Introduction and summary
Over the past decade, the changing U.S. energy mix—notably cheap natural gas—forced hundreds of coal-fired power plant closures and drove more than 50 U.S. coal mining and power companies into bankruptcy.1 Communities that rely heavily on coal revenue from mining to fund schools, roads, and other public services risk being left behind if they cannot maintain these essential services or find resources to invest in the infrastructure and assets central to success in a changing economy.2
As an example of how current revenue dependence amplifies the budget crisis facing coal communities, consider Big Horn County, Montana: There, four mines accounted for 60 percent of Montana’s coal exports from 2010 to 2019.3 When the receiving coal-fired power plants in the Midwest began to close, the local effects were immediate. Two of the county’s four mines closed in 2016 and 2021. The mine owner, Lighthouse Resources, filed for bankruptcy in December 2020 to shed its liabilities, including $2.7 million4 in workers’ pensions and nearly $15 million in taxes owed to Big Horn County and the state of Montana.5
In addition to lost back taxes, the county government is receiving fewer federal royalty payments. Mining companies pay the U.S. Department of Interior royalties on the coal mined in Big Horn County.6 Half of these royalty collections are sent back to the state of Montana, which then passes some of the royalties back to the county governments where mining occurs. In 2022, royalties received by Big Horn County fell to $1.2 million from a high of $4.5 million in 2012 and will continue to fall each year.7 The county government, local school districts, and the city of Hardin rely on royalties from federal leasing; state taxes on coal mining; and property taxes paid by mining and utility companies to pay for services and infrastructure.8 The loss of coal revenue has already forced the county government to lay off staff, reduce benefits, cut services, and raise taxes and fees on families and businesses outside the coal sector—on top of the economic distress the county experienced due to the jobs lost when the mines closed. And these impacts are occurring in a distressed rural county—most of which is part of the Crow Indian Reservation—where a lack of basic services creates acute economic vulnerability.9
Coal communities across the country have struggled as companies have shuttered coal mines and power plants, laid off workers, and filed for bankruptcy.
The situation in Big Horn County is not unique. Coal communities across the country have struggled as companies have shuttered coal mines and power plants, laid off workers, and filed for bankruptcy, sometimes without paying their tax obligations, properly maintaining workers’ pension funds, or setting aside funding for their cleanup responsibilities. Coal companies have little long-term investment in the success of these communities, and state and federal leaders have few if any strategies in place to replace lost revenue.
The failure to address dependence on coal revenue may be a harbinger of what’s to come for communities that rely heavily on revenue from oil and natural gas. The United States’ energy mix is, once again, changing: These communities will face revenue loss as markets, consumers, utilities, and governments transition to cheaper renewable energy sources as well as reduce carbon emissions. A federal policy framework to address revenue dependence is sorely needed to avoid repeating history—as seen in the painful and avoidable impacts of the necessary transition away from coal—and to build more diverse and resilient rural economies.
In a previous article,10 the Center for American Progress described how dependence on revenue from fossil fuels means some state and local governments will not be able to maintain services and infrastructure. CAP also discussed how this system sets up political opposition to a transition to renewable energy and thwarts climate action. The lessons from Big Horn County—and so many other coal communities across the country—must serve as a warning sign and underscore the importance of disentangling local economies from dependence on oil and gas revenue.
However, there are solutions that can address this revenue dependence. Specifically, Congress should replace annual revenue-sharing payments from coal, oil, and natural gas production with stable and permanent distributions from a new Energy and Resource Legacy Fund, to be established with a one-time upfront loan repaid over time with federal oil and gas revenue payments. The ultimate result would be an immediate, predictable, and permanent source of income for resource-dependent communities as they transition—and it would cost U.S. taxpayers nothing. A new independent Rural Investment Council is also needed to manage the fund for the sole benefit of communities transitioning away from fossil fuels.
Communities will resist the transition away from fossil fuels if drilling continues to be the only revenue available to support their schools, infrastructure, and other essential services.
