Revenue report holds gains, losses and stark warnings

A recent report by the state’s Consensus Revenue Estimating Group, which writes the revenue projections that set the bounds of the Legislature’s budgeting process, carries serious warning signs for the state’s long-term fiscal health. But when it comes to the budget that will be written this winter, some lawmakers and public education advocates say initial reactions to the report have been alarmist. 

“We’re really no worse off and in some ways there’s some good news as well,” Speaker of the House Steve Harshman (R-Gillette) told WyoFile. 

Gov. Mark Gordon, however, characterized the report as a call for cuts. “We will have to find a few new holes in our belt,” he said in a statement Tuesday. “This process will not be easy.”

The fine print of the report supports both reactions: On the one hand, the revenue shortfalls being projected for next year come from deepening cracks in Wyoming’s fiscal stability. On the other, the CREG report includes around $288 million in new cash from surpluses in the current budget period. That money is cash on hand for lawmakers to use as they see fit, even as it is diverted into funds described as savings accounts. 

Some aspects of the projections are more drastic than others. The report reduces revenue projections for the coming two-year budget period by $144 million on the general government side, for example, but only reduces revenue for public education by $4 million — thanks to a property tax windfall.

As the Legislature writes the next budget based on those revenue projections, members will choose whether to cover any differences between projected revenues and expenditures out of savings, or by continuing budget cuts. Under the current two-year budget, the state is spending around $3.2 billion out of the general fund. Additionally, public education is spending roughly $1.7 billion.

“I don’t think it’s a major revenue shortfall,” Harshman said of the CREG projections. “I think it’s more a little bit reduced revenue forecast, but really a shortfall is only when you know you don’t have the money to pay your bills.”

In a presentation to lawmakers Tuesday, CREG Chairman Don Richards said the state still faces a $250 million deficit in public education funding that is not in the report. The deficit is an estimate of how projected revenues will line up with the forthcoming two-year public education budget. The governor has not completed that budget yet.

The $250 million estimate comes from an earlier assessment by the Legislative Service Office, which Richards said LSO intends to update in the coming weeks. But the estimate doesn’t include $80 million the CREG says the state collected above its revenue projections for education funding. That surplus will be available for spending in the next budget cycle. 

Long story short, revenue downturns nearly match the surplus money moving into discretionary saving or spending accounts. But revenue projections are what steer budget writing, and as Gordon and Richards both noted, the decline in revenues are bound to create tough choices. 

“I would no longer say [the budget] is essentially balanced,” Richards said. “I’m anticipating that the Joint Appropriations Committee and the governor are going to have to make some more challenging decisions.”

Richards also noted that lawmakers do have money available. The Legislature will transfer $257 million into its chief savings account — colloquially termed “the rainy day fund” and technically called the Legislative Stabilization Reserve Account — at the end of the current budget period. Lawmakers could stop that transfer during the session. The rainy day fund currently holds around $1.7 billion. 

Other options for lawmakers, Richards said, include putting off building projects that consume large amounts of cash, or denying agency “exception requests” — one time asks for a spending boost. The Joint Appropriations Committee is likely to face at least $200 million in construction requests from around the state, Richards said. 

Through cuts and revenue diversions, but not raising new revenue, lawmakers have shrunk a deficit in education funding. In 2017, when lawmakers convened in the wake of a sudden energy downturn, it was pegged at around $400 million. 

At this time last year, CREG called the general fund balanced, and Richards told lawmakers they faced a $172 million deficit for education spending. That number was “manageable,” he said. 

In the subsequent session, the Legislature approved an additional $18 million for public school budgets to keep up with inflation and other rising costs. Lawmakers are likely to compound that number this year, with the Joint Appropriations Committee voting Tuesday to approve another $19 million. 

Lawmakers did not raise any significant new revenue last session, and covered the education budget with money from various savings accounts and by diverting some revenue and investment streams toward public schools. 

