Shale Public Finance Project

Local governments across Alaska rely heavily on the oil and gas industry, both directly and indirectly. Since the 1970s, production has been dominated by the North Slope region, with more limited (but recently increasing) production from the Cook Inlet region. Many oil and gas industry employees live in southern parts of the state but commute to the North Slope for one- or two-week shifts. These workers and their associated corporate headquarters provide a substantial part of the local sales and property tax base for local governments in the south. In the North Slope, industry activity is largely confined to regions without substantial government services, and oil and gas companies provide their own roads, public safety, and other services. As a result, local governments in the north see few direct costs from the industry but benefit substantially from oil- and gas-related property taxes collected by the North Slope Borough.

Looking forward, Alaska’s state and local governments face substantial fiscal challenges. More than 90 percent of state general fund revenues come from oil- and gas-related sources, and Alaska does not levy a state-wide sales tax or income tax (though many local governments collect sales taxes). Oil prices fell sharply in 2014 and, as production from the North Slope continues to fall, the state expects to face large deficits and will drain its reserve funds within the next several years without new revenue or dramatic cuts in spending. This trend may have a dramatic effect on Alaska’s many small local government entities, which rely heavily on revenue-sharing and grants from the state.

In north-central Arkansas, where natural gas production has grown dramatically due to development of the Fayetteville shale, county governments have generally experienced substantial net financial benefits. The leading revenue source has been from property taxes, as newly valuable mineral properties came onto the tax rolls in the five counties we examined. These counties also experienced new costs associated with road maintenance and repair, but these costs were substantially limited by agreements made between county and various natural gas companies, who helped repair many of the roads that were damaged during their operations.

Municipal governments in the region experienced smaller new revenues along with smaller new costs, and reported smaller net financial benefits than county governments. The leading revenue source for these municipalities has been sales taxes, which peaked during the most active drilling years of 2007 and 2008, and remain higher than they were before Fayetteville shale activity began. One city also generated substantial revenue from natural gas production on city-owned land. These municipalities experienced modest staff costs, with workforce retention registering as a small challenge during the peak years of drilling activity.

Local governments in California’s oil- and gas-producing regions experience a range of fiscal effects from the industry. In the Los Angeles basin, Los Angeles city and county experience modest effects from oil and gas development due to their large and diverse economies. The city of Long Beach benefits substantially due to its unique position as the working interest in the giant Wilmington oilfield, while the nearby city of Signal Hill experiences substantial negative fiscal effects due to long-term environmental damages associated with oil and gas development in the first half of the 20th century.

In Kern County, where 70 percent of California’s oil is produced, local governments experience large net fiscal benefits despite steadily declining oil and gas production. The county government relies on oil and gas property for a large share of its annual operating revenues. Cities in the region benefit from oil and gas companies and their employees that support the local economy and public finances.

In two regions of Colorado, the Denver-Julesberg and Piceance basins, county governments generally experienced large net fiscal benefits, with one exception. New revenues were led by property taxes, and also included severance taxes allocated from the state, as well as increased sales tax revenues for some counties. Some counties also entered into in-kind agreements with oil and gas operators which limited costs associated with road repair. Despite these agreements, road repair remained the most prominent issue, along with substantial staff costs, primarily from the addition of new staff and rising compensation to retain existing staff. One county (Rio Blanco) reported that road costs had increased faster than revenues, as most oil and gas production within the county occurs on federally owned land, where production is exempt from local property taxes. Unlike other counties we examined, this county had not entered into agreements with locally operating oil and gas companies to help maintain roadways.

The municipal governments we examined generally experienced small net fiscal benefits. Some cities in the sparsely populated Piceance basin region experienced large new revenues and large new costs, while others in more densely populated parts of the state, or further from oil and gas development, experienced relatively little of either. For heavily affected municipalities, primarily in the Piceance basin, sales taxes were the leading source of new revenue, along with leasing and royalties from government-owned land. These governments saw rapid population growth during the peak years of drilling in 2007 and 2008, and faced large new expenditures to upgrade municipal sewer and water systems, along with local road networks. For modestly affected communities, allocations of the state’s severance tax was the only major new revenue source associated with oil and gas development. Most of these municipalities experienced little to no increase in costs or service demands attributable to oil and gas development.

