How a letter withheld $53M in mineral royalties from Wyoming

By Gregory Nickerson

— April 18, 2013

By now you’ve probably heard that $53 million in federal mineral royalties (FMRs) will be withheld from the state of Wyoming due to sequestration — the mandatory federal spending cuts that went into effect in March.

The news came in a letter dated March 22^nd from Gregory Gould, the director of the Department of the Interior’s Office of Natural Resource Revenue (ONRR). In three short paragraphs he explained that Wyoming would be getting $10.6 million less in royalty payments each month for the next five months, effective immediately.

The loss in royalties results in $17.6 million less for the state’s School Foundation Program, which funds public schools, and about $35.3 million less for the Budget Reserve Account, which feeds Wyoming’s General Fund.

Moments like this underscore how easily Wyoming can lose money that flows from the federal government.

Last year, the state learned it would lose $82.7 million in annual federal Abandoned Mine Lands Funds it had enjoyed for years. With Wyoming currently getting nearly 40 percent of its state budget from the federal government, revenue adjustments like this can really sting.

So just how did this recent loss in mineral royalties happen?

It goes back to the Budget Control Act of 2011, the law that put the so-called “sequester” in motion. Those voting for the bill included Wyoming Sens. John Barrasso and Mike Enzi, both Republican, and Wyoming Rep. Cynthia Lummis, also a Republican.

Sequestration was designed to be a blunt instrument with cuts so painful they would force the Joint Select Committee on Deficit Reduction to reach an agreement on deficit reduction. When that didn’t happen, President Obama ordered the sequestration forward, placing the blame for the cuts squarely on Congress.

A report from the Office of Budget and Management put it plainly:

“The Administration has no discretion in the calculation and allocation of the reductions. Instead, the reductions have been calculated pursuant to the requirements specified in the Budget Control Act.”

The sequester went into effect on March 1^st, and three weeks later Wyoming got its letter of bad news, which sparked a strong reaction from Gov. Matt Mead:

“When the State reduced its budget by over 6% it did not achieve its reductions by withholding mineral revenue due under state leases. That would be taking someone else’s property. Similarly, the Department of Interior should not be able to meet its budget reduction by taking mineral revenues which belong to the states under the law.”

By contrast, Pat Etchart, spokesman for the ONRR, said the Department of Interior was following the law:

“The Budget Control Act mandates across-the-board 5.1 percent reductions. By law mineral states are not exempt from the sequestration. ONRR recognizes the hardships this may impose on states, but it is obliged to fulfill its mission in compliance with existing law.”

The statute controlling how federal royalties are disbursed to the states is 30 U.S.C 191. Until 2008, it required a 50-50 federal/state split of mineral royalties. Royalties flow from production companies to the ONRR, which divides the money among states, Indian tribes, and federal programs like the Reclamation Fund.

In 2008, Wyoming’s royalty split dropped to 48 percent because of Public Law 111-322, in which Congress took back 2 percent from the states for “net receipts sharing.”

Still, Wyoming is ahead of where it was before 1976, when states got only a 37.5 percent share of mineral royalties. That year, Wyoming’s congressional delegation helped boost the state share of mineral royalties from 37.5 percent to 50 percent through an amendment to section 35 of the Federal Mineral Leasing Act of 1920.

In Wyoming, Sen. Cliff Hansen (Republican) gets much of the credit for that change, but Democrats Sen. Gale McGee and Rep. Teno Roncalio also supported the effort. (The amendment was made in section 317(a) of the Federal Land Policy Management Act of 1976. See page 28 of FLPMA here.)

The boosting of the state share of royalties to 50 percent resulted in an additional $2.8 billion in revenue for Wyoming over the years.

In 2012, Wyoming got $995 million in royalties from minerals produced on federal lands within the state. To put that in perspective, Wyoming’s share amounted to almost half of the $2 billion in royalties distributed to all the states last year.

But today, the combination of congressional gridlock and the ongoing federal budget crisis threaten the royalty revenue. As Sam Western noted in a recent WyoFile essay, the federal government can restrict the flow of mineral revenues to Wyoming. The House and Senate have the power over how to split up federal money generated by leasing federal lands. They can also cut the flow by sequestration.

After receiving the letter from ONRR, Gov. Mead asked Attorney General Gregory Philips to examine if the state had any legal recourse for reclaiming the royalties. The answer came back in the negative, leaving only the option of taking up the matter with Wyoming’s congressional delegation.

— Gregory Nickerson is the government and policy reporter for WyoFile. He writes the Capitol Beat blog. Contact him at greg@wyofile.com.

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Gregory Gould’s Letter to Treasurer Mark Gordon

Gould Letter to Gov Mead (Text)