Should Wyoming use its permanent fund dollars to “invest in Main Street instead of Wall Street?”
It’s a topic of continuing discussion in the Legislature and a catchy concept that’s popular both with perpetually cash strapped local governments and the economic development crowd. But a sober consideration of Wyoming’s lending history makes it clear that the costs far outweigh the benefits and that such programs — particularly when applied to the private sector — are a poor fit for our self-avowed conservatism.
The original term used for loans from various state funds was Legislatively Designated Investments. Today we call them Public Purpose Investments. A more cynical term for these programs heard in the halls of the Legislature is “political purpose investments.”
Many states issue PPIs, but in Wyoming we do them a little differently and that departure is critical. Most states finance these loans with appropriated funds — accessible state revenue that would otherwise be available to fund government operations. But when we extend such loans in Wyoming we dip into the corpus of permanent funds — the inviolable principal that’s used to produce investment returns but can’t be drawn on directly for budgeting.
Wyoming is also relatively generous compared to other states in the region when it comes to extending loans to local governments, special districts and the private sector. That’s owed in large part to the general support of state residents. There’s some irony there. In Wyoming we think of ourselves as quite politically and economically conservative — traits somewhat at a paradox with such liberal financing.
This might be explained by the fact that, despite our self-perceptions, Wyoming citizens have often demonstrated a populist disposition when it comes to public money and its use. Thus, when bills containing a new plan for loaning money at below market rates of interest arise, they often pass. Lawmakers often invoke the old Main Street versus Wall Street slogan and it resonates with the populism of Wyoming people.
Public Purpose Investments go back nearly a century in Wyoming to the 1921 Farm Loan Act. That the focus of the 1921 Legislature was on farm loans is not surprising since the majority of lawmakers were either farmers, ranchers or otherwise economically connected to the agricultural sector. The stated purpose of the farm loan program was to foster and encourage farming and ranching in the state. This was to be accomplished through a system of rural credits controlled by the State Loan and Investment Board. This system of credit was financed out of the Common School Permanent Land Fund and the funds were to be distributed among the counties according to assessed valuation.
The program has changed quite a bit but it still exists. As do a whole host of its offspring — the Farm Loan Act set the precedent that opened the door to the dozens of PPI programs that have come and gone over the ensuing years in Wyoming.
A separate agricultural irrigation loan program was also considered during the 1921 session. Then Gov. Robert Carey had serious misgivings concerning the constitutionality of the irrigation bill. He noted that if such a bill was to become law, the Constitution should first be amended. Eventually that bill failed.
Since that time, there have been serious debates on whether Wyoming public money of any kind should be advanced to private interests — either for loans or outright grants. The foundation of this debate centers on the Wyoming Constitution itself. Article 16, Section 6 states in part: “Neither the state nor any county, city, township, town, school district, or any other political subdivision, shall loan or give its credit or make donations to or in aid of any individual, association or corporation, except for necessary support of the poor.” The section goes on to declare that the state shall not become owner of any association or corporation.
This section and other sections of the constitution have been amended by public vote a number of times to enable permanent funds to purchase corporate stocks and to enable the use of permanent funds for PPIs.
PPI statute modifications have followed a pendulum pattern over the last 20 years. The Legislature creates new uses for PPIs, but the pendulum swings back when they’re not used. Lamb processing facilities, hydroelectric power projects, deferred property tax financing and area redevelopment programs are only a small sample of intended purposes of these loan programs.
The state conducted PPI management audits in 1997 and 2015. After these reports the pendulum briefly swung toward greater restriction. Unused PPIs were repealed, the amount of funding available from permanent funds was reduced and higher interest rates were established.
We’ve learned from these audits that because most of these loans have been financed by the corpus of permanent funds rather than appropriated general funds, the permanent fund returns take a real hit. The funds accrue lower earning than they would if the loaned money were instead placed in prudent investments.
Interest rates on most of these PPIs are statutorily fixed well below market rates, making the state of Wyoming effectively the “lender of first resort” for many borrowers.
These audits also have raised a related concern — PPIs make it difficult for the State Treasurer’s Office to effectively manage its overall investment risk. In the private sector, high risk is rewarded by high rates of potential return. Most PPI loans carry a fair bit of risk, but the interest rates are fixed at artificially low levels. That leaves the Treasurer to mitigate that risk elsewhere in the State’s investment portfolio — it forces us to invest more funds than we would otherwise in low-risk, low-return options. In other words, PPIs wreak havoc on a risk-adjusted portfolio and cause lots of problems with the prudent investor rule.
What does this do to returns on permanent funds? During the 2018 Legislature a contentious bill containing a potential of $460 million in new PPIs was enacted. The loan was to come from the Permanent Wyoming Mineral Trust Fund. The amount included $400 million for cities, towns, and counties and $60 million for new community college dormitories all at interest rates around 2 percent. In terms of estimates developed by the Legislative Service Office, if all of the allocated money is lent to local governments it would result in $160 million in opportunity losses over a 10-year time span with another $34 million earnings losses from the loans for community college dorms. And that’s just from the lent money. The estimates do not include the above described disruptions to the entire portfolio.
There are several other downside risks when loaning money from permanent funds. Since the corpus is constitutionally required to be inviolate, i.e. it can’t be drawn down, the risks of nonpayment of loan principal hold wide-reaching potential consequences. For example, in the early 1980s a loan was made to a water and sewer district in the southeast part of the state for $600,000. Within one year the loan became delinquent. The corpus was then replenished from an appropriation of state general funds 32 years later in 2013. Lost interest was well over $500,000.
Another example involves an economic development loan to Hawkins and Powers Aviation, Inc., in the north-central part of Wyoming. A loan in the form of a bond for $3.5 million was eventually executed in 2003. The first payment became delinquent in 2004. The principal and a small amount of interest was recovered a number of years later but the program remained a significant money sink for the state.
There are a number of other defaults and delinquencies that have occurred through time, but it should also be pointed out that the vast majority of loans are made and repaid with no problems.
We need to take a good hard look at PPIs and decide if they are in fact a good idea for Wyoming. If we decide to continue with such measures, we should, at the very least, change the way we finance them. Funding for these type of loans should be financed with the earnings generated from permanent funds rather than from their corpus.
Realistic estimates of full historic costs to Wyoming’s permanent funds do not exist. However, considering the nearly 100 years of this practice, the compounded losses are obviously in the hundreds of millions. Without PPIs the state’s current structural deficit would clearly be much smaller than it is today. And most importantly, the State Treasurer’s Office could focus on prudent, well balanced investment management strategies employed by other sovereign wealth funds without devising mitigating strategies necessitated by PPIs.