February 20, 2018

PA Supreme Court Rules State Forest Gas Royalty Transfers Unconstitutional

Royalties earned on gas and oil extracted from state forests must be used for conservation and cannot be transferred to other departments for budgetary purposes
By Laura Legere and Don Hopey, Pittsburgh Post-Gazette, June 20, 2017

This lawsuit was brought by the Pennsylvania Environmental Defense Foundation
Download the Court decision as a pdf
Read more about this case on State Impact

The Pennsylvania Supreme Court on Tuesday ruled that royalties from oil and gas leases on state forest land must be dedicated to conserving the commonwealth’s public natural resources, not for general budgetary purposes, in a decision that gives new weight to the environmental protections outlined in the state Constitution.

Article 1, Section 27 of the Constitution, known as the Environmental Rights Amendment, does not give the state government a right to spend proceeds from the sale of publicly owned oil and gas for non-conservation purposes, even if they are generally in the public good, the four justices in the majority wrote in an opinion by Justice Christine Donohue.

Instead, “The phrase ‘for the benefit of all the people’” in the environmental amendment “is unambiguous and clearly indicates that assets of the trust are to be used for conservation and maintenance purposes,” Justice Donohue wrote.

Beginning in 2009, the General Assembly transferred money from a special conservation account funded by oil and gas revenue from state lands to help balance state budgets, including proceeds from three Marcellus Shale lease sales between 2008 and 2010 that raised $413 million for the state.

The Supreme Court majority made a distinction between upfront lease payments and oil and gas royalties, which are based on how much gas is sold from beneath leased forest parcels after drilling. Royalties from shale gas wells on state forests generated about $449 million between 2008 and February 2016.

The court found that the factual record in the case was not developed enough to decide if rents and bonus payments, like royalties, reflect revenue generated from the sale of oil and gas, and therefore belong to the state’s collective environmental trust. It sent that issue back to the Commonwealth Court to decide.

John Childe, attorney for the Pennsylvania Environmental Defense Foundation, which brought the case, said the decision should significantly reduce the state Legislature’s ability to use oil and gas drilling money to balance the general fund budget.

“This is the first time that the Environmental Rights Amendment — Article 1, Section 27 of the state Constitution — was recognized as protecting a viable public trust,” Mr. Childe said. “It says that the state-owned natural resources are the property of the people and not the commonwealth, and the funds from the conversion of that property must remain with the purposes of the public trust.”

The Supreme Court also dismissed a long-standing three-part test that had been used in place of the language of the Environmental Rights Amendment to gauge whether environmental actions comply with the Constitution, writing that the test “strips the constitutional provision of its meaning.”

Justice Max Baer, in a partial concurrence and dissent, hailed the “monumental steps” the majority decision takes in the development of the Environmental Rights Amendment by dismantling the nearly 50-year-old balancing test and confirming that the amendment is self-executing, without requiring any legislation to give it shape.

“These holdings solidify the jurisprudential sea-change” begun with the 2013 Supreme Court plurality opinion in a major environmental law case, Robinson Township v. Commonwealth, which “rejuvenated Section 27 and dispelled the oft-held view that the provision was merely an aspirational statement,” Justice Baer wrote.

John Dernbach, a Widener University law professor, said that for those reasons, “This case is easily a landmark decision.”

“This may be the most important case that any Pennsylvania court has ever decided about Article 1, Section 27,” he said.

Rose Monahan, a resident attorney with Fair Shake, an environmental law firm with offices in the Lawrenceville neighborhood of Pittsburgh and Akron, Ohio, said the decision was also important because it applied trust law — usually related to private land transactions — to publicly owned land and how the proceeds from the sale of public land or mineral rights can be used.

The Supreme Court decided that money from drilling in state forests must again be appropriated to the state Department of Conservation and Natural Resources through the Oil and Gas Lease Fund, a special fund to be used for conservation, recreation and flood control projects, as it had been for more than 50 years until state forest leases for Marcellus Shale drilling began.

Jennifer Kocher, a spokeswoman for the state Senate Republican majority, said the ruling is not an issue because the state is not currently diverting funds from the oil and gas leases to cover general government spending. “The money needs to be spent to help DCNR, and we will continue to support that,” she said.

Senate Republicans read the ruling as applying only to future spending decisions, but the court did not offer a clear signal about how it expects the lower court to treat past spending.

In the dissenting portion of his opinion, which was joined by Chief Justice Thomas Saylor, Justice Baer wrote that the members of the majority threaten to override the budget-balancing process.

“Despite a lack of support in the language of Section 27, hundreds of millions of dollars generated by the recent Marcellus Shale exploration on state land as well as proceeds from oil, gas, coal, timber, game and other natural resources, will be cordoned off from critical areas of the commonwealth’s budget, including education, infrastructure and other public works, without consideration of whether such funding is necessary to protect Pennsylvania’s public resources,” he wrote.

Mr. Dernbach said one of the issues the Commonwealth Court is going to have to address is what to do about the gas drilling revenue that has already been spent in a way that the Supreme Court now says was not consistent with the constitutional rule.

George Jugovic Jr., vice president of legal affairs at the statewide environmental advocacy group PennFuture, said the legislature and governor still have flexibility to divert royalty money from public land leases to the general fund as long as it is used for public trust resource purposes.

Those might include funding the state Department of Environmental Protection, protecting environmental resources or setting up a new Growing Greener fund to finance projects in state parks and forests, he said.