Wyoming’s economy is following the mineral industry — once again — into a downturn that could shrink revenue by 10 percent or more.
Based on WyoFile’s calculations using today’s energy prices, Wyoming could see its revenue drop by $500 million to as much as $832 million in 2017-2018, if prices don’t rebound.
State officials aren’t quoting such numbers, but they are clearly concerned.
“We’re headed for lean times,” Gov. Matt Mead said as he delivered a blunt assessment at a recent press conference.
After traversing a fiscal plateau in recent years, the state appears headed for a downturn of unknown duration. That’s because Wyoming’s economy, and particularly its revenue, is inordinately reliant on mineral extraction industries. When coal, oil and natural gas prices fluctuate, Wyoming’s revenue follows dramatically, creating the boom-and-bust cycles that the state has ridden for many decades.
Revenue forecasts in Wyoming were rosy in recent years when the price of oil hovered around $100 per barrel, and producers responded by increasing volume. That offset stagnant natural gas and coal prices. But now that the price of oil has tanked, and the other commodities remain low, Wyoming budget managers are faced with a major shortfall.
Just how much lawmakers might have to cut, or spend out of savings, is uncertain. But the picture will be clearer when the Consensus Revenue Estimating Group (CREG) updates its forecast in October, which will likely be a major reduction to its January forecast.
“Looking at [oil and gas] spot prices today versus the previous CREG assumption [from January], there is some distance between those two,” said Alex Kean, administrator of the state Economic Analysis Division.
State revenue estimates based on $85 oil and $4.30 natural gas nearly a year ago are going to be hundreds of millions of dollars lower now that those commodities are riding below $35 and $2.75. Energy prices are the biggest driver of state revenue, but Wyoming may also produce less fossil fuels, which would add to the crunch.
In other words, Wyoming’s paycheck is about to get cut, possibly by $500 million to more than $800 million. That’s a 10 percent to 15 percent decrease from the state’s last revenue projection made in Jan. 2015, and it comes after a period of flat revenue and budgeting.
WyoFile’s calculations are based on numbers from the Legislative Service Office tracking how state revenue changes according to mineral prices. Over a two year period, a sustained $20 drop in oil price projections equals a $360 million drop in state revenue. A sustained $1.25 drop in the price of gas would cut revenue by $472.5 million. The combined oil and gas decline would be $832.5 million.
However, it should be noted that mineral prices are volatile, and the state makes its official projections following long trends, rather than the spot prices used here.
The potential $832 million decline would come out of the $5.5 billion portion of the budget that lawmakers manage, which goes to the General Fund and schools. The decline is likely to be a major hit to so-called “exception requests,” typically the first layer of the budget exposed to revenue fluctuations.
Exception requests are used to fund projects and programs outside of standard operating budgets for services and salaries. They include things like capital construction, state aid to local governments, tourism marketing, and special projects at community colleges.
Assuming lawmakers renew the standard budget — and stick with a $37.5 million exception request they have already approved to renovate the State Capitol building — there will be very little money left over for more exception requests in 2017-2018.
In a June 3 letter to state agencies, Gov. Mead urged staff to prioritize budgets, look for potential areas of reduction, and “maintain efficiencies.”
“It looks clear that revenues will be down,” Mead wrote to heads of state departments. “Exception requests should be rare and reserved for critical needs.”
Another look at Medicaid and the “rainy day” fund
Due to the downturn in mineral prices, Gov. Mead is suggesting that lawmakers again consider expanding Medicaid.
Since 2013 lawmakers have refused to accept nearly $190 million in federal funds that could have provided care for nearly 18,000 low-income residents, many of whom are working. With Medicaid expansion, Wyoming could eliminate some state spending on health programs, and still bring in more federal Medicaid dollars. Though expansion would have cost the state $43 million to administer from 2016 to 2020, the Department of Health calculated this would be more than offset by shifting existing state-funded programs to Medicaid.
These calculations don’t include the estimated 800 Wyoming jobs that would be created by expanding Medicaid, nor the estimated dozens Wyoming lives that are lost prematurely each year due to lack of health insurance coverage, according to a calculation by the Wyoming Department of Health.
