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PA Supreme Court: Accounting Required For Environmental Rights Amendment Trust Fund Money From State Forest Oil & Gas Drilling
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By John C. Dernbach, Commonwealth Law School, Widener University This article first appeared on John C. Dernbach’s Blog August 17, 2022-- In 2017 and 2021, the Pennsylvania Environmental Defense Foundation (PEDF) obtained decisions from the Pennsylvania Supreme Court that royalties and other money the state receives from oil and gas drilling in state forests must be used to “conserve and maintain” public natural resources in accordance with Article I, Section 27 of the state constitution (Environmental Rights Amendment or ERA). The Court held that the General Assembly—the legislature–could not spend this money any way it saw fit. The General Assembly responded by allocating much of that money to pay for day-to-day expenses at the Department of Conservation and Natural Resources (DCNR). PEDF sued the state, arguing that these new funding statutes violated the ERA on their face. That is, PEDF argued that there were “no circumstances” under which these statutes would be valid. PEDF did not challenge DCNR’s actual expenditures as violative of the ERA. The Commonwealth Court, in a 2020 decision by Judge Michael Wojcik, rejected PEDF’s arguments. On August 5, [2022], the Supreme Court issued an opinion affirming the Commonwealth Court’s determination that these laws are facially constitutional. At the same time, it held that the state has a constitutional duty to account separately for the use of ERA trust fund money. This latter holding opens the door for future lawsuits claiming that these statutes are unconstitutional as applied—that is, that DCNR’s actual use of ERA trust fund money violates the ERA. The big remaining question, in other words, is: precisely what DCNR expenditures are consistent with the ERA duty to “conserve and maintain” public natural resources? The case involves five ERA issues, and it produced five opinions by the six justices who participated in the decision. (Justice Thomas Saylor did not participate.) After a brief explanation of the relevant law, this blog is organized according to those five issues, with the most controversial issues discussed last. While DCNR won all five issues, many constitutional strings were attached. Applicable Law The ERA [Environmental Rights Amendment] provides: The people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people. These cases all involve the second and third sentences of the ERA—its public trust clause. In its 2017 and 2021 decisions, the Supreme Court recognized that oil and gas drilling in state forests converts a public natural resource—state lands and the oil and gas under them—into cash, in the form of royalties and other money. The Court applied traditional trust law to hold that moneys received from the sale of trust assets must be spent for trust purposes. In the two earlier cases, though, the Court did not decide what expenditures qualified as ERA trust fund expenditures. The majority opinion in the August 5 decision, which was written by Chief Justice Max Baer, also noted that the state has three fiduciary duties in managing the ERA trust—duties that the Court had explained in its 2017 decision. The Commonwealth, the Court said, has a duty to treat public natural resources “with loyalty, impartiality, and prudence.” The duty of loyalty includes “administer[ing] the trust solely in the interest of the beneficiaries[,]” which include “all the people” of Pennsylvania, “including generations yet to come.” The duty of impartiality requires the state to give “due regard to the beneficiaries’ respective interests in light of the purposes of the trust.” The duty of prudence requires the state to administer the trust “as a prudent person would, by considering the purposes, provisions, distributional requirements and other circumstances of the trust and by exercising reasonable care, skill and caution.”
PEDF argued the state should not be permitted “to deplete, degrade, or diminish our State Forest and Park public natural resources to benefit another resource.” The Court unanimously rejected this argument, explaining that “Section 27 speaks in the unifying terms of ‘Pennsylvania’s natural resources’ and twice encompasses ‘all the people.’ There is no basis in the ERA, the Court held, for creating “regional segmentation of trust fund assets” or a separate ERA trust fund for state forests and parks. In a concurring opinion, Justice Sallie Updyke Mundy noted that state law allows DCNR to lease state forest and park land for oil and gas only if it decides that is in the “best interest of the Commonwealth” to do so. If the damage from oil and gas leasing is so great that all money received from leasing must be used to repair the damage, she said, DCNR could not lawfully engage in leasing. Thus, in her view, “the Commonwealth acts consistent with its trustee duties by allocating those funds for trust purposes beyond remediating and curing environmental damages related to the extraction of the oil and gas.”
