Natural Gas Taxes and Services

What's a fair and reasonable way for townships to tax natural gas ?

That's the essence behind a discussion at the NTC January meeting. The discussion was about a PSATS (Pennsylvania State Association of Township Supervisors) proposal to levy property taxes based on the value of leases. It was a pretty vague proposal and the consensus was that it would be too hard to administer and should be opposed. One person argued that it was fair to tax the underlying gas value since some properties were being sold without gas rights. So, the gas rights owner escaped property taxes while the surface rights owner paid the full tax burden.

Interesting issue - I agree with both positions.

The problem is that Pennsylvania tax policy has a serious imbalance between the taxes municipalities can levy and the services demanded by gas extraction. While I can't comment on the PSATS proposal because the specifics were not defined, I can discuss the issues involved in making a fair tax and offer some suggestions.

If you don't want to read the full discussion, here is my bottom line. The state should allocate a significant part of its gas-based royalty income and, if passed, severance taxes to the counties and towns from which those tax revenues were generated. The new revenue can pay for the new services and reduce local property taxes. It can be administered as easily as the gasoline/fuel tax allocation for road maintenance.

Municipalities rely mainly on property taxes, which are split roughly 1/4 to town, 1/4 to county, and 1/2 to school. While they can impose a 1% earnings tax ( shared 50-50 with schools), that tax does not apply to gas royalties. So a town gets no additional revenue from gas extraction; but the town is expected to keep the roads open under heavy truck traffic. This results in an imbalance between service demand by and revenue from gas operations. Much the same happens for county bridges and for other social and law enforcement costs.

Seeking extra revenue for the extra costs is reasonable. If the only source is a property tax, everyone pays the price for services required for only a few. Of course, one way out is to charge the gas companies a high enough fee for heavy weight truck volume on the roads under a Post and Bond ordinance to pay for damage repair. Every town should be doing this. And the state legislature should increase the bond limits and fees appropriately.

There is still the question of other costs and of how to split fairly property taxes between the surface owner and the gas rights owner. Today, the surface owner pays the full tax. If he does not own the gas rights, perhaps he is being overcharged compared to someone who owns both.

But how to compute fairly the percentage of taxes due to each owner? How do we assess or price the "value" of underground gas rights separately from the "value" of surface rights? If the gas rights are leased instead of owned, should the leasing company pay a property tax for its fair share? Companies do get loans and financing based on the value of their leased gas reserves, but they also change those values based on market factors, just as they pay more or less to lease equivalent properties at different times. If it gas can't be extracted from a property, the value of those gas reserves have zero value.

As an example, the Wall Street Journal reported today that Chesapeake Energy " said it will record a $1.8 billion fourth-quarter impairment charge to its natural gas and oil properties, ... The charges are an admission that some of the assets the nation's largest natural-gas producer acquired are no longer worth as much as once thought." This is a quarterly change in assessed value made by one leading gas company; others may change differently. How can county tax assessors keep up with this sort of changing market value and be fair to all?

Furthermore, since the Rule of Capture law applies to Marcellus Shale gas, the gas is considered "fugitive" (like a deer) and able to flee from parcel to parcel and belongs to whoever drains (captures) it with a well. That's not a good basis for tax assessment. I agree with the man who said it would be too hard to administer.

So what to do? The problem is hard to solve locally because the state has created this imbalance by its tax policy and the state should correct its policy to solve the problem.

The State gets additional gas-based income taxes from the companies and from the royalty owners. Some of that should be sent to the counties and towns that are providing the services that make possible the added revenue.

The legislature considered a severance tax bill last session. A severance tax taxes the value of gas removed or sold as it happens. No one pays unless they also are making money from the gas sale. If one is passed, it should have explicit provisions for sending a high percentage of the tax revenue to the specific counties and towns that are producing the revenue. That would assure that the gas profits pay for the added services. The additional revenue could be used to reduce property taxes in those towns and counties.

By allocating gas-based state royalty income or severance taxes back to the towns and counties that produce those revenues, the gas-rights owners pay a tax not paid by surface-only owners. By allowing some property tax reductions for the surface owners, this approach provides a fair tax balance for the two types of property owners. And it is easy to administer.

