Auditor General Eugene DePasquale Tuesday released the results of his performance audit of the Public Utility Commission’s collection and local government spending of the Act 13 drilling impact fees and found 24 percent of $85.6 million in fees sent to local governments in the 10 counties and 20 municipalities he audited were spent in ways that did not appear authorized by Act 13.

Using the results of the audit, over $100 million in Act 13 impact fees could have been misspent by local governments over the last 4 years.

“Our audit found that $170.3 million — 40 percent — of Act 13 payments to local governments were put into capital reserve accounts with no subsequent reporting required,” DePasquale said. “The law needs to be fixed to provide full and transparent accountability of every dollar collected under Act 13, regardless of when it is spent.”

Since enactment of Act 13 of 2012 through 2015, the PUC has collected approximately $856 million in the so-called impact fees, including $160.3 million distributed to counties and $267.6 million distributed to municipalities.

“Our audit shows that improvements to Act 13 of 2012 are needed to help the PUC, or another state agency, administer the distribution of funds, provide greater direction to local governments for proper spending, and ensure that the impact fees are used as intended,” DePasquale said. “Specifically, the law must be revisited to correct vague spending guidelines, poor reporting requirements, and lack of state oversight.

“The lack of clarity in Act 13 resulted in 24 percent of impact fee funds distributed to the local governments we reviewed being spent on questionable costs such as balancing budget deficits, salaries, operational expenses and entertainment.”

Examples of questionable spending by local governments in the audit were--

-- Bradford County spent $2.4 million for the operating expenses of a correctional facility;

-- Susquehanna County spent $5.2 million on payroll for the district attorney’s office;

-- Lycoming County spent $596,083 to buy land and construct a district judge’s office;

-- Tioga County provided $2.5 million in cash advances to its Dept. of Human Services;

-- Greene County spent $1.27 million to reconstruct community pools;

-- Clearfield County spent $287,500 to offset a deficit in the county court’s budget; and

-- North Strabane Township, Westmoreland County spent $7,500 on fireworks, $4,250 on inflatable party rentals and $1,200 for a live performance by a previous American Idol contestant.

Bradford, Greene, Susquehanna, Tioga and Lycoming counties are among the top 7 counties receiving Act 13 impact fees.

“Right now, we essentially have 37 counties and 1,487 municipalities independently interpreting the flawed language in Act 13,” DePasquale said.

“It is no wonder that local governments are broadly interpreting how to spend the money based on the 13 general criteria in the legislation,” he said. “To be appropriate under Act 13, that spending must meet the dual standard of fitting into one of the 13 broad criteria and being associated with natural gas well drilling operations in the community.

“Where we are seeing a problem with the spending is when local governments fail to connect the expenditures to direct impacts of drilling,” DePasquale said. “The current law should be amended to transfer the administration to a more appropriate entity such as the Department of Community and Economic Development (DCED) or the Commonwealth Financing Authority (CFA) and allow them to take a more active role in helping local government leaders make sure their spending plans meet both standards.”

Allowable local expenditures under Act 13 include--

-- Construction, reconstruction, maintenance and repair of roadways, bridges and public infrastructure;

-- Water, stormwater and sewer systems, including construction, reconstruction, maintenance and repair;

--  Emergency preparedness and public safety, including law enforcement and fire services, hazardous material response, 911, equipment acquisition and other services;

-- Environmental programs, including trails, parks and recreation, open space, flood plain management, conservation districts and agricultural preservation;

-- Preservation and reclamation of surface and subsurface waters and water supplies;

-- Tax reductions, including homestead exclusions;

-- Projects to increase the availability of safe and affordable housing to residents;

-- Records management, geographic information systems and information technology;

-- The delivery of social services;

-- Judicial services;

-- For deposit into the county or municipality's capital reserve fund if the funds are used solely for a purpose set forth in this subsection;

-- Career and technical centers for training of workers in the oil and gas industry; and

-- Local or regional planning initiatives under the Pennsylvania Municipalities Planning Code.

