Fiscal Plateau: Lawmakers trim budget to match declining revenue

When the Wyoming Legislature convenes this winter, look to see the government tightening its fiscal belt. After a spectacular decade of natural gas revenue growth from 1998 to 2008, and a corresponding doubling in the size of state government, the state is coming to terms with a new era of flat revenue.

Lawmakers are in a mood to curb the growth of government to meet a revenue plateau expected to last until 2018 — which is as far as state revenue forecasters attempt to  calculate. Fluctuations in the state and national economy are making legislators more cautious of taking on any new obligations that would require ongoing funding.

To be clear, Wyoming is not in a budget crisis. Compared to the federal government’s negotiations over a “fiscal cliff,” Wyoming is in a good position. The state has no debt, and proposed 8 percent cuts could whittle away about $74.5 million from a $1.6 billion budget for 2014. The state also has a $1.7 billion rainy day account, and roughly $5.45 billion in the Permanent Wyoming Mineral Trust Fund.

Driven by a constitutional requirement to balance the state budget, it’s expected that lawmakers will have a vigorous debate in the next session over how much to rein-in spending, and whether to use state savings to fund special projects.

“We had a great run from coal-bed methane (and deep natural gas) to the 2008 peak. As we see our budget plateau, we knew we were going to have to put the brakes on it,” Sen. Phil Nicholas (R-Laramie) said during a recent legislative committee hearing.

Natural Gas Boom and Bust

Among the important bits of information Wyoming Gov. Matt Mead receives in his daily morning briefing is the spot price of natural gas at the Opal Hub in western Wyoming. It’s a number the governor watches with great interest because of its effect on state revenue.

Wyoming produces such a large volume of natural gas that it represents the state’s largest single source of revenue, which ties a large portion of Wyoming’s economy to a roller coaster commodity. For each $1 change in the market price of natural gas, Wyoming stands to gain or lose $125 million in taxes and royalties to the General Fund and the Budget Reserve Account.

Early last decade, Wyoming stood at the forefront of natural gas discoveries made possible by the implementation of innovative drilling technology. “Unconventional” coal-bed methane wells in the Powder River Basin and deep “tight-sands” gas wells in the Upper Green River Basin gave the state huge volumes of gas production during a time of high natural gas pricing.

In 2005, Hurricane Katrina interrupted the domestic natural gas market, sending prices through the roof and helping to generate $465 million in severance taxes from Wyoming natural gas, up from $349 million in 2004. In 2006, natural gas severance taxes reached a peak at $673 million.

The state had plenty of money for expanding state services, adjusting salaries upward, investing more than $1 billion in the University of Wyoming and a campaign to rebuild 63 public schools. The Hathaway Scholarship program created in 2005 has since covered a significant share of tuition for college students.

Every community in the state benefited from the renewed investment after the lean years of the 1990s. The high water mark came in 2008, when the state’s assessed valuation reached $29 billion, according to the state’s most recent revenue report.

The Permanent Wyoming Mineral Trust Fund (PWMTF) more than tripled, going from $1.5 billion in 1999 to more than $5.7 billion in April 2012.

Back in 2008, the numbers looked good — really good — as in hundreds of millions in surplus.

But other areas of the nation were tapping into natural gas with new vigor. The widespread development of natural gas resources in Pennsylvania’s Marcellus formation and the Haynesville shale in Louisiana flooded the market with domestic natural gas, deflating the commodity’s price nationwide. Perhaps nowhere did the price drop hurt worse than in Wyoming because of its huge reliance on natural gas revenue. The assessed valuation for Wyoming’s natural gas in 2008 stood at $12 billion. It’s projected to dip to about $4.7 billion this year.

When the price of natural gas crashed in 2009, then-Governor Dave Freudenthal made 10 percent budget cuts to adjust to the loss in revenue.

Although the price of natural gas was no longer riding high, Wyoming’s revenues derived from the commodity held steady in 2010-11. But in early 2012 natural gas prices tumbled again, from $4 per thousand cubic feet (mcf) to $2 per mcf, owed to the continuing glut in production, a historically warm winter, and excess volumes in storage.

In the legislative budget session last February and March, lawmakers put in place a number of emergency measures, including setting aside $150 million for the governor to use in case gas prices further deteriorated. Lawmakers called for all state agencies to look through their budgets and be ready to cut 4 percent.