If you agree, let your state Representative and Senator know.

Facing The Gas Rush With Flexibility Not Zoning

Last month, the citizens of Franklin Township polled themselves about zoning. Their poll showed a 65% response rate with 87% opposed to zoning. That response was more than double the response to the original NTC survey of 2003 with a very different outcome. With time and awareness, people had become far more interested and opposed.

Their town leaders should listen to their views and act accordingly. Indeed, all towns should make a comparable assessment before voting any new regulation so dramatically different and rigid as zoning.

There are benefits and costs to zoning. A major cost and risk is rigidity of zoning ordinances, especially those based on a comprehensive plan that never considered natural gas exploitation. The “Gas Rush” is new and gas exploitation is likely to be the primary driver for our economy.

State code does not allow zoning ordinances to be changed rapidly or frequently, with even less flexibility for joint ordinances or individual ordinances subject to a joint planning commission.

We need to understand the real changes facing us and be able to adapt quickly and flexibly. Consider this excerpt from the Penn State website on Natural Gas Impacts - Local Government Information: "Many local governments will need to greatly expand and upgrade their comprehensive community planning efforts. The fast pace of gas drilling--and all of its related activities--means planning has to be done on a continuous, daily basis. Every new well drilled changes the community a little bit. Once-a-month meetings of the planning commission can’t keep up with the change. New thinking about how to plan for gas exploration must also exist."

There are alternatives to zoning that can meet local needs and provide for flexible county-town partnerships. For more facts, references, and ideas on gas and zoning, along with a high-growth non-zoning success story, visit this website at http://jessupjottings.blogspot.com/.

To meet the uncertainties of the gas rush, we need flexibility not rigid zoning based on a plan already overtaken by events.

( This post also appears as a "letter to the editor" in the 28Jan'09 editions of the Susquehanna County Transcript and the Susquehanna Independent.)

Jessup News Post - January 2009

Welcome to the first monthly Jessup News Post. The News Post will complement Jessup Jottings blogging by reporting information from township meetings, NTC meetings, and other sources.

Jessup Township Meeting :

The reorganization and monthly meeting was held Monday 5 January 2009. The township officials continue in their same roles.

Township meetings will still be held on the first Wednesday, but the time is changed to 7PM.

The property tax rate will be kept the same as 2009.

The supervisors are exploring options to reduce resident fees by obtaining a new provider for building code and sewage code permitting and enforcement instead of using COG.

The supervisors are considering a Post and Bond Ordinance and an engineering service provider to document the condition of our roads. The goal is to provide some protection from and reimbursement for major damage to roads by gas companies with fleets of water trucks and heavy drilling rigs.

NTC Meeting :

The NTC met 15 January at Silver Lake and installed new officers and committee members. Bill Stewart replaces Dave Darrow as Chairperson; Art Donato is Vice Chair; and Mary Long is Treasurer and Mary Mead is Secretary. Dave Darrow moves to the By Laws Committee. Congratulations to Bruce Griffis who has moved from the By Laws Committee to the Executive Committee.

Zoning issues were discussed with the usual degree of civility on both sides. Information about the recent survey of Franklin Township residents and voters was offered and, initially, strongly resisted by NTC officials and some supervisors. The survey was conducted by citizens mailing to 500 residents/voters and getting a 65% response with an overwhelming majority registering opposition to zoning. The Franklin Township representative expressed his disbelief until he could personally review the signatures, although he seemed already aware of the survey.

A letter by Carson Helfrich was presented which basically read like a farewell. He noted that the new (Oct08) version of the zoning ordinance could be adopted by any township independently of the others depending on their perceived need for zoning at this time, saying that some "may be ready for zoning and some may not". Bill Stewart reinforced the notion that zoning issues were a matter for the individual townships and not for discussion at the NTC. No mention was made of the fate of the Joint Planning Commission and the Intergovernmental Cooperation Agreement set up to administer compliance with the comprehensive plan and zoning and land use ordinances related to it.

The January budget reflected income received from Carson Helfrich (Zoning Funds) of $59,690.74 resulting in a net Balance of $67.722.32 on hand. No mention was made of how the returned funds (originally from a DCED Grant which expired 30June08) would or could be used.

