A Note From Pete Simpson:
This month we address the issue of Wyoming’s Permanent Mineral Trust Fund – its purpose and its meaning for Wyoming both now and in the future. Kerry Drake’s column, Sometimes Wyoming needs to spend rather than save, piqued the interest of many – mine included. So, I invited two of the most knowledgeable individuals on this topic I know to contribute their views: State Senator, Charles Scott, of Casper, senior statesman in the Wyoming Legislature and its longest serving member, and Sam Western, author, journalist, lecturer and Adjunct Professor of Economics at the University of Wyoming.
Not surprisingly, they come at the subject from very different perspectives. Senator Scott instructs us on the purposes of the Fund and urges our consideration of its worth as presently administered. Sam Western, on the other hand, questions the state’s management of the Fund and asks whether the present strategy is wise for the long run. That is, of course, what the Forum hopes for – views that can stimulate reasoned debate and discussion. Which of these views accord with your own and what do you see in our future?
— Peter K. Simpson
The Permanent Mineral Trust Fund is Wyoming’s financial centerpieceGuest Essay by Charles Scott — March 25, 2014
Perhaps the smartest financial move the people of Wyoming have ever made was the establishment of the Permanent Wyoming Mineral Trust Fund. The Fund has already been Wyoming’s fiscal savior in several economic downturns and promises to be our long-term financial anchor.
The fund was ratified as part of our Constitution by the people of Wyoming at the 1974 General Election and began accumulating funds in 1975. The text of the Constitutional provision establishing the Fund is simple:
“The Legislature shall provide by law for an excise tax on the privilege of severing or extracting minerals of one and one-half percent (1 1/2%) on the value of the gross product extracted. The minerals subject to such excise tax shall be coal, petroleum, natural gas, oil shale and such other minerals as may be designated by the Legislature. Such tax shall be in addition to any other excise, severance or ad valorem tax. The proceeds from such tax shall be deposited in the Permanent Wyoming Mineral Trust Fund. The fund, including all monies deposited in the fund from whatever source, shall remain inviolate. The monies in the fund shall be invested as prescribed by the Legislature and all income from fund investments shall be deposited by the State Treasurer in the general fund on an annual basis. The legislature may also specify by law, conditions and terms under which monies in the fund may be loaned to political subdivisions of the state.”
An important provision in the constitution is that the income generated is deposited in the General Fund. Dedicating the income to the General Fund means that the legislature has the ability to spend the income where it is needed most. Over the years there has been an attempt or two to earmark fund income to special purposes, but because that would require amending the constitution, these efforts never get anywhere. The result is that the income from the fund is available to help the state meet its essential obligations when economic times are tough, reducing the need to raise taxes under these circumstances.
A second key provision is that the fund itself is inviolate, meaning that the money in it cannot be appropriated and spent. My experience over the years is that money in any fund not protected by this kind of constitutional provision can and will be spent in an emergency. When Wyoming’s tax revenue goes way down because our mineral industries are in the bust phase of their historical boom and bust cycle, the legislature can be faced with the choice of raising taxes or cutting popular and needed programs like education. The vast majority of our state spending is in three hard-to-cut areas: education, medical assistance, and corrections. Under these circumstances the permanent funds would be raided if they were not constitutionally protected.
Over the years there have been several raids on the fund. The worst was for clean coal technology, the so called Char-Fuels fiasco. The legislature gave sweetheart low-interest loans to several companies which then went broke. The result was that we had to make provisions to make the body of the fund whole, an experience that educated the legislature not to do that again. This legislator is happy to report I voted against the offending bill on the theory that any company that had to come to the legislature rather than the commercial market for funding had to have something wrong with it.
A second raid was legal because of the provision that the fund could be loaned to local governments. We have used the body of the fund for low-interest loans to municipal water projects. The largest was the Cheyenne Stage II municipal water project which brings drinking water to Cheyenne by diverting water from the west side of the Sierra Madre Mountains in Carbon County to the North Platte to replace water Cheyenne pipes from the Snowy Range over Sherman Hill. The legislature has since developed the Water Development program with its own revenue sources to avoid this demand on the Permanent Fund.