To make matters worse, revenues from coal production also dropped in 2012. Gov. Mead’s spokesman, Renny MacKay, said coal production could decline by 10 percent for the year. This is due to a trend among utilities to retire aging coal-fired power plants and switching some base-load power generation from coal to natural gas.

The new fiscal picture has prompted heightened scrutiny of every program in the Wyoming state budget. In April, Gov. Mead directed state agencies to prepare for a total 8 percent budget cut. If agencies do not achieve the full 8 percent budget cut for fiscal year 2014, they will be mandated to reach that level by 2015-16, which is when the full impact will be felt, possibly resulting in loss of jobs and services.

This summer, Wyoming also got news it would lose more than $700 million in Abandoned Mine Land Funds over the next 10 years, a pot of money that had routinely made its way to non-reclamation related projects. AML taxes on coal are redistributed to coal states by the federal government, but in federal budget measures this year Wyoming’s share was cut back.

On top of that, there are several one-time expenses to deal with. The state endured a historically intense fire season in 2012 that ended up with a price tag of about $45 million. The state is also saving to build a new engineering building at the University of Wyoming, and has committed to a big water infrastructure project in Gillette, along with several projects to fix landfills around the state.

In July the state reported good news of higher than expected earnings from investments, which helped balance out some of the shortfalls. The revenues boosted the Legislative Stabilization Reserve Account (also called the Rainy Day Fund) from $1.4 billion to $1.6 billion. Taken together, the state ended up with $186 million more in its General Fund than it predicted in January. This has happened before because the state’s revenue forecasters don’t stick their necks out to predict the rise or fall of the stock market. Coal lease bonuses added $266 million to the Permanent Land Funding Holding Account, which pays for schools.

But one-time windfalls can’t be counted on to keep the budget afloat. And the larger-than-forecasted revenue hasn’t sent the legislature on a spending spree. Gov. Mead and legislative leadership aim to trim the budget. These state leaders often describe their goal as making sure Wyoming “lives within its means” — an agreeable enough term, but open to a wide range of interpretation.

The Consensus Revenue Estimating Group (CREG) projects that next year there will be a drop of nearly $200 million in revenue that is directed to the General Fund. The estimated $1.203 billion in revenue that goes to the General Fund this year is a level that Wyoming may not reach again until after 2018, according CREG’s October 2012 report.

“I don’t think we can expect to have the last 10 years be the model forever, that’s pretty unrealistic,” said Sen. Phil Nicholas (R-Laramie).

Nicholas has had a commanding role over the state budget for the past decade. He first served on the Joint Appropriations Committee (JAC) as the House Chair from 2003 to 2004. He continued to serve as a member of the JAC when he joined the Senate in 2005, and has served as Senate Chair of the committee since 2007.

“He’s been a demanding appropriations committee chairman,” said Dan Neal, director of the Equality State Policy Center. “He expects people to explain why they need the money, and what they’ll accomplish.  That’s completely legit.”

Neal says Sen. Nicholas isn’t afraid to spend money when its warranted, citing the senator’s support of spending over $400 million on school building last year. But given the state’s present fiscal picture, Sen. Nicholas is firm in his view that legislators need to cut the budget to ensure appropriations don’t outpace revenues.

Sen. Nicholas’ co-chair on the JAC Rep. Rosie Berger (R-Wyoming), has a sense of how those cuts should be made. “The first priority we have, I believe, is providing a quality of life, health and safety and making sure that the action we take doesn’t harm future services and individuals and making sure that we can be fiscally sound,” said Rep. Berger. She has served on the JAC since 2005, and was elected Chairman in 2009.

Neither Nicholas or Berger’s view on the task ahead seem objectionable, or at odds, to a general audience. Yet in a state where the government is the largest employer, there are many who will feel the budget cuts in real ways. And many will disagree where the state should place its priorities.

“If you cut government jobs, that’s fewer people in your community to buy clothes, food whatever,” said Neal. He hopes lawmakers will be selective in their cuts to minimize impacts to employees and local economies as much as possible.

What to cut?

As Wyoming lawmakers downsize the budget for fiscal year 2014, agencies that get the most funding will carry the largest share of the cuts.

The Department of Health takes up nearly one-third of the General Fund Budget by itself. The next five largest agencies are the University of Wyoming, Corrections, Community Colleges, and the Department of Family Services. Taken together these five agencies account for roughly two-thirds of ongoing appropriations from General Fund budget. (See pie chart.)

