Bedrock erosion: How much has Wyo lost to coal’s decline?

From its peak a decade ago, coal revenue for Wyoming has traced a steady decline.

How big a hole has that left in Wyoming’s government budget?

All told, the state today collects at least half a billion dollars less from coal sources each year than it did at the high point. That’s about a third of the state’s annual general fund budget for most government agencies excluding public education funding.

Coal’s dwindling prospects carry dire impacts for Wyoming workers and towns. Coal company bankruptcies impact workers’ retirement and health care benefits. Mine and plant closures are an even larger threat that could dry up livelihoods for Wyoming families and put entire communities dependent on coal jobs at risk.

For state government coffers, coal’s decline is a slower-moving catastrophe. But the decline has already had an enormous impact and will leave lasting change, lawmakers and analysts say.

Wyoming pays for state government — everything from public schools and road maintenance to public health and the criminal justice system —   primarily with revenue collected from the oil, gas and coal industries. Of those three, coal has been both the stable bedrock — not prone to the up-and-down swings of the oil and gas markets — and at times the largest contributor.

“Coal provided a firm base of revenues,” Bill Mai wrote in an email to WyoFile. Mai, now a retired university administrator, spent decades studying state revenues as a fiscal analyst for the Legislative Service Office and from 2009 to 2012 as co-chairman of the Consensus Revenue Estimating Group. CREG tracks energy markets and estimates state revenues for the Legislature, which then uses those estimates to write budgets.

“It certainly seemed to have its own trajectory,” compared to oil and gas, Mai wrote, “and I guess it still does. Only now, instead of regaining some traction like oil & gas, it’s slipping.”

From 1999 — as far back as recent CREG reports track severance taxes — to 2011, the severance taxes collected on coal did nothing but rise.

For a long time you needed just one trend line for coal, said Rob Godby, director of the University of Wyoming’s Center for Energy Economics and Public Policy: an arrow pointing up and to the right. “It was that stable,” Godby said. “You could depend on that because electricity was most cheaply produced by coal and Wyoming coal was cheaper than anywhere else’s.”

But around 2011, that trend reversed course. The new normal for coal, analysts say, is a steady decline as it’s pushed out of energy markets by cheaper natural gas and now, increasingly, by renewable energy sources.

In Wyoming, warning signs for coal mines abound, from companies offloading mines at a loss, to a new swathe of bankruptcies, to the entrance of new players lacking the blue-chip reputations of past mining giants.

Where the bottom lies for coal is, at this point, anyone’s guess. What’s not in doubt is what’s already been lost and what few, if any, observers believe is ever coming back. From peaks between 2008-2013, Wyoming’s coal revenues have plunged.

Four streams

Wyoming state government gets money from coal in four primary ways. Companies pay severance taxes to Wyoming on the coal they remove from the ground. Roughly half the federal mineral royalties paid to Washington D.C. on the coal owned by the federal government, returns to Wyoming.

Then there are coal lease bonuses — lump sum payments the state receives on the sale of new coal leases. Finally, revenue comes from ad valorem taxes, a form of property tax paid at the county level, but which is redistributed throughout the state.

Each revenue source reached its peak at different times. Though both ad valorem and state severance taxes peaked in 2011, that was a low year for coal lease bonus payments and a high year for federal mineral royalties, but not the highest. The state is today collecting roughly $450 million less a year from the four revenue streams than it did in 2011. Look at 2009, a good year for all sources though the peak for none, and the revenues today total roughly $610 million less.

Compare today’s income to the combined peaks for each coal revenue stream and there is $770 million less entering the state’s coffers.

This analysis does not include the sales or personal property tax dollars generated by the economic activity coal mines spark in nearby communities, or property taxes levied on mine lands and equipment.

Of the four revenue streams, coal lease bonuses have suffered the steepest decline. During the heyday, when companies snapped up leases to secure future access to the black rock, coal lease bonuses were a significant boon to Wyoming. Though the amounts varied, at times sharply, the state received more than $200 million most years since 2005.

That $200 million contribution to state balance sheets is now a zero. The CREG report does not anticipate any coal lease bonuses entering state coffers in the next 5 years — the farthest out it hazards a projection.

The Legislature used that money to build schools, and has yet to find a reliable replacement.

“Those lease sales funded school capital construction at a very aggressive pace,” Mai wrote.

“Construction will have to find another revenue source,” he wrote, “or slow considerably for the next 10-20 years as compared to the last 20. That really produces a double-hit to the state’s revenues/expenditure picture.”