In addition to a lack of clarity in Act 13 on how funds should be spent by local government, the audit said the Act does not require the PUC to monitor and verify local spending of impact fees and found serious flaws in the requirements for reporting how funds were spent.

There are no penalties or consequences in Act 13 for local governments that spend impact fees in ways not authorized by the Act.

The audit covered activities from February 14, 2012 (the enactment of Act 13) to April 30, 2016.

The audit found the PUC did accurately distributed the impact fee funds for the reporting years 2011 to 2014, unless otherwise noted.

“It is important to note that the PUC accurately calculated and distributed the impact fees based on the self-reported information submitted by municipalities,” DePasquale said. “However, our more in-depth review of the municipal data behind  the budget information submitted to the PUC found three of the seven affected municipalities we reviewed received overpayments totaling $863,514 over four years.”

“These overpayments would not have been detected without our audit,” DePasquale said. “We reviewed only a sample of municipalities and found $863,000. That should raise alarms for municipalities and the General Assembly.”

“The overpayments found during our audit is money that could have gone into a fund set up to provide much-needed housing for thousands of Pennsylvania families in areas affected by the drilling activity,” DePasquale said. “Based on our audit results, it is imperative that the General Assembly amend and improve Act 13 to maximize the impact of the funds distributed.”

The audit and the PUC’s Act 13 Impact Fee webpage show about 11 percent of the county impact fee revenues and about one-third of the local government fee revenues were spent on one or more of the broad environmental categories of allowable expenditures in the Act-- water, stormwater, sewer systems and environmental programs.

A copy of the audit is available online.

PUC Response

The Public Utility Commission Tuesday offered the following response to the release of a performance audit by the Auditor General--

Over the past five years, since the passage of Act 13 of 2012 and the inception of Pennsylvania’s unconventional gas well impact fee program, the PUC has fulfilled its obligation to collect and distribute more than $1 billion to counties, municipalities and other organizations.

This achievement is reflected in the following positive key findings by the Auditor General:

-- “PUC appears to have accurately distributed the impact fees to the conservation districts, state agencies, and counties in accordance with the law” (p. 22),

-- Additionally, with respect to the application of the municipality budget restriction, “PUC appears to have accurately applied the municipality restriction limit in accordance with the law” (p. 24),

-- And lastly, “with the limitation of relying on the self-reporting budgets from the municipalities, PUC appears to have accurately calculated the impact fees distributed to the municipalities in accordance with the law” (p. 27).

Findings included in the audit also point to the potential benefit of additional training for municipal officials, which the PUC has provided and is working to enhance – including the development of a webinar for municipal budget reporting and additional materials for municipal officials available on the Commission’s Act 13 website.

The PUC also continues to work with statewide associations for townships, boroughs and county commissioners to communicate about impact fee issues, and entered into a Memorandum of Understanding with the Department of Community and Economic Development in 2013, to provide ongoing training to municipalities.

Although the Commission was accurate in the calculation and distribution of funds, concerns were raised by the Auditor General regarding the accuracy of budgets submitted by municipalities which serve as the basis for certain distributions.

Additionally, a finding noted that a portion of impact fee expenditures reported to the Commission by some municipal recipients may not comport with the requirements as outlined in the Act.

As for these audit findings, specifically involving monitoring of local government spending and verification of budgets submitted by those entities, it is important to note that the Commission is not authorized to monitor, audit or enforce local government spending – something that was clearly acknowledged in the audit report.

The Commission emphasizes in its audit response letter that “other state agencies including the Department of Auditor General, Office of Attorney General and County District Attorney Offices, the Department of Community and Economic Development and the State Ethics Commission have general audit authority over county and municipal expenditures.”

As such, impact fees are subject to government oversight and audit at the state and local level.  

These broader discussions regarding the structure of the act, reporting requirements for fee recipients, potential monitoring of impact fee uses and other issues raised by the Auditor General are matters for the General Assembly.

A point-by-point list of the PUC’s responses to the findings and recommendations included in the Act 13 audit report are detailed in the Oct. 27, 2016 letter from the Commission to the Department of the Auditor General.

