In his February 13th 2012 State of the State address, Wyoming Governor Matthew Mead lost little time talking about his state’s mineral prowess.
“We remain number one in trona production; we have 70 percent of the world’s supply of bentonite; we are number one in coal production; we are number one in uranium reserves; and year in and year out we rank first or second in natural gas production,” he said.
It wasn’t until the middle of the speech that Mead addressed a darker concern, one dear to the constituency of every legislator in the room: the price of natural gas. It’s at a 10-year low and Mead confessed he had to adjust his budget accordingly.
“Based upon the revised estimates, I reduced my original budget proposal by about $64 million dollars to take the latest forecast into account,” Mead said.
The governor gave no mention what-so-ever to a source of funding that was supposed to insulate Wyoming’s budget from the whipsaw of commodities: The Wyoming Permanent Mineral Trust Fund (WPMTF)
Created thirty-eight years ago this month, the WPMTF mandated that a minimum of 1.5 percent of Wyoming severance taxes on gas, oil, coal, and other minerals be placed in a constitutionally protected trust.
Speaking before his collogues in the State Senate on February 7, 1974, Malcolm Wallop, not yet elected to the hallowed halls of Washington D.C., urged passage of the measure that would create the WPMTF. “These are the resources of Wyoming that are our bank deposits now,” he said.
Since the law involved an amendment to the constitution, it required voter approval. They obliged in November 1974.
Interest from the WPMTF gave Wyoming what it never had: income to Wyoming’s General Fund, the state’s main operating account, independent of yo-yoing tax revenues, particularly important to a boom and bust energy state. (For example, from 2000-2010, natural gas prices bounced between $2 and $14.50 per thousand cubic feet [mcf]. Without the stabilizing force of a WPMTF, creating a biennium budget would be mostly guesswork)
Alaska, Texas, New Mexico, and Alabama have similar permanent funds, all of which derive income from minerals. The values of the funds range from $40 billion (Alaska) to $2.5 billion (Alabama).
Montana, North Dakota, and Utah have smaller permanent funds with holdings of under a $1 billion.
The WPMTF has a corpus of $5.4 billion and receives about 40 percent of all Wyoming’s severance tax collections.
The cumulative total of interest income to the general fund since 1975 is $3.1 billion, or roughly the same amount it took to run the entire state of Wyoming from 2011 to 2012.
It’s been a mixed blessing, however. The interest has kept Wyoming complacent in its quest for economic diversification. The percentage of revenue to the general fund from WPMTF interest remains high – higher than any other state with a permanent fund – because there is no other revenue available to take its place.
Furthermore, the stream of interest struggles from its own volatility. On seven occasions there have been decreases in WPMTF interest from one year to the next, even though the corpus of the WPMTF continued to grow. Some of these drops were significant, like from 2002 to 2003 when interest to the general fund decreased from $90.5 million to $58.6 million.
The amount of interest usually bounces back the next year, but it adds a degree of instability that the WPMTF creators had hoped to avoid.
Hold the markets accountable, says Michael Walden-Newman, chief investment officer for Wyoming Treasurer’s Office.
In 1996 voters approved a constitutional amendment that allowed WPMTF investments to include equities, as long as the percentage of stocks did not exceed 55 percent of the portfolio.
“The changes in income, regardless in the growth of the corpus/investable funds, is the result of market conditions. The past decades have seen declining interest rates, which translate into less income in a fixed income/bond heavy portfolio like ours even if the amount of money to invest grows,” said Walden-Newman.
There have also been flush years when the legislature chose not to use all the interest. Ordinarily, up to 5 percent of all interest earned from the WPMTF goes directly into the state’s general fund. Beginning in 2000, however, the legislature created the WPMTF reserve account, a safety net for a safety net, which gave them the option of sticking away surplus interest income for tougher times.
Wyoming depends upon WPMTF to pay a significant proportion of basic operating funds. Other than Wyoming, only Alabama and New Mexico currently allow permanent funds’ interest to be delivered to the general fund.
An analysis by WyoFile shows that from 1987 to 2011 interest from the WPMTF has supplied an average of 18.6 percent of the general fund revenue. WPMFT interest made up the lowest percentage of general fund revenue in 2003, with 9 percent. The highest percentage was in 1991, with 25 percent, followed by 2008, when WPMFT interest made up 24 percent of all general fund revenues.
Contrast this to Alabama’s Trust Fund, which, for the last six years, supplied between 4 percent and 11 percent per year of the revenue to the state’s general fund.
In New Mexico, 2011 interest from the severance tax permanent fund made up roughly 3.1 percent of the total revenues going into the general fund, according to Charles Wollmann of the New Mexico State Investment Council.
Moreover, unlike Wyoming, the New Mexico constitution does not stipulate the exact percentage of severance taxes going into their permanent fund.
As a result, severance taxes have been increasingly diverted to pay off state bonds. In 2006, $58.7 million in severance taxes went into NM Permanent Fund. In 2011, it had dropped to a mere $6.5 million.
