State Budgets

Federal Sequestration Turns Into State Budget Cuts

As the federal government continues to make cuts due to sequestration, several states will find that a major revenue source is quickly drying up.

Mineral lease and royalty payments to states for the oil, gas, and other energy production done on federal lands within their borders are set to be cut through the entire sequestration period. The lease payments for federal lands used for flood control will also be reduced.

The money comes from the companies who produce mineral and renewable energy resources on federal lands. These companies make payments to the federal government for use of the land to, for example, extract oil from the ground on land owned by the government. The payments consist of lease and rental payments, bonuses, and royalties on all sales of energy resources. The system is administered through the Department of the Interior, and specifically through the Office of Natural Resources Revenue (ONRR). ONRR says that roughly $1 billion per month is collected from these payments (including offshore and tribal lands). Roughly half of these payments go back to the states where the land is located (except Alaska, where some leases pay back 90 percent to the state), while 40 percent funds water projects in 17 Western states, and the remaining ten percent goes to the U.S. Treasury.

But sequestration requires every federal government agency to make five percent reductions across the board, among other cutbacks. In the case of lease and royalty payments, the Department of the Interior is considering those payouts to be part of the overall budget and there, subject to the same percentage cut.

Stateline reports that the funds paid out to 36 states added up to $2.1 billion last year.

Top Five States Impacted by Mineral Payment Cuts
(in millions of dollars) 
(Source: Stateline)
State Federal mineral lease payment 2012 Cuts in 2013
Wyoming $995.2 $53.1
New Mexico $488.2 $26
Utah $164.6 $8.7
Colorado $157.8 $8.4
California $111.6 $5.5

Among the most outspoken on the matter is Wyoming Governor Matt Mead, whose state is set to lose $53 million over five months. Gov. Mead equated the practice with “taking someone else’s property.” He does not intend to go to court over the dispute. Mead and other governors believe their states are now suffering due to federal spending problems.

In Utah, these payments are particularly important to rural communities. These involve state grants for roads and other community services. Now the state intends to hold back on those payments until it knows how much money it can dole out.

North Dakota faces similar difficulties, although State Treasurer Kelly Schmidt said that “[c]ash flow is not going to be an issue for us.”

The Western Congressional Caucus says that Western states will be hurt the most by the cuts, as 99.3 percent of the federal lease and royalty payments went to member states.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

+ State Budgets In Depth