Replacing fossil fuel revenue helps communities plan for their future. It also removes one of the most daunting barriers to climate action. Communities will resist the transition away from fossil fuels if drilling continues to be the only revenue available to support their schools, infrastructure, and other essential services. Oil and gas executives benefit from—and lobby to protect—the current system where communities are fully dependent on the industry. Creating a new source of revenue will take the political power away from the oil and gas executives and give it to the communities where they operate, allowing people—not the industry—to determine their own future, including by fighting the climate crisis.
The broken contract with rural America
Rural communities are foundational to the U.S. economy, providing the energy, materials, and food for much of the nation and beyond. In return, rural communities benefit from local jobs and wages as well as through public revenue that pays for essential services, such as schools, public health, parks, libraries, and more. These pathways of material and service flows between rural and urban markets are sometimes described as a mutual contract.11 Rural areas are essential for urban areas to function. And rural regions expect to be fairly compensated and benefit from the value they produce.
In recent decades, however, economic restructuring has eroded the local benefits of resource extraction and processing, breaking the mutual contract between urban and rural regions. In the Pacific Northwest, for example, automation of timber mills and harvesting led to fewer jobs and to stagnant wages in timber communities.12 The same is true for manufacturing, coal mining, agriculture, and other economic activities that have experienced job losses even as output and productivity have risen. Increased ownership of rural assets by institutional investors such as through financialization;13 consolidation of corporate ownership;14 tax cuts;15 and trade policy have further undermined the basis upon which rural communities capture and retain value from economic activity they produce. At the same time, growth in the technology, finance, and innovation sectors has concentrated jobs, income, and wealth in cities, largely bypassing rural communities.16
In recent decades, … economic restructuring has eroded the local benefits of resource extraction and processing, breaking the mutual contract between urban and rural regions.
In addition to economic restructuring and deregulation, energy-producing states pursued tax policies that have created dependence on fossil fuels in ways that harm rural communities. Many communities use tax revenue to pay for shared resources—such as schools and buildings or roads and bridges—that the entire community uses and values. But some energy-producing states use fossil fuel revenue to pay for these services and infrastructure while making tax cuts and otherwise lowering the tax base. Raising taxes is politically difficult and is sometimes blocked by state constitutions and rules that intentionally strip governments of their autonomy to manage their own revenue and budgets in response to changing circumstances.17 This revenue structure is so dependent on energy extraction that local and state governments cannot generate sufficient revenue from sources other than fossil energy to maintain public services.18 Additionally, fossil fuel revenue is unpredictable and sometimes volatile, which makes it hard to plan. The outcome is that many rural areas are so locked into a resource-extractive economy that they cannot participate where the economy is growing or plan for the future. This revenue structure also breeds resistance to decarbonization and creates perverse incentives that value oil and gas over clean energy at a time when climate change demands a transition.19 Put simply: The United States cannot achieve its climate goals unless government implements rural economic policies that make it possible.
To be clear, rural America is not monolithic or all in decline. Rural communities are diverse, and many are succeeding in creative and innovative ways.20 Rural people and landscapes are essential to an equitable and resilient U.S. economy.21 As a country, the United States cannot achieve climate and conservation goals without meaningful participation—and leadership—of rural communities. The problem is that for too long, companies have been allowed to extract resource wealth to benefit investors and shareholders, and communities have been disincentivized and disenfranchised from building more stable, diverse, and resilient economies.22 What’s needed are policies that enable communities to use their nonrenewable resources to lasting effect. That means using the same tactics upon which wealthy individuals and corporations have always relied: invest and diversify resources when revenue and income are plentiful so that those same resources will grow and pay dividends in perpetuity. These ideas are essential for rural places to participate in the economy of the future without putting essential services and community values at risk.