Ad valorem taxes on surface coal are down to levels last seen in 2005-2006. Those taxes peaked on 2011 coal production, when the state levied an estimated $251 million in ad valorem taxes, according to annual reports by the Wyoming Department of Revenue. In 2017, the last year for which data is available, counties levied $71 million less in ad valorem taxes, at $180 million.

The CREG report does not segregate coal revenues from oil and gas in its federal mineral royalties figures. Data provided to WyoFile by the federal Office of Natural Resources Revenue, however, shows a significant drop in coal-generated federal royalties since a peak that came in 2012. ONRR provided total federal mineral royalties collected from Wyoming but not the amount returned to the state. WyoFile calculated that amount by dividing the total amount of federal mineral royalties collected in half. An ONRR spokeswoman told WyoFile that approximately 50 percent of any royalties collected on BLM land, which includes the federally owned coal in Wyoming, is returned to the state.

In 2012, according to that math, Wyoming collected approximately $586 million in coal from federal lands. Coal’s contribution made up 72 percent of the $809 million total Wyoming collected in federal mineral royalty money that year.

In 2018, Wyoming collected only approximately $202 million in coal royalties. The drop in collections of $384 million put the state at a level last seen in 2005.

State severance taxes have dropped by more than $95 million a year since a 2011 peak. Coal’s slide as a power source actually started a few years before that, Godby said, but existing contracts between power plants and mines kept revenues from declining for a few more years. That year, the state collected $294 million. Last year, severance tax from coal came in at $198 million. It’s the first time the amount has been below $200 million since 2006.

No end in sight

The decline is predicted to continue. The January 2019 CREG report estimated an additional $13 million or so drop in severance tax collections by 2024.

Godby envisions a steady decline across the remaining revenue sources, he said, a trend line the opposite of coal’s once-reliable rise. But he noted troubling signs among companies at Powder River Basin mines that could speed decline or lead to sharp drops followed by plateaus before the next drop, like a down staircase. Wyoming could face financial risks with the rapid erosion of the PRB’s industry, Godby said.

“If you look at revenues it looks like a slow decline but it’s declining,” he said. “The real problem is within the mines, the financial footing that the mines are on.”

Cloud Peak’s bankruptcy is a telling sign, Godby said. The company was seen as a solid operator, until a gamble on export markets went south. “We’ve got companies that are kind of on a knife’s edge,” Godby said.

Another bad sign is a sale of two mines by Contura Energy — itself an entity spawned by Alpha Natural Resource’s bankruptcy — to Blackjewel Energy, Godby said. The sale is a loss for Contura, which seeks to benefit from future tax write-offs, showing the tough times in the PRB. At the same time, a recent hearing raised questions about Blackjewel’s record of paying its fines in other states.

New operators with dubitable track records could carry environmental and financial risks to the state, Godby said. Those risks come at the moment when, thanks to the decline in coal revenues, the state is less financially equipped to absorb them.

“What we’re seeing now in the Powder River Basin is what happened in Appalachia where you see these vulture capitalists come and try to get whatever value they can get out of the mine,” he said. “They are much more risky and they’ve left a lot of reclamation and didn’t pay taxes.”

Unlike coal, oil and gas are stabilizing. CREG projections show a rise in severance taxes from both. But historically the fuel sources are more volatile than coal, vulnerable to sharp dips and rises on the winds of political fortune, foreign relations and global finance.

The reduced role of coal will leave the state more vulnerable to the next bust in those fuels, Mai said. “It’s extremely concerning,”

Even if lawmakers continue to reduce the size of state government, some worry that the next drop in fossil fuel markets could hit even harder. If oil and gas do start sinking again, Wyoming will find its revenue bedrock will be roughly half a billion dollars deeper than it was last decade — maybe even farther down depending on when the bust arrives and how coal’s fortunes unfold.

It’s the Spring Membership Drive.  Make a tax deductible donation today.

Meanwhile, lawmakers remain stuck in their efforts to move the state off its dependence on energy revenues. Mai does not believe the public has grasped the significance of what the change entails, he said.

“It is going to be pretty difficult to fill those revenue holes in the event of the demise of coal, oil, and natural gas,” he wrote. “That’s why I say it’s a problem of scale. I’m not sure people understand that to replace these revenue streams, our entire way of living in [Wyoming] will change. I’m also not sure people are going to like that very much.”

UPDATE: This story has been emended on June 6, to clarify that the annual loss in coal revenues is equivalent to one third of the state’s annual General Fund budget for state government. That budget does not include nearly $2 billion a year that Wyoming spends on K-12 public education, among other expenditures not covered by the General Fund. —Ed.