Lawmakers could divert mineral revenue earmarked for deposit in the Permanent Mineral Trust Fund and instead use the money to fund state government during the current budget crunch.
The Joint Appropriations Committee will consider a draft bill in December changing Wyoming’s mineral revenue distribution to send more of the income directly into immediate spending and less into savings in the state’s massive trust fund.
Despite contracting budgets in recent years, the state’s Permanent Mineral Trust Fund has continued to grow. The PMTF, which holds more than $7 billion, is one of the 100 largest sovereign wealth funds in the world. The Wyoming Constitution bars spending the trust fund’s deposits, but its investment income and interest earnings help fund state government.
The draft bill briefly discussed by the Joint Appropriations Committee on Friday would permanently divert some severance tax money away from the PMTF and into the state’s general fund for immediate spending. Lawmakers used a temporary diversion in 2016 to shore up budgets. Discussion on making the shift permanent was tabled, but the bill will be considered when the committee begins two weeks of budget talks in December.
On Friday, committee members received an update on the state’s fiscal deficit — which Legislative Service Office staff estimated at $770 million over the coming two-years. That number includes both general government funding and K-12 public education.
Throughout the last eight months, public discussion and media attention have focused on disputes between raising taxes or cutting budgets. But Friday’s discussion centered on a third, less-discussed set of solutions — rearranging existing revenue streams. The idea underpins the draft bill on severance distribution, but it’s not without detractors. Such changes involve risk, some elected officials say.
Mineral tax streams
Wyoming collects a 6 percent severance tax on minerals. As an energy state, it’s a significant bulk of the revenue. Of those 6 percentage points, Wyoming’s Constitution mandates that 1.5 percentage points feed the PMTF. What’s left is split into various accounts — with the lion’s share going to the state’s general fund, according to the Legislative Service Office.
Another sizeable portion goes to water development accounts — read a WyoFile report on its use here
Starting in 2005, the Legislature decided to take an additional 1 percentage point of the severance tax off the top for deposit into the PMTF, to further accelerate the fund’s growth.
In 2016, as the state’s mineral revenues plummeted and money for state services ran short, the Legislature voted to end the extra diversion to the trust fund and instead use that money for state operations. On Friday, LSO staff estimated that amount at $89 million a year.
The draft bill to be reconsidered in December would make that change permanent. Lawmakers who support it say the state needs to focus on surviving an energy downturn, not on growing its trust fund.
“For the foreseeable future we’re gonna need this money,” said Senate Appropriations Committee Chairman Bruce Burns (R-Sheridan).
“Should we get into another boom in the future, that would be great, then those future legislators can then vote to move that money … back to the permanent mineral trust fund,” he said.
Despite the immediate fiscal troubles, some lawmakers on the Joint Appropriations Committee worry taking the extra one percent severance money away from the PMTF could make the fund lose ground to inflation. While the PMTF can’t be spent, if it’s body doesn’t grow fast enough it can lose value.
“I’m opposed to this bill,” said Rep. Sue Wilson (R-Cheyenne). “I think we have an obligation to future generations to have this available to them and to not say ‘we don’t want to cut our own benefits but we are happy for you to cut yours.’”
State Treasurer Mark Gordon expressed concern about inflation in interviews with WyoFile in January. The downturn in mineral revenues affects the amount of money placed in the PMTF each year as well, he said. In fiscal year 2016, the constitutionally mandated 1.5 percent came to $100 million less than it did in 2012. If the fund’s growth slows too much, inflation rates could catch up with it and hurt its investment potency, he said.
Such fiscal prudence with a $7 billion trust fund can seem excessive to some, particularly after the Legislature cut $230,000 to a program for low income mothers during the 2017 general session. However, in Wyoming’s fiscally conservative legislature any move to divert away from savings raises eyebrows.
Agencies would get used to the extra money from the 1 percent, making it difficult to take it away from them, said Sen. Ogden Driskill (R-Devils Tower). The extra 1 percent would “disappear forever into government,” he said.
But fiscal prudence could go both ways, said Rep. Albert Sommers, the House chairman of the Select Committee on School Finance Recalibration. One immediate need, he said, is to maintain schools, whose upkeep and construction have been funded by bonus payments on new coal mine leases. Those bonuses have dried up and there is little indication of their return in any significant amount. Various lawmakers have said that without funding maintenance, the money spent on new schools will go to waste as they degrade.
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“If we do nothing else we need to put roofs on schools,” Sommers said.“We have to face up to this at some point.”
Shifting revenue streams away from savings accounts could pay for that maintenance without raising new taxes, he said.