The corpus of the Permanent Wyoming Mineral Trust Fund was also the source of funds for a state agriculture loan program in the 1980’s and early 1990’s. The Farm Loan Board (Wyoming’s top five elected officials) was conservative, keeping the loans from being too high in relation to the value of the lands on which they took a mortgage, and thus avoided most of the losses other agriculture lenders had. At 8 percent, the interest rates were not especially low, and this program has now been eliminated by cheaper commercial competition.
The fund was an important source of revenue for the state in the mineral industry bust that started in 1982 and lasted until the mid 1990’s. The fund was smaller then and could only be invested in fixed income securities (bonds and the like), but interest rates were high so earnings were high.
In 1996 the voters approved a constitutional amendment that allowed the corpus of our permanent funds to be invested in common stocks. This was fortunate because since then stocks have been more profitable investments than bonds. In the great stock market crash in 2008 and 2009 the state did not panic and continued to buy stocks, much to our subsequent profit.
The state has become a very sophisticated investor with widely diversified holdings and multiple professional investment managers. In the nature of the world we will suffer an occasional loss in our investments, but these will be offset by our successes. We are protected against disaster by our investment diversity. In general, we should expect the performance of our Permanent Fund investments to mirror the stock market as a whole, but to be a bit better than the market average. In some of the years in the first decade of this century, you could make a good statistical argument that the State of Wyoming was the best professional large money manager in the country.
Partly in response to our experience with the dot-com market crash, the legislature has established a spending policy with a reserve account. We set a percentage of the fund we expect to earn long-term (since 2004, 5 percent per year). We put anything over the 5 percent in the reserve account so we have a source of money if, due to a market crash, we don’t have the needed income for a year or two. There is a cap on the reserve account of 75 percent of the expected annual spending and any earnings over the cap get put back into the fund to protect it against inflation. In 2013 this resulted in a deposit into the Fund of $102.1 million.
In addition to the inflation-proofing using the excess earnings, the legislature has taken several other steps to improve the Permanent Mineral Trust Fund. Soon after the fund was established, the legislature passed a law raising the mineral tax rate deposited in the fund from the constitutional 1 1/2 percent to 2 percent. This law was repealed in the mineral bust after 1982 when we needed the tax revenue, but was reinstated when the current boom was getting started, and the 2 percent rate remains. In good years we have also appropriated money directly into the fund.
The legislature expects our mineral tax revenues to stabilize over the next decade or so. Revenue from oil production is likely to grow, coal to decline, trona to be steady, and natural gas to fluctuate. We think our governmental expenses will slowly grow due to inflation and population growth. To deal with this without a tax increase, we have built a “rainy-day” account with a balance equal to about one year’s General Fund budget, and we are trying to build up the Permanent Mineral Trust Fund so income from it will increase.
The market value of the Permanent Mineral Trust Fund was $6.1 billion on July 1, 2013, and is projected to grow to about $8 billion by July 2018. In addition, the July 1, 2013, market value of the Common School Permanent Land Fund (income dedicated to the public schools) was $2.6 billion. The Excellence in Higher Education Endowment was $113 million and the constitutionally-protected Hathaway Scholarship fund is over $500 million. (These last two are due to legislation this legislator sponsored.) The total of our constitutionally-protected funds is currently over $9 billion and rapidly approaching $10 billion. In addition, the University of Wyoming and Wyoming’s community colleges are developing significant endowments with their fund raising helped by state matching funds. The Workers’ Compensation fund and the retirement funds are protected from being spent, but are legally limited to their specific purposes.
The net result of this long-term financial policy is that for the foreseeable future you can expect Wyoming to continue to be a low tax, high government service state. We should avoid the financial problems and high taxes many of the other 49 states will have. In our spending we have set priorities — we spend heavily on education (both K-12 and higher education), water development, highways and corrections. We spend relatively less on medical assistance (mostly Medicaid including nursing homes and Developmental Disability programs) and welfare programs.
We have avoided debt. The Wyoming Permanent Mineral Trust Fund is the centerpiece of our financial strategy.
— Harvard-educated Charles Scott is a rancher who first served in the Wyoming House of Representatives from 1979 to 1982. He has served in the Wyoming Senate since 1983, representing Senate District 30 (Natrona County)..
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