Lawmakers also approved $44 million for construction projects, which added to the $155 million they had already appropriated for building this budget period.   

Complexity

The byzantine nature of the CREG report and the state’s budgeting system can make it difficult to comprehend, said Brian Farmer, the executive director of the Wyoming School Boards Association and a veteran of legislative affairs.

“We have become so complex that I don’t think the average citizen can understand the state’s revenue,” he said. Lawmakers tinker with the system to direct money streams toward and away from certain priorities. “It changes and sometimes changes frequently, and you have to stay on top of lots of legislation to know how money moves and flows,” he said. “I think even seasoned observers have a difficult time keeping up.” 

Farmer, like many longtime observers, also noted the changing dynamics of Wyoming’s economy. “The ways we used to fund the state are not going to hold for the future,” he said. But at the same time, he said, deficits can appear more insurmountable when discussed out of context. 

“Any time you see those really big numbers, I think it should prompt us to say, ‘what does that really mean?’” he said. 

Worrying trends

The CREG report continues to highlight two troubling trends in Wyoming’s revenue streams — declining money from coal and an increasing reliance on volatile oil prices — and adds a new concern: declining earnings from the state’s large investment funds as a result of global economic slowdown. 

The state made a $167 million windfall in capital gains from its investment portfolio this year. Such gains come from selling stocks at a profit, and are never profiled by CREG as they are a result of the treasurer’s office playing unpredictable equity markets. But lawmakers, particularly on the House side under Harshman’s leadership, have sought to better incorporate those gains into state budgets. 

The trick has been to use accounts that catch stock market earnings as reserves to guarantee a certain amount of funds for public education funding each year. 

Last year at this time, lawmakers were celebrating a windfall of $394 million that helped wipe out deficits in general government spending. 

But this week’s CREG report warns lawmakers that investment earnings are plunging rapidly as a recession seems ever more likely. Much of the investment gains the CREG does forecast — interest earnings and dividends — are “declining precipitously,” Richards told lawmakers. 

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Lawmakers betting on capital gains to refill accounts will increasingly be gambling against financial markets, Chief Investment Officer of the Wyoming State Treasurer’s Office Patrick Fleming told WyoFile on Wednesday. “The next two years we’re OK because we have enough in the reserve accounts,” he said. “Over the next five years the reserve accounts will be depleted if the current spending continues.”

The other increasingly volatile bet lawmakers are making by failing to create or raise taxes on anything outside the energy industry is an increasing reliance on severance and production taxes on the oil industry. 

Coal revenues are declining as production slows, and could drop more sharply if mines close, because that wipes out both production taxes and mineral property taxes. Coal production dropped 7% in the first six months of 2019, the CREG reported. The drop, and the fact that the CREG cannot accurately predict the retirements of large coal-fired power plants that buy Wyoming coal, is a worrisome trend, the report said. Particularly because “this commodity historically provided the least volatile contribution to severance taxes, [federal mineral royalties], and ad valorem taxes of Wyoming’s major energy commodities,” the report said. 

On the flip side, a hydraulic fracturing and horizontal drilling boom led oil production to “double digit growth” in 2018 and is predicted to do the same in 2019, Richards told lawmakers. A sales tax boost in the CREG report is also attributable in large part to increased oil production as a result of pipeline construction, Richards said. “They pay a lot of sales tax when they put in a pipeline,” he said. 

But unlike once-stable coal, oil prices have always been highly volatile. Over the course of this year alone oil prices ranged by $20 a barrel, Richards said. “I would … caution a little bit that we’re trading our revenue streams to be somewhat riskier,” he told the lawmakers. 

All told, the changing revenue picture struck even Senate Appropriations Committee Chairman Eli Bebout, who has been a chief opponent of significant tax reforms for years.

“Wyoming can not continue to rely on traditional sources for our revenue streams,” the oilman and longtime politician said Tuesday in reaction to the new CREG report.