Extensive public information about Pennsylvania’s impact fee program is available on the PUC’s interactive Act 13 website. Visitors can review specifics on funds collected and distributed for each year since 2011. 

The site allows individuals to search and download statistics such as distributions to individual municipalities or counties; allocation and usage of those funds, based on reports submitted by various municipalities; eligible wells per county/municipality; and payments by producers.

Township Supervisor’s Response

David Sanko, Executive Director of the PA State Association of Township Supervisors, issued the following statement commenting on Auditor General Eugene DePasquale’s audit of Act 13 drilling impact fee collection and spending by local governments--

“We commend Auditor General Eugene DePasquale on undertaking this review of the state’s municipalities and counties receiving the gas well impact fee and some recommendations for improving spending, reporting, and oversight requirements but must also point out that his findings are based on a review of spending in only 20 of the 1,487 municipalities receiving these funds and some of the conclusions are faulty or misdirected.

“Expenditures that are permissible by law should not be held out as ‘wrong’ because some in Harrisburg may have different personal spending priorities.

“We feel confident that our member townships are indeed following the Act 13 spending and reporting guidelines. PSATS has been diligent in communicating these requirements to its members and has published numerous articles about the act and the 13 categories of eligible expenditures laid out in the law. In addition, we have run several articles in our magazine about the many wonderful ways townships are spending the impact fee money to improve their communities.

“If the auditor general takes issue with the commonwealth’s rules governing the eligible expenditure of the gas well impact fees, he should not take that out on our member townships, who have only been abiding by the rules as laid out in Act 13, the impact fee law. We welcome the opportunity to comment and engage on any improvements to Act 13 just as we support efforts to improve the Open Records Law after a period of time has passed since its initial enactment.

“The auditor general also noted findings of overpayments to some municipalities, but these calculations are based on the current PUC guidance of ‘total budgeted revenues,’ which conflicts with the PUC’s final implementation order of May 26, 2012, which is what municipalities have been complying with.

“The auditor general should consider recalculating the alleged overpayments based on the rules in place when the reports were due to the PUC. This shows confusion on the part of the auditor general’s office with the PUC’s guidelines.

“We also take exception to what appears to be the auditor general’s – and thus the commonwealth’s – poorly veiled attempt here to go on a hunting expedition for money that they think is better spent by the state, not the deserving municipalities that are the most impacted by gas well drilling directly in their communities. This appears to be yet another Harrisburg insiders’ attempt to take money from the local level and put it in state coffers.

“These impact fees have provided approximately $856 million for projects in every corner of the Commonwealth since 2012. This funding has been a game-changer for local communities.

“More than 60 percent of the collected funds go directly to communities most impacted by drilling, with those hosting the most wells receiving the largest checks. Municipalities are using the revenues for a range of eligible projects – from road and bridge infrastructure and public safety to environmental programs and planning for the future. All of these investments directly benefit the citizens and businesses impacted by the energy industry.

“If the auditor general would like to see changes to the law to clarify the PUC’s spending and reporting requirements, we are open to offering our input on any legislation introduced to amend the law.

“In the meantime, we believe that the overwhelming majority of our member townships are properly using the impact fee money for current projects and future spending as authorized by Act 13 and the PUC’s guidelines for the expenditure of these fees. Funding spent on ineligible categories should stop immediately.”

NewsClips:

Swift: DePasquale Calls For Stronger Drilling Impact Fee Oversight

Auditor General: Flaws In Drilling Impact Fee Law Allowed Misspending

Audit Criticizes Local Government Use Of Drilling Impact Fee Revenue

McKelvey: Natural Gas Impact Fees Used To Pay American Idol Performance?

AP: Auditor Says Clearer Rules Needed For Drilling Impact Fee Use

Act 13 Impact Fee Program Questioned By State Auditor General

Auditor General: Some Drilling Impact Fee Money Spent Improperly

Editorial: Replace Drilling Impact Fee With Fair Tax

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DEP Investigation Into Rice Energy Ends With $3.5M Fine

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[Posted Dec. 6, 8 2016]

12/13/2016