October 29, 2014

Study: Shale boom revenues largely help local governments manage increased demand for services

Nicholas Institute for Environmental Policy Solutions

Increased oil and gas production has provided a variety of new revenue sources for local governments, in most cases helping them to cover the cost of increasing demands for their services, two Duke University researchers find.

Daniel Raimi and Richard G. Newell of the university's Energy Initiative have spent the past year studying the "shale boom's" impact on local government revenues and expenses in eight states that have seen a major increase in shale oil and gas production.

Their first report, released in May, found that the increased development has generally helped the public finances of local communities, providing new revenues and resources that usually – but not always – outweigh the increased demand for public services and other costs.

"Local governments collect new revenues from a range of sources," Newell said. "In most cases – but not all – these new revenue sources have been enough to keep up with increased demands for services."

The new report, released Oct. 30, goes into greater detail about specific revenue sources and how they are distributed at the local level. Both reports may be downloaded on the project's webpage, which also includes an interactive map and a blog about sites visited during the research.

Newell, director of the university-wide Energy Initiative, and Raimi, an associate in research at the Initiative, noted that while many local governments saw significant financial gains, some  in very rural regions sometime struggled to pay for all the new demands that accompanied shale development.

"Although they're seeing lots of new revenue, some local governments in North Dakota, Montana, and Texas have had a hard time managing oil- and gas-related growth," Raimi said. "We also describe a period in the mid-2000s when some local governments in Colorado and Wyoming had a hard time keeping up."

The report provides detail on revenue for local governments from four major sources: state taxes or fees on oil and gas production that flow through to local governments, local property taxes on oil and gas property, local government revenue from leasing of state-owned land, and local government revenue from leasing of federally owned land.

It shows that revenue for local governments from oil and gas production varies widely between states. School districts and school trust funds tend to see the largest share of revenue from oil and gas production, followed by counties and then cities. Oil and gas revenue also flows into grant programs for local governments, and goes to special districts such as airport authorities or sewer and water districts.

"One of the interesting things about our findings is that following these revenue flows does not always tell you whether local governments are able to manage the new costs from oil and gas production," Raimi said. "For example, Pennsylvania, Louisiana and Arkansas see the lowest share of revenue from oil and gas production, but local governments there have generally seen positive fiscal outcomes."

The authors attribute this to two major factors. First, the quantified flows do not include revenue from leases on local government land or local sales tax due to technical issues and limited data availability.

Second, the data do not account for issues that are not quantifiable, such as local government collaboration with oil and gas companies that can limit costs. For example, an oil company might agree to help pay for repairs or upgrades to rural roads that have seen an increased amount of heavy truck traffic to and from drilling sites.

"Public-private collaborations have been very important in states like Arkansas and Pennsylvania," Newell said. "They don't show up on a balance sheet, but they can have a major fiscal impact by limiting costs for local governments."

The authors note that these collaborations are not common in the rural regions that have struggled to keep up with new costs associated with a booming oil and gas industry.

Both reports examined oil and gas revenue flowing to local governments in Arkansas, Colorado, Louisiana, Montana, North Dakota, Pennsylvania, Texas and Wyoming.

The research was supported by a grant from the Alfred P. Sloan Foundation. The next phase of this research, currently under way, expands the geographic coverage to all major U.S. oil- and gas-producing regions.