SHOW US THE MONEY
Let’s start with the basics: Where does Wyoming get its revenues to operate state government?
The mineral industry is by far the primary driver of the state’s economy. In addition to providing many high-paying jobs, energy companies pay severance taxes that historically have contributed more to the state’s General Fund than any other sector of the economy.
From the inception of the state’s Permanent Mineral Trust Fund (PMTF) from Fiscal Year 1975 through FY 2014, severance tax contributions from natural gas, oil and coal have been the largest contributors to the permanent fund.
Natural gas has led the way at 43.1 percent, followed by crude oil, 27.1 percent, and coal at 25 percent.
These industries also account for the majority of sales and property taxes collected in Wyoming. Because the state disburses some of this tax revenue to local governments, the mineral industry also plays a vital role in keeping cities, towns and counties humming.
For the past four decades, Wyoming lawmakers have saved a huge amount of money that’s been generated from taxes and royalties on its abundant but finite mineral resources. The state now has about $6.9 billion in its PMTF. Constitutionally these funds can’t be appropriated for any reason, but a portion can be invested in a mixture of stock and bonds.
The State of Wyoming has three principal permanent funds — the PMTF, the Permanent Land Fund (PLF) and the Permanent Land Income Fund (PLIF). The latter is a “holding fund” for income from state land and investments that will eventually be spent.
The PMTF receives revenues from a 1.5 percent severance tax on oil, gas and coal. The only way the Legislature could divert this revenue stream to another account would be through an amendment to the Wyoming Constitution.
In 2005, the Legislature passed a law that diverts two-thirds of the constitutionally required distribution to the PMTF before any other distributions are made.
Investing these permanent funds raises money from interest and realized capital gains at the end of the year. Wyoming had a record year in 2014. It earned $395.3 million from its investments, which by law is administered by the State Treasurer’s Office. The previous record was set in 2013, when investment income totaled $346 million.
The state treasurer invests PMTF funds in government securities, corporate bonds, equities and a variety of statutorily authorized state loan programs.
When Wyoming became a state in 1890, it was awarded lands for specific purposes. Revenues that flow into the Permanent Land Fund may come from the sale of these lands, the production or sale of minerals, or any other depletable resource from the land.
The Legislature established 12 separate funds within the PLF to account for the revenues from these specifically designated lands. Seven are the Public Buildings at Capitol, Fish Hatchery, Deaf Dumb and Blind, Carey Act, Wyoming State Hospital, Wyoming State Training School and the Penitentiary accounts.
The PLIF has five funds to handle investment income and money received from surface leases. They are the Miner’s Hospital, Common School, Omnibus, University and Agriculture College. Lawmakers can only appropriate monies from the Miner’s Hospital fund for that facility.
Common School Land Income monies are distributed to the School Foundation Program to operate the state’s 48 school districts.
The Omnibus fund monies may only be spent on the state institutions by either the Legislature or the unanimous decision of the State Loan and Investment Board.
The University and Agriculture College monies can be spent by the University of Wyoming Board of Trustees.
Monies in the Agriculture College, the University and the Common Schools funds cannot be appropriated by the Legislature without a constitutional or federal law amendment, or both. This is not done very often.
How do legislators, other officials and the public keep track of the state’s expendable funds?
The Legislative Service Office periodically publishes a fiscal report, better known as the “Goldenrod Report.” This invaluable document is updated frequently during the legislative session to reflect how proposed or approved legislative action is expected to affect state revenues and expenditures.
For the first time in history, FY 2015 investment income from the PMTF and available funds from a pool of state agencies comprised the largest revenue stream directed to the GF, totaling $608.5 million, or 40.3 percent, of the revenue collections. Sales and use taxes totaling $544 million, or 36.1 percent, followed as the second largest contributor to GF revenue.
That means investment income and sales and use taxes comprised more than three-quarters of the GF revenue in FY 2015. It’s unknown if the trend will continue or how much Wyoming might make on its investments in the future, but it’s a significant source of revenue that should be closely tracked by legislators to see if it can become a consistent source of available state funds.
