Wyoming’s revenue is projected to decrease even more than previously predicted by the Consensus Revenue Estimating Group, to the tune of about 23 percent.

The state’s CREG report is released every January and October with predictions for the state’s budget so the state Legislature can have the best possible prediction of what lies ahead for Wyoming  drafting and voting on new legislation.

“We are going to have to prioritize,” said Sen. Ray Peterson, R-Cowley, who is co-chairman of the Legislature’s Joint Revenue Interim Committee.

Discussions about a “three-prong solution,” include having the state put less money into savings, spending less and possible changes to how severance taxes work or increasing taxes, such sales taxes on cigarettes.

The biggest difference between January’s report and October’s is that revenue projections through 2020 have dropped even further than previously projected, said Alex Kean, administrator for the Wyoming Economic Analysis Division.

“Overall, the biggest driver is the supply and demand imbalance in natural gas and oil,” Kean said. “There is sufficient production across the country and the demand is not growing at a pace to absorb the new production.”

Over the next three fiscal years, projected revenue for the state’s general fund and budget reserve account decreased by $617.5 million from what was predicted in January. The latest estimate is a decrease from $4.01 billion in 2013-14 to $2.94 billion in 2017-18.

At the same time, revenue for the state’s education accounts also is projected to decrease. The School Foundation Program Account and the School Capital Construction Account combined for $2.712 billion in revenue for 2013-14, then increased in 2015-16 to $2.73 billion, since revenues were based on the previous year’s activity.

According to the CREG report, those two educational accounts are set to decrease to $1.508 billion for the 2017-18 biennium.

The significant revenue decreases aren’t the only unusual activity noted in the new CREG report.

For the first time in Wyoming’s history, the fiscal year’s investment income from the Permanent Wyoming Mineral Trust Fund and state agency pool made up the largest revenue stream for the general fund at $608.5 milion, or 40.3 percent. Sales and use taxes were close behind at 36.1 percent, or $544 million, for fiscal year 2015.

“That was the intent — it is making the landing softer than in the past,” Peterson said.

That soft landing will be needed as the state’s general fund is anticipated to see a 50 percent decline in projected revenue in the next five years.

The peak year for the general fund and budget reserve account was in 2008, at just over $2.17 billion, Kean said. Fiscal year 2015’s total was $2.04 billion, and that’s now projected to decline to about $1.5 billion by 2020.

Taken from a single fiscal year perspective, 2015 was the highest general fund year on record, Kean said. The first six months of the previous fiscal year were strong, but that tapered off in the last half.

“It is kind of a tremendous drop from what we had last year,” Kean said.

The general fund and budget reserve account are projected to have a shortfall of $159.7 million by the end of the current fiscal year on June 30, 2016.

“This was not a big surprise,” Kean said, in reference to the impacts projected due to the ongoing decrease in mineral extraction values.

Black gold goes in the red

The October 2014 CREG report predicted oil production would go up through 2017 and that prices would remain stable between $85-90 per barrel through 2020.

Those numbers dropped in the January CREG report, with prices ranging from $50-65 per barrel through 2020.

Now prices are anticipated to range from $40-55 per barrel through 2020 with production decreasing from 83 million barrels in 2015 to 65 million barrels per year for 2018-20.

Wyoming’s oil sells for less than the WTI crude oil. Prices peaked at $107 in July 2014, and oil in the state was selling for $80 when the October 2014 CREG report was released. The downturn in oil price was just beginning then, and that significantly changed the October CREG report’s projections.

Oil production increased 20 percent in 2014 and sales during the first six months of 2015 increased 19 percent.

Wyoming’s oil rig counts decreased from 36 rigs in September 2014 to 11 rigs in September of this year, according to the recent CREG report. The price of Wyoming’s oil fell by about $44 per barrel year-over-year.

Production seems to have peaked in March at 250,000 barrels per day in Wyoming.

In 2016, Wyoming oil production is predicted to decrease by 12 million barrels, or 14.5 percent. Then in 2017 it’s anticipated to decrease by another 4 million barrels and by another 2 million barrels in 2018.

The tables turned for natural gas

Although warmer winters can be a welcome change when it comes to heating homes, the past few mild winters played a role in diminished natural gas revenue in Wyoming, Kean said.

Wyoming’s natural gas was almost $1 lower in 2015 than in 2014 at $3.55 per thousand cubic feet (mcf) and prices averaged at $2.85/mcf for the first six months of 2015.

Prices also were impacted by increased production across the country.

