysis does not permit determining if the Impact Fee covers the local public costs of shale development, under reasonable assumptions we find that in absence of the Impact Fee revenues, the typical High Drilling municipality would exhaust its initial fund balance in three years.

1. Introduction

Shale Gas Development and Public CostsPennsylvania covers large portions of two shale formations rich in natural gas, the Marcellus Shale and the Utica Shale. In the 2000s, advancements in drilling wells horizontally and in using hydraulics to release gas trapped in shale made drilling in both formations economically attractive. This encouraged extensive drilling, and by 2013 the state had become the country’s second largest producer of natural gas, behind only Texas. Looking forward, the U.S. Energy Information Administration estimates that in the coming decades the Marcellus Shale in particular will produce more natural gas than any other formation in the U.S.

Although drilling can create jobs and income, it also brings public costs. Each well can require hundreds of trips by tractor trailers or semi-trucks to bring water, sand, and materials to the well site and then to remove wastewater from the site. The traffic can degrade roads and generate dust, emissions, and congestion while waste water mismanagement can create other costs. The industry and associated economic activity can also increase use of emergency services or the time of government staff to address zoning or traffic issues. As a result, the growth in drilling around the U.S. has often increased local government spending.

Act 13 and the Impact Fee on Unconventional WellsPrior to 2012, drilling only affected the revenues of Pennsylvania’s local governments in so much as it affected property values, earned income, or other taxable economic variables; there was no direct tax on wells or production. Then in February of 2012, Governor Tom Corbett signed Act 13 into law, which revised the state’s oil and gas law and introduced

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Center for Metropolitan Studies

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Policy Brief Winter 2015/2016

Jeremy Weber1 and Max Harleman2

Innovative Solutions to Regional Issues

1 Assistant Professor, Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA 15260. Email: jgw99@pitt.edu.

2 Research Assistant, Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA 15260. Email: mrh105@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.

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

a fee, called the “Impact Fee,” on unconventional wells, defined as wells that are drilled into a shale formation below a specified depth. As suggested by the name, the Impact Fee is intended to offset the public costs associated with shale gas development. The Fee is levied on companies operating wells, with the Fee varying based on the age of the well and the annual price of natural gas.

Impact Fee Disbursement According to the Public Utility Commission, the Impact Fee has generated between $200 and $225 million each year for reporting years 2011 to 2014. For each reporting year, roughly $25 million goes to various state agencies or county conservation districts. Of the remaining Fees collected in the year, 40 percent go to the Marcellus Legacy Fund, which funds remediation of abandoned wells and infrastructure investments. More than half of the Marcellus Legacy Fund goes directly to state agencies and programs, with the remaining amount disbursed directly to counties. All counties can receive disbursements from the Legacy Fund, regardless of whether they contain wells. Some disbursements

occur through the awarding of grants while others are defined based on population.

The remaining 60 percent of Fee revenue enters the Unconventional Gas Well Fund and is disbursed to counties and municipalities. The disbursements depend on the number of wells, population, and highway mileage in the county or municipality. Local governments can use the funds based on thirteen criteria set forth in the act, including repairing roads and bridges and emergency services.

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Data and Impact Fee Reporting:Our analysis draws on municipal financial data from the Pennsylvania Department of Community and Economic Development. Some municipalities lack financial data for at least some years of our study period. All statistics presented are based on municipalities with complete financial data for the study period. We also use municipal-level data from the Public Utility Commission for the years 2011-2013, which includes the number of shale wells drilled and the Fees received in each reporting year. Although the Impact Fee was only authorized in 2012, the Fee applied retroactively. All qualifying 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 2012. Municipalities, therefore, first received Impact Fee disbursements in calendar year 2012.

2. How Has Shale Development and Impact Fee Revenue Affected Municipal Finances?

Classification of Municipalities We focus on municipalities because they bear much of the financial burden from heavy use of roads by the drilling industry. They also receive nearly two-thirds (64 percent) of the revenues disbursed through the Unconventional Gas Well Fund. And because of their generally small budgets, Impact Fee revenues represent a larger share of annual municipal revenues than they do for counties.

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Why Report Median Values? Although commonly used, the mean (or the average) can be very sensitive to observations with extreme values. Thus, the inclusion or exclusion of one or two municipalities with extreme values can substantially change the mean value. In contrast, extreme values have little, if any, effect on the median, making it a reliable measure of the experience of the typical municipality.

In line with the geography of the Marcellus Shale, drilling activity varies across the state, with no wells drilled in municipalities in the southeast and much drilling in the northeast and the southwest (Figure 1). We divide municipalities into four groups based on drilling activity or proximity to it: High Drilling, Low Drilling, Near Drilling, and Far Drilling (Table 1 and Figure 2). We divide the 2006-2013 period into three periods: 2006-2008 (prior to large-scale drilling), 2009-2011 (much drilling, without Impact Fees), and 2012-2013 (much drilling, with Impact Fees).

