The House and Senate cut an unusual budget deal last week when they agreed to give each chamber’s plan one year to work in the coming biennium.
After nearly three full working days without a public meeting last week, the budget conference committee convened Thursday morning and reached a compromise that calls for using a House plan to finance state schools and construction in fiscal year 2019; then switching to the Senate’s approach in fiscal year 2020.
The deal broke an impasse over “philosophical differences” between chamber leaders.
On Saturday, the two chambers agreed to the compromise, though one-third of the members of the House and more than a third of the senators voted against it. Opponents cited concerns about government or education spending and an inevitable tax hike or deficit.
Two separate but related finance bills still must be passed to complete the state’s two-year financial plan — House Bill 140, which makes cuts to education spending, and the state capital construction bill, HB194.
The total budget expends a little less than $2.9 billion for the coming biennium, according to the Legislative Service Office. Last biennium’s budget expended a little more than $3 billion.
Gov. Matt Mead will have until Wednesday night to veto any items in the budget he dislikes. Though lawmakers had hoped to finish Saturday, disagreement over state construction caused them to miss that deadline. The House will reconvene Wednesday at 5:30 p.m. to vote on the construction bill and HB-140.
It can attempt to override any vetoes but doing so requires two-thirds majorities in each chamber.
House successfully resists Senate education cuts
In the final week of the session, the House stifled Senate efforts to imposes deeper cuts in K-12 public school funding and to amend the Wyoming Constitution to remove protections for education. Some senators criticized the final compromise, citing education spending levels.
“How far until we hit the day of reckoning?” asked Sen. Dave Kinskey (R- Sheridan). He then suggested people who had resisted cuts to education were angling for an income tax. “I’m afraid that those forces that want to see us spend and not cut may actually want an income tax,” he said.
The Legislature needs to bring the education community to the table for an honest conversation, which has not happened yet, said Sen. Ogden Driskill (R-Devil’s Tower). “If we don’t, we’re going to continue on this path until we hit a hard wall.”
In a meeting with reporters Friday morning Bebout described the deal as a “good compromise.” On Saturday he told the Senate that he wasn’t entirely satisfied. “Is this the compromise I wanted? No,” he said.
Core to the budget agreement was a compromise on whether the state would make more significant use of capital gains and reserve accounts to help pay for K-12 school operations and construction. Speaker of the House Steve Harshman (R-Casper) and Senate President Eli Bebout (R-Riverton) have remained consistently far apart on this question. Bebout and many senators prefer to spend cash out of the state’s savings accounts to keep the Legislature’s focus on cutting budgets. Harshman wants to make more use of investment earnings on the state’s $7 billion Permanent Mineral Trust Fund and other state trust funds to protect education funding.
Unable to bring leadership together, the budget conference committee proposed the split. Both Harshman and Bebout said the one year split was the only way forward if the session was to end on time, given their “philosophical differences.”
For the 2019 fiscal year that begins July 1, the state will use the House’s funding plan. Reserve accounts will provide funding for school construction until the investment earnings are realized and used to replenish those accounts. Other funds, including a portion of the state’s severance tax revenues, money from online sales taxes, and federal mineral royalties will go to cover educational operations.
Then, in the second of the two fiscal years governed by the budget bill, the Senate plan gets its turn. Most of the revenue diversions and the use of investment earnings end. Education will be funded out of the state’s chief savings account, commonly called the “rainy day fund.”
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The conference committee was made up of five members from each chamber. All are members of the House and Senate Appropriations Committees.
Rep. Lloyd Larsen (R-Lander) said the House conferees worked closely with Harshman on compromises they might offer the Senate.
“We’re saying ‘Speaker, are you comfortable with this?’ — the speaker has suggestions, then we’re trying to mold that into something that is palatable to him,” Larsen said.
In meetings with reporters Friday morning, Bebout and Harshman both sought to play down their own roles in striking the deal, with Bebout saying the compromise had been proposed by Sen. Bruce Burns (R-Sheridan), the chairman of the Senate Appropriations Committee.
Giving each side a chance to enact its preferred funding mechanisms for one year was the clearest compromise on the budget bill, Larsen said. It would be difficult to test the value of the House’s revenue strategies, which were based on the idea of providing long-term sustainable funding, with a one-year trial, he said.
“The one thing that it might tell us is how the mechanics of it works,” he said.
Rep. Lloyd Larsen (R-Lander)
Bebout said the order of the compromise — who’s funding scheme would run in which year — was not a concern to him. “I don’t see the advantage of going one year or the second year,” he said. “I don’t think that was a sticking point at all.”
Under the compromise, the Legislature would have to again pass laws during the 2020 budget session if it chooses to enact the House’s revenue strategy for the 2021-22 biennium. Nevertheless, Harshman said the deal is a start.