Failure of temporary bailouts
A typical federal response to a loss of industrial activity and revenue in rural communities is to fund temporary, transition-oriented programs through the annual political appropriations process. Such short-term fixes have failed because they do not address underlying economic challenges. For example, Congress originally authorized the Secure Rural Schools program (SRS) in 2000 as a six-year transition program to replace declining timber revenue-sharing payments to county governments and local schools. Subsequent socioeconomic monitoring of the transition payments and related economic adjustment programs authorized by the Northwest Forest Plan suggests that the programs failed in part because the short-term transition frame itself did not match the nature of economic restructuring.23 Programs that allocate transition money directly to individuals to compensate for dislocation have also often proved ineffective—for example, retraining and reskilling programs, incentives for business relocation, and residents deciding to move geographically to other opportunities away from deindustrializing Midwest communities.24 Specific to revenue replacement, temporary payments tend to disincentivize making hard choices in favor of seeking continued bailouts; Congress has extended SRS erratically since 2006, and a more permanent and predictable fix sought by counties remains elusive.25 And a complicated web of state and local government taxation and expenditure limits can undermine or block the benefits of assistance.26
Helping communities invest in their future
A better way to address revenue dependence is to save and grow—not spend—revenue generated from an uncertain and ultimately finite resource and to give communities a say in how these assets are invested and distributed. This, however, is not a novel idea. Some fossil fuel-producing states manage substantial permanent funds built up with fossil fuel revenue. For example, the New Mexico State Land Office invests all the fossil fuel royalties it earns from leasing state trust lands into the Land Grant Permanent Fund, which has grown immensely and is now worth more than $25 billion.27 The permanent fund will distribute more money to the New Mexico State General Fund each year—in perpetuity—than the state collected in any single year of leasing. And the New Mexico State Investment Council uses a portion of the Land Grant Permanent Fund—the public’s capital—to invest in renewable energy projects in New Mexico. The federal government, by comparison, has no strategy for itself or the recipients of federal revenue distributions to manage revenue volatility or to use the proceeds of federal leasing to build lasting financial assets that will benefit future generations.
Average funds collected by the federal government each year from leasing public lands and waters for fossil fuel extraction, 2011–2020
The federal government collected an average of more than $10 billion each year from leasing public lands and waters for fossil fuel extraction from 2011 to 2020.28 About $2 billion of this amount was disbursed back to the states where that leasing occurred—95 percent from oil and natural gas and 5 percent from coal.29 States spent most of their payments—90 percent—each year, deepening their dependence on revenue from fossil fuel extraction. Oil and gas are likely to be part of the energy mix for another decade at or near current levels, even under aggressive climate scenarios,30 so the opportunity is substantial to build a permanent fund by investing future oil and natural gas royalties. For example, had such a federal fund been established for coal royalties at the beginning of federal leasing in Montana, Big Horn County would not be facing any decline in federal royalties today as coal extraction ends.
Establishing an Energy and Resource Legacy Fund
CAP recommends that Congress establish an Energy and Resource Legacy Fund to remake the relationship between the communities that extract, process, and deliver coal, oil, and gas to the U.S. economy and the revenue derived from those activities. Rather than use the current model, which leaves communities dependent on volatile royalty payments as they come in, the fund would replace this money with stable and predictable distributions made from a permanent financial asset. The fund would be established with a one-time, upfront loan repaid over time with federal oil, gas, and coal revenue payments. The ultimate result would be an immediate, predictable, and permanent source of income for resource-dependent communities as they transition and would cost U.S. taxpayers nothing.
To achieve its goals, the fund must be established with the following structure.
The Energy and Resource Legacy Fund must be managed transparently and independently:
- The fund is best established outside the U.S. Department of the Treasury to protect it from future reappropriation—for example, raiding by Congress or the states—and allow for a diversified investment strategy.
- The fund must have a clear fiduciary duty to resource-dependent and front-line communities, meaning decisions about how the fund is invested and how the proceeds are used must benefit those communities. One way to accomplish this is to establish a board with robust representation from beneficiary communities.
The Energy and Resource Legacy Fund must be financed through a Treasury loan that will be paid back over time:
- To establish the fund, Congress should make a one-time deposit of between $30 billion and $40 billion so that the fund is large enough to replace current payments—in the form of stabilized disbursements from the fund—to state and local governments immediately.31
- The deposit would be paid back by repealing federal disbursements to states and reappropriating these dollars to the Treasury.