Figure 2: Municipalities by Group

Table 1: Classification of Municipalities Number of Municipalities

Group Definition: “Municipalities that...”

Total (With Any Financial Data)

With Complete Financial Data

High Drilling..have more than the median number of wells drilled, among municipalities with wells

225 201

Low Drilling..have less than the median number of wells drilled, among municipalities with wells

203 180

Near Drilling ..have no wells but are in counties with a shale well

1,147 965

Far Drilling ..are in counties without a shale well

972 882

All 2,547 2,228

All reported statistics are based on the median, which is the value at which half of municipalities (of a given group) have a greater value and half have a lower value.

The Magnitude and Importance of Impact Fee Revenues• Impact Fee Disbursements Per Capita:

The typical municipality in the High Drilling group received $130 in Impact Fee disbursements per capita per reporting year, significantly more than the Low Drilling group, which received only $11 per capita, or the Near Drilling Group, which received even less (Figure 3).

• Impact Fee Revenue as a Share of Total Revenue: To measure the importance of Impact Fees for municipal budgets, for each municipality we divide its average annual disbursement over its average annual municipal revenues for the 2009-2011 period. For the typical High Drilling municipality, Impact Fee revenue represented 31.6 percent of the municipality’s average total revenue in the years immediately preceding the Impact Fee (2009-2011). The percentage was much lower for the Low and Near Drilling groups, at 3.8 and 0.1 percent (Figure 3).

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Total Revenues Over Time • Total Revenues Per Capita: During the

2012-13 period, the typical municipality in the High Drilling group experienced a 67.4 percent increase in revenues per capita over the 2006-08 value (from $352 to $590) (Table 2). By contrast, municipalities in the other three groups, for which the Impact Fee represented a small or zero percent of total revenues, experienced a relatively small or even negative growth in per capita revenues over the same period. Municipalities in the Low Drilling group, for example, only experienced a 4.1 percent increase.

• Tax Revenues Per Capita: The typical High and Low Drilling municipality experienced a modest increase in tax revenues per capita in the 2012-2013 period relative to the 2006-08 period. Municipalities in both groups saw a 17 to 18 percent increase. Note that tax revenues represent a little less

$ Pe

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ita P

er M

unic

ipal

ity P

er Ye

ar

Perc

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f Pre

-dril

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Reve

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Drilling Activity or Proximity

$150

$125

$100

$75

$50

$25

$0

45%

40%

35%

30%

25%

20%

15%

10%

5%

0% High Low Near Far

$130

31.6%

$11 3.8%$1 0.1% $0 0.0%

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.

Figure 3. The Size and Importance of Impact Fee Revenues

than half of the typical municipality’s revenue.

• Non-Tax Revenues Per Capita: The increase in total revenues primarily reflects an increase in non-tax revenues, which includes Impact Fee revenue. Non-tax revenues in the typical High Drilling municipality more than doubled from the 2006-08 period to the 2012-13 period. In contrast, Low, Near, and Far Drilling municipalities experienced low or negative growth in non-tax revenues.

Expenditures Over Time• Total Expenditures Per Capita: In

2012-13, average annual expenditures per capita increased by 30.8 percent over the 2006-08 baseline for the High Drilling group (from $333 to $436) (Table 3). In contrast, the Low Drilling group only experienced an increase of 4.5 percent, and the Near Drilling group showed a small decline.

• Road Expenditures Per Capita: Road expenditures increased by 30.3 percent for the High Drilling group compared to 3.1 percent for the Low Drilling municipalities. In contrast, road expenditures decreased for Near and Far Drilling municipalities.

• Non-Road Expenditures Per Capita: For High Drilling municipalities, non-road expenditures per capita increased much less, at 15.1 percent. Low Drilling municipalities saw a small increase (6.7 percent), while spending declined in Near and Far Drilling municipalities.

Fund Balances Per Capita Over TimeMunicipal fund balances reflect the accumulated savings of municipalities as measure by the end of the year value of cash and financial investments. The typical municipality in the High Drilling group experienced a 138.5 percent increase in its fund balance per capita in the 2012-13 period over the 2006-08

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Table 2: Median Total Revenues Per Capita

Total Revenue Per Capita 2006-2008 2009-2011 2012-2013 Percent Change(’06-’08 to ’09-’11)

Percent Change(’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%

Tax Revenue 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

Total Expenditures Per Capita 2006-2008 2009-2011 2012-2013 Percent Change(’06-’08 to ’09-’11)

Percent Change(’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%

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Fund

Bal

ace

($ p

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)

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

200

150

100

50

0

-50

-100

-150

-2000 1 2 3 4 5

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

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

baseline, indicating that municipalities saved part of the Impact Fee revenue (Table 4). The increase in the fund balance from $151 to $360 per capita, represents about 1.6 years of Impact Fee revenue for the typical High Drilling municipality.

