Gas Trust Fund to Help Communities Faces Uphill Battle

It’s hard to make a deal when two sides have little trust in each other. So, society has developed many ways of overcoming distrust: contracts define remedies, treaties have inspectors, suspects post bonds.   The Brookings Institution’s new report, “Permanent Trust Funds: Funding Economic Change with Fracking Revenues,” offers Pennsylvania policymakers a compelling tool for making a deal on a new severance tax on natural gas by protecting the proceeds from disputes over spending. Indeed, there is a reason they call them “trust” funds. 

A permanent trust fund – essentially a savings account with strings attached – is a resource management tool that can help states adapt to both variability (e.g., commodity prices) and anticipated change (e.g., demographics). The Highway Trust Fund and the Social Security Trust Fund are examples of (imperfect) lock boxes that manage investments over time to meet future obligations. Most tax revenues are spent or disbursed shortly after the government collects, but a trust fund allows a portion of these revenues to be held for use in tougher times. By doing so, this tool helps overcome distrust over government’s commitment to meeting those obligations. A permanent trust fund might be a path forward for a severance tax in Pennsylvania.

The Brookings report presents the potential benefit of permanent trust funds in states that already have significant severance and other taxes on natural gas production. Communities in shale drilling areas can be harmed if prices dip to low, causing drilling companies to curtail operations, reducing employment and economic activity (e.g. less patronage of restaurants, hotels and entertainment) in these communities.

Policymakers are dealing with just this mixed bag of winners and losers in today’s low gas price environment, but there are no saved funds to draw upon to help the losers. In addition, as shale drilling activities slow, industry-derived impact fee payments to local governments have dipped, dropping 10 percent from 2014 to 2015.

Policymakers, the industry, communities and consumers could benefit by trust fund monies hedging against price volatility, market boom-bust cycles and the related economic dislocation  intrinsic to extractive industries.

But in Pennsylvania the value proposition for a permanent trust fund is larger. A lockbox on the proceeds of any new severance tax on natural gas could provide lawmakers with assurances on how proceeds would be spent as well as managed over time.  Funding education, balancing the budget, distributions to local governments, and helping expand markets for the gas industry are just some of the competing  uses of such proceeds. A permanent trust fund could be designed in such a way that lawmakers future spending to established obligations, and thereby overcoming the fundamental distrust that stalemates governing in Pennsylvania today.

We have a ready example in the Commonwealth in the  condition of Pennsylvania coal communities. As a national leader in coal extraction, Pennsylvania’s coal industry has been pummeled by low natural gas prices and China’s reduced demand for the coal used in steel making.  And communities have suffered, as increased mechanization and reduced market demand have dropped Pennsylvania’s coal industry employment from 62,237 in 1994 to only 7,938 in 2014.

Imagine the windfall of support policymakers would enjoy if a resource-capitalized trust fund was currently available to support economic revitalization efforts in hard-hit communities? A trust fund approach to the Commonwealth’s natural gas resource, an approach that comprehends impacts in terms of generations rather than merely annual budget cycles, could be the smart idea that moves legislation forward in Pennsylvania. 

Mark Alan Hughes

Faculty Co-Director
Mark Alan Hughes leads the Kleinman Center as faculty co-director and writes on topics ranging from deep decarbonization to the future of Philadelphia’s energy landscape. He is also a professor of practice at the Weitzman School. 

Cornelia Colijn

Executive Director
Cornelia Colijn is the executive director of the Kleinman Center. She envisions, plans, and manages all center programming, while building connections with students, faculty, and leaders in the energy industry.