As state investments earnings decline, Wyoming State Treasurer Mark Gordon recommends that legislative leaders reduce their expectations for revenue from Wyoming’s Permanent Mineral Trust Fund in the coming biennium.
Holding more than $7 billion at the end of 2016, the Permanent Mineral Trust Fund is one of the 100 largest “sovereign wealth funds” in the world. Revenues from investments of the PMTF flow into the state’s general fund to pay for day-to-day operations.
A portion of those investment revenues then flow to the state’s so-called “rainy day fund,” where they are saved.
Many lawmakers, including Speaker of the House Steve Harshman and Senate President Eli Bebout, believe that the state’s current budget trouble is just the sort of situation the rainy day fund was created to address.
The account currently holds $1.7 billion. Revenues from investments of the PMTF continue to flow into the rainy day account even as the Legislature’s leaders use it to buffer the state’s revenue downturn.
How long the rainy day fund lasts depends on how quickly it’s spent versus the pace at which state investments feed revenues into it. Those investment revenues have declined the past few years and the state treasurer says legislators must factor that into their thinking.
Harshman believes the rainy day fund, officially known as the Legislative Stabilization Reserve Account, could last five to 10 years, in part because of the “refueling” from the PMTF.
Currently, the PMTF is invested in government securities, corporate bonds, domestic and international markets, and a variety of statutorily authorized state loan and investment programs, according to the Legislative Services Office. It leans on stable, but lower-earning, bond markets rather than riskier stock markets.
Under existing statutes, the Legislature can spend earnings that are equal to 5 percent of the fund’s value, based on a five-year average. Any amount the fund earns over that 5 percent can’t be spent. A portion of the excess goes into yet another pot of savings titled the Permanent Mineral Trust Fund Reserve Account. The account is used to make sure the general fund has money during bad investment years. The rest of the earnings above 5 percent goes back into the corpus to keep growing it.
Returns have slowed
But investment returns have not been that good. Gordon warns that PMTF earnings have been closer to 2 or 2.5 percent in recent years.
The PMTF is invested in markets theoretically free from Wyoming’s boom and bust cycle, the treasurer said. When energy markets bust, the state’s investments in diverse markets around the world provide revenue to make up some of the shortfall. Now those markets have slowed as well, particularly the bonds the fund is invested in, Gordon said.
His office has recommended that the state should plan on being more conservative in the future. The state should spend only up to 4 percent before placing the rest of the earnings back into the fund’s corpus. Doing so would rebuild the corpus of the PMTF, helping to protect it from inflation and slow investment markets.
State Treasurer Mark Gordon shakes hands in the gallery of the House Chamber as guests are welcomed into the chamber during Gov. Matt Mead’s 2016 State of the State address. (Dustin Bleizeffer/WyoFile)
It’s unlikely the fund will earn 5 percent of its corpus anytime soon, according to Patrick Fleming, chief investment officer of the Wyoming State Treasurer’s Office. In 2016, there was no investment income available to build the PMTF corpus. The same was true in 2012.
Revenues generated by the mineral severance tax continue to flow into the PMTF, but that stream has slowed with the energy bust. In fiscal year 2012 the PMTF grew by $390 million, both from severance taxes and from investment returns. By fiscal year 2016, the increase had dropped to $217 million. That year, investments of the corpus lost money, to the tune of $9.4 million.
Meanwhile, the portion of mineral severance taxes that is constitutionally mandated into the corpus was $100 million less than it was in FY 2012. Finally, of the $217 million the PMTF did gain in 2016, nearly $91 million came from extra severance tax money the Legislature had been adding to the corpus. The extra severance revenues won’t flow to the PMTF this year though, because that money has been redirected to the general fund.
If an omnibus bill to solve the education funding crisis becomes law, those severance tax revenues will be diverted to finance the public schools until mid 2021.
The Treasurer’s Office wants to make sure the state will only spend 4 percent of any PMTF investment income going forward, in hopes more money will be returned into the corpus if investments start to earn again.
A screenshot from the Legislative Service Office’s Budget Fiscal Data Book for 2017. This flowchart shows how the Permanent Wyoming Mineral Trust Fund feeds both savings accounts and the general fund that pays for state services.
Moreover, as Wyoming’s needy eye turns on the LSRA, the refueling has slowed. Gordon recognizes it’s a tough time to ask for the restraint implied in moving from 5 to 4 percent of the previous five-year average market value of the PMTF, but he said the purpose of the PMTF is to keep the state’s finances stable in the long term. If the Legislature spends investment income too fast and doesn’t feed any back into the corpus, the fund will be vulnerable to inflation and begin to shrink in buying power. A smaller corpus earns less going forward.
“My job is to safeguard the resources of the state, and part of that is to make sure that tomorrow’s permanent fund has the same potency that today’s does,” he said.
Gordon’s request would protect the corpus of the PMTF; however, it would do so at the expense of the Legislature’s insurance policy against bad investment years like the last one, according to Harshman.
In good investment years, extra revenue is stored in the Permanent Mineral Trust Fund Reserve Account to ensure the general fund has enough money to meet obligations, regardless of the market picture. Gordon would like the Legislature to leave less money in that reserve account and move more back into the corpus.
But the Select Committee on Capital Financing and Investments, which counts Harshman among its members, has introduced a bill to increase the amount of money that is stored in the Permanent Mineral Trust Fund Reserve Account, decreasing the amount returned to the corpus.
Without that change, if investment incomes stay down, the Legislature would have less money to meet its requirements, according to Harshman. “It’s not the time to do that I don’t think,” Harshman said.
The change would stay in effect for the next two fiscal years, 2018-2019.
