Natural gas is pumped from the ground of the Beaumont Municipal Airport Monday, Nov. 22, 2010 in Beaumont, Texas. Gas wells on the airport property are pumping in millions, but deed restrictions and federal rules mean the Southeast Texas city can’t use the money to plug their budget shortfalls or to improve city services. (AP Photo/Pat Sullivan)
BEAUMONT, Texas (AP) — Advances in drilling have helped American towns and cities strike natural gas, and just in time, it would appear. With many facing cash crunches, the millions of dollars they’re reaping in royalties could go toward saving public services, jobs and badly needed road projects.
Not so fast. Because of restrictions built into deeds and federal grants, municipalities can’t use most of their newfound wealth to plug budget shortfalls.
And so, while elected officials struggle to make ends meet, the money sits there, close enough to smell but just out of reach.
“There are street projects we’d like to move forward with, the designs are in place, but because of federal rules we’re not in a position to utilize the funds,” said Kyle Hayes, city manager of Beaumont, Texas, a refinery town that has made millions on gas drilling at the airport. “Right now, it’s just sitting there — $35.3 million.”
The rules differ slightly depending on whether they’re dictated by a government agency, such as the Federal Aviation Administration, or by a charitable foundation or individual during a deed transfer. But the bottom line is the same: Revenues made from gas drilling often have to be reinvested into the area where the minerals were extracted.
With new technologies and drilling techniques making once out-of-reach gas reserves accessible, the problem is expanding and currently affects about a dozen airports, including several in Texas and Louisiana, and at least one in Pennsylvania, said Lynn Lunsford, an FAA spokesman.
“The FAA has been reevaluating this policy in light of these windfalls,” Lunsford said.
The FAA tied a reinvestment clause to the grants it gives out to ensure that money made at airports — for example from leasing stores or renting hangar space — gets reinvested there to help fund maintenance and improvements, Lunsford explained. The clause only became a problem recently with the millions made from natural gas extraction on airport properties.
Beaumont — a Southeast Texas refinery city of just over 110,000 residents — has made more than $35 million in the past 10 months from gas royalty checks. But because of the reinvestment clause, that money has to go back into its tiny airport, which handles no more than 18,000 flights annually and has 39 private hangars for single-engine planes.
“I couldn’t spend that much money if I tore everything down and rebuilt it,” said Brenda Beadle, Beaumont’s capital projects manager.
“I couldn’t spend $3 million out there, let alone $35 million,” Hayes said, laughing.
The city has tried to give the FAA money back, hoping to cut ties to get full access to the gas money. But Hayes said the answer the agency gave the city: “We’ve never had anyone want to return the money. We don’t know if we can do that.”
Lunsford acknowledged that grant contracts are not designed to allow for payback because they “rarely are looking to give money back.” Improvement grants have a 20-year clause that requires all revenue in that time to be reinvested in the airport, he said. Grants used for land acquisition have a “forever obligation” and nearly all major airports — and many smaller ones — have received federal grants.
Beaumont’s sales tax revenues dropped $4 million last year and it faced a possible $600,000 budget shortfall for 2010. The city increased nearly all its fees, from rentals to licensing and permits, and eliminated 30 city positions through attrition, Hayes said. Tax revenues rebounded a bit this year — they’re up 2 percent — but the city is still far from making up for the money it lost.
Nevertheless, Beaumont is determined to begin a much-needed $30 million infrastructure project. The roads, some major arteries leading to the town’s major retail areas, are 30 years old. Potholes have been patched and re-patched, asphalt and concrete are failing, Hayes said.
“Now there is money,” he said in frustration, because the FAA “pointed out that there is a clause in the contract that says any revenue from mineral interests has to be utilized at the airport.”
Fort Worth, a growing city of more than 720,000 west of Dallas, sits smack in “the honey hole” of the Barnett Shale, as Mayor Michael Moncrief likes to say. The geologic formation, like others that crisscross the nation and world, has long been known to contain rich natural gas reserves that were out of reach until new drilling methods made them accessible about five years ago.
Fort Worth, one of the first cities to enjoy the riches of new natural gas drilling, has made more than $89.5 million in the last 10 years from gas royalties, leases and bonuses from drilling in parks, golf courses and the major airport.
That money would cover the city’s $72 million budget shortfall, which forced the closure of public pools and nearly shut down libraries. But only about $15 million of it was unrestricted, the rest has to be reinvested in areas where the money was made.
“It has been a tremendous challenge for this council,” Moncrief said of the cash shortfall it faced and the need to balance the budget. “But that budget gap could have been much more had it not been for the great impact of the natural gas play for the Barnett Shale.”
Pittsburgh, meanwhile, is watching and learning. It is trying to arrange a deal with the FAA before signing a lease with a gas company to extract money from its airport, which sits on the lucrative Marcellus Shale.
Cash-strapped Allegheny County owns the airport land and its mineral rights, said county spokesman Kevin Evanto.
“Since county taxpayers purchased the land . we would like a significant amount of any revenues generated by gas drilling to benefit county taxpayers,” he said.
In Houston, Joe Turner, the director of the parks and recreation department, is simply hoping to have such concerns. In August, the city signed a three-year lease with a gas drilling company. Exploration will take at least a year. If gas is extracted and the city makes money, any revenues made from the largest 770-acre Herman Brown Park has to be reinvested there due to deed restrictions, Turner said. The city will almost definitely reinvest revenues made in two smaller parks in them as well.
“We’re trying to protect the parks in the long term. No one ever envisioned that they’d earn this kind of income. We could only hope we could earn a fraction of that,” Turner said, after learning about revenues made elsewhere.