While tabled Friday, the draft bill ensures this third element — existing revenue streams — will be part of the discussion about tax hikes and budget cuts.
Update: At a Select Committee on School Facilities meeting Monday, Speaker of the House Steve Harshman and Rep. Tom Walters, who is also an Appropriations Committee member, brought a bill to divert the 1 percent severance tax towards school construction and maintenance, according to a report in the Casper Star-Tribune. -Ed.
Some excellent comments here on a very well written report. It makes me wonder why the legislature is not relying on some of this knowledge that is available to them from commenters like these in thinking through revenue decisions. Short term thinking was clearly a problem when the decision was made to reduce taxes on coal. I was struck, though, by the comments of Rep. Sue Wilson, who apparently thinks it okay to rob the school children of today of their future and the future of the state by further cutting education funding, but that it would be wrong to leave the future a slightly smaller savings account. It is true that fossil fuels are not renewable and that is why their marketability is likely to decrease as time goes on. If those were the state’s only resources, that would be a problem, but we are generously endowed with renewable sources of energy that are the economy of the future. I am much less worried about possible effects of inflation than I am about the politics that impede our meeting the future fully prepared to actively participate in the economy. We need well educated citizens and we need a diverse economy, including the development of renewables to secure a prosperous future. Or we can just sit in conservative fear and wait for the future to pass us by.
The concerns expressed in the article appear to be misplaced. The legislature created the Spending Policy Reserve Account (SPRA) to help inflation-proof the Permanent Mineral Trust Fund. In doing so, the legislature specified that a certain percentage of the annual earnings on the Trust Fund would be applied to general government expenses. Any earnings above this amount would then be placed into the SPRA, and when the money in this account reaches a certain level, the surplus spills into the Trust Fund to help inflation-proof it. That has happened many times over the years.
The legislature diverted an extra 1% of the state’s severance taxes into the PMTF last decade during years of large budget surpluses. It was one of many actions legislatures took during these years to save and invest the surplus funds for times of future need in a boom and bust economy. The intention of the diversion was to help build the Trust Fund’s principle, not inflation-proof it. The Trust Fund has nearly doubled in the past 15 years, well above the level of inflation.
The concern was expressed that re-diverting (for now) the 1% severance tax flow back to its traditional use would nurture dependency among state agencies on the funds. However, it appears that the opposite is true. Many legislators have grown ideologically dependent on what was a temporary diversion in the first place.
Laramie
Mr. Massie’s history is thought-provoking and helpful if a bit off-target. A year ago, the Treasurer’s Office did a study to understand how well the spending policies he mentions offset inflation. It turns out not well at all. But then that was only partly the purpose of the original spending policies.
Their purpose was to build a mechanism to assure a dependable income stream from the “inviolate” permanent funds that were otherwise subject to the unpredictability of investment markets. Thus, the spending policy reserve accounts were meant to provide enough cushion from good years to guarantee a stated income rate — the spending policy amount — in bad years. After some experience, that rate was determined to be about 5% across funds.
What Mr. Massie is referring to is the feature that once a reserve account was filled to a level judged sufficient to meet the primary objective of providing a stable 5% income through all markets, any excess earnings were supposed to “tip” back into the corpus of the associated permanent fund as a way to inflation proof it. Meanwhile, importantly, the funds continued to grow from their accustomed sources. An example would be the 1.5% constitutional severance tax which funds the Permanent Mineral Trust Fund (PMTF). The fund was still meant to grow from tax receipts regardless of whether the spending policy met its objectives. Moreover, the constitutional 1.5% severance tax was never intended to be a hedge against inflation.
At the time the spending policy was established at 5% fixed income instruments like bonds were earning nearly 8% in interest, so that spending rate was pretty manageable. In the intervening years, first with the 2008 crash and more recently the general downward pressure the Federal Reserve has applied to interest rates, circumstances have changed. These new considerations have given the legislature reason to raise the limits of the various SPRAs and suspend “inflation proofing” for the time being.
Demonstrably, then we are no longer saving or inflation proofing. Instead we have effectively liberated income to be used for current spending. Times are tough to be sure, but if this practice becomes a habit, it may well have consequences for our kids and our kids’ future educational opportunities unless we are confident we have reached the limits of educational progress or we are prepared to pay higher taxes to meet higher costs in the future.
What is helpful about Mr. Massie’s comment is his recollection that the additional statutory 1% severance tax (beyond the 1.5% constitutional tax) was diverted into the PMTF over the past decade to build the Trust Fund’s principle, “not inflation proof it.” Our study revealed that the 1% statutory diversion provided the single most dependable and meaningful offset against an inflation rate that has hovered just below 2% since 2008. The spending policy inflation proofing mechanisms themselves never met their inflation hurdle without it.
