Earlier this month, at the annual Governor’s Business Forum organized by the Wyoming Business Alliance, I had the honor of moderating a panel focusing on many of the state’s thornier fiscal quandaries.
Kipp Coddington, Director of Energy Policy and Economics at the University of Wyoming, set the stage for the discussion perfectly with a brief talk. He outlined how our natural-resource-based economy is totally dependent on the evolution of national opinion toward climate change and therefore fossil fuels. He shared ample data that suggest that the finite nature of the coal industry’s lifespan is no longer speculation, and that just how long the industry has left hinges on several future policy decisions, including whether to enact a federal carbon tax.
The oil and gas industry has a longer horizon, according to Coddington, but evidence suggests it too will experience significant change in the next 50 years.
These factors are already producing short-run fiscal impacts for Wyoming state government. Following Coddington’s remarks, panel members opined that longer-run impacts now appear more likely than they were even one year ago.
One such challenge is the increasing volatility of state revenue. A recent study by PEW Charitable Trusts concluded that Wyoming has the most volatile revenue flows among all of the states except Alaska and North Dakota. This is traced to Wyoming’s dependence on revenues from fossil fuels and is further exacerbated by the fact that fossil fuel revenues tend to move somewhat in concert with each other.
One panelist emphasized that over time coal, revenues have been far less volatile than oil and gas revenues. Accordingly, the rapidly declining coal market points to increased reliance on the more volatile oil and gas revenues. Assuming no new diversified revenue streams are adopted, revenue volatility will continue to increase accordingly.
The examination of volatility led naturally into discussion of the Legislative Stabilization Reserve Account — commonly known as the rainy day fund.
The fund exists to buffer government spending — which by nature is stable — from the wild swings of natural-resource-based revenues. It is not practical to operate school systems, health department agencies, the highway patrol and other public services without being able to reliably pay the bills and make payroll, regardless of the price of coal. The rainy day fund provides that reliability. It bridges the gaps between spending and income when mineral revenues tank, until they climb back up.
As volatility grows over the next few years — bigger and more frequent ups and downs in revenue — so too will the amount of money we need to maintain in the rainy day insulate against it.
The existence of these reserve funds, panelists pointed out, is a major reason that many Wyoming residents resist changes in the state’s revenue sources such as tax broadening. This dilemma was highlighted by legislative panelists who pointed out that the primary purpose of rainy day funds is to buffer volatility — not offset long-run revenue decreases.
This, it was agreed, has not been well articulated to the public.
Discussion migrated to the clear statistical evidence that diversification of the state’s economy into sectors other than minerals is not sustainable under the existing tax structure. The fact is that the taxes raised from new diversified industries would fall far short of the costs of increased state and local government services required by these new businesses and their employees.
Taken together, that means that just as our revenue forecast is darkening and looking more unpredictable because of our reliance on minerals, we find ourselves with real structural obstacles to developing alternatives.
Piling on too is the fact that concerns about Wyoming’s ability to financially cope with fossil fuels’ decline add to the difficulty of attracting new enterprises. One panelist shared how potential new businesses are initially impressed with the state’s low taxes. However, the lack of clarity concerning the state’s future ability to maintain low taxes without sizable mineral revenues causes reservations about where the future tax burden will migrate should they choose Wyoming as a place to locate. Consequently, new business prospects increasingly divert their location plans to other states with a more established and stable fiscal system.
It’s an ironic unintended consequence that our low taxes may actually discourage economic growth — one of many fiscal dilemmas faced by the Wyoming Legislature.
Panelists also took on the expenditure side of the budgeting process.
Many noted that because mineral industry taxes pay for the majority of public services, those that receive these services don’t directly feel the pinch of increased demand. Without that personal impact, they rationally demand more of these services than they would if such demand came with consequence of added taxes. Public education was cited as an example. But the “if you don’t pay, you don’t pay attention” phenomenon applies equally to other public services and is a reliable tendency of citizens when it comes to government programs.
Another cost-related issue briefly raised by the panel concerned the extent to which the state finances county, city and local school districts. Wyoming state government reverts more state dollars to city and county governments than nearly every other state. Most of the money goes to local capital projects. Local governments in other states typically self-fund such endeavors through taxes, fees and frequently bond issues.
We fund so much more from the state level largely because Wyoming law, more than nearly every other state, imposes extensive limits and controls over how much those local governments can assess through taxes, fees and borrowing. The amount of this funding is significant and is financed through general funds, severance taxes, mineral royalties and fuel taxes. Together they total nearly $400 million per biennium. That’s about as much as currently forecast in the biennium general fund and public education deficit.
Legislative panelists expressed some reservations about changing the state’s long-standing policy of providing grants and loans to local governments. Some towns couldn’t otherwise pay for capital improvements and general local government expenses even if restrictions are removed. Municipal governments, however, have themselves taken a different stance and asked the state to provide them more opportunities for fiscal self determination. Several such bills have been worked in standing committees of the legislature.
Those on the panel who have close knowledge of the state’s current fiscal condition acknowledged that funding for the upcoming two-year budget cycle now appears less problematic than it seemed at the close of the 2019 session. That’s because of significant capital gains during the last fiscal year as well as some other unexpected revenue revisions and mineral lease royalties. This, it was explained, is fortunate because during the forthcoming budget session, a two-thirds majority of the House is constitutionally required to even introduce any bill.
No doubt much clarity will emerge over the next 12 months concerning longer-term fiscal challenges in Wyoming.
The panel fostered much discussion among the hundreds of Wyoming citizens attending the forum, both during the audience questions segment and afterward. Fiscal solutions are never easy to sort out — as demonstrated at the completion of the panel’s allotted time — but they merits the attention of every Wyoming resident. After all, as one panelist pointed out, we are all in it together.