Gov and legislators clash on savings, agree on spendingBy Gregory Nickerson February 5, 2013
This week Wyoming lawmakers in the House and Senate debate the supplemental budget bill, which sets the state’s spending policy for 2014.
Gov. Matt Mead introduced his recommendations for the supplemental budget in November, proposing to slice state spending by 6.5 percent and adjust revenue streams for savings and add several one-time expenses. But legislative leadership decided to go their own way in a few key areas.
The Joint Appropriations Committee (JAC) decided not to follow Gov. Mead’s proposal to build up $3 billion in short-term savings in the Legislative Stabilization Reserve Account (LSRA) by 2016. That fund gives the state ready access to the money if the economy hits a rough patch. Instead, the JAC wants to take a more measured approach, building a savings of $8 billion by 2018 in the Permanent Mineral Trust Fund (PMTF), which is off-limits for spending.
“I still believe this is the time to put a bit more of our savings in a liquid account, rather than into the permanent account. Both accounts generate interest revenue for Wyoming, but building liquid savings prepares us better for the future,” said Gov. Mead.
In a separate action, the JAC will forgo adding coal lease bonus money to the LSRA, and instead put it into the Permanent Land Fund holding account to guard against a shortfall in K-12 funding.
Aside from the differences relating to savings, the JAC budget bill still includes key recommendations from the governor for one-time spending.
The major one-time projects include $55 million for the University of Wyoming College of Engineering project, $31.2 million for fire suppression, $20 million for cities and counties, and $15 million to fix leaky landfills. The JAC also recommended $6.67 million for federally mandated Medicaid expansion under the Affordable Care Act.
If you work for the state, there’s good news: The supplemental budget bill, known as “House Bill/Senate File 001,” includes a $6 million bonus to state employees working in the executive, judicial and legislative branches, and to employees of school districts, community colleges, and the University of Wyoming.
In total, the JAC budget recommended about $76.8 million in new General Fund spending (most of it going to one-time expenses) off-set with $62.1 million in budget cuts.
“I appreciate that the JAC agreed with my proposal to reduce ongoing spending by about 6.5 percent starting July 1st. This is one part of my approach — flattening ongoing spending — which needs to be combined with the other part; transparent, flexible, and liquid savings,” said Gov. Mead.
Overall, the budget shows that the JAC continues its fiscally conservative approach oriented toward long-term savings. In light of projected flat revenues, the JAC has made modest cuts to ongoing expenses.
“We’ve made some responsible reductions in government,” said JAC co-chair Sen. Eli Bebout (R-Lander). “Hopefully the legislature will buy into our budget. We’re still providing services, and there’s no layoffs.”
The JAC had about $4 million in unspent money left over from the last budget session.
The Consensus Revenue Estimating Group increased its revenue projections, first in October and again in January, putting about $90 million on the table.
So with budget reductions of about $60 million, the JAC has a General Fund balance of about $150 million to spend. Out of that, the JAC has so far proposed spending about $138 million, leaving $12 million in unspent money.
As mentioned above, the JAC has proposed about $76.8 million in new spending, with most of that going to one-time projects.
Gov. Mead had proposed spending $60 million from the LSRA to pay for expenses from last summer’s wildfires and set aside money for fire costs this year.
The JAC opted to set aside only $31 million to build up the fire suppression account, and to take that money from the General Fund.
Currently the state still has about $8 million in unpaid fire bills from last season. The JAC’s decision means less money is set aside for fighting fires this summer, but it provides less drawdown of the LSRA.
The state often provides money to aid local governments, and this year was not different. The supplemental budget bill gives cities and counties a $20 million appropriation to spend on anything outside of personnel expenses.
Another $15 million will go to the Department of Environmental Quality for fixing leaking landfills. With this appropriation, the state will have invested a total $45 million to clean up and upgrade landfills. Before the job is done, Wyoming could spend $250 million on the landfills project. (For more on landfills, read this Capitol Beat post.)
The state is set to spend $55 million in general funds on the UW College of Engineering project, which will be matched by $14.2 million from another state account. That spending is in addition to $30 million in capitol gains money that the JAC set aside for the project last year, and $21.8 million in corporate donations and state match announced earlier this month.