We examined local governments in southern Kansas’ Mississippian Lime region and the southwestern Hugoton gas region. In the Mississippian Lime region, municipal governments have generally experienced net fiscal benefits associated with increased sales taxes driven by the oil and gas workforce. However, multiple county governments have not been able to keep up with demand for road repairs. This challenge has been exacerbated by state policies that make revenue from oil- and gas-related sources unpredictable and volatile. Specifically, oil and gas property valuation practices do not accurately reflect the changing price of oil and gas, and allocations from the state’s Oil and Gas Depletion Trust Fund are unpredictable and subject to “sweeps,” where the state government retains revenue that is statutorily allocated to counties. In addition, a number of counties have been subject to lawsuits due to disputes over the proper interpretation of state-issued guidelines for assessing the value of oil and gas property. In several cases, counties have been forced to repay hundreds of thousands of dollars in tax revenues collected in previous years. Finally, local governments in the Mississippian Lime region have experienced damage to public and private property from earthquakes caused by oil and gas wastewater injection.

For local governments in the Hugoton region, where natural gas production has occurred since the 1930s and has been declining for decades, the oil and gas industry provides an important tax base and local governments experience substantial benefits from the industry. For counties, ad valorem property taxes and allocations from the state’s Oil and Gas Depletion Trust Fund, though volatile, have easily outweighed costs associated with the industry. For municipalities, the oil and gas workforce helps support local sales taxes, with little in the way of new costs.

In the northwestern corner of Louisiana, parish governments (Louisiana does not have counties. Instead, parishes maintain roads and property records) have generally experienced substantial net financial benefits associated with natural gas development from the Haynesville shale. Revenues and costs both increased rapidly for these local governments in 2007 and 2008, then declined almost as swiftly as drilling activity slowed in 2010 and 2011. The leading two revenue sources for these parish governments have been from sales taxes and leases of parish-owned land, which generated $20 million to $30 million each for two parish governments, nearly doubling overall revenues in certain years. These parishes also experienced substantial new costs to repair roads affected by heavy truck traffic, and experienced major challenges with workforce retention during the peak years of drilling, leading to an increase in compensation for staff.

We were not able to arrange sufficient meetings with municipal officials to report on the net fiscal impacts to municipalities.

Eastern Montana experienced a surge in oil activity from the Bakken shale in the mid-2000s. As much of this activity has shifted across the border to North Dakota, drilling in the region has slowed. However, population growth has been substantial, as many workers live in eastern Montana and commute to the North Dakota oil fields. We were not able to arrange sufficient interviews with county government officials to determine the overall fiscal impact to counties, but did observe that counties in the region generally have experienced large new revenues, primarily from allocations from Montana’s severance tax. Counties have also substantially increased their expenditures on roads and bridges, although it is unclear whether these expenditures represent a new cost brought on by oil- and gas-related activity, an opportunity to upgrade existing infrastructure due to new revenues, or some combination.

Municipalities in eastern Montana have generally experienced net negative financial impacts. The state government allocates a very small share of severance tax revenue to municipalities and since the state does not have a sales tax, municipalities have not experienced any major new revenues associated with population growth. They have, however, experienced substantial new costs, primarily from upgrades and expansions of sewer and water infrastructure. Eastern Montana municipalities have also experienced new staff costs, as workforce retention challenges have led governments to substantially increase compensation.

Both regions of New Mexico we examined, the Permian basin in the southeast and the San Juan basin in the northwest, are heavily dependent on the oil and gas industry as an economic driver. For local governments in these regions, local government fiscal health tends to grow stronger during years with high production, and weaken during periods of low production. For county governments, road damage has been the leading cost but has generally been manageable thanks to revenue from property taxes on oil and gas production and equipment. One county out of the three we examined also receives substantial in-kind donations from industry on road maintenance and repair.

