Wyoming has created a series of large savings accounts over the past 40 years anticipating a “rainy day” when that savings can be spent on urgent needs. The Legislature’s priority has been to stash money into savings accounts and to limit spending to select brick-and-mortar projects.
By all accounts this strategy has successfully amassed a large savings — $19 billion — a handsome amount for a state of 584,000. Yet many local leaders say the state has lost sight of the intended purpose of that savings, and ignored infrastructure needs. The rain is falling on some local governments as state leaders keep billions of dollars cached in Wyoming’s savings accounts.
“I can understand putting so much away,” said Douglas mayor Bruce Jones. “But when is enough enough?”
The city of Douglas is humming with the activity of about 30 oil rigs operating north of town, drilling into several different shale-like formations in the Powder River Basin. Each rig creates dozens of jobs for drillers and the many companies that provide services, parts, equipment, water, and chemicals to each drilling operation.
All this activity has Jones busy keeping up with demands for expanded services for the growing town. Douglas has had an influx of indigent people who come looking for a job and a place to live, he says. Several mobile home parks have sprung up outside city limits, offering oilfield workers a place to park their RVs.
The boom has a major influence on the City of Douglas’s budget. Sales tax revenue is up, and so are the city’s expenses. The police department added several patrols, and the city has more than $6 million in new street projects underway. It’s a challenge to retain city employees when they can make upwards of $25 an hour doing basic work in the oilfield, Jones says.
Meanwhile, the wells drilled in the Powder River Basin are a boost to state revenue, sending millions of dollars of mineral taxes to Cheyenne.
Under current state policy little of that money will come back to Douglas or Converse County — or any other local government entity for that matter. Instead, most of the new revenue will find its way into government agencies, schools, and savings.
Gov. Matt Mead (R) continues to argue that building infrastructure in places like Douglas is a worthy way of investing in the state. His stance aims to reorient an elaborate savings apparatus that lawmakers have all but institutionalized.
Over the past 40 years the state has stashed away the windfalls of mineral booms into its Permanent Mineral Trust Fund, which has a balance of more than $7 billion. Another $2 billion is in Wyoming’s rainy-day account. Investment accounts for schools, university scholarships, and other purposes bring the total to nearly $19 billion.
Meanwhile, towns such as Douglas scrounge to find enough local tax revenue to pay for their street and sewer projects. Smaller towns located far from the oil play fare even worse, relying on ad valorem and minimal sales tax collections from local businesses. Some places struggle to provide the most basic services, like keeping the library open more than a few hours a week.
Every winter, Wyoming’s 99 municipalities and 23 county governments turn to the state Legislature in Cheyenne to ask for additional support. Lawmakers dole it out according to a complicated formula that fluctuates depending on the political winds and the flow of state revenue.
“It’s hard to plan seven to 10 years down the road when you don’t know what your money is that is going to come in from the state,” Jones said. “You don’t know what you are going to get year to year. … If they say we don’t want to give you any money, that’s what we get, and we have to deal with what we get.”
Savings vs rainy day spending
Spending on towns and counties pales in comparison to what the state saves. Last summer the state stashed $793 million into various savings accounts.
In the last legislative session the state spent $175 million out of a $3.6 billion total budget to aid local governments. Gov. Mead now wants to spend $25 million more on towns and counties for the 2016 fiscal year.
Many of these savings accounts invest large sums in governments outside of Wyoming. Hundreds of millions of dollars in the permanent fund are invested in United States government bonds. Tens of millions more are invested in foreign government bonds in Spain and Italy, and in companies based in Canada, Germany, Taiwan, China, and elsewhere.
Lawmakers argue that such permanent fund investments help diversify the state’s revenue away from mineral sources and, importantly, stave off imposition of an income tax, which many consider anathema to Wyoming’s values.
“I know you need to put money away in case of hard times, and I saw tough times when I was a kid,” said Mayor Jones of Douglas. “It’s tough to see how much money we have, and not putting it back into the critical infrastructure into the state.”
To be fair, the state has invested heavily in special projects. Since 2000, lawmakers have put billions into upgrading roads, K-12 schools, community colleges, the University of Wyoming and infrastructure projects such as the Gillette Madison water pipeline and a fiber optic network for state agencies.