“I think it’s the beginning of something very important,” Harshman said, “and all these things begin with little first steps.”
At least one piece of evidence would work in favor of his argument after a year. “We’ll have about $250 million more cash,” he told reporters Friday. His estimate anticipates receiving $75 million in investment earnings from the Permanent Mineral Trust Fund and another $80 million in investment earnings from school accounts, $70 million from federal mineral royalties, and around $25 million from new business filing fees to the Secretary of State’s office and online sales taxes.
“Shazam, that’s $250 million,” Harshman said.
A lot of things will have changed by next year, Harshman said, including who returns to the Legislature. If he follows longstanding House tradition, Harshman will no longer be the Speaker of the House.
But to the speaker, one of the biggest steps taken in the session was drawing lawmakers’ and the public’s attention to the state system of reserve accounts and the revenue streams that feed billions of dollars into those accounts. “I think there’s more House members, and more senators, that know about this than ever before in my 16 years in the Legislature,” he said.
Treasurer worries
State Treasurer Mark Gordon has been tracking the budget compromise. It “will be complicated to implement at our level and at the auditor’s level,” he said. In February, Gordon confirmed his plans to run for governor in 2018, according to a report in the Casper Star-Tribune.
The decision to turn to trust fund investments to address current needs is Gordon’s “biggest concern” about the Legislature’s budget efforts, he told WyoFile last week.
“We are eroding the buffer that we depend on to ensure a steady stream of income,” he said.
The Treasurer’s Office in recent years adjusted the state’s investment portfolio and has “tilted the funds to throw off more income” to help meet school funding needs. The change “comes at the expense of future generations,” the treasurer said.
State Treasurer Mark Gordon speaks to a legislative committee in December 2017. (Andrew Graham/WyoFile)
The theory behind the state’s creation of the Permanent Mineral Trust Fund was to ensure that future generations benefit from the one-time production of minerals in the present. Gordon said the state wants the PMTF to grow over the long term so it can become a bigger contributor to general fund revenues. Income from the fund helps dampen the volatility of the fossil fuels and other minerals markets, he noted.
Now Gordon is seeing early signs of “mining the Permanent Mineral Trust Fund” to pay for today’s needs. He noted the state construction bill uses the fund to finance loans to pay for college dormitories and “very low interest loans” to communities for street and road construction.
“It’s a way of mining the inviolate funds,” he said.
Spending changes
Though there were some sticking points, budget line items themselves were far less contentious than disagreement over the funding mechanisms in the bill.
The compromise budget includes $43.5 million to build a new Carey Junior High School in Cheyenne, a goal long sought by Cheyenne lawmakers including House Appropriations Committee Chairman Bob Nicholas (R-Cheyenne).
There was little disagreement over Gov. Matt Mead’s ENDOW initiative, which will cost $41.5 million over the next two years. The money will come out of the rainy day fund.
A dispute over funding the Environmental Quality Council was resolved after an attempt to finance it for just one year failed. Some lawmakers questioned the independent council’s decision to deny a coal company’s mining permit during the funding fight. Those complaints raised ethics concerns. Ultimately, the council was funded for the full biennium. A budget footnote calling for a report on the agency’s efficiency, and whether it could be staffed by the Department of Environmental Quality, remains.
The Department of Health and the Department of Family Services both saw some money put back into their budgets after deep cuts over the last few years. The budget bill includes a $21 million appropriation to the DOH to address shortfalls for what the state pays for Medicaid payments and long term care for the elderly.
Appropriations to the struggling Office of the Public Defender increased. The Senate staved off a House reduction to ensure that an extra $2 million was allotted to the agency to hire more attorneys. The funds are intended to keep the state from running afoul of its constitutional obligation to provide legal defense to the poor in criminal cases.
While avoiding deep cuts to agencies that have seen a steady reduction of funding for three years, the Legislature may have increased the structural budget deficit that has dominated its discussions and will likely continue to do so. On Saturday evening, LSO staff informed lawmakers that the structural deficit — calculated strictly by comparing state revenues to the expenditures — rose from $900 million to $1 billion for the coming biennium.
It’s unclear why the deficit increased if this year’s budget is lower than last year’s. LSO staff were unable to answer the question Monday by press time, citing fiscal complexities and the amount of work they have to do before lawmakers’ return Wednesday.
Harshman and his allies in the House hope their moves to pull more cash out of the state’s billions of dollars in savings and investment earnings will chip away at the deficit number. Bebout and many senators say earmarking interest and investment earnings only serves to disguise the deficit, and will prolong the pain by allowing lawmakers to continue to spend more money than the state brings in.
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