States Battle to Recover Royalties for Energy Production on Public Lands

Posted September 10, 2013 at 3:19pm

Western governors won a rare — though potentially short-lived — victory last month when the Interior Department reversed plans to withhold roughly $100 million in fiscal 2013 royalty payments to states for oil, gas and coal produced on federal lands within their borders.

To the dismay of state governments, the Interior Department had said it would withhold roughly 5 percent of the royalties owed under the Mineral Leasing Act of 1920 (PL 66-146) to comply with across-the-board spending reductions under the sequester. They were relieved when the department relented, after concluding as part of a legal review urged by the states that mineral payments qualified under a 1985 budget law that allows certain sequestered funds to be withheld initially, then disbursed in subsequent fiscal years.

But the decision doesn’t mean the states will see the cash anytime soon. The funds will not be restored until after the new fiscal year begins next month. And even then, fiscal 2014 royalty payments will be subject to the sequester — meaning the Interior Department will withhold 5 percent in fiscal 2014 only to return the funds after the next fiscal year starts.

Further complicating matters is how those funds will be disbursed. While Interior’s Office of Natural Resources Revenue told states it would “work expeditiously” to disburse the sequestered payments in the new fiscal year, spokesman Patrick Etchart said last week that such payments may require congressional approval.

“We will return the funds when we have written direction to do so,” he said.

And the sequester’s reach extends beyond mineral development. Western governors and their congressional delegations have for months been battling the U.S. Forest Service, an arm of the Agriculture Department that has sought the return of already disbursed federal timber payments that fund schools, roads and emergency services in hundreds of rural counties through the Secure Rural Schools program.

Senate Energy and Natural Resources Chairman Ron Wyden, an Oregon Democrat who co-sponsored the 2000 law creating the rural schools program, characterized the Forest Service’s response to the sequester as “marked by confusion, misdirection and a lack of transparency” after the agency sent a new round of bills to counties in his state and others demanding higher reimbursements.

‘State Revenues’

The amounts of mining royalties at stake are not insignificant, especially for major energy-producing states. Coal-rich Wyoming faced a cut of more than $50 million in fiscal 2013 from the sequester. And New Mexico stood to lose more than $25 million — money that Sen. Tom Udall noted funds the state’s public schools.

“These are state revenues, based on mineral development within state borders and are not federal funds,” Udall, a Democrat, complained to Interior Secretary Sally Jewell during a hearing in March.

Udall, who served for eight years as his state’s attorney general, said the threat to withhold royalties breaches a compact between the state and federal governments.

“These state royalties are part of the bargain between Western states and the federal government, which owns so much land within our states,” Udall said. “Altering that bargain risks increasing conflict between the state and the federal government.”

Udall’s cousin Mark plans to join with fellow Colorado Democrat Michael Bennet this week to introduce legislation in the Senate that would end the payment delays permanently by exempting mineral royalties from the sequester completely.

In the meantime, the fate of state payments from other resource-funded federal programs remains unsettled. Interior is currently reviewing whether payments authorized by other federal laws — including the sharing of geothermal leasing revenues with counties and offshore oil and gas royalties with Gulf Coast states — qualify for the same treatment as those under the Mineral Leasing Act.

Congressional frustration over the administration’s efforts to recover the timber payments that were already distributed appears headed for a showdown later this month.

House Natural Resources Chairman Doc Hastings, R-Wash., issued a series of subpoenas last week to the Agriculture Department and the Office of Management and Budget setting a Sept. 18 deadline to produce documents related to the sequester.

Hastings said the administration’s refusal to turn over documents his committee has sought for months adds insult to the injury of the sequester.

“Retroactively cutting these funds and asking states to pay back the money is outrageous and will cause considerable economic harm to communities that are already struggling to survive,” he said in a statement.

An administration official said the timber payments do not meet the “very specific rules” for an exemption from the sequester under the 1985 statute. “The law does not provide the administration any discretion in the application of sequestration to this funding,” the official said.