In the face of limited revenue and growing needs, some towns and counties have considered creating special districts for water and sewage to raise more tax revenue. Such districts raise local taxes from property owners, but they must be approved by taxpayers. Gov. Mead says he’s heard from mineral companies who are not pleased with the prospect of local governments raising taxes, including their taxes, because the state isn’t providing sufficient aid to towns and counties. The companies feel they’ve already paid their fair share, Mead says.
Part of the reason for tight budgets in booming areas is that that the oil and gas industry is exempt from the Industrial Siting Act. This act was created to more quickly feed sales tax revenue to the small governments dealing with boom activities and infrastructure needs. These apply to the construction of power plants, coal mines, and other industrial facilities, for example — but not oil and gas activities.
The situation sets the tone for a conversation about savings that may happen after the 2015 legislative session concludes, when lawmakers pick up interim work. Lawmakers commonly use the time between sessions to discuss alternative policy ideas, particularly on complex issues such as the state savings policy. In recent meetings of the Joint Appropriations Committee lawmakers said they would look to the interim for more in-depth discussions.
Creating the Permanent Wyoming Mineral Trust Fund
Wyoming has created a series of large savings accounts over the past 40 years. The Legislature’s priority has been to sock money into these savings accounts and to spend on select brick-and-mortar projects rather than increasing aid to local governments.
Wyoming created its Permanent Mineral Trust Fund in 1975 to save and invest income from severance taxes.
“The general reasoning was that the our state’s mineral wealth is nonrenewable, and therefore if we spend it as we get it, one day we will turn around and we will have depleted our mineral resources, and we will not have the kind of money that we’ve been used to,” said Kathy Karpan (D), who served as Wyoming Secretary of State from 1987 to 1995.
The state avoided creating a severance tax during the first half of the 1900s, largely on the notion that it would hurt businesses and result in the loss of jobs. Despite passing the Legislature in 1923, a constitutional amendment to create a severance tax failed to win statewide approval from voters. A 2 percent severance tax on oil passed the House but failed in the Senate in 1949.
In 1966, Democratic candidate Ernest Wilkerson ran for governor on a platform that included creating the severance tax. A Casper attorney and former owner of the Wyoming Automotive Company, he campaigned on the slogan “Wyoming’s wealth for Wyoming’s people.” In practice, that meant taxing out-of-state mineral companies for the finite minerals they produced, before the profits flowed across the state line to company headquarters in Denver or Houston.
In one 1966 campaign speech Wilkerson argued that Wyoming was losing the value of its resources at the benefit of other states:
“The wealth created by the literally billions of dollars of minerals being taken out of our ground is building other cities, other states, benefiting other people. … Wyoming’s people in this campaign, by their choice of parties or of candidates, have what may be our last chance to stop this slow economic death of our state — this incessant bleeding away of our mineral wealth to the advantage of other places.”
Wilkerson lost the election, but large parts of his proposals were later adopted by Gov. Stan Hathaway (R) when the state faced an $8 million shortfall for the 1969-1971 biennium. (For full history of Wilkerson’s severance tax campaign, read the article in this issue of Annals of Wyoming.) The initial severance tax rate was 1 percent. Today the severance tax rate is 6 percent of fair market value for oil and gas, 7 percent for surface coal, and 4 percent for trona and uranium. (Click here for more details.)
In 1974, lawmakers moved to raise the severance tax. Gov. Hathaway promised to veto the tax hike unless lawmakers passed a constitutional amendment to permanently save part of the severance tax revenue. In 1974, voters approved the amendment, and the Permanent Wyoming Mineral Trust Fund was created in 1975.
Since the creation of the fund, it has helped to cushion Wyoming from the creation of an income tax, Karpan said.
“When I was in state office, the (Permanent Mineral Trust Fund) income produced revenue equivalent of what income tax revenue would be for the state, so in a way that was our income tax revenue,” Karpan said. “Our mineral wealth has created a taxpayer-friendly environment in Wyoming, which is why we have no state income tax and property taxes are generally lower.”