Fleming said that although stock markets have been very high since the election of President Trump, revenue from the PMTF is more dependent on interest rates than on the stock market. Interest rates have gone up since the election, which is bad for the fund, he said. There is also considerable uncertainty about the long-term effect of the Trump administration on the markets, Fleming said.
“Until we know what happens with Trump’s policies, it’ll be very difficult to change the portfolio” to benefit from them, he said.
A senate bill, SF 49, would create an investment funds committee, made up of the state treasurer, an appointee from his office and three civilian appointees. The civilians would be required to have at least seven years of experience managing large investment funds of more than $500 million. Think Jackson Hole and Wilson retirees with successful finance careers behind them, Fleming said.
Gordon also supports a bill House Revenue Committee Chairman Mike Madden (R, HD-40, Buffalo) is bringing to set rules on use of the rainy day fund. “I do support the cautious use of it,” he said, warning against lawmaker hopes of a quick turnaround in mineral revenue.
“There are some things we see on the horizon here that have a possibly long-term nature to them,” he said.
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This year, the Legislature also has a tool they didn’t have before, Gordon said. Because of an amendment to the Wyoming Constitution passed by voters in the November election, Gordon’s office has the authority to begin investing other, smaller state trust funds in stocks and bonds.
Gordon said many of the funds in the state’s portfolio shouldn’t be invested, but the his office has suggested beginning by putting a few funds into an investment pool. That pool would be considered experimental, and the Treasurer’s Office could then invest more funds.
A bill to move five funds into such a pool has been proposed by the appropriations committee. The bill included the Wyoming Wildlife and Natural Resource Trust ($104 million) and the Wyoming Game and Fish Account – Trust Account 2 ($28 million).
Bob Budd with the Wyoming Wildlife and Natural Resource Trust fund welcomed the change. Interest from the Wildlife and Natural Resource Trust is used to support conservation efforts around the state. The trust came in handy when the state was trying to keep sage grouse from being listed under the Federal Endangered Species Act, Budd said. Its interest paid for habitat improvement efforts and conservation easements that helped Wyoming show federal regulators it was working to protect the species.
The fund receives money by legislative appropriation — the board can request funds from the Legislature, which appropriates it out of the General Fund. Budd said the board declined to request any additional money last year, given the state’s revenue woes.
Now, however, the Treasurer’s Office could grow the fund by investing it. “Ideally, you’d have an option for the fund to grow and [be] somewhat inflation proof,” Budd said, without having to ask the fiscally pressed Legislature for more money.
The treasurer’s office would like to manage these and other investments, like the PMTF, in house, but they need more staff to do so, Fleming said. Currently, they pay fees to investment managers elsewhere.
Fleming estimated that by taking $3 million of what the office now pays in fees and spending it on in-house staff instead, the state could save $17 million. What’s more, Fleming said, the PMTF is underperforming, badly, when compared to other funds of its size. The earnings of the PMTF rank in the bottom quartile for comparable large funds. If earnings had been at the median of those other funds, the state would have pulled in an extra billion dollars over the last three years.
If there is an advantage to the state’s current fiscal problems, it’s that it creates a desire to reevaluate longstanding financial policies, Gordon said.
“When you’re rolling in dough there’s less of an inclination to look at how you can do things better than you are,” he said.
On Jan. 18, the Wyoming Game and Fish Commission declined to participate in the experiment. The commission decided to wait and see how investments of the other funds perform.
“If this thing works out, we won’t be the only fund wanting to get in later,” said Carrie Little, the commission president at the time.
State accounts abound
There are plenty of other pots of money in the state’s bank accounts. Each year the Legislative Service Office puts together a document called the Budget Fiscal Data Book, which uses flowcharts to map the state’s revenue streams. The book has pages of accounts labeled for various purposes.
There is $16.5 million in the Tobacco Settlement Trust Income account; $26.4 million in the State Facilities Construction account; and $170 million in Water Development Account III. The Capitol Building Rehabilitation and Restoration account has $138.6 million. The Off-Road Recreational Vehicle Account has $2.67 million. There is $5 million in the Wyoming Children’s Trust Fund and $1.8 billion in the Worker’s Compensation Trust.
The list goes on. All carry strings, but not all are inviolate, according to House Revenue Chairman Madden.
“There’s accounts around,” he said, citing the Water Development III Account. “You hate to raid those accounts because there must be some reason you made a plan to use that money … but that’s one.”
Sen. Ray Peterson (R, SD-19, Cowley) is chairman of the Senate Revenue Committee. He thinks a portion of the Permanent Mineral Trust Fund could be pulled back from national and international markets and be invested in Wyoming-based projects instead.
Madden and many other lawmakers think it’s premature to start talking about accounts set aside for other purposes before the Legislature talks seriously about revenue.
“You shouldn’t be totally destroying the whole financial infrastructure of the state government simply because you don’t want to raise revenues,” Madden said.
Budd said he gets nervous at what he sees as “open season” on some of the state’s finances, but he does not believe the Legislature would eye the money in a fund like the Natural Resource and Wildlife Trust.
“I don’t have any concern that a legislator is going to go in there for a one-time reward,” he said. Projects the Wildlife Trust finances create jobs and boost small, local economies throughout the state, he said.
One new idea for the Permanent Mineral Trust Fund comes from Sen. Ray Peterson (R, SD-19, Cowley). He said he would like to see the state invest more of the fund into local projects.
In the next interim period, legislative committees should examine dedicating some portion of the PMTF, perhaps $1 billion, to projects within the state, he said. The state could give bonds to communities for roads or schools, charge the communities interest and reinvest it back into the account to protect the corpus.
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