Mr. Massie’s points out that the fund has nearly doubled in the past 15 years which he asserts has outpaced inflation. He is right; but that growth has come about because of the continued extraction of Wyoming minerals and the taxes levied on them and not through reinvestment of earnings or any device designed to offset inflation. Why is that? It is because we spend our dividends, interest, and capital gains routinely or set them aside in the “rainy day account” or Strategic Investments and Projects Account (SIPA) for spending later. Arguably, funds like the PMTF would have been larger and hence able to earn more today if they had been protected against inflation, but here we are.
The PMTF is not a “savings account” and it was never intended to be only so big. It was passed as a way to give future Wyoming generations some of the benefits we derive today from the one-time production of our mineral wealth. It was put forward in 1974 to provide a continuing source of income for our state, not a pot for some future generation to spend at whim. That is why the Constitutional provision which established it made it “inviolate.” Voters passed it back then because they had a care for the future and recognized our mineral wealth might not be renewable. The PMTF is a revenue source not a savings account.
Stan Hathaway’s vision has certainly performed. Taken altogether, the earnings from of Wyoming’s investment portfolio now represent Wyoming’s second largest source of annual income. Their ability to produce revenue is a principle reason why Wyoming’s tax burden remains modest.
But just to put it in perspective what does a 2% inflation rate do to the PMTF’s ability to meet next year’s challenges? The market value of the PMTF on October 31st was $7,912,131,179.00. All things being equal, inflation will deplete the fund’s overall value about $158,242,623.58 by October next year.
Inflation evaporates a piece of the corpus every year and thus reduces the PMTF’s relative ability to produce commensurate earnings. Less money means you make less and inflation always works to make sure you have less. Conversely more money means more potential income.
For reference sake, back in 1980 inflation stood near 10%. Imagine losing almost a billion dollars of value every year to inflation from the PMTF. Ouch! It is nice that we currently enjoy such a low inflation rate that some can think losing only 100 million dollars annually to inflation isn’t that big a deal.
From a perspective of justice and rights this is a terrible idea. Fossil fuels are nonrenewable. If we opt to exploit them, future generations opportunity to exploit them is removed. It is just to save at least 2.5 of 6 percent for the future generations. We are not even giving them half. Moreover, creating a viable fund whose interest can fund government is a huge deal. Look at Norway.
As an addendum , it is worth pointing out that Wyoming’s state severance tax on Coal was hovering at 10 percent for the decade from 1976 thru 1986.
A study commissioned by the Legislature in 1999 and researched by the UW economics department showed that higher taxes ( of all kinds) on minerals and energy were NOT an impediment to production , growth , or new development of resources. it killed that myth, but the study was promptly buried and all but forgotten and the mostly Republican mostly conservative Legislature went back to trumpeting the dogma that mineral taxes harm revenue.( In reality , taxes are more of a pass thru cost of doing business )
Think where Wyoming could have gone revenue-wise if the state severance tax on Coal had remained near 10 percent since the turn of the millenium , instead of dogmatically being reduced to 6-7 percent ? Would we have sold less coal ? — maybe a percent or two of tonnage. Would we have collected a massive amount of mineral taxes to offset that ? Yes… billions of dollars thru the Wyoming coal boom that began in roughly 2001 and lasted a decade.Would industry and employment have suffered from keeping the taxes at ten percent? No. Fast forward to FY2018 and we’re back in a decline staring into the abyss of ” Bust” . It is likely Wyoming will ever again muster the political will to tax the coal industry at former severance rates. We cut ourselves down at the knees in good times and are now crawling on elbows in bad times. That’s how we roll in Cheyenne…Boom Bust- Rince and repeat -Never Learn From It.
So forgive me if I’m not optimistic about the still-Republican still- conservative Wyoming Legislature doing anything radical with mineral taxation , even though that is exactly the Rx for the malady of revenue decline , in part, while we are still selling any coal at all .
It’s not as grim in Cheyenne was it was back in the late 60’s when THAT economic bust left Wyoming’s general fund with about $ 500 in the bank . Not a typo… the State had five hundred bucks to it’s name when Republican governor Stan Hathaway did a miraculous thing and got the Lej to adopt mineral severance taxes, which at that time were rare anywhere in America . Desperate times required desperate measures.
Just like now, maybe…
Here’s an informative report on the history of the Wyoming state severance tax up through FY 2011.
https://legisweb.state.wy.us/budget/wyosevtaxes.pdf