Nice rainy-day fund, Wyoming – but what’s it for?

Wyoming needs to decide what its rainy-day account is for, and how it intends to use it, the Pew Charitable Trusts advised a legislative committee last week. Lawmakers have neither settled on a savings balance goal, or defined the function of the fund since it was created 10 years ago.

The prestigious think tank presented its analysis to the Legislature’s Joint Interim Revenue Committee in Buffalo Sept. 11. The takeaway: Wyoming needs to clarify the purpose of the rainy-day fund; it also needs to set parameters for how much to save and when to spend out of the fund.

With mineral revenue trending down by hundreds of millions of dollars, Wyoming lawmakers are debating the state’s rainy-day fund as they prepare for the 2016 budget session. The fund, officially called the Legislative Stabilization Reserve Account, had a balance of $1.8 billion when the Legislature adjourned in March.

Here are highlights from Pew’s report and lawmakers’ responses:

1. Wyoming needs to decide what the purpose of the rainy-day fund is. Is it for smoothing out temporary shortfalls, or to ease fundamental shifts in the state’s economy, or something else? What can the savings be spent on? Setting this purpose is critical to deciding how much to save.
2. Wyoming lawmakers need to decide how much “coverage” they want the fund to provide. “It is similar to deciding what level of insurance coverage you want,” said Brenna Erford, Pew’s manager for State Fiscal Health and Economic Growt. For example, Wyoming could cover nine out of 10 revenue downturns with $3.2 billion in the rainy-day fund. The $1.8 billion the state has currently in rainy-day savings could cover about half of the potential revenue downturns in a decade. Deciding the level of protection is vital to setting savings targets.
3. Wyoming needs to set conditions for when the rainy-day fund should be tapped. For example, does a $50-million or $100-million shortfall warrant spending rainy day savings?
4. The statistical model used in the Pew report comes from Minnesota. Despite the fact that Wyoming’s revenue sources are different from Minnesota’s, the same mathematical methods can be applied. Minnesota state economist Matt Schoeppner and University of Minnesota professor Thomas Stinson developed the model. Both are national leaders in tracking revenue volatility to set Minnesota’s new rainy-day savings targets each year.
5. Wyoming is the first state Pew has worked with on a volatility study like this. Aside from Minnesota, Wyoming has the potential to be a national leader in using evidence-based models to set rainy-day savings goals.
6. Over the past 20 years Wyoming’s revenue streams have relied more on mineral taxes and investments, and less on property tax. That’s despite decades of talk among Wyoming leaders to rely less on mineral revenue and diversify its economy. The post-2000 boom in gas, coal, and oil production made more revenue available, and legislators rolled it into the budget.
7. As mineral taxes increased, so did Wyoming’s revenue volatility. Commodity prices are notoriously up-and-down, and coal lease bonuses are one of Wyoming’s principle sources of revenue volatility. Some years the bonuses don’t come in at all, while in other years they provide hundreds of millions in revenue, which the state has directed to building schools.
8. The report follows Pew’s previous finding that Wyoming has the second most volatile revenue in the nation, behind oil-rich Alaska. The chart below shows Wyoming’s revenue — which is heavily reliant on severance taxes — fluctuates like a whipsaw. “Wild swings in revenue can hurt your ability to pursue budgetary goals,” both for spending and saving, Erford said.
9. While the Pew study vindicated calls for saving more than $3 billion in the rainy-day fund, Sen. Cale Case (R-Lander) said there are scenarios where the state could require $4 billion or $5 billion. Legislative Service Office budget director Don Richards says a sustained 10 percent to 15 percent downturn for several years could burn through savings of more than $4 billion in a manner of 10 years.
10. Senate President Phil Nicholas (R-Laramie) asked Pew experts whether Wyoming’s current volatile revenue base is bad for the state economy, and whether Wyoming should look at other revenue sources. The Pew consultants did not have a ready response. Back in the 1990s a panel of Wyoming lawmakers recommended a state income tax, but the idea was dropped when mineral revenue surged in the 2000s.
11. Some lawmakers such as Rep. Roy Edwards (R-Gillette) don’t want to touch rainy-day savings without first making big cuts.

— Flickr Creative Commons photo by Coulter Sounderman.