“We have been blessed with enough mineral resources that we don’t have to pay taxes at the same level as people in Connecticut or Maryland or Virginia. We’ve gotten a very good appetite for government services in Wyoming knowing that the bill is paid for by someone else, the railroad, the mineral companies, the big taxpayers in the state.”
Permanent Mineral Trust Fund Reserve Account
In 2000, lawmakers created a subsidiary of the Permanent Wyoming Mineral Trust Fund called the Spending Policy Reserve Account, or simply the “reserve account.”
The reserve account acts as a liquid savings for PMTF investment income above the statutory amount contributed to the General Fund. When the reserve balance reaches a certain value it sends money back to the PMTF. The cap of the reserve account is 5 percent of the five-year rolling average of the permanent fund.
As of October 2014, the reserve account has a balance of about $190 million. For the first time in memory, Gov. Mead’s proposed budget — released in December 2014 — included this reserve account in his list of revenue available for appropriations. Whether lawmakers will follow Mead’s lead to include this income as available funds for budgeting will be a topic of discussion among lawmakers in the upcoming session and interim.
Rainy day account
Over the past several legislative sessions towns and counties have seen the rainy day fund grow while they face pressing needs to rebuild streets, sewers and water systems.
Despite its original intent as a liquid account for emergencies, legislative convention has all but put the rainy-day fund out of reach. During recent downturns lawmakers have never spent money from the account, opting instead to cut agency budgets and level off growth in government spending.
The account was originally created as a two-year measure in the 2005 budget bill, in anticipation of passing a formal law at a later date. However, that has never happened, and the Joint Appropriations Committee has maintained the fund in every budget bill since.
The 2005 budget bill put an initial amount of $85 million into the rainy-day account. It now contains $2 billion. The Wyoming Tribune Eagle wrote editorials in favor of creating the rainy-day account, saying it provided a way for the state to make important infrastructure investments, an option not available with Permanent Mineral Trust Fund. By law, only interest from the PWMTF can be spent while the corpus must remain inviolate.
“These revenues, once they go into the (permanent) fund, are lost forever,” one editorial stated. “That means their ability to help the state in a financial crisis is nil.”
By 2007 the state experienced a drop in revenue, and Sen. Phil Nicholas (R-Laramie) argued that the state wasn’t saving enough into its permanent fund and rainy day accounts.
In 2009 the state was bracing for the national recession, and the Wyoming Tribune Eagle argued for diverting 1 percent of severance tax from the Permanent Fund to the rainy-day account.
A Feb. 21, 2009, editorial read:
“Mr. Brown (Rep. Kermit Brown (R-Laramie)) and others have stuffed (the permanent fund) with hundreds of millions of dollars in recent years rather than investing that money in Wyoming or setting it aside in savings they can get to in a fiscal emergency. They asserted it was being put away for a rainy day, but now the rain is falling and every penny of it is out of reach.”
In a 2013 interview, Sen. Nicholas said the state should only tap into the rainy-day fund after taking two other emergency steps: diverting severance taxes from the permanent fund, and raising the cap on the Spending Policy Reserve Account, which would direct more money to the General Fund.
Lawmakers have since defined a trigger for a rainy day event that would tap into the fund. In the 2014 session, they created a rule that would automatically transfer $150 million from the rainy day account to the General Fund. That would only happen if state revenue estimators released a special report showing more than $150 million drop in General Fund revenue before their annual October meeting.
As the Legislature prepares to convene, state economists are eyeing low oil prices, which could result in a $220 million decline in projected revenue for the 2015-2016 spending cycle. That, coupled with flat-to-declining coal production in the face of cheap natural gas and CO2 emissions regulation, could lead to a new revenue drought for Wyoming.
Whether a true bust will materialize is uncertain, but the current situation adds urgency to the question of whether Wyoming will consider revising its savings policy to invest in local infrastructure while there remains money to do so.
City and county leaders still see Gov. Mead as an executive who has heard their plight.
“Gov. Mead has been really good working with cities and counties trying to get them a steady stream of income,” said Mayor Jones of Douglas. “He understands who makes the money. If you don’t have the infrastructure out in the counties and towns, you don’t make any money.”
“If you look at it now, we have the lowest state population in the union. How are you going to keep kids here? You have to have a strong economic base and a strong infrastructure.”