Constitutionality of using Oil and Gas Lease Fund money for environmental agencies’ operations still not resolved

The following is from the November 2020 issue of The PIOGA Press.

An October 22 decision of the Commonwealth Court, along with a pending appeal of that court’s July 2019 decision on remand from the Pennsylvania Supreme Court’s June 2017 decision on the initial challenge by the Pennsylvania Environmental Defense Foundation (PEDF), has not resolved the lawfulness of using proceeds from leasing of Commonwealth-owned land for the operating expenses of the Commonwealth’s agencies responsible for “conserving and maintaining” the Commonwealth’s public natural resources.

Since 1947 Pennsylvania has received money from leasing state-owned lands for the extraction and sale of oil and natural gas. The Oil and Gas Lease Fund was established in 1955 for the deposit of all rents and royalties from oil and gas leases of Commonwealth land to be ‘‘exclusively used for conservation, recreation, dams, or flood control or to match any Federal grants which may be made for any of the aforementioned purposes.’’

The cumulative proceeds from Commonwealth oil and gas leases from 1947-2008 (the first year of Marcellus Shale leasing) totaled $165 million, whereas oil and gas proceeds in 2009 alone exceeded $167 million, mostly from the initial bonus (rental) payments from the 2008 leases rather than the royalties. The significant increase in the Oil and Gas Lease Fund from the Commonwealth’s Marcellus Shale leasing from 2009-19 provided “new found” money that the General Assembly and Governors Rendell, Corbett and Wolf used to help balance the Commonwealth’s annual budget.

In 2012, PEDF filed a lawsuit challenging, under Pennsylvania’s unique Environmental Rights Amendment (ERA), the constitutionality of the Commonwealth’s Marcellus Shale leasing and the appropriations of Oil and Gas Lease Fund royalties to the General Fund, which was not restricted to conservation purposes. In June 2017, the Pennsylvania Supreme Court ruled that the ERA established a public trust over public natural resources that is governed by private, not public, trust principles in effect in 1971 when the ERA was adopted.

The court also ruled that that any revenues derived from the sale of public natural resources, such as the oil and natural gas underlying state-owned lands, remain part of the trust corpus and may be expended only to conserve and maintain Pennsylvania’s public natural resources. Because there was no question that the royalties were derived from the sale of public natural gas resources, the Supreme Court held that the General Fund appropriations of Lease Fund royalties challenged by PEDF were unconstitutional because the funds could be used for non-trust purposes.

As the record did not establish whether other revenue streams from the leases, such as rental or bonus payments, were derived from the sale of oil and natural gas, the court remanded the case to the Commonwealth Court to determine whether these other revenue streams also remained part of the corpus of the trust that could be used only for the trust purposes of “conserving and maintaining” the public natural resources.

PEDF had filed additional lawsuits challenging subsequent annual budget Lease Fund appropriations to the General Fund and directly to the Department of Conservation and Resources (DCNR) for operating expenses. In 2017, the Oil and Gas Lease Fund was transferred to the Fiscal Code and continued as a special fund in the State Treasury, with the requirement that “the General Assembly shall consider the Commonwealth’s trustee duties under section 27 of Article I of the Constitution of Pennsylvania [the ERA].”

The Commonwealth Court’s October 22 decision held, among other things, that the appropriation of $110 million from the Oil and Gas Lease Fund in FY 2017-18 and 2019 to fund DCNR’s operating expenses was not facially unconstitutional under the ERA because only trust principal is restricted for use for trust purposes, but trust principal and income are commingled in the Lease Fund. The court stated that because the challenged Fiscal Code provision “authorizes the appropriation or transfer of monies within the Lease Fund without any indication as to the specific nature of the funds, i.e., royalties, rents, bonuses, interest or other sources, [and] [b]ecause the Lease Fund is comprised of both restricted corpus and unrestricted deposits, we cannot conclude that Section 1601.2-E(c) violates Section 27 on its face.”

PEDF had argued that Section 1601.2-E(c) violated the ERA “by failing to provide that the funds must be used to conserve and maintain the corpus by preventing and remedying the degradation, diminution and depletion of our public natural resources,” i.e., trust purposes are limited to environmental “projects.” On the other hand, the Commonwealth had argued that “[t]he appropriation of trust monies for an agency’s general operating expenses does not violate” the ERA, i.e., trust purposes are not limited to “projects” but include operating expenses of the people and agencies that actually do the “conserving and maintaining” of the Commonwealth’s public natural resources. PIOGA had also made this same argument in its amicus briefs in the PEDF litigation.

As the Commonwealth Court observed that “[t]he constitutional problem arises only when trust assets are applied to non-trust purposes,” PIOGA General Counsel Kevin Moody explained why the constitutionality of using Oil and Gas Lease Fund money for environmental agencies’ operating expenses still is not resolved. “It’s not clear whether the Commonwealth Court determined that the environmental agencies’ operating expenses are ‘trust purposes’ or whether these expenses are not unlawful to the extent they are funded by non-trust corpus, that is, trust income. The issue of whether the lease revenue streams other than royalties are trust corpus or something else, such as income, was recently argued before the Pennsylvania Supreme Court on September 17, and PEDF has appealed the October 2020 decision to our Supreme Court. So, it appears that we will have await the Supreme Court’s decisions in both appeals for the resolution of this issue.”

The August 2019 PIOGA Press contains an article concerning the Commonwealth Court’s July 2019 decision that was appealed and argued before the Pennsylvania Supreme Court on September 17.

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