Wyoming has dozens of accounts to tap for different reasons, including a “rainy day fund” that has already grown to more than $1.8 billion since 2005. It’s officially called the Legislative Stabilization Reserve Account (LSRA).
Counting on steady production from oil, natural gas, coal and other mineral industries to pay most of its bills can leave the state high and dry whenever a boom period turns into a bust. Wyoming has plenty of money in the bank, but the state has never developed a specific strategy for determining how much to save or define when it’s “raining” hard enough to spend some of its temporary reserves to keep the government and public schools running.
Republican legislative leaders have been adamant that the state should not touch the LSRA — no matter how many people think it’s already “raining” for several cities, towns and counties that need help now. There are also critical infrastructure needs throughout Wyoming that are being ignored, including state highways, because they maintain the state can’t afford to pay for them.
GOP leaders who control the purse strings contend the state needs to save at least $3.9 billion — the cost of running the state government for a two-year period — before any savings in the rainy day fund is used.
The Joint Revenue Committee has been assigned the task of developing regulations so Wyoming finally has an accountable method of savings that spells out how much money will be saved and also guides how those funds can be spent.
There may not be enough time to draft and obtain sufficient support for a bill to regulate the state’s temporary savings during the upcoming budget session, but it will be an important discussion to watch. The issue will probably land in the lap of lawmakers again in 2017.
THE STATE’S CRYSTAL BALL
Do the governor and state lawmakers know in advance how much revenue will be available for the budget?
They get the best possible fiscal forecast from the Continuing Revenue Estimating Group (CREG), which is responsible for projections of the main sources of income to the state’s major accounts.
Prior to 1983, the executive and legislative branches made separate estimates of state revenue, which often led to arguments about whose figures were right instead of focusing on the actual budget work that must be completed. The two branches came to an informal agreement that year to create a joint process that would give them more reliable, consistent revenue estimates.
The answer was CREG, which is composed of members from various professional fields and governmental organizations. Its members include the LSO’s budget/fiscal manager and the Economic Analysis Division administrator from the Department of Administration and Information, who serve as the Co-Chairmen of CREG.
The body of the group is made up of the director of the Wyoming Oil and Gas Commission, the director of the Wyoming Geological Survey, a University of Wyoming economics professor, and representatives from the State Auditor’s Office, Department of Revenue, Department of Education and the State Treasurer’s Office. The members of CREG project the various streams of revenue to the General Fund, revenues from mineral severance taxes and federal mineral royalties, the revenues received by the Common School Land Income Account, and the total state assessed valuation.
CREG begins its work in August when its minerals subgroup starts preparing estimates of mineral valuations. In late September the subgroup finalizes those estimates.
In early October, the full CREG group reviews the subgroup’s work and forecasts the balance of the revenue categories. All of the information is compiled into CREG’s annual report and used as state government’s official revenue forecast for preparing and estimating state agency budgets.
CREG revises its October forecasts in January, if needed. Another report is then issued with revised projections. The governor uses the October report to prepare his recommended budget, which is due on Dec. 1, but if CREG meets in January, legislators have access to the latest data available before they begin the bulk of their work.
The report includes major revenue sources to the General Fund — severance taxes, including sales and use taxes, agencies’ pooled interest and PMTF interest. Smaller sources include charges for sales and services, franchise taxes and licenses and permits.
The projected production, price, expected severance tax receipts and federal mineral royalties are forecast for oil, natural gas, coal, trona and other minerals. CREG details the expected distribution of severance taxes and royalties to each fund or account that receives them.
The final section of the report projects income derived from the investment of monies from the Common School Permanent Land Fund. It also forecasts the total state-assessed valuation based on mineral price and production estimates, and projections of assessed valuation for all other types of property based on historical trends.
In October 2015, CREG’s report indicated a major revenue shortfall due to lower production and prices of oil, natural gas and coal. The experts said General Fund revenues for Fiscal Year 2015 would be down $159 million compared to what legislators already budgeted. Seeing continued low mineral production and prices throughout FY 2016-17, CREG raised the total shortfall for the next three years to $619 million.
And the bad news didn’t stop there. CREG also projected a shortfall in education revenues of about $700 million for the same period. The final tally for General Fund and education revenue was $1.3 billion less than CREG had projected receiving in January 2015.
