Taxing Oil Tapping into Santa Barbara County's Natural Wealth

Conclusions 5

• CL1
  An oil production tax could generate essential new and ongoing revenue for the County.
• CL2
  The principal vehicle for taxing oil production in California, the property tax, was lowered substantially with the passage of Proposition 13 in 1978.
• CL3
  The County of Santa Barbara is facing estimated budget gaps of $5 million in Fiscal Year 2013-2014 and $13.7 million in Fiscal Year 2014-2015.
• CL4
  Once the proposed North County Jail opens, its operating cost is projected to deplete the Santa Barbara County General Fund by $17.3 million annually.
• CL5
  16 SB241, The California Education and Resources Reinvestment Act (CERRA), if passed, would impose a 9.9% severance tax on the extraction of oil from the earth or water within California’s jurisdiction. Ninety- three percent of the proceeds would go to the University of California, California State University, and Community College systems. Seven percent of the proceeds would go to the California Department of Parks and Recreation. 2 012-2013 Santa Barbara County Grand Jury Page 7 The County of Santa Barbara, like many government entities, found its financial wellbeing severely compromised by the Great Recession of 2008. This exacerbated the County’s existing financial challenges. It is critical for elected officials to identify new sources of revenue. The Jury is fully aware of the debates concerning the environmental ramifications of drilling for oil. These include, but are not limited to, the effects on endangered species and the safety of technologies like hydraulic fracturing. The Jury is also aware, given the experience of the 1969 Santa Barbara oil spill and the history of environmentalism in the area, that some residents would prefer that no oil be extracted from land in the county or offshore waters. These are complicated issues with devoted advocates on both sides. The Jury takes no stand on these environmental issues in this report. However, as this nonrenewable energy resource continues to be extracted from the ground in the county, the 2012-2013 Santa Barbara County Grand Jury recommends that the Santa Barbara County Board of Supervisors follow the recommendation of the Chief Executive Officer of the County of Santa Barbara and allow the voters to decide if an oil production tax will be implemented. FINDINGS AND RECOMMENDATIONS Finding 1 The principal vehicle for taxing oil production in California, the property tax, was lowered substantially with the passage of Proposition 13 in 1978. Finding 2 The County of Santa Barbara is facing estimated budget gaps of $5 million in Fiscal Year 2013-2014 and $13.7 million in Fiscal Year 2014-2015. Finding 3 Once the proposed North County Jail opens, its operating cost is projected to deplete the Santa Barbara County General Fund by $17.3 million annually. Finding 4 An oil production tax could generate essential new and ongoing revenue for the County. Recommendation 1 That the members of the Santa Barbara County Board of Supervisors follow the recommendation of the Chief Executive Officer of the County of Santa Barbara and allow the voters to decide if an oil production tax will be implemented by putting this issue on the next county-wide ballot. REQUEST FOR RESPONSE In accordance with California Penal Code Section 933 (c), each agency and government body affected by or named in this report is requested to respond in writing to the findings and recommendations in a timely manner. The following are the affected agencies for this report, with the mandated response period for each. 2 012-2013 Santa Barbara County Grand Jury Page 8 Santa Barbara County Supervisor, 1st District, Salud Carbajal – 90 days Finding 1, 2, 3, 4 Recommendation 1 Santa Barbara County Supervisor, 2nd District, Janet Wolf – 90 days Finding 1, 2, 3, 4 Recommendation 1 Santa Barbara County Supervisor, 3rd District, Doreen Farr – 90 days Finding 1, 2, 3, 4 Recommendation 1 Santa Barbara County Supervisor, 4th District, Peter Adam – 90 days Finding 1, 2, 3, 4 Recommendation 1 Santa Barbara County Supervisor, 5th District, Steve Lavagnino – 90 days Finding 1, 2, 3, 4 Recommendation 1 2 012-2013 Santa Barbara County Grand Jury Page 9 Appendix A The Monterey Shale Formation Outlined Source: N Y Times February 3, 2013 2 012-2013 Santa Barbara County Grand Jury Page 10 Appendix B Source: gregcroft.com/santamaria.ivnu 2 012-2013 Santa Barbara County Grand Jury Page 11 Appendix C Calculated Oil Tax Revenue Using Rates from Other Locales Locale Rate** Law 2012 Santa Midway- Calculated Barbara County Sunset Revenue ** Production $/Barrel* Kentucky 4.5% Ky.Rev.Stat§ 143A.020 3,388,668 BBL $ 14,562,801 North Dakota 11.5% N.D. Code § 57-51.1-01 3,388,668 BBL $ 37,216,046 Oklahoma 7.0% Okla.Stats.