CREG reports record 2013 revenue for Wyoming, but flat projections

CHEYENNE — The latest numbers from Wyoming’s revenue estimators are in, and they show the state had a banner year for investment income. When the fiscal year ended on June 30, 2013, the state had pulled in $346 million in investment income from the Permanent Mineral Trust Fund and pooled accounts. That pushed General Fund Revenue — which is just part of the state’s money for general operations — to over $1.381 billion, the highest annual revenue for that account in state history.

That’s good news, but before you get too excited, keep in mind that the Budget Reserve Account (BRA) — the state’s other coffee can for general government expenses — fell short of projections by $17.1 million, primarily due to sequestration of federal mineral royalties (FMRs). Over the 2013-2014 biennium, combined General Fund/BRA revenue is expected to fall $135 million short of that received in 2011-2012. And looking further down the road, the state’s revenue estimators see reduced revenue from Federal Mineral Royalties and mineral production. While revenue was really good this year, the state will likely see its funding stay nearly flat or even decline slightly over the next few years.

So how did Wyoming rake in that $346 million in capital gains from investments? In preliminary numbers released earlier this year, the Treasurer’s office reported about one-third, or $123 million, came from gains in equity in manager directed funds. In other words, the state’s investment advisors — groups like State Street Global Advisors and Northern Trust — captured capital gains as the stock market rose to record highs this past year.

At the same time, the State Treasurer’s office rebalanced its accounts, a routine process that redirects allocation of investments every few years to maintain proper diversification. The buying and selling involved in rebalancing those accounts brought in roughly $110 million in capital gains.

And finally, the state sold off bonds it had been holding since the early 2000s, when interest rates were around 5 percent. Today, interest rates are at historically low levels, about 2 percent. So when Wyoming sold the older bonds and bought new ones, it was able to pocket the 3 percent difference, resulting in about $107 million in gains.

While $346 million in unprojected revenue sounds like a major windfall, only a portion of the money will be available to the General Fund. That’s because state law passed by previous legislatures directs unprojected capital gains into several different accounts. This year, about $102.1 million in investment income will go back into the Permanent Wyoming Mineral Trust Fund, while another $30.1 million will go into a PWMTF reserve account, which lawmakers rarely spend, eventually letting the money go back into the PWMTF corpus.

Still, that leaves about $60 million in pooled investment income that will go to the General Fund. Add to that another $90 million that will go into the Strategic Investment and Projects Account a “coffee can” created by legislators last year to fund specific one-time investments like the $115 million project to recreate the College of Engineering at the University of Wyoming. All told there is about $150 million available that wasn’t projected or allocated for the 2013-2014 budget.

Such unprojected revenue is a routine part of Wyoming’s fiscal picture because the treasurer’s office and the CREG group don’t forecast capital gains. That often puts money on the table for the legislature that wasn’t part of earlier budgeting, giving lawmakers extra resources to work with in each session. While some state officials and the governor think it would be better to include capital gains in forecasting, others think the gains should be excluded due to their unpredictable nature.

In the next step of the process, Gov. Mead will be taking the revenue projections in the CREG report as the baseline for crafting his proposed 2015-2016 budget. If experience is any guide, the governor won’t budget ongoing expenses based on these one-time windfalls, instead keeping his budget within CREG’s revenue projections. However he may propose some particular one-time investments of the $150 million, like investing in the state’s broadband network.

Whether the legislature will agree with Gov. Mead’s proposed spending is another question. Last year, the legislature bypassed the governor’s proposal to provide $11 million in salary raises, instead opting for a one-time 1 percent bonus of $2.5 million for state employees, then pledging $115 million to fund the College of Engineering project. This has been a sticking point between the legislature, which has a certain independent streak, and the governor, whose carefully laid budget plans aren’t necessarily the last word on state spending. (For more read this WyoFile feature: $115M pledged to make College of Engineering top tier.)

Gov. Mead has said he plans to make salary raises for state and university employees his top priority. While the state has enough money right now to pay for the $14 million merit-based raise proposed by the university this year, and presumably enough to cover the salary hikes for state employees too, the Joint Appropriations Committee may take a conservative outlook and bypass ongoing salary boosts that could increase the size of government for years into the future. At the same time, Gov. Mead and others have made clear that the state will suffer from a loss of talented and experienced employees if it fails to pay them what the market says they are worth. (For more, see the WyoFile article: Mead revisits salary raises as revenue climbs.)

Legislators could balk adding to ongoing salaries because Wyoming’s fiscal prospects aren’t rock solid, due to the state’s reliance on mineral revenue. Severance taxes and federal mineral royalties from coal, oil, and gas contribute about 44 percent of the state’s revenue.

Looking forward, the October 2013 CREG report forecasts less revenue from coal and natural gas, and slightly increased oil revenue. The report also noted that severance tax collections in 2013 were at their lowest level in eight years.

Today, Wyoming’s mineral revenue is split roughly in thirds between coal, natural gas and oil, due to recent declines in coal and gas output, and a surge in oil production. Today’s oil production has helped the state budget, but declines in coal output hurt the revenue more. Coal has a greater impact on Wyoming’s federal mineral royalties, because most coal mined in the state comes from federal mineral leases in the Powder River Basin. Oil is produced on a variety of state, federal, and private lands.

Declines in coal output due to changing markets and regulations impact state revenue in several ways. First, mineral royalties flow to the Budget Reserve Account, but also to the School Foundation Program — a non-General Fund account that pays to operate Wyoming’s K-12 schools.

At the same time, auctions of federal coal land provide “bonuses” to the state every few years, a principal source of cash for the School Capital Construction Account. Out of this year’s two coal lease auctions, only one bid was submitted, and that was rejected by the Bureau of Land Management for being below market value. The next coal lease auction isn’t until the end of 2014, foreshadowing a possible slowdown in coal lease bonus revenue.

Don Richards, the budget and fiscal manager in the Legislative Service Office, told the legislature’s Joint Education Committee on Thursday that the School Capital Construction Account is poised to see its revenue drop from $700 million to about $450 million. He cautioned lawmakers that if they intend to keep up the pace on rebuilding Wyoming schools, they’ll likely need to find other sources of revenue.

October 2013 CREG Report