The ailing canary in Wyoming’s mineral revenue mine

Recent news about the alarming increase in coal companies falling behind on their tax payments will test the stress limits of Wyoming’s legislators.

Federal mineral royalties used to be taken for granted as a near certainty. Coal mining companies seemed to always put this expense toward the top of their to-do list when it came time to pay bills. When paid, nearly half of these royalties come back to the State of Wyoming to use for whatever purpose budgeters choose.

Historically, it was always unpaid ad valorem or gross-product taxes that were most problematic. It’s now common knowledge among lawmakers that the 18-month delay between production and the tax due date is a major problem. In fact, the year-and-a-half grace period is such a concern that proposed legislation may well change it to a monthly obligation. More on that in a bit.

The new spate of FMR delinquencies, however, creates a special and unrivaled fiscal difficulty for the Wyoming School Foundation Program. This is the program that assures equal educational opportunity for all public school students regardless of local resources. Here is why:

There are four major sources of funding for the foundation program. The FMR’s account for 32% of the program’s revenue, the state property tax of 12 mills for schools pitches in 31%, earnings from the common school permanent land fund are good for 25% and school district recapture accounts for 10%. You don’t have to be a finance whiz to see that throwing the largest source of money into question makes budgeting very difficult.

But the problem is even larger than it might appear at first glance.

The foundation program suffers from an obvious over reliance on the mineral industry. Nearly one-third of the foundation program depends directly on FMRs. Approximately one-third of FMRs have historically come from coal. That comes to10% of the School Foundation Program that is dependent on coal industry FMRs.

The latest news concerning coal FMR delinquencies suggests that about $65 million is now delinquent. Compare that to the roughly $80 million in coal royalties that were budgeted for 2019 and 2020 and you see that these missed tax payments are no small matter for this crucial program.

Compounding the problem, coal ad valorem taxes comprise 12% of the property taxes that fund our schools. Remember, these property taxes are the second largest source of school foundation funding, behind only the suddenly questionable FMRs.

But wait, there’s more! School district recapture funds — the fourth leg on the school funding stool — are also heavily dependent on coal ad valorem taxes.

The way our system is set up, school districts from areas that generate more money than the model says they need to spend have to turn over, i.e. recapture, the surplus to the state which redistributes those funds to less-well-off districts. The Campbell County school district is, not surprisingly, a major recapture district thanks largely to coal ad valorem taxes. In the current budget cycle the surplus districts are slated to pitch in about $84 million per year. At least half of that is supposed to come from the Powder River Basin coal industry. If coal production falls or if companies fail to pay their ad valorem taxes, recapture funds will decline too. Any reduction in recapture funding must be made up for elsewhere — most likely from the state’s general funds or the legislative stabilization account, a.k.a the “rainy day fund.”

To sum up what’s at stake here, of the $800 million per year School Foundation Program budget, about 20% depends on coal-related taxes — $80 million from FMRs, $32 million from ad valorem taxes and another $42 million from recapture … every year.

When millions of dollars in ad valorem and now federal mineral royalties are delinquent, it is clear that the School Foundation Program is on shaky footing.

This is a subject that is sure to be raised during the upcoming legislative session. Proposed solutions will vary from tax broadening, strategies to reduce delinquencies and, of course, reducing school expenditures. History shows that revenue-raising measures rarely make headway in budget sessions. However, dealing with tax delinquencies and public school budget reductions will no doubt both be discussed.

Cutting spending for public education has been easier said than done historically for a number of reasons. A series of court cases dealing with equal educational opportunity led to the adoption of a cost-based foundation funding model. The model calls for a fixed level of funding per student for all school districts but adjusted according to local cost of living variations. This fixed level of spending in any given year must be evidence-based, in the professional judgement of public education experts.

The per-student cost is paid for with a combination of local and state funding. When a school district doesn’t have the tax base to provide the requisite per-student investment — again, an amount determined by professional evidence — the state is on the hook to make up the difference from the School Foundation Program. Therefore little incentive exists at the local level for efficiency such as consolidating small school districts, reducing transportation expense or limiting student activities.

Consolidating, cutting transportation and limiting activities wouldn’t come to significant reductions in education costs anyway. Instructional costs, however, make up about 60% to 65% of a typical school district’s budget. Increasing average class size is one potential reduction in the funding model that would really add up, but lawmakers have been reluctant to fully pursue this cost-reduction avenue.

The state hires consultants to re-calibrate the funding model about every five years. This task is, once again, scheduled for the 2020 interim. The most fruitful avenue for making significant cuts to education funding begins with recalibration. This topic, too, is sure to be discussed in the upcoming budget session.

Support informed commentary with a tax-deductible donation.

Delinquencies of ad valorem taxes and what to do about them will likely occupy a significant amount of time and effort during the session. This possibility is reinforced by the fact that a select committee was formed during the 2019 interim to deal with coal bankruptcies and related tax delinquencies. The committee now has the benefit of learning the pattern that has developed in connection with the past three or four coal bankruptcies.

The pattern seems to go like this: First, a mining company develops financial stresses.

Next, debts, including property taxes, begin to emerge. Property taxes are of low priority because of the absence of lien superiority.

Then the company files for bankruptcy leaving creditors such as the state with precious little leverage to collect what they’re owed. Tax delinquencies and unpaid tax obligations accumulate as current production evolves into past production.

Next, after bankruptcy a new party is attracted to purchase or otherwise operate the bankrupt company’s mines, often making various assurances of paying all or a portion of the delinquent taxes. Results are mixed with these new entities, but most often the taxes remain unpaid. New companies acquiring these old debts find that they are in no position to pay back taxes as well as taxes that accrue after they have become the new operator.

And if that weren’t enough, now that FMR’s are in the delinquency mix, so is a vexing additional wrinkle. As a federal obligation, FMRs are beyond the control of the state to mitigate. We just get to deal with the obvious fiscal impacts that ripple through the state budget. The biggest challenge will likely involve finding replacement dollars to backfill FMR shortfalls in the School Foundation Program.

The select committee on coal bankruptcies is, however, taking the first steps in dealing with delinquent ad valorem taxes by drafting a bill calling for monthly payments of these tax obligations. This is a first clear step and an obvious remedy to an old problem. The bill draft calls for an extended period of time to pay the tax obligations that have been created under the existing system as the new monthly system simultaneously phases in. In addition, the draft includes a discount on outstanding tax obligations for companies that wish to take advantage.

As in all legislation, amendments will change the draft. It is critical, however, that lawmakers not lose sight of the original problem that needs to be solved amid the wheeling and dealing toward a final version.

This bill, along with another bill sponsored by the select committee that will strengthen lien superiority for Wyoming state and local governments, will do much to reestablish the integrity of the state’s mineral tax system. It is important for legislators to understand that without these assertive measures, the mineral tax system in Wyoming could disintegrate in the face of deliberate avoidance by those who are obligated to pay taxes.