The November budget ( presented here because no meetings were held in November or December) reflected expenditure of $2,434 for Kilmer Insurance for Composting Equipment. It was resolved to pay for this from the funds on hand and not to request reimbursement from the townships.

Bill Stewart mentioned the Penn State Data Center population projection showing Susquehanna County growing to 77,530 by 2030 or almost 90% from 42,238 in 2000 as reported in the Township News magazine. I asked if anyone knew of any data to support this dramatic change from 7 years of constant decline to 41,123 in 2007 per the Census Bureau. No one did and I summarized the pertinent data as discussed in my post ( Susquehanna County Population Explosion - Really ?? ). Bob Templeton said that he thought the projection was too high ( as I recall, he used the term "outlandish"). Without substantial justification, this counter-trend projection for Susquehanna County is not credible.

There was discussion of a PSATS proposal to assess and collect property tax for the value of underlying natural gas based on leases. Pros and Cons were argued with the consensus being that it would be very hard to administer and that the NTC should oppose the proposal.

There was a question raised about getting gas company representatives to come to discuss impacts; I didn't hear the resolution, if any. Bob Templeton provided some copies of a Penn State brochure on impacts of gas drilling on townships.

Susquehanna County Population Explosion - Really ??

The exciting news from the Penn State Data Center is a projection that Susquehanna County will grow by 83.6% to 77,530 in 2030 from 42,238 in 2000. Our County's newest projected growth rate is the second highest in the state, behind Pike County's 103.8% projection.

That's fantastically exciting ! But is it believable or just fantasy?

I didn't know, so I went digging for answers and got some interesting information. Bottom Line - It seems Incredible - as in not to be believed. One knowledgeable government staffer said "Outrageous" ; another said "Outlandish". Those statements are supported by the US Census Bureau annual population estimates. There may be an explanation or justification for that Penn State projection, but it eludes me.

Let's look at some facts, starting with the difference between "estimates" and "projections". The authoritative source for estimates is the Census Bureau which makes them annually for the nation, the states, and the counties based on solid data and methodology. The Census Bureau also makes long term projections ( to 2030 and 2050) for the nation and the states (not for counties), but specifies that they are not reliable. After all, projections are basically guesses about the future.

The US Census Bureau estimates for Susquehanna County from 2000 through July 2007 are in this table : Pennsylvania County Population Estimates . The County has declined 1115 people from the 2000 census to latest July 2007 estimate of 41,115 for a 2.6% decline rate over 7 years.

The Penn State Data center agrees and cites these estimates on their reports and in this March 2008 report ( RB032008.pdf ) notes that Susquehanna County lost 302 people in 1 year from 2006 to 2007 for a minus 0.7% growth rate (a decline), ranking it 60th of 67 counties. The table shows that to be the lowest growth rank for all 5 counties in the Northern Tier Region. On the other hand, Pike County was ranked #1 for growth as it has been for 7 years, justifying its #1 ranking in the 2030 projections.

Well, that was March 2008. In November 2008, Penn State published a report ( RB110308.pdf) about county population projections with a pretty color map and the exciting fantastical news that Susquehanna County had exploded to #2 rank in growth from #60. The projection was also published in the January edition of "Township News" creating a stir with local township officials.

Unfortunately, Penn State data Center gave no explanation for this sudden large turn around from population decline to growth. The Northern Tier Regional Planning and Development Commission (NTRPDC), which had published a much smaller 30 year projection in June 2008, thought there must be a transcription or data error. At my request, they contacted the Penn State Data Center and got no explanation or substantiation for the Susquehanna County projection only a bland statement that projections are based on 7-year estimates.

Well, since the Census 7-year estimates show constant decline, not growth, the NTRPDC staff population expert was not persuaded by this explanation. Our county planning department had seen the projection, thought it very high and was told that the Penn State Data Center thought we would go from out-migration to in-migration. Without justification, that's no explanation. My email to the Data Center has gone unanswered.

Of course, there will be real Census data in April 2010. And we can compare that real data to the Penn State Data Center 2010 projection of 48,523 ( an 18% increase in 3 years from 2007). Until then or until the Penn State Data Center comes up with some strong fact-based reasons, their Susquehanna County 2030 projection should be considered "Incredible" - literally unbelievable.