Seventeen straight years of growth
For the first half of the WPMTF’s existence, income to the general fund grew every year, even in 1986 when oil prices hit $10 per barrel and severance tax collections slumped.
Then came 1992, when oil prices could not seem to climb above $2 per barrel. In 1993, revenue from the WPMTF to the general fund dropped from $92.7 million to $88.3, a modest 4.7 percent.
It had been a good 17-year run. Then the volatility arrived.
No matter, according to those who had to cut thin slices of a financial pie. The income proved invaluable, says Mike Sullivan, who served as Wyoming’s governor from 1987 to 1995.
“Maybe the income wasn’t totally consistent but it was consistent enough. I don’t know what we would have done without it,” said Sullivan, who oversaw lean budgets and projected shortfalls.
Sullivan said during his tenure, WPMTF interest provided between 22 percent and 25 percent of general fund revenue. “Try contemplating a 25 percent cut in expenditures or raising taxes 25 percent,” he said.
The constitutional protection afforded the trust was vital, said Sullivan. “It was key that Governor Hathaway insisted that the legislature put the measure to the voters for approval. They had a say and got behind it. You can imagine the times I would have dipped into those funds if (the fund) hadn’t been constitutionally protected.”
Since its inception, the WPMTF has 5.6 percent trailing five-year return (returns that occur over the past 12 months) on investment, according to Walden-Newman.
Natural Gas: the essential wild card
Past the year 2000, the legislature’s need for WPMTF interest increasingly depended on the price of natural gas. The general fund directly receives 62 percent of severance taxes not bound for the WPMTF. In theory, the higher the price of natural gas, the less the state needs interest money from the WPMFT.
In 1996, coal, oil, and natural gas delivered an equal amount of severance taxes to the state. A combination of strong prices and new discoveries in Sublette County’s Jonah Field and northeast Wyoming (coal-bed methane) changed that ratio.
From 2003 to 2006, severance tax collections jumped from $83.8 million to $406 million per year, mostly due to a boom in natural gas. That era included the 2005 hurricane, Katrina, which crippled gas production in the Gulf of Mexico, thus creating a shortage and a breathtaking increase in prices. Wyoming producers were ready to deliver.
By 2008, natural gas severance tax revenues to Wyoming were $720 million. The same year, oil contributed $153 million and coal $261 million.
Natural gas prices, however, are the manic-depressive of commodities. From 2000-2010, natural gas prices bounced between $2 and $14.50 per thousand cubic feet (mcf).
This added an even more bewildering element to the connection between energy prices and the amount of interest delivered from the WPMFT and the general fund.
For example, when natural gas prices spiked at $10 per mcf in December 2000 (it’s been averaging about $2.50 per mcf in February 2012), interest from the WPMTF corpus to the general fund from 2000 to 2001 dropped. From 2002 to 2003, the price of natural gas tripled from $2 per mcf to $6 per mcf, interest from the WPMTF corpus to the general fund fell by 50 percent.
In short, the ideals of a permanent fund (a well-funded trust produces stable investment income) got rattled by a world that suffers from increasing price unpredictability, both in equities and commodities.
Lack of Diversity: the Dark Side of the WPMTF Interest
A generation of Wyoming lawmakers has grown up counting on the bounty of the mineral trust fund. In 2005, legislators set a goal of boosting the corpus the WPMTF to $4 billion by 2010. They made it with time to spare, partially because they increased the percentage of the severance tax going into the WPMTF from 1.5 percent to 2.5 percent.
There’s a dark side of relying on WPMTF interest as a constant stream of revenue to the general fund: it reveals Wyoming’s nagging inability to diversify.
Bob Jensen, CEO of the Wyoming Business Council, says that diversity actually is occurring in Wyoming, it’s just that mineral financial contribution is so large is overwhelms everything else. “The growth rate of GDP for non-mineral industries in Wyoming over the past five years outpaces all of our neighboring states… We’re not satisfied with where we are but we are making progress,” he said.
But has the interest from the WPMTF kept Wyoming from diversifying, stifling ambition and creativity?
It’s a mixed bag, says, Bill Schilling, President of the Wyoming Business Alliance. Wyoming has made strides in diversifying its economy, he says, but not its tax structure. It’s also odd, says Schilling, that the interest from WPMTF gives additional funds to what most state legislatures are struggling to control: state and local government spending.
This is a tough dynamic to change. Big states with small populations are expensive to run, especially if viewed through the cost-per-capita lens. Government employees add stability to small economically marginal towns that find diversification difficult. Coincidentally, states with permanent funds are also the states with the highest percentage of public employees. A 2010 Center for Economic and Policy Research report lists Wyoming, Alaska, and New Mexico as having the top-three highest percentage of public employees.
What the WPMTF interest is doing, then, is maintaining the status quo. While no town wants to see its zip code erased from the map, the reality is that all communities have to innovate and change, a task rarely given to public workers. As Mead said in his state of the state address, “Wyoming kids have to compete on a global scale.”
And on a global scale, few kids, especially small town kids, get the luxury of keeping things the same.