Imagine this scenario: You worked hard, saved and scrabbled together $400,000 by age 55. You turned it over to your broker hoping he’d keep the money safe but also grow it so you’d be in a position to retire in another 10 years. The broker consulted experts, bought and sold … and bought and sold some more. At the end of 10 years, you had $800,000 — twice as much as you started with.
Pretty good, right?
You’re plenty happy until your neighbor Sally comes over to spoil the party. Sally threw her $400,000 into the Vanguard Balanced Index Fund — which puts 60% of its assets into a broad index that tracks the U.S. stock market, and the other 40% into an index that tracks the U.S. bond market. It’s a simple and fairly conservative investment, even for someone nearing retirement.
By buying and holding this low-cost index fund, Sally ended up with $1,086,000 after 10 years. A million bucks! And $286,000 more than you. The new car? The vacation in Cabo? Spoiling the grandkids? Retirement will come much easier for Sally.
That’s the story of Wyoming’s investments, in a nutshell.
As many state residents know, Wyoming has a lot of money — now more than $22 billion — socked away in permanent funds. What most aren’t aware of is that Wyoming could have a whole lot more.
Wyoming’s return on its permanent investments has been weak for a long time. And the consequences for the state as it tries to navigate the current budget crisis are far more severe than missing a trip to Cabo.
Sitting out an opportunity
The popular narrative is that Wyoming’s investments are a rare bright spot amid a windstorm of bad news.
Most media coverage describes Wyoming’s investing as a success. RVK, the state’s investment consultant, reports in its latest annual report that Wyoming beat its customized “benchmark” by four-tenths of 1% over the 10 years to June 2019. State Treasurer Curt Meier praised the state’s Chief Investment Officer Patrick Fleming in an April column for beating that benchmark again, amid the falling markets that marked the onset of COVID-19.
This is not the entire story, however.
The decade ending in June 2019 — a tremendous bull market, as U.S. stocks rose from the ashes of the financial crisis — was considered a generational opportunity for a long-term-oriented investor to build wealth.
Wyoming largely sat it out.
The state’s two biggest funds — the $8 billion Permanent Mineral Trust Fund and the $4 billion Common School Permanent Lands Fund — had just 12.5% of their assets directly invested in the U.S. stock market at the end of that period, according to an investment performance report RVK prepared for the state. U.S. stocks make up more than half of the world’s market.
Over that decade, Wyoming’s permanent funds lagged behind more than 85% of similar funds nationwide, including sovereign-wealth funds in other states, endowments and foundations, according to data from RVK.
Meier, who spent 24 years in the Legislature and operates a 4,300-acre farm and ranch near La Grange, ran for treasurer on the premise that investment returns could improve. He said he’s added more equity-like investments to the portfolio, and that taking more risk should boost returns over time. The state has favored international equities because they pay higher dividends, he said, but he acknowledged that they have badly lagged U.S. markets.
“If you had a magic ball, you would have gone into the S&P 500 and left it there for 20 years,” he said.
No experts would expect Wyoming, or any prudently managed fund, to match the heroic performance of the S&P 500, which rose 14.7% a year over the decade ending June 2019. But take the humble Vanguard Balanced Index Fund — far more conservatively invested than the typical sovereign wealth fund, and used here as a stand-in example of the innumerable low-cost index funds that are readily available. It earned 10.51% per year over the same period. That is a notable increase over Wyoming’s Permanent Mineral Trust Fund, which earned just 7.1%, as well as the Common School Permanent Lands Fund which returned 7.3%.
The two funds are crucial sources of revenue for Wyoming government. PMTF spending now makes up more than a quarter of general-fund revenues, on average, and the PLF is an important contributor to spending on K-12 education.
The roughly 3.3-percentage-point gap in annual performance between those funds and the Vanguard Balanced Index Fund may seem modest, but it has huge implications when compounding billions of dollars over 10 years.
The two Wyoming funds held assets of $5.5 billion in June 2009, according to data on the Treasurer’s website. If those assets had simply earned the return generated by the conservative Vanguard fund over the following decade, Wyoming would have an additional $4 billion today.
Or more. Wyoming has another nearly $1 billion in smaller equity-oriented permanent funds with similarly weak returns, and another $1 billion-plus in other funds, including the Legislative Stabilization Reserve Account, which only recently began investing in equities.
It’s not just an index fund that Wyoming is lagging. Financial records show the state has dramatically underperformed compared to similar permanent funds in other mineral-rich states, as well as pension systems and endowments, which have a similar goal of preserving and growing wealth over long periods.
For a more apples-to-apples comparison, two other large sovereign-wealth funds in western states left Wyoming in the dust. The $18 billion New Mexico Land Grant Permanent Fund earned 9.4% per year over the decade ending last June. The $64-billion Alaska Permanent Fund earned 9.2%. College endowments worth $1 billion or more posted average returns of 9%. Large public-pension plans earned 9.7%.
Fleming, Wyoming’s chief investment officer since late 2015, said the S&P’s recent run is an anomaly that’s unlikely to repeat, and that Wyoming’s performance will exceed a 60-40 stock-bond index moving forward.
“Looking backward is the easiest thing in the world,” Fleming said. “Tell me where it’s going to be in the next 20 years.”
And yet, looking backward allows a glimpse into how investment decisions affect state finances.
All the financial talk can also obscure how the issue has real-world impacts on the typical Wyoming family.
The proportional share of Wyoming’s savings per family may be worth more than that family’s own personal savings, after all. Divided by the state’s population of 579,000, the savings yields $155,000 for each family of four — far more than the typical U.S. family has saved.
Residents don’t personally own that share — the permanent funds are designed to exist forever — but those funds work for all state residents. An extra $4 billion accrued by better returns — the kind the index fund would have generated — would amount to an extra $28,000 at work for each Wyoming family.
Everyone agrees that the downturn in the minerals industry is bad news for Wyoming. But Wyoming’s weak investment returns also represent a significant — and rarely discussed — reason the state is going to have to cut spending or raise taxes.
Under the state’s current policies, that foregone $4 billion would have enabled additional state spending of $200 million, year after year. That’s some expensive water under the bridge. Gov. Mark Gordon and legislators are currently weighing controversial rollbacks to the state’s sales-tax exemptions to try to save less than that — only $186 million.
This month, Gordon announced a 10% cut to the general fund budget, acknowledged that some state employees would lose jobs, and warned that additional cuts will be necessary.
The implications of the state’s long-term investing record, long under the radar, now threaten to impact everything from state government employees to teachers worried about salary cuts and those fearful of new state taxes.
It’s not a lost cause. Even now, modest improvement to investment returns would mean huge gains for the state. Every 1-percentage-point increase in the annual returns earned by the PMTF and Common School PLF would generate an extra $120 million in revenue.
The issue has garnered little attention, even by state legislators. That may be because until very recently, Wyoming has been minerals-rich enough not to care. Legislators say scrutiny of investment performance is likely to get sharper now that the state faces its biggest economic crisis in decades.
“There’s no reason why we shouldn’t be competitive with others,” Senate Revenue Committee Chairman Cale Case (R-Lander), said. “It’s probably past time to ask the real tough questions.”
Wyofile will do just that in this series.
This is part 1 of a four-part story package analyzing Wyoming’s investments and their impact on state spending.