§ 68-1001 3,388,668 BBL $ 22,653,246 5 Virginia Counties 0.5% (various) 3,388,668 BBL $ 1,618,089 Municipal Codes Beverly Hills, CA $ 0.36 BBL § 3-1-219 3,388,668 BBL n/a $ 1,219,920 Long Beach, CA $ 0.40 BBL § 3.80.221 3,388,668 BBL n/a $ 1,355,467 Seal Beach, CA $ 0.58 BBL § 5.55.015 3,388,668 BBL n/a $ 1,965,427 Signal Hill, CA $ 0.60 BBL § 5.12.010 3,388,668 BBL n/a $ 2,033,201 Torrance, CA $ 0.30 BBL § 228.2.1 3,388,668 BBL n/a $ 1,016,600 Calculated Oil Tax Revenue Using Sample Rates Santa Barbara @ $1.00/ BBL *** 3,388,668 BBL n/a $ 3,388,668 Santa Barbara @ $1.44 / BBL **** 3,388,668 BBL n/a $ 4,879,682 NOTE: * To simplify the presentation, the base is assumed to be market value, although some locales use a different base for calculating the tax. Midway-Sunset price is from the Presentation by County Assessor and County Counsel to the Board of Supervisors on August 12, 2012 ** Most locales have inflation-adjusted rates, exemptions, incentives and other modifications that, where applicable, will change the calculated revenue amount. *** Rate proposed by Santa Barbara County Staff in 2012 **** Rate proposed in Measure O for Los Angeles in 2011 2 012-2013 Santa Barbara County Grand Jury Page 12

Observations 1

• OB1
  County Budget Gaps According to the Executive Summary of the Recommended 2012-2013 County Budget (Executive Summary)8, “Santa Barbara County continues to face significant internal challenges such as increases in employee retirement and healthcare costs, reliance on one- time funding solutions, deferred maintenance of critical infrastructure, funding of a new North County Jail, increasing cost of Fire Department operations, and lack of new revenues”. The current estimate for operating the proposed North County Jail is $17.3 million per year. To solve the budget gap, the Executive Summary reported the Chief Executive Officer’s (CEO) office had “explored strategies for revenue enhancement including an oil production tax, economic development, fee adjustments and increasing the Transient Occupancy Tax (TOT)”. On February 14, 2012, the CEO recommended to the BOS that they allow the voters of the County to decide if they agreed with an oil production tax by having staff draft “a ballot measure that identifies the tax methodology and the nature of the tax, general or special, with a plan to proceed with placing it on the November 2012 ballot”. However, the BOS chose not to implement the recommendation at that time and no ballot proposal on an oil production tax was presented. During the past four years, significant staffing and service level reductions have been required to balance the budget. In addition to furloughs initiated in FY 2008-2009, the County lost over 450 full-time-equivalent employees. Up to 32.5 additional positions may be lost in the FY 2013-2014 budget cycle. As a result of available revenues and the expected increases to expenditures, it will be necessary to reduce service levels by $8.3 million in FY 2013-2014. Service reductions include, among other things, many losses in the Public Health Department and the elimination of the targeted gang intervention program 7 Rates as of this writing; many locales have inflation-adjusted rates, exemptions, incentives and other modifications that, where applicable, will change the per barrel rates found in municipal and other codes 8 Presentation by County CEO to the Santa Barbara County Board of Supervisors on May 15, 2012 2 012-2013 Santa Barbara County Grand Jury Page 4 in the Probation Department and the Juvenile Justice Program in the Alcohol, Drug and Mental Health Services Department. Also included in the effort to balance the budget are the loss of three firefighter positions and seven Sheriff Deputy positions. The projected service reductions will help fund expected increases in several areas including employee salaries and pay increases (estimated at $3.6 million), the annual “set aside” for the proposed