PEDF argued that DCNR had previously used the Keystone Fund to improve state parks and forests. “PEDF claims that [the General Assembly’s decision to reduce] this line of funding constitutes a violation of the Commonwealth’s trustee obligations under Section 27, which should have entailed public notice and an evaluation of the effect of the transfer of these funds on DCNR and the projects affected by the reduced funding.” The Court unanimously rejected this argument, saying that the Keystone fund does not involve ERA trust assets. “We likewise do not find support in Section 27 or basic trust law for PEDF’s claim that the Commonwealth must provide a public evaluation for every decision that could potentially impact Pennsylvania’s natural resource trust.”
Under the 1955 Act, PEDF argued, “DCNR had the statutory authority both to lease State forest and park lands for oil and gas exploration and extraction and to dispense funds to remedy any harm resulting from those leases.” The General Assembly replaced the 1955 Act with legislation creating a new lease fund and directing that money from oil and gas leasing is to be spent as annually directed by the General Assembly. This legislation also states that “the General Assembly shall consider the Commonwealth’s trustee duties under section 27 of Article I of the Constitution of Pennsylvania,” when appropriating lease fund money. For PEDF, the “consider” language means that the General Assembly can spend the ERA trust fund money however it wants—exactly what the Court in its earlier decisions said the General Assembly could not do. The Court rejected this argument by a 5-1 vote. The Court began its analysis by repeating what it had said in its prior two opinions—that the General Assembly is also bound by the ERA obligation to conserve and maintain public natural resources. This responsibility exists independent of the legislation itself. “[W]e view this language as an express reminder to the General Assembly of its mandatory duties imposed by the Constitution….The statute’s arguably inarticulate use of the verb “consider” does not negate the mandatory nature of the General Assembly’s Section 27 duties.” The Court thus held that the replacement legislation “is facially constitutional as it requires the General Assembly to consider its mandatory trustee duties and does not authorize the Commonwealth to use trust assets for non-trust purposes.” This holding, the Court said, “does not negate the potential” of a challenge to “the General Assembly’s ultimate appropriation of the Lease Fund”—if that appropriation violates the ERA. Justice Kevin Dougherty dissented. For Justice Dougherty, the use of “consider” made this legislative provision facially unconstitutional because it does not require “the money be spent only to further trust purposes.”
PEDF argued that the ERA does not authorize the state “to sell State Forest assets to generate revenue for the general operating expenses of DCNR.” Such sales deplete the state’s public natural resources, PEDF said, which violates the duty to “conserve and maintain” such resources. The Court rejected this argument (4 to 2). It noted that DCNR’s primary statutory mission—which includes protection and maintenance of state parks and forests—is “indisputably in furtherance of the purposes of the Section 27 trust.” It explained that “basic trust law clearly empowers the Commonwealth, as trustee, to incur reasonable costs in administering the trust to conserve and maintain Pennsylvania’s public natural resources.” The Court held: “[W]e conclude that the use of trust assets to fund DCNR’s operations is within the authority of the Commonwealth as trustee to incur costs in administering the Section 27 trust, absent demonstration that these administrative costs are unreasonable or that the DCNR has failed to act with prudence, loyalty, or impartiality in carrying out its fiduciary duties.” In a footnote, the Court added that it was not deciding “whether all of DCNR’s statutory responsibilities qualify as trust purposes because PEDF, in the current litigation, presents a facial challenge to the use of trust assets for DCNR’s general operations, rather than challenging DCNR’s use of trust funds for specific administrative costs.” In its facial attack on the statutes that authorized DCNR’s expenditure of ERA trust fund moneys, PEDF had argued that there were “no circumstances” under which the statutes were consistent with the ERA. But the Court explained that it is possible that DCNR is spending all of the ERA trust funds for trust fund purposes. Justices Dougherty and Wecht dissented. Justice Dougherty argued that the majority contradicted the Court’s holdings in the 2017 and 2021 cases. Like this case, he said, those cases were facial challenges to statutes. \ And in those cases, he added, “this Court struck down statutes that permitted the Commonwealth to spend trust funds without prohibiting the expenditure of trust funds for non-trust purposes.” The statutes at issue here do the same thing, he argued. He disputed the majority’s conclusion that DCNR’s operating expenses are “indisputably” in furtherance of the ERA. “The DCNR’s mission goals of economic use of state forests, recreation, and heritage conservation are not explicitly related to the trustees’ Article I, Section 27 duties to conserve and maintain public natural resources.” The General Assembly, he said, should have expressly limited the use of ERA trust fund money for DCNR’s operating expenses to ERA purposes. Justice David Wecht agreed with Justice Dougherty, but added another objection. “With these budgetary appropriations,” he explained, “the Commonwealth is deploying public natural resources to raise revenue and offset its obligation to fund government operations. On this basis alone, I would hold that PEDF has lodged a successful facial challenge.” He continued: “A trustee’s ability to use trust corpus to cover reasonable trustee expenses alleviates the expenses associated with being trustee. It does not relieve the Commonwealth of its independent obligation to fund government operations.” Justice Christine Donohue, who wrote the 2017 and 2021 opinions for the Court, filed a concurring opinion to respond to Justices Dougherty and Wecht. She was joined by Justice Debra Todd. Justice Donohue explained that, in Commonwealth Court, DCNR had sought a declaration “that its current usage of the Lease Fund is wholly consistent with its Section 27 trustee responsibilities.” The Commonwealth Court denied that declaration. She also explained, in a footnote, that, after the 2017 decision, “as a matter of law, Article I, Section 27 fiduciary duties are incorporated into all legislative and executive action at all levels of the Commonwealth’s governance,” thus making it “unnecessary to pronounce the existence of mandatory constitutional fiduciary duties in legislation or orders relating to Article I, Section 27 trust assets.”
