The original objective of the coal-severance law was to provide coal-producing counties funds to develop projects that would diversify their economies to plan for life after the use of the extractive, finite resources dwindled.
Although not flawless, the tax has provided Eastern Kentucky with a mechanism to improve its water, sewer, police and fire services, including other important public infrastructure needs.
Unfortunately, without a diverse tax base, many local governments in the core coal-producing counties depend on this tax to supplement a majority of their general fund budgets.
As a result, when coal production is down, local governments struggle to survive due to the lack of money coming in from the coal severance fund. As coal production continues to decline, where are legislators and county judge-executives going to turn when this money runs out?
A plan must be in place to maintain financial security of Kentucky's coal-producing counties and ensure their fiscal sustainability as these severance funds continue to decrease.
According to a 2011 CNNMoney report, coal production in central Appalachia is expected to decrease 40 percent in the next five years. This decline will result in substantial job losses, which we have already begun to experience with recent layoffs by Arch Coal in Knott, Perry and Pike counties. It will also result in a decline of severance tax-generated funds for local governments.
Moreover, the continued saturation of the natural gas market from expanding drilling of the Marcellus shale in West Virginia and Pennsylvania has led to less drilling in Kentucky, thus providing fewer severance dollars from the production of natural gas.
In West Virginia, the Center for Budget and Policy suggested a 1 percent tax increase on all coal and natural gas to fund an endowment that draws interest, creating financial security for future generations of its state.
The West Virginia report indicates that if such a permanent endowment had been created in 1980, the trust funds would have assets of nearly $1.9 billion today. Similar approaches have been enacted in Alaska, Montana, New Mexico, North Dakota, Utah and Wyoming on extraction of natural resources from their respective states.
Kentucky should follow suit. However, instead of imposing an additional or increased severance tax, the legislature should earmark a small portion of the 50 percent of coal severance dollars that are allocated directly to the state's general fund.
Unfortunately, this 50 percent allocation of coal-severance funds, produced directly from coal-producing counties, rarely finds its way back to the mountains. This is an ideal way to fund such an endowment and provide financial security for East Kentucky.
In the meantime, public officials in the mountains must be smarter as to how they spend current coal severance funds, by taking a regional approach to development, as opposed to the parochial and factional nature existing across county borders.
A more regional approach to development, evident in Central Kentucky, will benefit all of Appalachian Kentucky.
To that end, the creation of such a regional endowment from coal severance funds would enable East Kentucky to have a sense of fiscal security while focusing on other important policy objectives, such as improving early childhood education, prenatal care, oral health and college attainment rates.
For generations, East Kentucky has been plagued by a lack of long-term strategic planning. The creation of a permanent endowment from the production of coal gives the region an opportunity to ensure future fiscal sustainability as it continues to diversify its economy.