North County Jail ($3.3 million), and an increase in the contribution to the Santa Barbara County Employee Retirement System (SBCERS) of $8.1 million over FY 2012-2013. It should be noted that the County’s Deferred Maintenance Backlog, which is unfunded, is estimated at $292 million and it continues to grow. According to the Santa Barbara County Recommended Operational Plan, Fiscal Years 2013-14 and 2014-2015:9 However, it is critical to note that the ongoing cycle of service reductions is not sustainable and therefore the County must consider revenue enhancement strategies resulting from increased economic activity and resident supported tax increases. County Oil Production Onshore oil production in the County is experiencing a resurgence. From an all-time high in 1964 of 8,950,404 barrels, oil production fell to a low of 1,913,093 barrels in 2005. This number has risen steadily to 3,388,668 barrels extracted in 2012, as reported by DOGGR. The Jury learned that this resurgence is influenced by three major factors. First, the production of oil is currently economically feasible. Unlike the 1980s, when the price of a barrel of oil dropped to single digits, the price of oil has hovered between $90 and $100 for some time. Using the Midway-Sunset Price per barrel of $95.5010, the 3,388,668 barrels extracted last year in the County were worth $334,250,000. With the world’s energy needs increasing, the price is expected to stay in this range in the near future. Secondly, a part of the Monterey Shale Formation is in the County. (See map in Appendix A.) Although oil companies have drilled in the formation for over 100 years, it is only fairly recently that the reserves residing there have been estimated to contain 15.4 billion barrels of oil.11 Lastly, today’s oil companies are using technology not available years ago such as hydraulic fracturing, or “fracking”. Fracking utilizes steam and chemicals under extreme pressure to crack the rock and allow natural gas and oil to flow to the surface. Based on the current economics of oil production, the vast availability of the resource, and the use of ever newer and more efficient technologies, oil exploration and production in Santa Barbara County are here to stay. Currently, the onshore oil in the County comes from approximately 13 active oil fields with over 4,050 active wells, operated by approximately 20 companies. (See Appendix B.) According to the presentation to the BOS referenced above, there were over 40 proposed 9 Executive Summary, Page B-20, May 2013 10 Presentation by County Assessor and County Counsel to the Santa Barbara County Board of Supervisors on August 14, 2012 11 eia.gov Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays, U.S. Energy Information Administration, July 8, 2011 2 012-2013 Santa Barbara County Grand Jury Page 5 projects in the prior three years. Each proposed project is subject to a lengthy and extensive permitting process. Primary permitting jurisdictions include the County’s Planning and Development Department for land use, building, grading, and petroleum permits; the Santa Barbara County Air Pollution Control District for air permits; and DOGGR for well permitting. The BOS also passed new regulations for companies working in the County that require them to obtain an oil drilling and production plan permit for fracking in new or existing wells. In addition, the State’s Senate Committee on Natural Resources and Water and Environmental Quality is studying legislation meant to regulate and control the practice of fracking. An important part of the permitting process for many projects is the Environmental Impact Report (EIR). These are voluminous, extensive documents that can cost the oil company upwards of $1,000,000. The review process for the reports attempts to cover every aspect of the potential impacts of a project and allows for public comment at each stage. One element of many EIRs is addressing potential adverse impacts to federally-listed and/or state-listed endangered or threatened species, such as the California Tiger Salamander and the California Red Legged Frog. Projects will commence only after all potential environmental impacts have been addressed and permits have been obtained. Relying on the aforementioned regulatory agencies to thoroughly evaluate all projects for safety and environmental issues before issuing