PEDF relied in its argument on the trust principle prohibiting the commingling of trust funds with other funds. In response, the Court agreed that this trust principle applies. “A trustee has a duty to maintain ‘adequate records of the administration of the trust’ and to ‘keep trust property separate from the trustee’s own property.’“ Thus, when a lawyer keeps money in trust for a client, the lawyer must keep that money in a separate account from her own money. Lawyers are frequently disbarred for keeping a client’s money in their own account—for commingling the two accounts. All too often, the trustee (in this example, the lawyer) uses the trustee’s commingled money for her own purposes, not trust purposes. The Court (by a 4-2 vote) rejected PEDF’s argument that the challenged statute was unconstitutional on its face. Although the statute did not contain language requiring that the ERA trust fund money be kept in a separate account, the Court reasoned, the Commonwealth can fulfill its trust duties simply “by segregating the monies from the different funds and keeping an accurate accounting.” It is possible, in other words, for the statute to be applied in a constitutional manner. The Court did not decide whether DCNR actually commingled funds. Justices Dougherty and Wecht dissented. Echoing what he said elsewhere in his opinion, Justice Dougherty faulted the General Assembly for not expressly limiting DCNR. The legislation being challenged, he said, “allows the Commonwealth to commingle its own funds with trust funds, which would violate its duties as a trustee,” and “fails to require an accounting if “[a]ny other money appropriated or transferred to the fund” is non-trust money.” Justice Wecht echoed this view and explained that the majority would make it harder for organizations like PEDF to vindicate the constitutional trust: “Rejecting this facial challenge shifts to third parties such as PEDF the expense and burden of sifting through the Commonwealth’s accounting in order to lodge as-applied challenges to particular disbursements. Relying upon third parties to monitor the Commonwealth’s compliance with its constitutional obligations is no substitute for judicial review of unconstitutional statutes.” In her concurring opinion, Justice Donohue (with Justice Todd) pointed out that the Commonwealth Court granted PEDF’s request for declaratory relief for an accounting. The Commonwealth Court declared the state “is required to keep detailed accounts of the trust monies derived from the oil and gas leases and track how they are spent as part of its administration of the trust.” The Commonwealth did not appeal that decision. (The majority opinion made the same point.) She concluded “that the Commonwealth Court’s order requiring the Commonwealth to account for asset expenditures, as specifically requested by the PEDF, will bring any as-applied constitutional defects to light. Indeed, I would not join the Majority Opinion if it ‘[d]eem[ed] the entirety of DCNR’s budget to be a reasonable cost of trust administration[.]’” She described herself as “highly sensitive to the possibility that the General Assembly has violated its fiduciary duties by creating a funding scheme that forces DCNR to utilize trust assets for non-trust purposes.” Still, she said, “we must presume good faith on the part of the General Assembly.” Underlying Problems Two difficult problems are at the core of this case. First, oil and gas leasing on state lands converts a nonrenewable public natural resource, which is essentially permanent, into money, which may or may not be used for conservation purposes of lasting value. As the Supreme Court emphasized in its 2021 decision, the Commonwealth as trustee “cannot prioritize the needs of the living over those yet to be born.” It is true, as DCNR argued, that “[c]onservation and maintenance activities are not accomplished in a vacuum: they require people and equipment.” But it is also true, as PEDF argued, that the ultimate result of the conversion is loss of nonrenewable public natural resources for which DCNR’s operating expenses may not fully compensate. That issue remains undecided. In other states, like Michigan, revenues from oil and gas leasing on public lands are used to buy additional public lands. That, at least, replaces lost natural resources with additional natural resources. An approach like that would require the support of the General Assembly and the Governor. But it also suggests that DCNR’s most justifiable use of ERA trust funds is for capital expenditures related to