Mead says that expanding Medicaid in 2016 may provide $70 million in additional federal funds each year to help soften the state’s projected revenue decline. That estimate will be refined by the Wyoming Department of Health in the next few months.
Mead also recommended lawmakers consider tapping the state’s $1.8 billion “rainy day” fund, created in 2005 and officially known as the Legislative Stabilization Reserve Account. Lawmakers have declined previous suggestions by Gov. Mead to use the rainy day account to help cover temporary shortfalls in revenue or special one-time expenses.
Mead says the fund should be used more to invest in infrastructure that would pay dividends to local communities, rather than investing nearly all the money in out-of-state, fixed-income securities and bond markets that generate a low return.
Meanwhile many lawmakers have said they want to keep building the fund, aiming for a corpus of $3.5 billion, an amount some believe necessary to get the state through a decade of low revenue. They base that assumption on the state’s decade-long revenue slump in the 1990s. Growing the fund is likely off the table for now, given the state’s revenue challenges.
Mead’s suggestion to invest locally was partially heeded in the 2015 session, when lawmakers diverted about $200 million before it was deposited in the rainy day fund to pay for special projects in 2015-2016. These included $37.5 million for the State Capitol renovation, $42.5 million in matching funds for the University of Wyoming, $3.2 million for irrigation upgrades at UW’s Jacoby Golf Course in Laramie, and millions more for projects around the state.
Whether to cut the budget or spend from the rainy day fund, and to what levels, will likely be a major topic of debate during the 2016 budget session. Rep. Steve Harshman (R-Casper), chairman of the Joint Appropriations Committee, said he does not want to spend rainy day funds to avoid cuts entirely. He favors an approach that mixes cuts and spending from savings to balance the budget. That would help make the savings last longer, in case the downturn becomes a “rainy season” that lasts eight to 10 years, or more.
The Pew Charitable Trusts has analyzed Wyoming’s rainy day fund and will release a report to lawmakers at the Sept. 10-11 meeting of the Revenue Committee in Buffalo.
Defining Wyoming’s values
While Mead suggests spending from the rainy day fund, he opposes across-the-board spending cuts and raising new taxes. The last major round of agency cuts led to complaints about drops in government services, he said.
He said the amount of money lawmakers put into savings in recent years makes across-the-board state agency budget cuts unnecessary. Last year alone, Wyoming put $793 million into savings. Besides, a flat cut levied on all agencies isn’t likely to realize the size of savings the state may be forced to find, he said. Instead, Mead recommends prioritizing programs to make targeted cuts, he said.
While Mead looks to maintain the core of Wyoming’s budget, others see the impending revenue rainy day or rainy season as a political opening to whittle government down to bare necessities.
“To take money from any savings account to continue spending at the same level is irresponsible,” said Maureen Bader, a policy analyst with the Wyoming Liberty Group, a libertarian think tank. “It shows a short-termism. We need to see some leadership from the Governor and the legislature to look at fundamental spending reform.”
Wyoming’s current level of spending came after a huge influx of mineral tax revenues in the 2000s, Bader said, a level that cannot be sustained by the state’s small population. The boom enabled lawmakers to double General Fund spending to $3.6 billion in 10 years.
Other policy watchers look to the downturn as an opportunity for lawmakers and citizens to define what a rainy day is, and what the LSRA should be used for. Those discussions didn’t happen when the fund was created in 2005, said Bri Jones, director of the Equality State Policy Center.
Given the potentially long-term decline in mineral prices, Jones said it is important for Wyoming to closely examine its values before making critical budget decisions, like turning down federal money for Medicaid expansion that she said could help the economy and 18,000 residents directly.
“I don’t think they are valuing our people in the way I would,” Jones said. “Our values are helping our neighbors, being able to be healthy, and quality of life. That’s what we hold dear as Wyomingites — to me — and it is hard to not keep going back to Medicaid expansion and think, ‘This is really a values statement that they are rejecting this.’”
“What things do we value?” Jones said. “Is it managing our public land, our wildlife and our tourism industry? Is it making sure our people are healthy — for example Medicaid expansion? [Those values are] going to be really important now. We are going to be having this conversation for a pretty long time.”