permits, the Jury takes no position on future onshore oil production. Two concerns raised about an oil production tax are job losses in the County and a possible rise in the price of gasoline at the pump. In its Oil Production Tax Proposal, County staff concluded that neither of these would be meaningful.12 Current Santa Barbara County Tax Assessments on Oil Producing Properties The primary tax imposed on oil producers, pursuant to California state law, is the property tax. The process of assessing property used for oil production is complicated. Counties assess property taxes on oil producers pursuant to the State’s Revenue and Taxation Code.13 Subject to various limits including those enacted as part of Proposition 13, the property tax is calculated annually, starting with the “base year value of the property” and continuing according to the “discounted cash flow” estimated from future production of proven reserves.14 If a production tax applies in a city or county, an oil company can deduct the tax, as it can also deduct permit fees.15 12 Presentation by County CEO to the Santa Barbara County Board of Supervisors on February 14, 2012; Oil Production Tax Proposal, pages 5-6 13 http://www.boe.ca.gov/proptaxes/pdf/ah566.pdf As specialized appraisal techniques are required according to Property Tax Rule 468(c), county assessors may also consult the “Assessment of Petroleum Properties” portion of the State Board Equalization’s(SBE) handbook. It was developed in 1966 with input by industry representatives, county assessors, and petroleum experts. 14 More information can be obtained from Title 18, Sec 468 (SBE Rule 468) at ca.gov and from the Assessors’ Handbook, Section 566, titled “Assessment of Petroleum Properties”, ibid 15 Assessors’ Handbook, Section 566, page 5-10, ibid 2 012-2013 Santa Barbara County Grand Jury Page 6 Oil producers are currently assessed approximately $12,250,000 in property taxes by the County both on proven oil or gas reserves and other taxable property. Often, these assessments are appealed. Resolution of a dispute can take years before the money is released to the County’s General Fund. If an oil production tax, similar to those in at least five California cities, were to be enacted in the County, staff stated any reduction to property taxes on oil producing properties likely would be minimal. The cost and complexity of assessing oil producing properties has not deterred those interested in the production of minerals. The Jury learned that over 200 documents were recorded in the County in 2011 transferring leasehold mineral rights interests in over 20,000 acres. New Revenue Source Keeping in mind the County’s ongoing budget gap, the Jury urges elected officials to identify new sources of revenue. The majority of oil producing states engaged in oil extraction has a production or severance tax. The chart below, the information in the “Background” section of this report and the chart in Appendix C include examples from the Jury’s research of these taxes. Calculated Oil Tax Revenue Using Sample Rates Rate/Barrel 2012 Santa Barbara Calculated Production/Barrels Revenue $1.00 Proposed by County Staff 3,388,668 $3,388,668 $1.44 Measure O Ballot in Los Angeles 3,388,668 $4,879,682 It is evident that a new source of revenue could be raised. It is important to note that the charts illustrate the revenue that would have been raised if the production taxes used in other locations were applied to the number of barrels extracted in the County in 2012. The Jury notes that oil taxation is constantly changing across the country. At this writing, there were over 40 pieces of legislation under consideration, including SB241 in the California State Senate,16 to implement new oil taxes and/or to change elements of existing taxes in various states. For the County, implementing the tax per barrel would be the simplest way to tax oil production as there is already a requirement to report to the State of California the number of barrels extracted. An oil production tax would represent a new source of revenue, not imposed on the general populace, such as a sales tax would be. An oil production tax could garner additional ongoing revenues for the County.

Agency Responses 1

Government agencies' official responses to this report's findings and recommendations. Click on a response to see the structured breakdown.