Low and Near Drilling municipalities experienced a roughly 20 percent increase in their fund balance. The lack of an increase in non-tax revenues for these two groups indicates that the increased savings reflects greater tax revenues, less spending, or a combination of the two.

3. Do Growing Fund Balances Mean That Municipalities Have Too Much Money?

One interpretation of the increase in fund balances in High Drilling municipalities is that Impact Fee revenue exceeds the local public costs of shale development. Several reasons make this interpretation unlikely. Municipalities only began receiving Fee revenues in the second half of 2012. For fund balances to have remained constant, municipalities would have had to spend revenues from three reporting years (2011, 2012, and 2013) in

Table 4: Median Fund Balance Per Capita

Fund Balance Per Capita 2006-2008 2009-2011 2012-2013 Percent Change(’06-’08 to ’09-’11)

Percent Change(’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%

less than a year and a half. Many plausible uses of Fee revenue (repaving roads), however, take months or years to plan. In addition, if municipal managers were uncertain that the Fee disbursements would continue, they may have stockpiled revenues for leaner years ahead.

4. Municipal Finances in Absence of Impact Fee Revenue

The increased spending by High Drilling municipalities is plausibly a conservative estimate of the municipal costs

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Sources Consulted

Abramzon, Shmuel, Constantine Samaras, Aimee Curtright, Aviva Litovitz, and Nicholas Burger. 2014. “Estimating the consumptive use costs of shale natural gas extraction on Pennsylvania roadways.” Journal of Infrastructure System 20 (3).

Energy Information Administration. Natural Gas. http://www.eia.gov/naturalgas/.

General Assembly of the Commonwealth of Pennsylvania. 2012. “Act of Feb. 14, 2012, P.L. 87, No. 13.” Pennsylvania General Assembly. www.legis.state.pa.us/WU01/LI/LI/US/HTM/2012/0/0013..HTM.

Gordalla, Birgit C., Ulrich Ewers, and Fritz H. Frimmel. 2013. “Hydraulic fracturing: a toxicological threat for groundwater and drinking-water?” Environmental Earth Sciences 3875-3893.

McKenzie, Lisa M., Roxana Z. Witter, Lee S. Newman, and John L. Adgate. 2012. “Human health risk assessment of air emissions from development of unconventional natural gas resources.” Science of the Total Environment 424: 79-87.

Pennsylvania Public Utility Commission. n.d. Act 13 (Impact Fee). www.puc.state.pa.us/filing_resources/issues_laws_regulations/act_13_impact_fee_.aspx.

Raimi, Daniel and Richard G. Newell. 2014. “Shale Public Finance; Local government revenues and costs associated with oil and gas development.” Duke University Energy Initiative.

associated with drilling. Act 13 did not have a “use it or lose it” requirement. As such, if municipalities did not have good uses for the revenues, they could save them or use them to lower tax rates.

In per capita terms, we estimate how drilling would have affected finances in the High Drilling group in absence of the Impact Fee. The 2006-08 to 2012-13 increase in expenditures is taken as an estimate of the additional annual expenditures needed to maintain the municipality’s level of public goods and services in the face of drilling ($103). We assume that tax revenue increases by the observed change over the same periods ($26) and that non-tax revenue does not change. Adding the change in revenue and expenditure to the 2006-2008 levels results in $378 in revenue and $436 in expenditures, leading to an annual deficit of $58 ($436-378).

The typical High Drilling municipality had a fund balance of $151 per capita in the 2006-08 period. Three years of shale development – and the associated annual deficits – would consume the fund balance in less than three years. Afterwards, municipalities would need to increase taxes or borrow more money to 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.

5. Summary

Shale development in Pennsylvania has contributed little to the revenues of municipalities outside of the state’s Impact Fee. For municipalities in areas with substantial drilling, Fee revenue supported a 15.1 percent increase in non-road spending and a 30.3 increase in road spending. For these municipalities, the Fee also led to a 138.5 percent increase in fund balances. We estimate that in absence of the Fee, municipalities in High Drilling areas would have exhausted their pre-drilling fund balances in less than three years. This highlights the value of a revenue-sharing policy to prevent local residents from bearing the public costs of shale development.

Accessing the Data: The data used in this analysis is available for download at www.metrostudies.pitt.edu/Projects/Shale-Development-and-Municipal-Finances.

Recommended Citation:Weber, J.G. and M. Harleman, (2015), “Shale Development, Impact Fees, and Municipal Finances in Pennsylvania”, Center for Metropolitan Studies Policy Brief, Winter 2015/2016.

About the Center for Metropolitan Studies 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 public policy 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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