The most notable impact came from Pennsylvania, where 2.4 times more natural gas was produced and marketed than in Wyoming in 2014. But in 2009, Wyoming was producing 8.5 times more natural gas than Pennsylvania was.

While the price for natural gas still is projected to increase, it won’t be nearly as much as previously projected in the January CREG report. Past projections were for $4/mcf each year from 2016-20.

Current natural gas production and price forecasts are:

• 2015: 1.96 trillion cubic feet, $2.85/mcf

• 2016: 1.93 trillion cubic feet, $3.20/mcf

• 2017: 1.89 trillion cubic feet, $3.25/mcf

• 2018: 1.86 trillion cubic feet, $3.30/mcf

• 2019: 1.82 trillion cubic feet, $3.35/mcf

• 2020: 1.78 trillion cubic feet, $3.40/mcf

Coal and other minerals

Wyoming surface coal production has declined since its peak in 2008, when 462 million tons were produced.

The abundance of cheap natural gas is reducing tax collections on natural gas production and competing against coal, according to the CREG report. Coal also is facing obstacles from the Environmental Protection Agency’s new Clean Power Plan that was released in August. However, compliance with the new EPA regulations isn’t required until 2022, so the full effect is not included in the CREG report’s projections.

The possibility for selling Wyoming’s coal on the Asian market was not factored into the future projections either, since that deal is still on the table. 

So for now, coal production is anticipated to decrease from 375 million tons in 2015 to 360 million tons per year for 2018-20. Meanwhile, the price is projected to remain at $13.50 per ton for the next five years.

Unlike its counterparts in Wyoming’s mineral extraction industry, trona is projected to increase in production from 20 million tons in 2015 to 21 million tons for 2018-20 with a flatlined price of $75 per ton.

Boom or bust is familiar territory

This is not the first time Wyoming has experienced the bust of the boom and bust cycle — but this time the state is better prepared.

“The major thing will be spending less than we have in the last 10 years as revenues increased,” Peterson said. “Then the next thing is basically saving a little less — we put a lot aside in the coffee cans.”

As of October, there is about $1.8 billion in the state’s rainy day fund, and that’s a safety net the state did not have during past downturns, Kean said.

“It does not make much sense to continue the rate of savings as we have,” Peterson said. “What we have appropriated for the savings accounts will be a lot less.”

The state’s approach to making up for the projected decreases in revenue will likely be “a mixed bag,” Peterson said. This could include seeking new sources of revenue.

“Obviously, it is the policy-makers’ choice on what to do with that, but there is a safety net we didn’t have in past downturns,” Kean said. “We have seen volatility before; this is not new.”

Wyoming Gov. Matt Mead outlined his plan to deal with the revenue shortfall reported by the Consensus Revenue Estimating Group (CREG) report.

“Today’s CREG reduces projected revenue for the 2015-2016 biennium and affects the remainder of the 2016 fiscal year appropriations,” Gov. Mead said. “The CREG also projects lower revenue for the 2017-18 biennium. The projection for the present fiscal year — FY 2016 — requires me to reduce appropriations to ensure spending does not exceed projected revenue. By state law, we cannot overspend.”

The reductions for FY 2016 will come from agency budgets and restrictions on major project accounts. When building the 2015-16 budget, more than $109 million was set aside. These funds are known as the statutory budget reserve. They are a safeguard for this very situation. They, too, can be used to address the 2016 revenue shortfall.

Budget recommendations for the 2017-18 biennium are being developed now. Gov. Mead’s budget priorities are as follows:

• Investment in state and local governments to keep communities strong.

• Investment in education. This investment in youth helps Wyoming stay competitive now and in the future.

• Investment in economic opportunities. This investment diversifies Wyoming’s economy, provides jobs for Wyoming people and supports major industries — energy, tourism and ag.

• State programs necessary for the most vulnerable populations.

“The Legislature has been my partner in fiscal planning from my first day in office,” Mead said. “We have worked on fiscal policy that grows Wyoming’s economy, creates opportunities, and allows us to move steadily forward in all revenue climates. We have established and grown savings and permanent funds. We must steer a steady course now as we navigate a period of diminished revenue.”

The CREG report is created by a team of experts such as Alex Kean, administrator for the Wyoming Economic Analysis Division, the budget and fiscal manager from the legislative service office as well as representatives from the State Auditor’s Office, State Treasurer’s Office, Department of Revenue, Department of Education, Wyoming Geological Survey, Wyoming Oil and Gas Conservation Commission, and the University of Wyoming.