Part 2 : NTC Intergovernmental Zoning Agreement

This post continues the previous one by adding my commentary to the excerpts provided in that post. Basically, I believe the the "Agreement" creates a serious restriction on the ability of a township to alter the Zoning Ordinance to meet township needs - in addition to the undue restrictions of the zoning ordinance on citizens' ability to use their land freely.

The Intergovernmental Cooperation Agreement for Multi-Municipal Planning and Implementation (the "Agreement")establishes a Joint Planning Committee for development of a Multi-Municipal Comprehensive Plan and its implementation by SLADO and Zoning ordinances. It then declares that Plan to be the Municipal Comprehensive Plan of each municipality which approves it. The Agreement cites a 1-year waiting period for withdrawal from the Agreement as dictated by the Municipal Planning Code (MPC). It does not address the requirements of the MPC for amendment or termination of a Multi-Municipal zoning ordinance, which are more restrictive and require a 3-year period for termination or withdrawal. A single Municipality zoning ordinance is much more easily changed and terminated.

The question is whether the resulting Zoning Ordinance will be treated as a single Municipality ordinance or as a Multi-Municipality ordinance. The new Section 400 of the 22OCT 08 version of the Ordinance refers to the MPC and states the case that the Participating Municipalities are acting in cooperation while zoning independently, not jointly. It seems the NTC intent is to create a hybrid form of individual zoning ordinance requiring 2/3rds of the participating municipalities to agree on changes rather than 100% for joint zoning. The NTC Committee exercises the same control over the individual municipality actions as it would in a joint ordinance based on determinations of consistency.

I am not a lawyer, but the “Agreement” and “Ordinance” with their processes and procedures for amendments and approvals read like a “joint” endeavor in substance with qualifiers to soften the “joint” MPC requirements. Perhaps that is legally sufficient to establish cooperative individual zoning rather than joint zoning under the MPC, but I would want a strongly written legal opinion to that effect since the MPC is much more restrictive of municipality freedom of action under joint zoning.

If it is determined to be a “Joint Zoning Ordinance”, then Article VIII-A of the MPC applies. Specifically, S808-A(c) states “No municipality may withdraw from or repeal a joint municipality zoning ordinance during the first three years following the date of enactment.” And S809-A(c) states “No amendment to the joint municipal zoning ordinance shall be effective unless all the participating municipalities approve the amendment.” If unanimous agreement is not reached, the only recourse is for the municipality to repeal their zoning ordinance in a 3-year process.

While cooperative individual zoning per the “Agreement” is less burdensome, a municipality is still locked into a very inflexible process requiring a 2/3rds vote of all participating NTC municipalities to approve a change to their ordinance and 75% vote to change the Agreement itself with a 1-year waiting period for repeal or withdrawal. Once a change or curative amendment is made, another cannot be made for 36 months per the MPC S609.2.

Two additional issues need to be raised and answered : First, per Section 13, there must have been earlier agreements and resolutions going back to 2003 to set initial funding. What do these agreements and resolutions say and when were they made? Did any earlier or subsequent agreements change or add substance to this agreement version? Second, Per Section 19, there is a very specific process of ordinance enactment and attestation by each municipality to “enter into this Planning Agreement”. When was this done by each municipality and are the records available?

Finally, a Municipality that does not want to be locked into this rigid process, subordinating it's decision authority to a 2/3rds vote of other municipalities, should withdraw from the “Agreement” immediately. It can then explore the option to be a member of the NTC that is not participating in the Comprehensive Plan and Zoning Ordinance – just as Montrose Borough is doing.

Part 1 : NTC Intergovernmental Zoning Agreement- Summary Excerpts

In an earlier post , I commented on the October 22,2008 version of the NTC Zoning Ordinance and concluded that it was not desirable on substance from a citizen or landowner standpoint. Some aspects still confused me because I did not know how the townships had agreed to administer the ordinance. I have now read a version of that agreement and can summarize it in this post. It's long and deals with the agreement as it is. My comments will be in a second post.

