CREG predicts a decrease in revenue, but state legislators are ready

This isn’t Wyoming’s first rodeo when it comes to riding the boom-and-bust cycle that comes with the mineral extraction industry.

Wyoming’s revenue is projected to decrease by about 23 percent, according to the latest report from the Consensus Revenue Estimating Group (CREG).

“These figures are frightening to me as (Senate) Revenue Committee chairman,” said Sen. Ray Peterson, R-Cowley.

But, unlike busts of the past, the state is prepared with a $1.9 billion safety net, thanks to the rainy day fund that has built up over the years when the state’s economy was booming.

The Legislature has known for months that commodity prices would drop, and planning has been underway for a “long, long time,” said Rep. Tim Stubson, R-Casper, a member of the Appropriations Committee. “But, the ultimate solution will involve spending savings, some cuts to expenditures and some heavy-duty planning going forward.”

With enough warning and some careful planning, the state can afford the predicted drop in revenue for the next few years, Stubson said. “But, the question is, what about the next two years and four years beyond that,” he said.

The price of oil peaked in July 2014 at almost $110 per barrel, then dropped to less than $50 per barrel in January. From there, it increased to about $60 per barrel for a few months in mid-2015 and has remained under $50 per barrel since July.

During all of that time, legislators were in conversation with Gov. Matt Mead and looking at the state’s finances, Stubson said.

“It is important to note it was not a surprise,” Stubson said. “We have known for four or five months that CREG would show something along these lines — there was going to be a decrease in revenue, and conversations began long before CREG came out.”

Assuming the CREG report is accurate, the Legislature will need to take a close look at expenditures, trim budgets and cushion the blow by dipping into savings, Stubson said.

“A few years ago, we cut budgets and trimmed them by up to 6 percent and got $60 million in cuts from that effort,” Stubson said.

Some of the CREG report’s predictions for decreased revenue for the state could last far longer than just until 2020. It could be another 10-15 years before things return to the booming end of the cycle, Peterson said.

“The first few years we will be fine, but spending will need to be cut,” Peterson said. “We put enough away to make the landing softer from the boom-and-bust cycle. The coffee cans we put into will help us meet the needs we created.”

But now the question legislators are facing is: How much savings is enough, Peterson said. For now, the recommendation is to keep the spending percentages the same as before, which means everyone’s share of the state-funding pie will be the same. But now the pie is smaller, so every entity that receives state funding will take the same step down in state funds.

Of course, that could change once the legislative session begins in early 2016; for now, it is merely a recommendation.

“My theory was, if revenues are down and we cut spending and we cut other things, then we should cut savings as well,” Peterson said.

Some of the legislators made the comment that Wyoming will be fine, and the $200 million shortfall could be pulled from the rainy day fund so past spending could be maintained, Peterson said.

“We have to be very careful not to spend one-time money from the rainy day fund,” said Sen. Hank Coe, R-Cody. “I was through it in the ’90s, and we were required to have a balanced budget. There will be tremendous effort in February to tighten our belts and make cuts if we have to.”

The trick legislators will face in coming years is how to maintain essential state services with less revenue. 

“If things don’t change, in the next four, five, six years, those coffee cans will dry up and we will subsidize from the amounts we saved — then we will have to face the reality of looking at different taxation,” Peterson said, noting that the state will need to wean itself off the minerals it has traditionally depended upon. “If programs are selected to be cut or removed, that is where the battle begins, since priorities can be different.”

General fund

Over the next three fiscal years, revenue for Wyoming’s general fund and budget reserve account is projected to decrease from $4.01 billion in 2013-14 to $2.94 billion in 2017-18.

The state will need to cut unnecessary expenditures, assess all current revenue sources and then look into creating new revenue sources, Peterson said. Once all expenditures have been cut and all possible sources of revenue are collected, the state will be facing some tough decisions, he said.

“I look forward to times with less revenue; it makes us take a look at our expenditures and helps us to review it,” Peterson said.

If too many cuts are made, that would impact services that run entirely or partially on state funding — “hospitals closing, highways cracking and falling apart, bridges falling down, prisoners back on the street, mental health patients back on the street, those are services we must provide,” Peterson said.

Before Wyoming became a major player in mineral production, bonds were passed to build schools, sewers and other necessities.

“Mineral revenues have spoiled Wyoming a bit,” Peterson said. “It is going to be a hard sell. This is how we did it 50 years ago — if you wanted something, you taxed yourself for it.”

Peterson used the tobacco cessation program as an example of a non-essential state-funded program. It was initially developed with a trust fund, but now needs state funds.

“When we had money in flush, we played with it, but now money is tighter and it is going to be hard to say yes to fluffy, feel-good programs,” Peterson said.

Education fund

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.

“That is some frightening figures,” Peterson said. “But we have not piddled money away — we’ve done some good things with the revenues we had; long-term projects like schools we built.”

Coe, who is co-chairman of the Joint Senate Education Interim Committee, said he recently returned from three days of meetings in Casper about school facilities, updated information on the school foundation program and projected impacts from the 20 percent drop in revenue.

“It is a bit of doom and gloom, but does not impact us immediately,” Coe said.

The impact for schools will be felt in the next biennium, he said. The school foundation program mostly comes from ad valorem taxes, so a 20 percent decrease in valuation means a $700 million hit for the foundation over the next four years.

Most of the state’s schools are built using funds generated from coal lease bids, and Wyoming has spent about $3.2 billion building and renovating schools across the state in recent years, Coe said. If needed, the state could slow down the pace on building new schools, since some of the previously replaced buildings could have lasted another 10-20 years, Peterson said. 

What happens in the coming years is “up in the air,” Coe said.

As for the Hathaway Scholarship fund, it is still in good shape, Peterson said.

But planning for the future isn’t just making cuts — it’s also seeking new funds. Other revenue sources are available for education, and some are doing quite well, such as this year’s increase in tourism, Wyoming’s No. 2 industry.

“All in all, it is going to be a balancing act over the next few years,” Coe said. “The state has been through this before, and we will get through it (again) and do what we have to do to balance the budget, and I see that happening again.”

(See the rest of the story here.)