Federal Mineral Royalty sequester exposes risks to Wyoming’s funding

Two months ago the Department of the Interior informed Wyoming that sequestration would take a bite out of the more than $900 million in federal mineral royalties the state receives each year.

The loss in revenue amounts to $53 million for Wyoming, or a 5.1 percent reduction.

Officials estimate that the loss in revenue will mean $28 million less for the Budget Reserve Account, while another $24 million will be shaved from deposits made to the School Foundation Program and the School Capital Construction Account.

If all revenue projections hold, Wyoming can cover the reduced revenue to the Budget Reserve Account by drawing on the Statutory Reserve Amount, a cushion lawmakers are required to set aside in each budget. The state also has enough money in its Permanent Land Fund Holding Account to absorb the hit to the School Foundation Program and the School Capital Construction Account.

Drawing on the savings account for schools and the Budget Reserve Account will prevent an immediate crisis, but it will also reduce money available for unmet needs.

The decrease in capital construction money won’t stop any current projects, but it may mean some students could have to wait longer for new schools to be built, and contractors might have less campus projects to pursue. For most Wyoming residents, the sequestered revenues for the School Foundation Program and the Budget Reserve Account won’t create direct challenges, though they will certainly cause headaches for the state’s leaders.

The drop in revenue adds pressure to an already trimmed General Fund budget, which Wyoming lawmakers cut by more than $60 million earlier this year. State fiscal planners say the additional, unanticipated loss of $53 million in federal mineral royalties revenue represents a major disruption.

“It’s significant. It really throws a wrench in the works,” said Bill Mai, the administrator of the state Economic Analysis Division. “It blows your forecast out of the water with little warning.”

Each biennium, Wyoming gets about $1.6 billion to $1.8 billion in federal mineral royalty payments (FMRs), which account for a sizable portion of the state’s entire two-year $8.9 billion budget. More FMRs flow to Wyoming than any other state, largely because of extensive coal mining on federal land in the Powder River Basin.

Gov. Matt Mead and Treasurer Mark Gordon both criticized the way the federal government withheld the FMRs without prior notification. According to Mai, at least one official (Gordon) questioned whether FMRs would be subject to sequestration, but no one at the federal level told Wyoming what to expect.

“It’s pretty aggravating to have to deal with something like this,” Mai said of the sudden nature of the reduction. “You get this notice that says, ‘Oh, by the way we kept 10 million out of this (monthly FMR) payment.’ Only the feds get away with that.”

Wyoming’s budget is built using revenue forecasts that factor in projections for mineral prices and rates of production, among other variables. For the most part, the revenue estimates keep the state on a steady fiscal path, but there are always wrinkles. Mai called changes in federal policy “un-forecastable” events.

So just how will the cut in FMRs affect Wyoming?

Each year Wyoming splits up the royalty revenue to fund a variety of accounts. The largest share of the royalties goes to the Budget Reserve Account, which transfers much of its balance into the General Fund each year. That money helps fund the Department of Health, the Department of Corrections, and the bulk of most other programs outside of K-12 education and school construction. This is the money that provides the bulk of state services to state residents.

Mai estimates the sequestration of FMRs will result in about $28 million less for the Budget Reserve Account (BRA) for 2013.

The loss in revenue isn’t likely to force readjustments in existing agency budgets. Instead, about $6 million could be pulled out of leftover transfers that would normally go into the Legislative Stabilization Reserve Account, also known as the “rainy day fund.”

The state will have to draw on other sources to cover the remaining $22 million in lost BRA revenue. The funds will likely come  come from the Statutory Reserve Amount, which equals 5 percent of the General Fund budget, or $104 million. “You could call that reserve a good policy for handling unanticipated times like these,” Mai said.

Alternatively, if the state has a good investment year in 2013, the money could come from capital gains on investment accounts, but that won’t be known until September 2013.

The other major accounts receiving the bulk of FMRs are the School Foundation Program (SFP) and the School Capital Construction Account (SCCA).

Deposits to the School Foundation Program will be cut by $14.3 million due to sequestration. That reduction could be covered by a transfer from the Permanent Land Fund Holding Account, preventing any adverse impacts to Wyoming’s teachers and school children.

Finally, the School Capital Construction Account will see deposits decreased by about $10 million due to a reduction in Coal Lease Bonus payments — also part of the sequester of the $53 million in federal mineral royalties. The SCCA could also cover its shortfall by using money from the Permanent Land Fund Holding Account.

Despite its name, the Permanent Land Fund Holding Account isn’t an inviolate investment account where the corpus can’t be touched. Instead, it is a savings account that generates investment income, while also allowing spending of the principal. The Common School Permanent Land Fund is the inviolate investment account for education, akin to the Permanent Wyoming Mineral Trust Fund and feeds the General Fund.

The drop in royalties is part of a trend in reductions in mineral revenues for Wyoming. Last year, Congress chose to stem the flow of Abandoned Mine Lands money to Wyoming, a move estimated to cut revenue to Wyoming by more than $700 million in the coming decade, or roughly $70 million to $80 million each year.

“Under current projections, [the FMR cut] shouldn’t drag any of the accounts underwater. If it continues, we are talking $107 million minimum (in lost revenue every two years),” Mai said. “That’s not much different than the hit we just took from the loss of the (AML funds). Between the two of them, you’re talking over a billion dollars in hits [over the next few years] provided the sequester continues.”

For Wyoming, the real danger in this trend is that at some future date the School Foundation Program may not receive enough FMRs to cover ongoing operation of K-12 schools, and other funding sources like property taxes won’t make up the shortfall.

If that occurs, the legislature is required by law to transfer money from the General Fund to fund education for the state’s children. In that way, a loss in FMR funding for schools could have a negative effect on every departmental budget that relies on the General Fund.

“Things are developing in such a way that it could become a major problem for us in the not so distant future,” Mai said.

Reporter’s note: This post was updated on 5/28/2013 to clarify the role of savings in addressing FMR cuts.

Editor’s note: This post follows on the recent feature “Wyoming: Where Independent People Rely on Federal Funds” and a previous post “How a letter withheld $53M in mineral royalties from Wyoming.” Look for further coverage of risks to Wyoming’s finances in the upcoming weeks.