This version of the NTC Intergovernmental Cooperation Agreement for Multi-Municipal Planning and Implementation was signed by the participating townships and boroughs in late 2007 and/or early 2008. Montrose Borough has its own zoning code and did not participate. The key summary excerpts follow.

Section 1 : establishes the NTC Planning Committee (the “Committee”).

Section 2 – Purpose of the Committee : “The Committee is established to develop a Multi-Municipal Comprehensive plan for the geographic area encompassed by the Participating Municipalities ( the planning area) pursuant to MPC Article III and Article XI, and to implement the land use management provisions of the adopted Multi-Municipal Comprehensive Plan by the adoption and administration of zoning ordinances and subdivision and land development ordinances.”

Section 3 – Powers of the Committee : three “Powers” are provided - “A” provides the power to develop the plan; “B” provides the power to conduct its business and to obtain grants and funds.“C” , “Multi-Municipal Comprehensive Plan Implementation” states “The Committee is empowered to conduct reviews and make recommendations as authorized by this agreement for the general consistency and fair share considerations of certain zoning ordinances and zoning map amendments proposed by any Participating Municipality; and for any development of regional significance and impact.”

Section 4 – Organization : Establishes one voting member and one alternate for each of the 12 Participating Municipalities ( Montrose Borough is a member of the NTC but not of this Planning Committee). Voting and alternate members must be elected officials of their municipality.

Sections 5 and 6 – Discusses meetings public participation and consultation.

Sections 7 to 11 – Discusses development, review, and approval of the Plan, culminating with each municipality voting on the Plan per the requirements o the MPC. Upon approval,”The Multi-Municipal Comprehensive Plan shall become the comprehensive plan for that Participating Municipality.”

Section 12 – Committee Responsibilities After Plan Approval : In addition to monitoring, reviewing, and updating the plan, “The Committee shall have additional responsibilities for implementing the Multi-Municipal Comprehensive Plan as more fully set forth in the Implementation Agreement.”

Section 13 to 14 – Initial Funding and Financial Policies : Agrees that “the Participating Municipalities will make the initial payment as previously committed by resolution of each governing body by May 15, 20003.” Establishes policies and the fiscal year as 1 October to 30 September. Allows one municipality to provide financial management as an in-kind contribution.

Section 15A – Voluntary Withdrawal : sets four conditions apply to the municipality :

1. Submit written notice;

2. Conduct a public hearing to solicit comment;

3. Pass a resolution authorizing withdrawal;

4. “The withdrawal shall be effective one (1) year from the adoption of the resolution authorizing the withdrawal. The one-year waiting period will allow for the necessary revisions of the Multi-Municipal Comprehensive Plan and zoning ordinances and zoning maps.”

“Any municipality authorizing withdrawal from the Committee shall be bound by the requirements of this Agreement, including compliance with all subdivision and land development, zoning and comprehensive plan amendment review processes, even during the one-year waiting period, except as may be permitted herein.”

Section 16 – Local Planning and Zoning : States that each Municipality shall retain authority and responsibility for enforcement and administration of ordinances except as established by the Agreement. Establishes four new local Joint Multi-Municipal Planning Commissions for 10 members and continues the individual ones for Liberty and Silver Lake. Establishes five Joint Zoning Hearing Boards “in accord with S904 of the MPC”.

Sections 18 and 19 – Amendment and Execution : “ To enter into this Planning Agreement, the governing body of a Participating Municipality must adopt an ordinance approving this planning and the chief elected official of such Participating Municipality must execute this Planning Agreement, with the attestation of of the secretary or assistant secretary of such Participating Municipality, and the seal of the Participating Municipality affixed thereto. Once done, it requires a unanimous vote for amendment of the Agreement, which shall remain in effect until terminated by written consent of at least 75% of the Participating Municipalities.

Section 20B – Municipal Land Use Commitment : “Each Participating Municipality agrees to maintain all land uses and housing types and densities as provided in the initial zoning ordinance and zoning map adopted by the Participating Municipality unless an amendment to the ordinance or map is authorized in accord with the procedures in this Agreement.”

