The Empire State’s Industrial Devolution

The drilling technology revolution now sweeping the country has already turned America into the world’s leading natural gas producer, and by next year will make us number one in oil production as well. The economic benefits are being felt far and wide.

But not in New York, which has essentially decided to sit this one out.

This is quite a turnaround for the self-proclaimed Empire State, where economic progress was once almost a religion. In the 1820s the Erie Canal made New York Harbor the portal to America’s heartland; it vaulted Manhattan past Boston and Philadelphia to become the nation’s commercial center. Later the state capitalized on railroads that used gentle routes across the Appalachians, on abundant hydropower from Niagara Falls and elsewhere, and on forests, farmland and fisheries that supported a vibrant rural life. Downstate, New Yorkers built an intricate web of subways, tunnels, bridges and highways to bind five counties into one great city, and to bind that city to its suburbs. One of New York’s leading personalities of the mid-20th century was Robert Moses, known as the “master builder.”

But Moses’ approach was to bulldoze opposition to his projects the same way he bulldozed the earth on which he built them. Partly in reaction to that aggressive approach, New York today is, along with California, the theological center of American NIMBYism. Some projects still manage to get built downstate, where profits from the service economy are robust enough to overcome the drag of endless what’s-in-it-for-me demands. But most of upstate New York has devolved from an Industrial Revolution powerhouse to an economic backwater. A few cutesy places scratch out a living on tourism and servicing the vacation-home crowd. Meanwhile, cities from Poughkeepsie to Buffalo struggle to stay relevant.

This is the backdrop against which we should view, with considerable sadness but little surprise, last week’s court decision that all but ensured New York will only watch its neighbors prosper from energy development.

The Court of Appeals, New York’s highest court, upheld zoning laws that effectively ban hydraulic fracturing and other energy development in the upstate towns of Dryden and Middlefield. Because fracking is both an industrial operation and an instance of local land use, the decision centered on whether the towns overstepped their power to regulate land use by effectively outlawing an entire industry within their borders.

The court said the towns were within their rights to do just that. Dryden can – and did – forbid you from looking for gas and minerals on your own land, or from trying to extract them, if you happened to know of any. In the court’s view, this outright prohibition on extracting oil and gas does not actually relate to oil and gas; it relates to land use, and merely happens to prohibit oil and gas incidentally.

If this logic seems tortured to you, then you probably agree with the dissenters in the 5-2 ruling. Dissenting Judge Eugene Pigott cited the state’s Environmental Conservation Law Section 23-0303: “[t]he provisions of this article shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law.” Pigott argued that the zoning laws do relate to the industry they effectively forbid; thus the state law should trump local zoning concerns in this instance.

The majority, which evidently found this reasoning unconvincing, observed that the state Legislature is free to overrule these zoning laws, but given New York’s political culture, this is unlikely. So New York will continue to just say no to the energy boom that is reviving the economic fortunes of other parts of rural America, from Appalachia to North Dakota to the desert Southwest.

Whether this result is good or bad depends on your point of view. If you are a landowner with property that sits atop the Marcellus Shale, the state’s six-year-old indefinite moratorium on fracking is already depriving you of income that is helping similar landowners make ends meet in nearby states like Pennsylvania and Ohio. You have already been told to wait while Gov. Andrew Cuomo continues to order studies before deciding whether to lift the moratorium on fracking that he inherited.

Now, even if Cuomo did decide to lift the moratorium, landowners unlucky enough to hold property in towns like Dryden or Middlefield can be (and have been) told that, for all practical energy development purposes, their property might as well be on the moon. Their fellow townsfolk, most of whom presumably do not own valuable mineral rights, can decide that there are no circumstances in which they are prepared to see landowners profit from their property. Energy companies are unlikely to invest much money in mineral leases, exploratory well, pipelines and other infrastructure in a region where those investments can be wiped out on short notice according to local whim. The industry has already turned its focus away from New York thanks to the moratorium.

However, if you are one of the non-landowning townspeople, or if you are a vacation homeowner who does most of his living in, say, a rent-stabilized apartment in Greenwich Village, you are no doubt delighted that the Court of Appeals has given your town the power to prohibit mineral development and the inevitable traffic and visual impact such development would bring, as well as the mostly overblown environmental hazards that you fear.

In New York, the interests of property owners usually take second place behind the interests of those who don’t own property but who believe they are entitled to benefit from the investments of others. This is why thousands of downstate apartments are still under “emergency” rent regulations first enacted in 1943.

The Legislature in Albany could step in to make the state a more appealing candidate for investment by curbing bans like Dryden’s zoning laws. In all likelihood, however, New York will sit back and watch America’s energy revolution happen elsewhere in America.

About Larry M. Elkin 551 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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