For municipalities, gross receipts taxes (which are similar to sales taxes but include transactions for both goods and services) are the dominant revenue source, and they tend to track oil and gas activity in both regions. Leading costs for municipalities primarily center on workforce retention when oil and gas activity is booming. The leading challenge for municipalities in both regions is diversification of their fiscal bases. Local officials aspire to greater diversification, but the prospects are challenging given high local housing costs, geographic isolation, limited long-distance transportation options, and limited access to amenities.

Local governments in North Dakota's Bakken region have experienced a mix of negative and positive fiscal effects. Bakken development has created major demands on rural roads and generated rapid population growth in this extremely rural part of the country. While local governments have seen their budgets swell by as much as 10-fold since 2005 due to severance tax revenue (which the state imposes in lieu of allowing local governments to collect property taxes on oil and gas production) and sales taxes, a number of local governments were not able to keep pace with demand for services during the rapid growth phase from 2008 through 2014. Costs were led by road repair for counties, road and utility infrastructure for municipalities, and rapid growth in staff costs for all government entities we examined.

As oil prices fell in late 2014 and 2015, drilling activity and population growth slowed, easing the most acute demands. Most county governments have had less trouble maintaining roads and paying for needed upgrades as truck traffic decreased and state policies shifted more revenue towards impacted regions. Municipalities appear to be facing challenges associated with large debt loads incurred by major investments in new infrastructure designed to serve a larger population. If drilling activity remains at a low level, declining revenue from state severance taxes and limited revenue from local sources may create long-term challenges managing these debts.

Local governments in Ohio’s Utica shale region have experienced a range of new revenues and costs associated with a rapid increase in shale development. The net effects have generally been positive, with counties benefiting from lease revenues and sales taxes, and municipalities benefiting from in-kind donations and increased municipal income taxes driven by oil and gas activity.

Road-use maintenance agreements (RUMAs) have played a large role in limiting road costs for counties and townships, which maintain much of the state’s rural road networks. However, road costs have still been substantial. In addition, county and municipal governments have seen substantial increases in costs for law enforcement and emergency services associated with the industry, along with workforce retention challenges.

Oil and gas activity has produced mixed fiscal results for Oklahoma local government finances. Counties in the Mississippian Lime region, where drilling has boomed in recent years, have experienced widespread damage to local roads, and allocations of the state’s severance tax (called the Gross Production Tax, or GPT) have not been sufficient to manage these challenges. Counties collect substantial revenue from ad-valorem taxes on oil and gas property, but those revenues may not be used for local roads. Instead, roads are funded through several dedicated sources including allocations of the GPT. As a result, most facets of county government in the region have seen large fiscal benefits, while county roads have suffered. Local governments in the region have also experienced damage to public and private property from wastewater injection-related earthquakes. Counties in other parts of the state have also seen mixed experiences. Those with more robust infrastructure prior to heavy drilling activity have generally seen net fiscal benefits, while those with more limited infrastructure have struggled to repair roads damaged by industry truck traffic.

For municipal governments, oil and gas activity has largely been beneficial across the regions we examined. While population has increased in several cities, the growth has been manageable, and revenue from sales taxes and other sources have generally outpaced new demand for services and costs, such as increased compensation to retain staff. Oklahoma’s substantial local oil and gas workforce is likely an important factor limiting population growth in rural cities.

The local governments we visited in the northeast and southwest regions of Pennsylvania have experienced a range of net positive financial effects as a result of Marcellus shale development. The primary new revenue source for both county and township governments has been from the state’s impact fee, which is paid for each unconventional natural gas well drilled in the state and allocated in large measure back to local governments where the drilling occurred. This revenue has in some cases doubled the operating budgets of townships, and provided substantial new revenue for county governments.