The proposed 8 percent cuts to each agency can be found here. Not every agency is expected to undergo an even 8 percent cut for 2014. The Department of Health, for instance, had already committed to trimming 4 percent from its budget before Gov. Mead set the 8 percent bar for all state agencies.

Sen. Nicholas said the department’s budget has grown as healthcare costs increase across the nation — a major contributor to the doubling of the overall state budget since 1999.

Lee Clabots, deputy director for the Wyoming Department of Health, said the agency will reduce its budget by $19 million for 2014. The agency will try to trim administrative costs as much as possible to minimize adverse impacts on core services to clients that use Medicaid and public health services.

The $19 million in cuts include $7.2 million from the Medicaid program, $4.8 million out of mental health and substance abuse services, $1.4 million in preschools, $1.3 million for the state hospital, and other reductions totaling a little more than $4 million.

The legislature will debate whether to approve a second round of $1.5 million in funds for disability services as it did in 2012.

“There isn’t a cut within the Department of Health budget that doesn’t affect a constituency somewhere,” Clabots said.

University of Wyoming

The University of Wyoming faces proposed budget cuts of more than $15.6 million out of its $185 million budget for 2014.

Of that number, $6.1 million includes reductions in funds for instructional improvements, intercollegiate athletics, and maintenance. Another $2.3 million cut would trim the availability of graduate assistantships and scholarships for out-of-state residents. Separately, the School of Energy Resources will cut $816,000 out of graduate assistantships and matching funds for faculty research grants.

The university also proposes to reduce personnel costs by $6.4 million. At present, the university has approximately 2,900 full-time benefited employees. Chris Boswell, vice president for University of Wyoming Government and Community Affairs, said the university plans to achieve the reductions through attrition, without resorting to layoffs.

Between 60 to 90 staff and administrative workers that leave or retire in the next year will not be replaced, said Boswell, adding that the university is not instituting a hiring freeze. The university will also leave 20-35 faculty positions unfilled, which could result in the elimination of some course offerings, and increase the number of students in other classes.

Michael Barker, Chair of the Faculty Senate and Professor in Civil & Architectural Engineering, said the proposed cuts would have a “serious negative impact” on the university. “The 2009 budget reductions trimmed the fat and forced UW to prioritize programs to reduce certain services. An 8 percent cut after these 2009 reductions will get into the meat – there is little to no remaining discretionary budget to cut.”

Other departments

The Department of Corrections has identified $11.5 million in proposed budget cuts. About $6 million of that will come from reductions in inmate medical expenses across the Department’s five facilities. Reductions in overtime pay would save about $1.9 million. Cuts to substance abuse treatment funding would amount to about $1.3 million.

The Department of Family Services proposes to cut about $6.3 million from its General Fund appropriation, largely by eliminating 30 vacant positions.

The Wyoming Community College Commission proposes to cut about $10 million from its budget, largely through a $7.5 million reduction in unrestricted operational funding to colleges, and $1.6 million to come out of employee benefits such as health insurance premiums and retirement contributions. The commission also proposes to cut $142,000 from Wyoming Public Television.

Jim Rose, executive director of the Wyoming Community College Commission, said the reductions are manageable for 2014, but they come on top of cuts made under Gov. Freudenthal in 2010.

The remaining agencies that make up about one-third of the General Fund budget have also submitted cuts. JAC co-chair Rep. Berger said the JAC will examine these cuts very closely, since 8 percent reductions in a small agency can result in the loss of employees that perform a significant part of the workload.

Rep. Berger said cuts for 2014 are, “laying the foundation of the budget for the 2015-16 budget.”

“Challenges offer you that opportunity of reconfiguring and looking at where to be more efficient,” Rep. Berger continued.” If you don’t have that challenge you become complacent.”

Raising Revenue

Wyoming leaders typically hate to raise taxes and fees on residents. But this year several revenue-raising proposals have gained traction in interim committees.

The Revenue Committee approved a draft bill this October that would raise the tax for gasoline and diesel by 10 cents per gallon. Rep. Mike Madden (R-Buffalo) says Wyoming hasn’t raised its fuel taxes since 1998.

As highway maintenance costs and gas prices have climbed, the legislature has dipped into the general fund to pay for routine maintenance. Since the boom has petered out, Wyoming is looking for new ways to cover about $134.5 million in Wyoming Department of Transportation (WYDOT) costs for 2014. That represents about 30 percent of the WYDOT budget. The federal government picks up the other 70 percent of the tab, but that revenue is uncertain given that national fiscal picture.

