The Wyoming House Floor at the opening of hte 2014 budget Session. House Minority Floor Leader Mary Throne (D-Cheyenne), at lower center in tan jacket, has asked for a public discussion of Wyoming’s savings policy, and the “rainy day” account in particular. (WyoFile/Gregory Nickerson — click to enlarge)
Minority leader wants open debate on Wyoming’s savings policy
By Gregory Nickerson
— April 1, 2014
House Minority Floor Leader Mary Throne. (LSO)
At the end of Wyoming’s 2014 legislative session, Wyoming’s House Minority Leader Mary Throne (D-Cheyenne) raised a question that lies at the heart of the state’s budget policy: Are we investing the state’s savings in the most effective way?
Currently Wyoming has some $6.5 billion in its Permanent Mineral Trust Fund, part of which is invested in equities to provide income to the General Fund. However, another $1.66 billion is in a “rainy day” account invested entirely in fixed-income investments that are highly liquid, but generate a low return — the equivalent of “cash.”
“We have got to explain to the public, in a public forum, why we are amassing huge amounts of cash,” said Rep. Throne in an end-of-session press conference. She says this winter’s cold weather and high natural gas prices could grow Wyoming’s “rainy day” reserve account to more then $2 billion this year. “We owe it to the public to explain why we are taking taxpayer money and not providing taxpayer services,” Throne said.
Over the past decade, Wyoming’s lawmakers have taken a conservative approach toward savings, making an effort to stash enough money to carry the state through a long period of flat or declining revenues. Assuming present policies continue, Wyoming will have enough investment income and savings stashed away to cover roughly 40 percent of the General Fund budget for a decade.
Supporters of this savings policy say it is necessary because Wyoming collects some 70 percent of its revenue from severance taxes, royalties, and property taxes from the boom-and-bust prone mineral industry.
Wyoming State Senator Eli Bebout (left) and State Representative Steve Harshman (right)
“Really, 70-75 percent of our revenues come from the mineral industry,” said Joint Appropriations Committee co-chair Rep. Steve Harshman (R-Casper). “That is relying on the weather, the world markets, and the regulatory policies that come from Washington D.C. Those are big drivers of our market, and they are very volatile.”
Legislative leaders such as Sen. Phil Nicholas (R-Laramie), Sen. Eli Bebout (R-Riverton), and Harshman champion a policy of saving $3 billion in revenue in Legislative Stabilization Reserve Account (LSRA), also known as the “rainy day account.” That’s almost as much as the $3.5 billion biennial budget for the General Fund, which pays for most of Wyoming’s programs outside of K-12 education.
“That is a smaller reserve than our colleagues had in the last boom,” Nicholas said in a press conference. “That money will pay for salaries and for salaries 5 to 20 years from now. That is long-term strategic planning.”
“I think a lot of people in the legislature believe that $3 billion is roughly right because that’s about what it takes to run our state for a couple years,” said Gov. Matt Mead in an 2013 interview with WyoFile. Of course, that rainy day money wouldn’t be spent all at once. If the state drew about $300 million a year from the “rainy day” account, it could cover revenue shortfalls of 20 percent for five budget cycles — a full decade.
The growth of Wyoming’s investment portfolio. (State Treasurer’s Office — click to enlarge)
“Is it really a good fiscal policy to amass a full biennium’s worth of savings?” Throne said. “Maybe that is the right thing to do — I don’t know. … We need a full public discussion about how much savings we need. The Joint Appropriations Committee has had their internal discussion. … I have seen their charts, and it doesn’t show any strain on the General Fund for years down the road.”
In addition to the LSRA savings, Rep. Harshman would like to see the Permanent Mineral Trust Fund (PWMTF) grow to $8 billion from its current balance of $6.5 billion. With $8 billion in the PWMTF, he believes the investment income generated would cover about 20 percent to 25 percent of the state’s $3.5 billion General Fund biennial budget. That level of investment income, plus money from liquid savings, could pay for roughly 40 percent the state’s budget in an extended period of decreased mineral revenue.
For Nicholas, Harshman, and others, their savings targets are informed by the experience of a previous generation of legislators who served in the revenue-starved decades of the 1980s and 1990s. During that time, as their story goes, the state went through every savings account in order to keep the budget afloat.
“We’d used all the coffee cans that had been hidden around,” said Sen. John Hines (R-Gillette) in an interview with WyoFile in 2013. “Something had to change.”
Republican leaders say their savings goals would be enough to help the state through the next bust in Wyoming’s mineral economy.
“I’m the kind of guy that really looks to the future,” said Sen. Eli Bebout, who served in the House from 1987 to 2000. “I’ve been through the tough times, I’m one who says spend less now and save more and build for the future.”
A detailed description of the investment allocation strategy for Wyoming’s savings accounts. (State Treasurer’s Office — click to enlarge)
In the meantime, though, Rep. Throne questions the fiscal policy of amassing large amounts of cash in liquid savings accounts, which the state can only invest in low-return vehicles, such as bonds and certain securities. She says the policy of keeping cash on hand means the state isn’t receiving the higher rate of return offered by stocks and equities. ”Money in cash savings doesn’t do much for the state of Wyoming,” Throne said.
For now little can be done to change that because the state Treasurer’s office is constitutionally prohibited from investing the “rainy day” account in equities. That’s because Article 16 Section 6 of the Wyoming Constitution restricts state investments in equities to permanent funds and endowments.
