Barring any sharp changes by January, lawmakers will convene in Cheyenne next year with a fresh $958 million on state balance sheets, according to the fine print of the annual October state revenue report.
The bottom line for lawmakers: Education funding continues to run at a deficit but projected revenues match projected expenditures on the general government side. That budget can in fact can grow up to two percent without sliding back into deficit territory, according to remarks Legislative Service Office fiscal analyst Don Richards made to lawmakers in Thermopolis last week.
“You’re balanced,” Richards told the Joint Appropriations Committee, which has spent the last two years surgically examining agency budgets for available cuts. Gov. Matt Mead cut $245 million from those same agency budgets following a sharp drop in energy revenues in 2016.
Increased revenue projections for the coming fiscal year closed the gap on the “structural deficit” in Wyoming’s budget, while a good year for financial markets and an oil drilling uptick refilled state coffers faster than expected in the fiscal year that just ended, according to the report by the state’s Consensus Revenue Estimating Group.
Wyoming’s Legislature relies on the CREG revenue projections to write its two-year budget. The October CREG report raised estimates across the state’s various accounts — from education funding to the general fund to a budget reserve account used as insurance against a bad revenue estimate — by $463 million for the 2019-2020 period.
Meanwhile, the state added almost $495 million in hard cash to its chief savings account, nicknamed the “rainy day fund.” Though lawmakers have worried about drawing the fund down too far, its balance has now grown to $1.9 billion. And though it’s commonly referred to as a savings account, lawmakers have few restrictions on how they use money in the fund, technically named the Legislative Stabilization Reserve Account.
The $495 million influx to savings comes from last year’s actual revenues exceeding the CREG projections used to write the budget. Some lawmakers considered CREG’s January 2017 oil revenue projections conservative at the time. That estimation proved to be true. A sales tax boost that accompanied an uptick in drilling and better-than-expected investment earnings also contributed.
The funds that came in but were not planned for in last year’s budget go into savings. Add the $495 million in savings to the $463 million in increased revenue projections for the coming biennium and there is a new $958 million on state balance sheets.
At the end of 2017 the education funding deficit was at $484 million per two year budgeting cycle, according to remarks House Appropriations Committee Chairman Bob Nicholas (R-Cheyenne) made to WyoFile at the time. The deficit is now at $172 million a biennium, Richards said.
“What I would say to that is ‘manageable,’” he said.
Investment portfolio continues to shine
The biggest windfall came from capital gains on Wyoming’s $20 billion investment portfolio. “Realized capital gains” are profits made from selling Wyoming’s stocks as investment managers shift the funds from one area of the market to another. For the 2018 fiscal year, such gains totalled $394 million across different investment funds, according to the CREG report.
Capital gains are an inadvertent win for the state and one that is never included in revenue projections, said Patrick Fleming, Wyoming’s Chief Investment Officer. “It happens just through the course of business,” Fleming said. This was one of the largest years for capital gains, he said, with a booming stock market that only recently has begun to falter.
Though the money may not be included in budgeting profiles, that doesn’t mean lawmakers don’t know how to take advantage of realized capital gains. To make sure windfalls fund certain projects or get squirreled away in savings, lawmakers write bills that direct investment earnings into certain accounts.
For example, Wyoming’s largest savings account, the Permanent Mineral Trust Fund, earned $526 million in the 2018 fiscal year. Realized capital gains accounted for $267.9 million of that, a healthy windfall. Statute — which can be rewritten during any legislative session depending on lawmakers’ priorities at the time — directs that money to various places. So while $176.2 million went into the general fund to cover the budget and $88.1 million went to the rainy day fund where lawmakers can spend it or save it as they want, another $88.1 million went to the Legislature’s building fund — the Strategic Investments and Projects Account.
That SIPA money is itself largely predestined: $37 million will go to state health facilities, $9.4 million to the University of Wyoming’s Science Initiative, a construction project, $15 million to state facilities in Casper and $4.2 million shifted to cover future school construction. Thus, predetermined priorities means only $22.5 million remains in the SIPA account for lawmakers to play with this coming session.
Another portion of the investment earnings goes into reserve accounts to cover budgets if markets go south and interest and dividends dry up.
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The positive shift in Wyoming’s fiscal fortunes is another example of the increasing importance of Wyoming’s investment portfolio, Fleming said. The windfall of capital gains aside, dividends and interests on Wyoming’s $20 billion — the more stable revenue from investments that are profiled in CREG — are now projected to bring in $591 million over the next two years.
“Whether the market goes up, down or sidewise we’re still going to be close to that number,” Fleming said. With the addition of the realized capital gains, the stock market is covering roughly one-third of the state’s two-year budget, he said.
The treasurer’s office is trying to increase investment gains for the state. Fleming called such gains the most stable part of state budgets, contrasting them with volatile energy markets, Wyoming’s traditional and still principle revenue source. “How can you sit there with any bit of confidence knowing how much money you’re going to spend for the next five years?” Fleming asked about budgeting off energy revenue projections.
Federal mineral royalties and severance taxes — the most direct taxes on the energy industry — generated $1.18 billion for state coffers this year, according to the CREG report. That’s the highest level in the last three fiscal years, but a far cry from the $2.1 billion high-water mark in 2008, the report said. The report noted that the recent upticks don’t reduce the volatility of the state’s revenue structure, and said Wyoming’s dependence on both the energy industry and financial markets contribute.
“Wyoming’s state revenue streams are volatile,” the report read. “The fluctuation is not only directly caused by change in mineral prices but also is greatly affected by financial markets.”
The report also noted that with upticks over the last two years, 2016 now remains the state’s lowest revenue year in recent times. The report characterized recovery since then as “healthy” but said that it remains far below the good times of the previous decade.
“Wyoming revenue collections take the elevator down, but the stairs on the way up,” the report said.
When the CREG revenue report miraculously produces a heap of money that alleviates the pending budget deficit, it also takes away the urgency for the legislature to grapple with bottom to top Tax Reform , something Wyoming has needed since… I dunno, about three Boom-Busts ago.
So the 2019 legislative seesion will probably see the solons kicking that empty 55-gallon oil drum down the road. Plus ca change…