MuniLand

There are shale gas fields covering more than half of the United States, but Pennsylvania has emerged as the rising star of domestic energy production with its “Mighty Marcellus” fields. This is a great resource for Pennsylvania, but I’ve been confused about legislation that would impose an “impact fee” on shale gas producers instead of the traditional volume-based royalty structure used by other states. The loss of revenues to the state over the next 20 years using the “impact fee” could be approximately $24 billion using current gas prices. If gas prices doubled (they are currently at 10-year lows), losses to the state could exceed $48 billion or more.

The energy states of North Dakota, Wyoming, Texas and Oklahoma historically have earned substantial revenues from energy royalties. It seemed odd that Tom Corbett, the Pennsylvania governor who received substantial campaign contributions from gas producers, barred his shale gas commission from even considering a royalty or gas tax.

When energy producers do cost-benefit analyses, they use very sophisticated modeling in which the primary input is the quantity of “recoverable” oil or gas in an area. The second input is the projected demand and supply for energy, which in turn determines its price. Finally, the modelers factor in business expenses, primarily the depth of well drilling required and the cost to haul the energy to a pipeline terminus or railroad depot. In the case of natural gas they might include the cost to liquefy the gas for easier transport. Generally at the end of all the calculations they look at the cost of paying mineral rights fees to landholders and royalty fees to the state. All these inputs move around constantly, and projecting them years or decades ahead requires quantitative wizardry.

The fees for mineral rights paid to landowners are negotiated costs. Mineral rights vary because landowners don’t have a central platform to see what other landowners are being paid and generally accept what the energy company offers. State royalty fees, though, are foreseeable: They’re set by the legislature and are generally clustered around similar levels across the nation. Oklahoma has a scale that starts at 7 percent when gas prices exceed $2.10 and slides downward if gas prices go lower. West Virginia, also a Marcellus shale state, imposes a 6.1 percent effective royalty rate, while Texas charges 5.4 percent of well revenue.

Pennsylvania is different in that the governor and legislature want to impose a fixed annual fee on drillers that changes over time, going from $50,000 in the first year to $20,000 a year from the fourth to 10th years and $10,000 annually for years 11 to 20. The impact fee will earn Pennsylvania $360,000 over the life of the gas well.

In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.

The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.

From Bonddesk’s December Transparency Report I pulled the data for these charts showing the seven most actively traded states’ bonds. Bonddesk uses “investor buys” data, which represents trades that end up in a retail investor’s account. In the bond markets there are often many trades between broker-dealers before the securities land in an investor’s account, so Bonddesk scrubs the data to show the real level of investor demand.

Fracking — the extraction of natural gas from underground deposits of shale — is receiving an increasing amount of attention. The 2010 documentary Gasland brought the issue into the national spotlight and highlighted the problem of contaminated groundwater that can occur when a well casing ruptures and fracking fluids escape into the water table. In addition, there is the issue of used fracking liquids being injected into spent wells for permanent disposal. Of course, the fracking industry and environmentalists have a lot of disagreement about the extent to which these fluids contaminate groundwater.

There is another, less discussed, problem of used fracking fluids that are moved offsite for processing and disposal. Where are these fluids going and who is regulating them? The community of Kingston, NY (near where I live) decided they didn’t want to accept these fracking fluids for processing. From the Daily Freeman:

The city engineer says no spent hydrofracking fluid will be coming to the sewage treatment plant even though the state Department of Environmental Conservation lists the plant as a capable of handling the fluid.

Federal bankruptcy judge Mary France dismissed the Harrisburg City Council’s petition to file municipal bankruptcy last Thursday. According to Bloomberg her ruling stated:

“For Chapter 9 bankruptcy to work, all of the branches of the municipality must be on the same page,” France said. “Therefore I find that city council was not authorized to file the petition.”

Judge France has hit the nail on the head. The legislative and executive branches of Harrisburg’s government have been behaving like two sides of a family fighting over a deceased parent’s estate. The battle has been brutal and family members have talked past each other. Harrisburg mayor Linda Thompson seems to have little patience for others’ views, which is a tough way to govern.

Pennsylvania Governor Tom Corbett took the next step in the process of pushing the bankrupt capital of his state towards fiscal recovery today. Bloomberg reports:

David Unkovic, chief lawyer for the Pennsylvania Community and Economic Development Department, is set to run the finances of Harrisburg after Governor Tom Corbett nominated him as the state’s first municipal receiver.

Once approved by a state court, the overseer may act without the consent of the bankrupt capital city’s elected officials. Unkovic’s appointment may be reviewed as soon as Nov. 28.