Section 21 – Ordinance Consistency and Review Process : Establishes the process for authorization of all Municipality proposed zoning text or map amendments by the Committee. A two-thirds (2/3) vote of all the Participating Municipalities is required before a Municipality can enact its proposed amendment. If the vote is denied, the Committee will tell the Municipality what changes are needed for approval. The Municipality may agree to the changes and resubmit it for approval; or it may seek to amend the Agreement; or it may initiate withdrawal from the Committee.

Section 22 – Review of Developments of Regional Significance and Impact : Requires a Municipality to bring all such “Developments” to the Committee for review and comment. Terms are defined and a lengthy review process is described which culminates with the Committee providing “advisory only” comments for the Municipality to consider before exercising its power to approve the development.

Section 23 – Specific Plans Review and Adoption Process : “As authorized by Section 1106 of the MPC, the Participating Municipalities shall have the authority to adopt a Specific Plan for the systematic implementation of the Multi-Municipal Comprehensive Plan for any nonresidential area covered by the Multi-Municipal Comprehensive Plan. Special plans shall also be governed by the following:” The review process mirrors that of Section 21 above with the same options for compliance or withdrawal.

Section 24 – Regional Legal Defense Fund : Each Municipality agrees to appropriate funds annually to “assist participating municipalities with litigation related to implementation of the Multi-Municipal Comprehensive Plan”.

Section 25 – Annual Report : Each year the Committee shall prepare an annual report and send a copy to each participating municipality and to the Susquehanna County Planning Commission.

A Non-Zoning Success Story

I believe the NTC Zoning Ordinance is an unnecessarily rigid set of regulations based on a comprehensive plan that is already overtaken by events in Susquehanna County.

Some argue that we need zoning to protect us from the future. That might be believable if the future only would unfold the way the planners anticipate.

However, we now we face a "Gas Boom" which was not in the plan and which will impact our growth in ways driven by geology rather than a "plan". Since we can't predict the growth pattern accurately, it makes sense to be very flexible in adapting to it while preserving our rural lifestyle. Rural lifestyle means many things; to me, a big part is freedom from intrusive government controls that inhibit enjoyment of the present and restrict flexible adaptation to the future.

If inflexible zoning based on a comprehensive plan is the wrong solution, where can we look for a better approach? How about a place that has rapid growth with low costs and good living standards? Houston, Texas, is the non-zoning success story that planners learn about but don't tell you about.

Here are some excerpts from a recent article on this non-zoning success story :

"As cities across the nation reel from the steepest housing market decline since the 1930s, Houston’s real estate market is surprisingly strong. While new housing sales have fallen dramatically, they haven’t fallen as far or as steeply as in other cities across Texas or the nation. At least part of this resilience is due to the market-driven nature of the city’s land development process, including a real-estate market unencumbered by zoning.

More than 2 million people live within the city’s borders while another four million round out the metropolitan area. Houston may well emerge as the archtype city of the 21st century. Urbanist Joel Kotkin used the term “Opportunity Urbanism” to describe the city in a study for the Greater Houston Partnership, pointing out that Houston’s entrepreneurial drive, affordability, tolerance for diversity, and willingness to adapt to changing economic circumstance may well propel it to become the next U.S. megacity.

Underappreciated in the city’s success may be its uniquely flexible and adaptable approach to land-use regulation. Unlike every other major city in the US, Houston has shunned zoning regulation, preferring to leave choices about land uses up to the real estate market."

Sounds pretty good. But did it happen by chance with no controls? Not really:

"Despite the lack of municipal zoning, land development is not completely unregulated. Houston has adopted several statutes to set standards for infrastructure, parking, building setbacks, and building location. More importantly, in many parts of the city, private deed restrictions that limit future land uses run with the land, not the property owner. Nevertheless, substantial amounts of land are unrestricted by private deed, and property owners aggressively promote the flexibility and economic opportunity resulting by the lack of regulation."

In my "Zoning 101" post, I suggested alternatives to the NTC zoning based on township ordinances that set performance standards and allow free use of land provided those standards are met. It seems that Houston has been very successful in doing just that.

Our needs, priorities, and ordinances may be different, but we can benefit from Houston's example by keeping our freedom to "aggressively promote the flexibility and economic opportunity resulting by lack of regulation."