Background of Issue and Legislation

In FY 1991, Congress decided that States should share in the costs the Federal Government incurs in managing onshore mineral leases and revenues. States share in the revenues and, in most cases, get half of most revenues. Therefore, full cost sharing would require that they share 50 percent of the costs. However, to reduce the full impact of NRS, Congress provided that States pay only 25 percent. Each State's share of the costs is deducted from the monthly royalty distributions made by the Minerals Management Service (MMS). While the MMS is responsible for making those monthly deductions, our costs make up only about 30% of the total charged to the States. The Bureau of Land Management (BLM) and the U.S. Forest Service (FS) comprise the other 70% of the costs. BLM and FS submit cost estimates and allocations to MMS. We use these figures, merge them with our own, and then allocate costs according to methodologies authorized in statute.

To estimate and allocate MMS costs for the onshore minerals program, we initially developed a method which was based on the ratio of Federal onshore producing leases to total producing leases (onshore, offshore and Indian). This amount, along with BLM and FS estimates, was then allocated to each State in the same proportion as that State's revenues to total revenues. This is referred to as the "Revenue Method." Several states objected to this method arguing that costs allocated to them were too high and not representative of the actual costs expended in managing leases within their State. As a result, the Department's FY 1992 Appropriations Act required MMS, in conjunction with BLM and FS, to study the costs to collect onshore revenues. This study confirmed that MMS costs to perform onshore mineral activities for a few States were less than costs allocated to those States under the Revenue Method.

Permanent net receipts sharing language was enacted in the Omnibus Budget Reconciliation Act of 1993 (OBRA). This Act statutorily established two methodolgies for calculating NRS amounts. One method was, of course, the Revenue Method. The other was the "Cost Method," which is designed to cap some of the higher cost allocations derived from the Revenue Method. The Cost Method is the best estimate of the three agencies' actual costs to conduct onshore mineral activities in each State. The language in the Act calls for MMS to calculate State shares using both methods and then charge each State the lower of the two. Report language accompanying this legislation further specifies the process to be used.

Continuing Efforts to Improve Cost Estimates

Because NRS has been a contentious issue with respect to MMS' relationship with its State partners, we have sought to make our costs accurate and to operate as cost effectively as possible. We have looked for more efficient ways to do our business. For example, a common reference data reinvention laboratory resulted in the re-engineering of the mineral lease and payor data process. Also, we now offer a variety of electronic reporting options to payors, thereby increasing significantly the accuracy of the data we receive.

We believe MMS is cost effective. Federal onshore revenue collections of $1.04 billion compares to MMS' Federal onshore revenue management costs of $32.9 million--a cost of slightly more than 3%.

Additionally, MMS performs many compliance functions in a cost effective manner. For example, in audit, for every $1 we spend, we collect $8; in the area of production volume comparisons, for every $1 we spend, we collect $15.

We have made an effort to lower our costs, and as a result, the costs charged to States for royalty collection has decreased about 26% over the last two fiscal years. In the past, we hired Coopers and Lybrand, a certified public accounting firm, to look at our methodologies. They concluded that our allocation methods were acceptable. Additionally, each year we have sought refinements in our procedures.

In FY 1995, MMS formed a team, which included a representative of the Department's Inspector General, to again review the methodologies used in allocating costs to States. This group recommended a number of changes which have been implemented. Last fall, prior to implementing the recommendations, we consulted with States impacted by NRS as well as other interest groups. Eight States responded. While some remain irrevocably opposed to NRS under any circumstances, most supported the methodological changes recommended by the team. When the proposals are fully implemented, State deductions will decrease overall by approximately $5 million annually, and each State's individual deduction will decrease.

As I stated above, MMS has already implemented most of the improvements recommended by the team. They include improved procedures for allocating program support and executive direction costs and more precise workload factors for the Audit and Systems Management Divisions. These changes will result in a $3 million savings for the States this year.

Minerals Management Service Costs

I would now like to turn to a discussion of how MMS allocated FY 95 costs, as specified in OBRA, to the States for FY 96. Since our original allocation of FY 95 costs, we reviewed the way they had been categorized and aggregated them in a manner that is more reflective of how we operate. However, while some of our terminology describing these costs has been recently modified, the bottom line allocation to the States did not change. Our costs are now broken out as "program;" "program support;" and "executive direction" costs. "Program" costs include payroll and other costs that can be directly identified to processes that a division performs. "Program support" costs include the administrative costs such as office space and telecommunications. "Executive direction" costs include MMS and Royalty Management Program's (RMP) management costs.

MMS Washington headquarters budget is first divided among the Offshore Minerals Management and the Royalty Management programs. The portion allocated to RMP, program support and executive direction, is further allocated to RMP divisions based on each division's budgeted dollars in proportion to the total RMP budget. The divisions further allocate the combined program costs and its allocated portion of program support and executive direction costs among onshore Federal, offshore Federal and Indian revenue management.

In analyzing the activities in its divisions, MMS looks for indications of where the work is being done, or "work load indicators" to identify relationships between a division's allocated budget and the three areas of revenue management--Federal onshore; Federal offshore; and Indian. Work load indicators include reported royalty lines; production lines; producing leases; non producing leases; etc. This analysis is done for each category of MMS costs.

Audit costs are handled somewhat differently because some of the States actually do the work under a Federal Oil and Gas Royalty Management Act, Section 205 contract with MMS and are fully reimbursed for their work.

For States that do not perform audits under a section 205 delegated audit, direct audit program costs are allocated based on that State's revenue collections. For example, Alaska does not have a funded 205 audit agreement. Therefore, direct audit costs are allocated to Alaska based on revenue collections for Alaska leases compared with total revenue collections.

The appropriation of $4 million for 205 Audit Agreements is not included in the NRS calculation, as directed by OBRA report language. However, States (such as Wyoming and New Mexico) which perform funded delegated audits share audit management and support costs. For example, the RMP division that oversees 205 audits provides coordination and contract monitoring. These types of audit management costs and others such as audit training, computers, audit manuals and other support functions are allocated to States that have funded audit agreements based on the amount of their contract.

Further Refinements to NRS

The Department formed the Royalty Policy Committee in FY 1995, as part of the Minerals Management Advisory Board to provide advice to the Secretary on the Department's management of Federal and Indian mineral leases and to serve as a sounding board for new procedures and policies. The Committee formed eight subcommittees, one of which is the Subcommittee on Disbursements and Net Receipts Sharing. This Subcommittee presented an interim report to the Royalty Policy Committee on June 4, 1996, and will likely have a final report later this year. The NRS Subcommittee, chaired by Ms. Johnnie Burton of Wyoming, includes representatives from Colorado, Montana, New Mexico, Wyoming and Utah. MMS has provided extensive information to the Subcommittee to assist in its efforts and will continue to work diligently with the Royalty Policy Committee to pursue any recommendations that the Committee adopts. MMS also continues to conduct ongoing dialogues on this issue with the Interstate Oil and Gas Compact Commission and the State and Tribal Audit Committee. In addition, the Department of Interior's Office of Inspector General and the General Accounting Office are concurrently performing reviews of NRS.

Finally, MMS plans to continue to examine the issue to identify areas where we can further improve our cost estimates and refine the formulas set out in the statute. We have recently begun a benchmarking study to compare our costs to those of the States. This concludes my prepared testimony. However, I would be pleased to answer any questions you or the other Members of the Subcommittee may have.