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Permanent trust funds: Funding economic change with fracking revenues
By Devashree Saha and Mark Muro - Brookings, April 19, 2016
The recent boom and bust of unconventional oil and gas development, or “fracking,” has reopened serious questions about resource management in many U.S. states. While the oil and gas boom generated revenue, jobs, and economic development, the recent bust has adversely impacted state budgets due to declining industry investments in exploration and production and job cuts.
The boom-bust cycle of unconventional oil and gas development highlights the need for strategic management by state governments of fracking-related revenues, not only to minimize the less desirable aspects of the boom-bust cycle but also to enhance long-term prosperity. States can address these challenges by imposing a reasonable severance (extraction) tax on their oil and gas industry and channeling a portion of the revenue into permanent trust funds. In doing so, states can convert volatile near-term revenues from unconventional oil and gas development into a longer-term and continuous source of investment funds for building sustainable and dynamic economies.
To that end, this report advances five elements of good fund governance and management that states should consider in the design and implementation of permanent trust funds:
- Establish an effective governance framework
- Define the fund’s revenue source, deposit, and withdrawal rules
- Design the investment strategy
- Seize the opportunity to invest fund earnings to economic transformation
- Formulate explicit disclosure and transparency standards
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