Harrisburg is a town that’s been crushed by debt and years of incompetent management. The city has been led by a mayor, Linda Thompson, who is unable to work with a majority of her city council and who will likely find her role greatly diminished as the state takes fiscal control of the insolvent city. I’m not sure that I’ve ever seen a politician who has so little control over the affairs of her city. Edith Honan and Kristina Cooke of Reuters did an outstanding backgrounder about the level of dysfunction among the Harrisburg’s political class:

Prayers notwithstanding, [Linda] Thompson and [Comptroller] Dan Miller, the city’s top financial official, refuse to speak to one another, even as the city they lead continues hemorrhaging money. Thompson characterized Miller as a “political opportunist who will stop at nothing to accomplish his self-centered ambitions.” Miller, who plans to challenge Thompson for mayor in 2013, said he considers Thompson “paranoid,” “not well educated” and “a phony.”

His words seem kind compared with those offered by four former Thompson aides. They told the local newspaper that the mayor isn’t fit to hold office.

The capital of the Keystone State is swirling with political infighting and power grabs over the issue of money. There is just not enough of it to pay all of Harrisburg’s creditors who have appeared at the door. Now that the county has said “Enough!” to providing more loans to cover debt payments, it’s the end of road and events are accelerating.

Harrisburg had already filed for municipal bankruptcy a week ago, but that didn’t stop the state from finalizing legislation that will put the city into receivership. Pennsylvania’s latest move adds another layer of complexity to the resolution process. The Harrisburg City Council responded to the state’s action with the following statement published in the Patriot News:

“First, they attempted to restrict the city’s ability to generate revenue and negotiate with its creditors, which were allowed in the Act 47 law, as well as penalize the city if it filed for bankruptcy. But that wasn’t good enough. Now, this takeover legislation gives a receiver unlimited power to sell any resource the city and its authorities have, without allowing Harrisburg an alternate source of revenue.”

The current bankruptcy drama in Harrisburg, Pennsylvania is just the third act of a long running effort to make the city something more than a corridor for those who commute into the city for work. Most of the current debt problems of Harrisburg stem from failed projects intended to revitalize the city and extremely bad business decisions.

The chart above shows the massive increase in Harrisburg’s population that occurred up to 1950 then starting falling steeply since mid-century. The city’s population was actually smaller in 2010 than it was in 1900. It’s just one of many American cities that has seen its vitality and population fade away.

Almost all the news coverage now is focused on the current players and their attempts to use the law to bend events towards their vision of the future. For example, the mayor, the county and the state are petitioning in bankruptcy court to halt the actions of the city council who filed for Chapter 9 bankruptcy. The bankruptcy judge will sort out these claims in an emergency court hearing on Monday. It’s high drama and makes for great journalism.

Hat tip to Ted Nesi of WPRI.com for pointing out this excellent union sponsored video that discusses the problems for the public pensions of Rhode Island. Although the details are specific to that state the structural problems apply to almost every state because public pensions across America are underfunded. Every state faces problems that are politically or financially difficult. Either taxpayers will be paying more to top pension plans or retirees will be receiving smaller pension payments. Pension reform is a complex topic and I hope we see more educational efforts like this video.

Further:

WPRI.com Judge Taft-Carter issues decision in pivotal RI pension case

Desperation costs are steep

Harrisburg, the state capital of Pennsylvania, has narrowly averted filing for Chapter 9 bankruptcy as their independent city Parking Authority has secured a loan to advance future payments to the city for use of city land. Unfortunately the unnamed lender will be charging the Authority 10.75% interest. The costs of desperation are steep. This one-off lease payment from the Parking Authority allows the city to make their September 15th bond payment on their crushing incinerator debt and avoid Chapter 9, but what about the next bond payment in 2012? They don’t seem to have any more assets to borrow against. So they’ve postponed the problem but not solved it. From Bloomberg:

The Parking Authority will borrow to make the payment, and some on the council balked at the interest rate of as much as 10.75 percent on the loan. About a third of the city’s 49,500 residents live below the federal poverty level. The lease covers land under several garages, and the loan costs may reduce the authority’s income, which provides revenue to the city.

Harrisburg walks the well worn path

The capitol city of Pennsylvania, Harrisburg, is functionally if not legally bankrupt. Yesterday the City council voted against the mayor’s rescue plan which would have brought them a small reprieve but would not have fixed their core financial issues. The city’s main problem is a grossly expensive incinerator project which has burdened the city with way too much debt. Their situation is similar to the sewer system woes of  Jefferson County, Alabama on about one tenth the scale. Like Jefferson County, anger about bondholders being prioritized ahead of the needs of citizens was on display at yesterday’s city council meeting. From Reuters:

“Wall Street gets paid and Main Street gets the shaft,” Councilman Brad Koplinski, who voted against the plan, said during the angry, packed council meeting.

At the root of Harrisburg’s troubles is a complicated financing scheme used to fund a state-of-the-art revamp of its trash-burning incinerator that left the city saddled with a $300 million debt.