Should the budget bill pass as written, the College of Engineering project will have $120 million. UW officials have called the project the single largest building effort in the history of the university. (For more on the UW College of Engineering project, read this WyoFile feature.)
The Gillette Madison Pipeline water project will get $30 million this year, but not from the General Fund as Gov. Mead proposed. The money will come from Abandoned Mine Lands Funds, as laid out in Senate File 106.
“A lot of the money we’ve spent is one-time money,” said Sen. Bebout. “We need to finish projects we’ve started. The one-time (General Fund) money drops off in the next biennium.”
In place of General Fund money for one-time projects, the JAC created a new account for one-time spending called the Strategic Investments and Projects Account (SIPA). The account will get money from un-forecasted capital gains from the PMTF, which typically come into the General Fund after the legislative session ends. The gains range anywhere from $2 million in 2009 to $100 million in 2012.
The JAC has already identified $80 million in projects to fund out of the SIPA in the 2015-2016 biennium, including more landfill remediation, cities and counties, and “transformational” energy projects.
The SIPA creates a reliable source for one-time spending projects out of capital gains.
In recent years Gov. Mead and the legislature have disagreed on whether or not to include capital gains in budgeting discussions. In 2012 the legislature appropriated $30 million out of potential capital gains for the UW College of Engineering, which precluded the Gov. from having that money to work with in his recommendations for the 2014 budget.
Saving Coal Lease Bonuses
Last November, Gov. Mead proposed building up the LSRA using coal lease bonus money. That money comes to the state whenever the Bureau of Land Management leases a new tract of coal for mining, most often in the Powder River Basin. Half of the coal lease bonus goes to the federal government, and half goes to the state.
Coal lease bonuses are major windfalls of several hundred million dollars, and typically most of that money has gone into the School Capital Construction Account. Mead looked at the bonuses as a quick and relatively pain-free way to build up a large amount of cash in the LSRA. That liquid savings could help cushion any General Fund budget shortfalls, while also earning investment income.
Rather than building up the LSRA, the JAC wants coal lease bonus money to go toward the Permanent Land Fund holding account (PLF), a short-term savings account for operating the state’s K-12 schools.
Building up the short terms savings in the PLF account will provide a buffer for the state school budget, which gets funds from property taxes and Federal Mineral Royalties. If those revenue streams dry up, K-12 school budget would draw money from the General Fund, at the expense of most other state agencies.
The JAC plans to put up to $450 million of coal lease bonus money into the PLF, an initial amount that could help avoid drawing on the General Fund. The move reduces the risk of this potential liability to the General Fund, which JAC members have worried about for years.
Once the PLF reaches a balance of $450 million, excess money will tip into the Permanent Land Fund Common School Account, essentially a permanent trust that generates investment income to support schools.
“Permanent” savings, or spendable savings?
The second major difference between Gov. Mead’s budget recommendations and the JAC bill is the focus placed on growing savings in “permanent,” untouchable savings rather than in “coffee cans” that remain available for spending.
Under the Wyoming constitution, the PMTF receives 1.5 percent of severance tax revenue. State statutes dictate that another 1 percent of severance taxes go to the PMTF, but that stream can be redirected.
Gov. Mead wanted to build up liquid savings by temporarily diverting the statutory 1 percent flow of severance taxes from the PMTF to the LSRA.
Gov. Mead’s proposal came after a drop in natural gas prices in early 2012 left Wyoming with much less revenue than expected. In response he and other state leaders called for more liquid savings to provide flexibility in covering budget shortfalls. With a long-term flattening of revenue expected to last for the next decade, leaders are looking for lifelines that can help stave off a budget crisis.
“The first lifeline is to cut the fat out of budgets,” said JAC co-chair Rep. Steve Harshman (R-Casper). Following that, he would recommend budgeting for a 5 percent return on the PMTF, rather than the current 2.5 percent the JAC currently looks at. After that, Harshman said, the JAC could start dipping into the LSRA to avoid tax increases.
“The governor’s proposal for the 1 percent (PMTF) diversion was moving that last lifeline to the front,” Harshman said.