HOW IT ALL BEGAN
How did Wyoming start saving its tax revenue from mineral development?
Wyoming lawmakers and voters kicked and screamed for 80 years against creating a mineral severance tax that would help better fund state government. Opponents feared the mineral industry that was so vital to Wyoming’s economy would be hurt by the tax and likely pick up stakes and move to another state.
Delegates to the constitutional convention in 1889, one year before statehood, soundly rejected a mineral severance tax. In 1924, a proposed constitutional amendment to put a 1 percent tax on the gross value of crude oil and other minerals actually had more votes cast for it than against. But the state constitution requires an amendment to receive a majority of the total votes cast in an election, and the proposal lost when it couldn’t meet that threshold.
Supporters didn’t give up. In 1949, a bill to create a mineral severance tax and establish a permanent mineral trust fund to protect the state from any economic downturn in the mineral industry was killed by the Senate. A 2 percent tax died in 1955 and a 3 percent tax failed in 1967.
Stan Hathaway, a Republican lawyer from Cheyenne, ran for governor in 1966 against Democratic businessman Ernest Wilkerson of Casper, a strong advocate of the mineral severance tax who made it the central issue of his campaign. During several contentious debates Hathaway derided the idea Wyoming needed such a tax, and he trounced Wilkerson by more than 10,000 votes.
But a not-so-funny thing happened midway through Hathaway’s first term — Wyoming saw the balance of its General Fund drop to only $80. Yes, you read that right — 80 bucks. Wilkerson renewed his public campaign for the tax and this time Hathaway, looking at that pathetic amount of money in the bank, agreed with his former opponent.
However, the governor couldn’t get anyone in the Legislature to sponsor his 1 percent mineral severance tax bill. Finally, on the last day to consider bills, House Revenue Committee Chairman Rep. Cliff Davis of Gillette told Hathaway he would introduce the measure. “I felt sorry for you,” he told the governor.
With the state’s dismal revenue picture now staring lawmakers in the face, the severance tax measure won approval in both the House and Senate in the 1969 session. When the amendment was put on the general election ballot, this time it passed.
Four years later, some legislators wanted to double the mineral severance tax, but Hathaway said he would veto such a bill unless lawmakers also passed one to put 2 percent of the severance taxes collected into a Permanent Mineral Trust Fund (PMTF). In November 1974, voters gave their blessing to that constitutional amendment, too.
Wyoming’s accumulation of revenue to fund state government forever changed after that election. A portion of the tax money now flows automatically into the PMTF, and the corpus cannot be touched for any reason. Money made from investing the interest earned from the account each year is used by state government to fund about 60 percent of its operating budget.
As lawmakers prepare to return to Cheyenne for the 2016 budget session, the PMTF has grown to $6.9 billion.
Still, imagine how much it might contain now if Wyoming had instituted a mineral severance tax in 1890, its first year of statehood.
A TALE OF TWO STATES – ALASKA LOSES BUDGET GROUND
A few years ago, Sarah Palin (the former half-term Republican governor of Alaska and bumbling vice presidential candidate, in case you forgot) had a few tips about mineral severance taxes that drew the interest of some Wyoming lawmakers.
Changing the way her state collects its mineral taxes helped raise Alaska’s Permanent Mineral Trust Fund to $49.9 billion. That’s more than seven times what’s now in Wyoming’s PMTF, even though we started our permanent fund several years before Alaskans did.
Wyoming’s flat severance tax rate is regressive: The state collects severance tax on the gross value of the minerals. When mineral prices increase, the state’s taxable mineral values can actually decrease. This policy can also act as a disincentive for companies to explore and develop new fields or mines, the sector in which they invest the most money.
Palin introduced a higher minimum severance tax rate in Alaska; a sliding scale that allows the state to receive a greater share of energy company profits when mineral prices rise, but a lower portion when they fall. It also approved significant deductions for exploration and drilling, including tax credits for small producers.
Wyoming hasn’t changed its severance tax rate since 1981. Was Palin on to something? The Cowboy State has a projected General Fund shortfall of $618 million through 2018, and when you add education expenses, the total balloons to $1.3 billion.