public natural resources. Second, there was a time, not too long ago, when DCNR’s operating expenses were paid almost entirely from the General Fund. Oil and gas leasing under the 1955 Act brought in relatively small amounts of revenue, and it had only a minimal effect on DCNR’s budget. But now, because of legislatively created budget limitations, DCNR needs the ERA trust fund money from oil and gas leasing in order to operate. That was not previously true. And it is also why this case matters to DCNR. Yet however valiantly DCNR strives to manage the oil and gas leasing program in an environmentally prudent way, this new reality creates pressure on DCNR to lease public natural resources to pay for its expenses. That is precisely where the Supreme Court’s 2017 decision says DCNR cannot lawfully be. In that decision, the Court took pains to emphasize that the Commonwealth’s proper role is a trustee of public natural resources, not a proprietor of these resources. A proprietor, the Court said in that case, measures “its gains by the balance sheet profits and appreciation it realizes from its resources operations.” Summing Up: DCNR Won, Sort Of While DCNR won this case, it remains to be seen how much of DCNR’s budget can be paid for with ERA trust fund money. The Court made clear that DCNR cannot commingle ERA trust fund money with other funds. The Commonwealth Court’s 2020 order to DCNR to keep detailed accounts of how ERA trust fund money is spent still stands. And Chief Justice Baer’s majority opinion effectively endorsed that order, recognizing the legal rule on which it is based and saying that the Commonwealth can fulfill its trust duties “by segregating the monies from the different funds and keeping an accurate accounting.” And at least four justices (Dougherty, Wecht, Donohue, Todd) expressed skepticism that all of DCNR’s operating expenses are used to “conserve and maintain” public natural resources. The trust rules for keeping detailed accounts of trust money and prohibiting the commingling of trust assets with other funds are important for ensuring the integrity of ERA trust fund moneys. They make it possible for beneficiaries (including but not limited to PEDF members) to ensure that this money is spent as it should be. Without these rules, as Justice Wecht indicated, it would be possible for the state to use accounting shell games and clever appropriation legislation to make it all but impossible to know how the ERA trust fund money is spent. So it is likely that there will be more litigation, and that these trust rules will play a central role in it. John C. Dernbach is Commonwealth Professor of Environmental Law and Sustainability at Widener University, Commonwealth Law School in Harrisburg, Pennsylvania. He also directs the school’s Environmental Law and Sustainability Center. He has divided his career between teaching and government service. (Photo: Unconventional shale gas drilling pads in DCNR State Forest.) (Reprinted from John C. Dernbach’s Blog.) Related Articles: Related Articles This Week: -- Conventional Oil & Gas Drillers Want To Rewrite Penn State Study Showing Their Drilling Wastewater Dumped On Roads Is Bad For Human Health, Environment [PaEN] -- DEP: Conventional Oil & Gas Driller Compliance Review Will Go Back At Least 5 Years; Whether It Will Be Public Document Not Decided [PaEN] -- Inside Climate News: Q/A With Eliza Griswold Pulitzer Winning Author Of Deep Dive Into Fracking In PA, How Extractive Industries ‘Gut’ Communities - By David Shribman, Former Editor Pittsburgh Post-Gazette [PaEN] -- Climate Wire: New Federal Climate, Energy Law Includes New $700 Million Grant Program To Mitigate Methane Emissions From Conventional Oil & Gas Wells [PaEN] -- Yale School Of Public Health Study Found PA Children 2 To 3 Times More Likely To Be Diagnosed With Leukemia If They Live Near Unconventional Shale Gas Facilities [PaEN] -- Grant Township Charter Banning Drilling Wastewater Injection Wells Struck Down By State Court; Decision Appealed To PA Supreme Court [PaEN] -- PA PUC: Cost Of Natural Gas Provided By Major Utilities In PA Increased As Much As 154% Over Last Year [PaEN] -- Independent Fiscal Office Reports Decline In PA Natural Gas Production For 2nd Quarter In A Row For First Time; But An Increase In New Wells Drilled [PaEN] -- New Poll: Strong Majority Of PA Voters Support Climate Action To Cut Carbon and Methane Pollution [PaEN] [Posted: August 17, 2022] |
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8/22/2022 |
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