- This proposal contemplates ending only the portion of federal oil, gas, and coal revenue disbursed to states from onshore leasing, from Section 8(g) of the Outer Continental Shelf Lands Act, and from provisions of the Alaska Statehood Act. The balance of leasing revenue disbursed to the Treasury, the Reclamation Fund, the Land and Water Conservation Fund, and other federal funds, as well as to states in the Gulf of Mexico through the Gulf of Mexico Energy Security Act of 2006, are not affected. This proposal does not affect leasing revenue or disbursements from activity on Native American tribal lands.
- If future royalties are not sufficient to pay off the deposit, Congress—instead of states and communities—would assume the risk and use additional federal royalties in the Treasury not otherwise appropriated to repay the loan.
The Energy and Resource Legacy Fund must guarantee payments to transitioning communities:
- The corpus of the fund would be invested to earn income. A diversified investment strategy may seek a return, net of inflation, sufficient to finance stabilized annual payments to state and local governments and protect the value of the fund in perpetuity. The fund would make distributions to state and local governments each year to replace annual federal royalty payments that would no longer be made. To help ensure payments are stable and predictable, the fund must disburse a constant share of the average value. For example, New Mexico’s Land Grant Permanent Fund distributes 5 percent of the five-year average fund balance to the State General Fund each year. The State Investment Council manages the fund to return at least 5 percent, net of inflation, to maintain the fund in perpetuity.
- Disbursements to state and local governments could be used for any governmental purpose.
Establishing an independent Rural Investment Council
The second key feature of this proposal is founding an independent Rural Investment Council that safeguards the Energy and Resource Legacy Fund for community benefit and maximizes the fund’s impact. The primary role of the council would be to manage the fund independent from Congress in order to facilitate a diversified investment strategy and to protect the fund from being raided for other purposes. The council’s independence would guarantee the fund is stewarded for generations to come. The council, established for this purpose, will take on important roles. Based on successful revenue management models such as New Mexico’s Land Grant Permanent Fund and the Southern Ute Indian Tribe Permanent Fund and Corporation,32 the council would enable and support holistic, community-led and -owned efforts to transition the rural economy away from dependence on fossil fuels. It would accomplish this mission by providing permanent and predictable revenue and by making public finance available to leverage investments in public infrastructure, renewable energy, and other sectors that advance economic diversification goals.33
The National Academies of Sciences, Engineering, and Medicine recommended a national transition corporation as the best way to simultaneously advance the energy transition and revitalize the U.S. economy.34 After considering alternatives and the success of economic development models internationally such as the Millennium Challenge Corp.,35 the academies concluded that a corporation could best provide the autonomy and long-term view necessary to support locally led transition and rural development solutions.
The Rural Investment Council would serve the following diverse roles and functions.
The Rural Investment Council must manage the Energy and Resource Legacy Fund for the benefit of rural communities:
- The council would establish a clear fiduciary relationship with eligible communities and manage the fund on their behalf.
- The council is best established as a federally chartered nonprofit organization overseen by a board of directors with members representative of beneficiary communities, federal agency directors, community development and financial management experience, and bipartisan affiliations.
- Establishing an independent council is also necessary to manage the fund using a diversified investment strategy. The Treasury typically is restricted from investing federal dollars in risky assets, including stocks and other securities.
The Rural Investment Council must administer direct payments and public finance:
- A primary function of the council would be to administer the direct payments to states from the fund.
- The council would make payments to states using a formula that replicates historic distributions of revenue-sharing payments. The council may, at the discretion of the board, take into account economic conditions of each eligible state and county, using measurements of poverty rates, household income, land values, and unemployment rates as well as other economic, demographic, and capacity indicators.
The Rural Investment Council must guarantee transparent evaluation and monitoring:
- Rigorous monitoring and assessment of progress toward defined community-level outcomes will be necessary to learning and success of direct payments and public finance investments. For example, the council could assess if and how payments are offset by tax switching, revenue limits, or other state fiscal policies that undermine the purposes of the fund.