Meanwhile, about 53 percent of the fuel purchases in Wyoming are made by drivers coming from out of state. With Wyoming’s low fuel taxes, Madden says those non-resident drivers are causing a lot of wear and tear on roads and leaving Wyoming citizens to pick up the tab through state appropriations.

The fuel tax proposal would put the gas tax at 24 cents per gallon, which would bring Wyoming in line with taxes levied by neighboring states. It would raise $71 million in revenue, of which $50 million would flow to the Department of Transportation while $21 million would flow to local governments for road maintenance.

Rep. Madden says opponents of the fuel tax increase shouldn’t worry because out-of-state drivers, truckers and industry will bear most of the cost, while the average driver who travels 20,000 miles a year would pay about $8 more a month in taxes.

The fuel tax increase is widely supported by Wyoming trucking and extraction industries because better roads will save them costs in the long run. The Wyoming Taxpayers Association, a lobbying group made up largely by industrial taxpayers, supports the tax because it is transparent and would allow those who use the roads to pay their share.

The Travel, Recreation, and Wildlife Interim Committee approved a draft bill last week that would allow the Wyoming Game and Fish Department to increase license fees on a rate indexed to inflation without having to seek yearly approval from lawmakers.

At present, Wyoming G&F has requested the legislature to approve license fee increases every five years or so. Sen. Bruce Burns (R-Big Horn) says the new proposal would allow the department to raise its fees in a more predictable way that would keep up with costs, without having to go through the lengthy process of seeking legislative approval each time.

Rep. Allen Jaggi (R-Lyman) was one of six committee members out of 14 who opposed the measure, largely because his constituents voiced concerns about raising hunting license prices in the midst of a recession.

Currently, Wyoming G&F has a budget of about $150 million, of which about $10 million comes from the General Fund, with the rest coming from license fees. Wyoming G&F administrators interpreted the governor’s request for 8 percent cuts to only apply to General Fund appropriations, meaning it would cut about $800,000. But Rep. Jaggi said he believes the whole budget should be subject to the 8 percent cuts. “I would like them to prioritize and see if there are some things we can do without, just like we’re asking the Wyoming citizens to do,” he said.

Is it raining yet?

Most lawmakers remain averse to taking on recurring spending, but some are open to discussing one-time budget requests that might be of significant benefit to residents. This year Gov. Mead has prioritized several such projects. In preparing his budget recommendations, he is looking at revenues to see if there is enough money available.

Gov. Mead’s big-ticket items for this year include $45 million for fighting wildfires, and $30 million for the Gillette Madison Pipeline Project, which eventually will cost $217 million in state funds and loans. Last year the legislature funded $15 million for improving landfills. Gov. Mead said he wants to continue that level of investment this year since the landfills project could cost a total $230 million to complete. Setting aside money for highways, and future construction of a new engineering building at the university, is also on the big-ticket items list.

Gov. Mead has also called for a reassessment of state’s rate of K-12 school construction. The needs list for schools has grown shorter, and that might present an opportunity to realign capital construction funds to other projects.

One possibility for funding extra big-ticket projects would be diverting funds that normally go into the PWMTF. At present, the state puts 1.5 percent of severance taxes into the fund by constitutional requirement. Another 1 percent of severance taxes — about $130 million — flows in by legislative statute, but that revenue can be redirected for other purposes if lawmakers so choose.

In the 2009-2010 fiscal year, the legislature diverted 1 percent — about $100 million — from revenues flowing to the PWMTF to help the budget through the stock market downturn. Last year the legislature voted down a proposal to divert $50 million (or about 0.5 percent in revenues to the PWMTF) for other projects.

Gov. Mead’s spokesman Renny MacKay says the governor wants legislators to discuss diverting some of the money that goes into the Permanent Wyoming Mineral Trust Fund (PWMTF), but not for spending on special projects. If the idea goes forward, Gov. Mead would prefer diverting PWMTF funds to the rainy day account, and covering the big-ticket items from other sources.

Gov. Mead and legislators seem to agree that revenues diverted away from the PWMTF should not cover recurring expenses. “If we scalp that money my hope is we’re scalping it for one time expenditures, not operating budgets,” said Sen. Nicholas.

