Moody's: Lower Natural Gas Prices Hurt Pennsylvania Municipalities

Lower natural gas prices are a credit negative for local governments in gas-rich areas of Pennsylvania because they will pressure impact fees that counties and municipalities collect, according to Moody's Investors Service.

Issuers dependent on the fees as a major revenue driver are especially vulnerable, Moody's said in a report Monday.

The price of natural gas plunged 9.5% the week of Jan. 19 after already spending much of January below $3 per million British thermal units.

Natural gas producers in Pennsylvania pay an impact fee on each unconventional well based on the average price of natural gas. The fee calculation does not account for how much gas is extracted. Two-thirds of the state sits on the ancient geological Marcellus Shale formation and the fee is designed to offset local infrastructure and environmental costs.

Gov. Tom Wolf has suggested a full-fledged tax on Marcellus Shale drilling although Wolf, a Democrat, may have trouble passing the measure through the Republican-controlled legislature.

Pennsylvania faces a $1.9 billion budget deficit for fiscal 2015-16 while its rainy day fund is exhausted, according to the Harrisburg-based Independent Fiscal Office. The gap could widen to $2.6 billion by 2019-20, said the organization.

"The price of natural gas is currently 30% lower than the average price in 2014," said Moody's. "Assuming prices do not rebound, the 2016 distribution, which is based on the average price of natural gas in calendar year 2015, will drop from this year's distribution."

Natural gas producers in Pennsylvania paid the state roughly $226 million in impact fees last year, of which $123 million went to local governments. The number of wells in each jurisdiction determines the share of the distributions, adjusted for certain factors.

The state collects fees in April and distributes them to localities in July.

According to Moody's, these revenues are most significant for small municipalities within the heart of the shale region - in north-central Pennsylvania, near New York state's Southern Tier. Moody's cited well-rich Tioga County townships Charleston and Jackson, whose municipal budgets are limited. Jackson's general fund balance, for instance, surged to 85% of revenues in 2013 from 21% in 2012.

"In many cases, impact fee revenue over the past three years has contributed to fund balance growth, road project funding and the easing of other revenue pressures," said Moody's.

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