- Investments in data collection and management will enable the development of sophisticated analytical tools to strengthen local leaders’ and governments’ technical capacity in creating evidence-based policy interventions. For example, the council could research the linkages between place-based public assets—including good schools, access to health care, parks, libraries, and functioning infrastructure—and resilient and diverse economies.
The Rural Investment Council must oversee contracting, collaboration, and partnerships:
- The board will select and hire an executive director who reports directly to a board of directors. The executive director has the authority to hire staff and contract with investment managers and consultants to discharge the council’s duties.
- The council’s activities would be funded by a portion of the disbursements from the fund. For example, 0.5 percent of the ending fund balance would provide from $150 million to $200 million annually, depending on the size of the initial loan.
- Oversight would be provided by the Treasury Department Office of the Inspector General.
- The council’s executive director would sit on relevant federal teams coordinating and delivering transition and rural economic development assistance, such as the existing Interagency Working Group on Coal and Power Plant Communities and Economic Revitalization.36
- The council may partner with regional intermediary or hub institutions to provide technical assistance, deliver payments, and coordinate public finance with relevant rural development, infrastructure, and conservation grants and loans to leverage local development strategies.37
Once established, the council’s mission could expand beyond the core focus on fund management and payment distributions. For example, states have used their fossil fuel endowments in creative ways to advance the energy transition and diversify rural economies. New Mexico’s State Investment Council uses a small share of the principal in the Land Grant Permanent Fund to invest public capital in renewable energy projects and companies. The proposed federal fund could do something similar by enabling the council to invest a portion of the principal in renewable energy, state-directed investments such as schools and other public infrastructure, as well as other private businesses that advance the energy transition and economic diversification in other sectors where the economy is growing—such as health care, manufacturing, and service sectors.
The fund may also facilitate additional savings by enabling state and local governments to establish individual accounts in the fund and invest state severance taxes, local property taxes, and other direct fossil fuel revenue.
Finally, the functions and roles established with regard to stabilizing revenue would benefit communities across rural America dependent on natural resource sectors. So, while the council would restrict the use of federal fossil fuel dollars received from the fund to support communities located in the states where the revenue originated, the types of resources included in the fund could be expanded to include royalties from critical mineral mining and renewable energy infrastructure sited on federal lands. Congress could also appropriate additional funds to the council for energy transition assistance programs, including for grants to build rural capacity, to retrain the displaced fossil fuel workforce, and to advance economic diversification in rural energy-dependent communities across the United States.
The National Energy Community Transition Act
Sen. Michael Bennet (D-CO) introduced a proposal in May 2022 to establish a federal endowment that would provide permanent payments to fossil fuel energy communities and would set up a transition corporation to manage the fund.38 The endowment would receive a $20 billion deposit to fund the permanent payments, and the principal could be used to finance capital investments that benefit energy communities. The corporation also would receive annual royalties for 10 years to fund temporary transition assistance programs, such as grants for workforce training and economic development planning. Sen. Bennet’s proposal establishes a new framework for providing transition assistance, including permanent payments to energy communities. However, it does not break the unsustainable link between fossil fuel extraction and state budgets. Annual mineral revenue-sharing payments to states and communities would continue. By establishing the framework discussed above, the Bennet proposal could enable this type of decoupling. The endowment established by the National Energy Community Transition Act could receive an additional Treasury loan and manage the payments and investment portfolio, as this report has recommended.
To achieve rapid and transformative change in energy systems necessary to meet the scale of the climate crisis, policymakers must pursue parallel reforms to galvanize rural development and modernize public revenue systems. Decoupling state and local budgets from annual oil and natural gas extraction is necessary to avoid repeating the devastating budget crises in coal communities. Any new policy must also reverse the draining of wealth away from rural communities. An Energy and Resource Legacy Fund and an independent Rural Investment Council offer the framework and institutions to align the federal coal, oil, and gas program with climate and rural development goals. This policy framework will give communities the resources to plan for the future and the revenue to maintain essential services. It will also remove a major barrier to climate action, as these communities will not be left behind in a transition to a clean energy future.