“Diverting this stream away from PWMTF is an option, but that decision would be made by the entire legislature and that takes a lot of steps to get there. Put differently, this is an option, but just one option among several, e.g., budget reduction, less savings, delaying these expenditures, higher revenue, e.g., fuel taxes (user fee), etc.,” Rep. Berger told WyoFile via email.

Rep. Berger says that spending money out of the rainy day account for big-ticket items would likely be met with mixed reviews in the legislature.

Senate President Jim Anderson (R-Glenrock) said, “My sense is the more conservative people would tell you that we are some distance from a rainy day. Those that are less conservative would say maybe its time to dip into these (savings).”

Sen. Nicholas believes that the rainy day account should be tapped only if the state lacks money to pay for K-12 education. Currently, the rainy day account balance is $1.3 billion. CREG estimates it will grow to $1.716 billion by June 30, 2014.

Sen. Nicholas says he would also like to see the rainy day account pushed up to $3 billion, which he says would cover up to a decade of disappointing revenues. He said in the 1990s the state had a cushion of savings that would have lasted 10 years, but the doubling of the budget since then means the money currently in savings wouldn’t go as far.

Others think the money in savings should be used when times are tough, and then replenished whenever possible. “There isn’t a reason to put an arbitrary target (for the amount of savings int he rainy day fund) and not use any money until we get there,” said Dan Neal of the Equality State Policy Center. “If they are looking at cuts that are going to cut things that the people of Wyoming need, then they ought to take a look at that rainy day account.

What’s Ahead

As the legislature moves into uncertain fiscal times, it will be doing so under new leadership. Both co-chairs of the JAC, Sen. Nicholas and Rep. Berger, will move off the committee before the legislative session begins.

Sen. Nicholas will become Majority Floor Leader, a position that precludes him from taking a committee assignment.

Rep. Berger is the new House Speaker Pro Tem, and will chair the House Corporations, Elections, and Political Subdivisions Committee.

In House caucuses held November 17, Rep. Steve Harshman (R-Casper) was elected as Chair of the House Appropriations Committee. A teacher and coach, he first served in the legislature in 2003 and became a member of the Appropriations Committee in 2007.

Rep. Harshman will serve as co-chair of the JAC along with Sen. Eli Bebout (R-Lander) the new chair of the Senate Appropriations Committee.

An oil and gas drilling contractor, Sen. Bebout joined the Senate in 2007. In the last session he served as chair of the Senate Minerals, Business and Economic Development Committee. He was the Republican candidate for Governor in 2002, losing to Dave Freudenthal (D). He previously served as a representative from 1987-2000 and was a member of the House Appropriations Committee in 1993 and 1995-1996.

Only five members of this year’s JAC will return for 2013: Rep. Steve Harshman (R-Casper, chairman), Rep Ken Esquibel (D-Cheyenne), Rep. Sue Wallis (R-Recluse), Sen. John Hastert (D-Green River), and Sen. Curt Meier (R-LaGrange).

New JAC members include Rep. Donald Burkhart (R-Rawlins), Rep. Glenn Moniz (R-Laramie), Rep. Bob Nicholas (R-Cheyenne), Rep. Tim Stubson (R-Casper), Sen. Eli Bebout (R-Riverton, chairman), Sen. Dan Dockstader (R-Afton), and Sen. Drew Perkins (R-Casper).

For a full list of new committee assignments, see the Legislative Service Office website.

Gov. Mead will release his budget recommendations on November 30, and the JAC will start supplementary budget hearings with agencies by the middle of the month.

Agency budget hearings will continue when the legislative session begins on Tuesday January 8, lasting until about the end of the month, when the JAC will work up the budget and draft bills.

In February, the House and Senate will hear and extensively debate the budget bills. Lawmakers will then make changes, and present a combined version for Gov. Mead’s signature at the end of the session in March.

Citizens can get in touch with legislators any time between now and the end of the session to make their voices heard in the budget negotiations.

For now, legislators will hope for good natural gas prices, which currently stand at about $3.64 per mcf, above the $3.35 per mcf price forecasted earlier this month. Frigid weather in the upcoming months would increase heating demand and boost the state budget, but meteorologists say this winter isn’t projected to get very cold.

Editor’s note: This  article has been corrected to reflect the actual dollar amount of $74.5 million for the proposed cuts among state agencies.

If you’d like to weigh in on the legislative debate, see WyoFile’s guide to contacting your legislators for ways to make your voice heard in the 2013 session.