“Part of the reason the state likes the fixed income assets is they are somewhat more liquid,” said State Treasurer Mark Gordon (R) in an interview with WyoFile. “If you need money right away they are easy to turn into cash quickly. They are predictable because they have interest and dividends associated with them. They are fairly safe instruments.”
Throne wonders if the state shouldn’t be directing more of the money being stashed in permanent and liquid savings toward infrastructure projects.
“Those are tax dollars from our extractive services. Those industries need services like well-maintained county roads. We don’t want to be in a position even 10 years down the road where our roads have fallen apart and we don’t have water and sewer and landfills,” Throne said. “In 20 years, if no one wants our minerals, we are going to be in really bad shape if we don’t had the infrastructure to attract other types of business.”
Wyoming’s State Agency Pool invests the “rainy day” account and other funds in fixed-income securities and bonds to maintain a liquid supply of cash. (State Treasurer’s Office — click to enlarge)
“People say I just want to spend it, but I am saying, ‘Is this the best thing we can do for this money?’ If we don’t need this money for 10 to 15 years, then having it sit in a cash account is not the best idea,” Throne said. “It doesn’t give us income, at least not much, and it doesn’t invest in infrastructure … You have to make those investments and make sure the money is working for Wyoming.”
The state has made some efforts to invest in infrastructure, like the $15 million put toward building a unified network for state agencies. It is hoped such a network would help boost speeds across the state to help attract internet-based businesses. Similarly, Harshman noted that the state put more than $756 million toward “extras” this year, much of it directed toward capital construction projects.
“Our extras are $756 million for capital construction, water accounts, Business Ready Communities (grants), all the endowments for the University of Wyoming, community colleges, Public Television, the Cultural Trust Fund, and all the work we’ve done in the retirement program to make sure we can continue our promises (for public employee pensions),” Harshman said.
Sen. Nicholas says that the budget for 2015-2016 begins to lay the foundation for the initiatives that will help the private sector. Many of those projects will work at keeping the energy industry competitive through developing new export streams for natural gas and coal. Other industries like will also be included, according to Nicholas.
“We have taken a test run to revive the economic development loan fund to begin targeting large projects,” Nicholas said. “One the projects being looked at is the Cody Labs project. We put in $35 million for that. We put in $10 million for the large project initiative, the fund the governor tapped to approve Magpul.”
How Wyoming saves
In total, the state has some $17 billion in investments under management by the office of State Treasurer Mark Gordon (R). The breakdown of those investments is as follows:
$6.5 billion PWMTF (up to 55 percent invested in equities, corpus inviolate)
$5.9 billion State Agency Pool (liquid account that invests LSRA “rainy day” fund, money for General Fund spending, and other accounts)
$3 billion Permanent Land Funds (up to 55 percent invested in equities)
$1.58 billion Workers Compensation Fund
$738 million Hathaway Endowment, Excellence in Higher Education Endowment, and Tobacco Settlement Fund.
The investment allocation of Wyoming’s total investment portfolio. (State Treasurer’s Office — click to enlarge)
The state collects several billion dollars in severance taxes from mineral production each biennium. The severance tax levied is 6 percent of the value of oil and natural gas and 7 percent for coal mined on the surface. The state sets aside roughly one-third of that amount (2.5 percent of the mineral value) for savings in the Permanent Wyoming Mineral Trust Fund.
“We’ve tried to save a small amount from severance,” Harshman said. “The idea is when the minerals are severed they are gone forever. We spend two-thirds of it every year. We try to save about a third.”
Of the 2.5 percent in severance tax directed to the PWMTF, 1.5 percent is mandated by the constitutional provision that set up the fund in 1975. Current statute directs 1 percent in severance tax to the PWMTF. The law could be changed to redirect that revenue to another account.
“It is a huge policy we need to continue is to save a third of the severance,” Harshman said. “If we can do that we will grow the Permanent Mineral Trust Fund to $8 billion by 2018.”
The projected amounts of severance taxes that will be saved in 2013-2014 total $686 million, according to state estimates.
The “rainy day” account is usually filled up by unspent funds left over at the end of the biennium, which comes this June 30. As the state’s liquid savings continue to grow, Throne is clear about where she would like the savings discussion to begin.
“The first question is, what do we need to have in the “rainy day” account? What projections justify that?” Throne said. “What are the majority’s opinions that say we need all this cash?“
Senator Phil Nicholas (R-Laramie)
Sen. Phil Nicholas (R-Laramie) told WyoFile in a 2012 interview that the savings target for the “rainy day” account has grown as the size of the General Fund budget has increased. The state’s budget has doubled since the year 2000, and so Nicholas and others think the liquid reserves need to increase a corresponding amount.
“If you want to have the same protection that we had [in the 1980s], you would have to have $3 billion [in the LSRA],” Nicholas said in the 2012 interview. “It would give us the same level of protection we had in the eighties. If we did hit a trough, you could pull out about $300 million a year. That’s a trough where I’m comfortable,” Nicholas said.
In Throne’s view, Republican leaders have decided on a target of $3 billion for the LSRA without sufficient public discussion or legislative debate as to whether that is the right number or not. Still, she acknowledged that projections might support the $3 billion target.
“If they have such good arguments for amassing all this, then they should be able to explain it publicly,” Throne said.
— Gregory Nickerson is the government and policy reporter for WyoFile. He writes the Capitol Beat blog. Contact him at greg@wyofile.com.
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