New costs for these local governments have been limited, and are primarily related to staff. In several counties we visited, new staff were added to manage increased service demands related to law enforcement, emergency services, and to a lesser extent social services such as assistance with affordable housing. For townships, which maintain the bulk of Pennsylvania’s rural road network, costs were more limited and typically included the addition of a small number of employees to the road maintenance staff. Road repair costs have generally been small for townships, due to agreements with natural gas companies to repair township roads damaged by industry-related truck traffic.

Texas counties and municipalities have experienced a range of new revenues and costs, and the net financial effects of recent oil and gas development have ranged from roughly neutral to a large net positive. For counties with new oil and gas production, property tax revenues have grown significantly. For municipalities, sales taxes have been the leading new revenue source, and some have seen large new revenues from leasing municipal land for oil and gas production.

Local governments have also experienced a range of new costs. For most counties, road repair has been the leading cost, and in some cases they have roughly equaled the level of new revenue from property taxes. For municipalities experiencing rapid growth, such as those in the Eagle Ford region, sewer and water infrastructure has been a leading cost, while some larger municipalities such as Fort Worth and Midland have seen substantial road repair costs, as these cities maintain hundreds of miles of roads that are affected by heavy truck traffic. Municipalities and counties have both experienced new staff costs, primarily workforce retention challenges leading local governments to increase compensation.

Local governments in Utah—with one exception—have experienced net fiscal benefits from increased oil and gas development in the Uintah basin region of Eastern Utah. Property taxes, sales taxes, and allocations of federal leasing dollars from the state government have boosted public finances for county governments. Most crude oil is trucked from the region rather than transported through pipelines, and counties often face challenges with repairing roads affected by this heavy truck traffic. Other major challenges for county governments are related to workforce retention and increased demands on law enforcement from traffic issues and crimes committed by the oil and gas workforce. For two of the three counties we examined, revenues have easily outweighed costs. In Carbon County, where oil and gas vehicle traffic is heavy but where relatively little production occurs, revenues have failed to keep pace with road costs.

Every city in eastern Utah that we examined has experienced substantial fiscal benefits from increased oil and gas development. Key revenue sources are state allocations of federal leasing revenue and sales taxes driven by the oil and gas workforce. Municipalities have also faced increased demand for road repair and emergency services, and have struggled with workforce retention during the most active phases of drilling. In all cases, however, new revenues have easily allowed them to manage these impacts.

Local government finances among the West Virginia local governments we examined have generally benefited from Marcellus shale development. For counties and municipalities, allocations from the state severance tax have been an important source of revenue. Municipalities have benefited from sales taxes due to increased sales volumes associated with Marcellus-driven economic activity. Counties have benefited from increased property tax revenues, boosted by new natural gas properties and their associated infrastructure.

Local governments also described several common challenges, including damage to local roads. In West Virginia, the state government maintains rural road networks, so while road damage does not have a direct impact on county government finances, it does create challenges for local residents and businesses. For municipalities, industry vehicles have damaged city streets and added substantial costs. Heavy vehicle traffic associated with drilling and pipeline construction has also led to a surge in traffic accidents and EMS calls, creating substantial new demands on first responders and raising costs for counties and cities. In addition, a number of local governments in the region struggled to retain their workforce, and were forced to raise wages and other compensation to compete with the oil and gas industry.

Counties and municipalities in southwestern Wyoming have experienced differing financial effects related to natural gas development. The Sublette County government experienced a large net financial benefit due to rapid growth in property tax revenues in the late 2000s, along with smaller but substantial increases in revenue from sales taxes. Municipal governments in the region also experienced substantial new revenues from sales taxes associated with population growth. However, several struggled with fiscal issues during the boom period, and several years later describe a roughly neutral or a small net positive fiscal impact.

As in other western states, the leading cost for counties has been roads, while the leading cost for municipalities has been sewer and water infrastructure upgrades to serve a growing population. Staff costs have also been substantial for both levels of government, with workforce retention creating major challenges during the peak years of drilling activity and local government compensation rising across the board.