In lieu of Gov. Mead’s plan to divert severance taxes to the LSRA, the JAC plans to keep that money flowing into the PMTF. That will help the fund get closer to $8 billion balance the JAC would like to see by 2018. Currently the PMTF balance stands at about $5.86 billion.
Sen. Bebout and Rep. Harshman see the $8 billion goal for the PMTF as a good number because a corpus of that size would provide about $400 million a year in investment income. That’s enough revenue to cover 25 percent of Wyoming’s General Fund budget.
In the 1990s, Bebout said the permanent fund covered about 25 percent of the General Fund Budget, but that proportion dropped to 15 percent in the 2000s as appropriations rose. If spending stays at current levels, building the PMTF up to $8 billion will restore its previous proportion of General Fund contributions.
Gov. Mead has argued that the LSRA generates investment income just like the PMTF, while also providing spending flexibility if needed. But the JAC has chosen to forgo that short-term flexibility in hopes of gaining a larger PMTF revenue stream over the long term.
The preference for long-term savings over the short-term rainy day account reflects a feeling among lawmakers that Wyoming isn’t in dire fiscal straits.
“I don’t think we’ve reached the rainy day,” said Speaker of the House Rep. Tom Lubnau (R-Gillette) “Every dollar that we put into savings pays for itself in seven years. Let’s just keep it in a permanent place where we can fund 25 percent of our General Fund expenditures out of PMTF. That provides us a good buffer should times get tough, against future tax increases.”
Are the cuts enough?
Compared to the total biennium budget of $3.2 billion, some think the JAC’s cuts of $60 million for fiscal year 2014 seem minimal.
The Wyoming Liberty Group has criticized lawmakers for exaggerating the significance of the cuts. From the group’s point of view, the proposed $60 million cuts for 2014 are more than wiped out by $76 million proposed for new spending.
Sen. Bebout said he disagrees with the perception that the state is not cutting enough. He noted that much of the state General Fund budget goes toward savings and one-time projects. It also goes to cities and counties, highway construction, and other projects outside of yearly operating budgets. The 6.5 percent cuts are for ongoing General Fund spending on standard budgets for agencies.
“That’s where the 6.5 percent reduction is real,” Bebout said. “Is 6.5 percent enough? I think it’s a heck of a good start.”
Down the road, the JAC is working to avoid a projected budget crunch in 2018. In that year, current rates of budget growth in large agencies like the Department of Health could outpace projected revenues, and the state budget will go into the red. If low natural gas prices persist, and demand for coal continues to slip, it will make the problem worse. (For more on the projected crunch, read this WyoFile feature.)
Sen. Bebout says the supplemental budget bill helps position Wyoming for the next few years. “We’re looking to the future beyond a couple of bienniums, to try to have some vision. That’s a hidden thing that not a lot people realize that we’re doing with this budget,” he said.
Part of that effort will make this year’s cuts permanent, while calling for new cuts to ongoing spending in the 2015-2016 budget. [See pie chart.]
The JAC also has plans to prop up revenue streams. Hidden in the fine print of the JAC budget bill are a few key efforts designed to keep Wyoming’s energy industry competitive. The bill provides $50,000 to Gov. Mead for encouraging liquefied natural gas export facilities or routing tar sands oil pipelines through the state. It also gives Gov. Mead $100,000 to support efforts to make deepwater ports available for exporting Wyoming coal to Asia.
“Coal has been the foundation of our budget for years,” Harshman said. That dynamic is changing as old coal-fired power plants shut down across the nation due to cheap natural gas and new air quality regulations.
A further decline in domestic coal markets would have serious consequences for Wyoming’s budget, in the form of lower revenue from severance taxes, property taxes, and coal lease bonuses.
Harshman and Bebout see exporting coal to China as a key strategy for keeping the industry alive in the state. “We could become an energy exporter, the new OPEC of this century,” Harshman said.
Currently, opposition to coal exports in Montana, Oregon, and Washington is holding up Powder River Basin coal, creating an opening for Canada to beat Wyoming in the Asian coal market. “The Canadians are going to race us to it, and that will impact Wyoming really forever,” Harshman said.
— Gregory Nickerson is the government and policy reporter for WyoFile. He is based in Cheyenne during the 2013 legislative session. Contact him at email@example.com.
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