But Alaska is now facing a whopping $3.5 billion shortfall, at least partially due to the hit the state took from substantially lower mineral prices due to its new sliding scale. Its governor is facing criticism from all sides for his proposed way to deal with the problem: He’s suggested creating both an income tax and a sales tax, neither of which Alaska has now. He may have to cut the minerals dividend for Alaska residents, which — combined with his new taxes — has been estimated to reduce everyone’s annual income by about $5,500.
During the past interim session Wyoming’s Task Force on Mineral Tax Collections considered a potential bill that would change the state’s collection system. It was fought tooth-and-nail by energy producers who didn’t want to pay more, and the idea was scrubbed.
Those lower mineral prices Palin didn’t foresee could have made our state’s revenue picture even dimmer. It turns out Alaska would have been a lousy role model for Wyoming.
Many Alaska legislators have taken their governor to task for not recommending much more in state budget reductions and not freezing state jobs. Compared to that state’s problems, Wyoming seems to have it pretty good: We still don’t have a state income tax, Gov. Matt Mead has saved millions by not replacing state workers when they leave, and our considerably lower shortfall should be easier to erase.
So Wyoming was wise not to follow Sarah Palin’s advice. Is anyone surprised? We didn’t think so.
STATE BUDGETING PROCESS: WHO DECIDES WHERE ALL OF THE MONEY GOES?
What is the State of Wyoming’s timetable for its budgeting process each year?
All state agencies, the University of Wyoming, community colleges and K-12 public schools build their budgets for two fiscal years of operation, or a biennium. The fiscal year begins on July 1 and ends on the following June 30. The Legislature’s budget session is always in even-numbered years, and each biennium starts on July 1 following the budget session.
During the summer months, agency fiscal personnel work with the Budget Division of the Department of Administration and Information (A&I) to prepare a “standard” budget request for each agency in July. The standard budget is generally what an agency had received for the prior biennium — which is known as its “base” budget — with adjustments made for legislative- or executive-approved transfers of funds into or out of an agency’s budget.
The standard budget contains strictly the amount of funding to enable an agency to continue furnishing the same level of services during the next biennium. It does not include requests for equipment, any special projects or services, or any requests for special or nonrecurring funding. However, the limitations placed on either personnel or equipment do not apply to the university.
Each agency may develop an “exception budget,” though none is required. An exception budget seeks increased funding deemed necessary to maintain current levels of service, or increased funding to expand services to a new group of recipients or a new service to existing recipients.
The A&I Budget Division deadline to receive all budget requests is the end of August. The division assembles all of the agency requests into a package for the governor to review.
The Budget Division has a deadline of Oct. 1 in each odd-numbered year to file copies of the base and standard budgets with the Legislative Service Office (LSO). This submission is known as the “Chapter 17 Report.”
LSO staff members review the report and identify items that may be of special interest to the powerful Joint Appropriations Committee (JAC). [Please note: The press almost always calls it “the powerful JAC,” not to inflate the lawmakers’ egos — the members take care of that themselves — but because the committee’s extensive work and recommendations really do serve as a guidepost for how many legislators ultimately vote on an appropriation.]
The Consensus Revenue Estimating Group (CREG), which was outlined in our revenue section, meets in October to develop revenue forecasts for the upcoming biennium. The governor uses this information to work with the Budget Division to prepare his budget recommendations to the Legislature, which are due by Dec. 1 each year.
If an agency believes it needs additional funding after lawmakers have approved a biennial budget, it can prepare a “supplemental” budget request in the summer months prior to a general legislative session. It contains only exception requests for funds in addition to what was approved in the budget session, so it does not have any base or standard requests.
If an agency needs funds in addition to the amounts approved during the budget and supplemental requests, it can ask during the next budget session for an additional appropriation that will be effective immediately. This allows for the Legislature — which usually adjourns in March — to make an appropriation for an agency to receive necessary funding through June 30, the end of the biennium. This process gives an agency three separate legislative sessions to request funding for a single biennium.
WHAT’S IN IT?
Exactly what does the state budget include?
When the governor and legislators refer to the state budget, they mean the agency requests that come under their respective purview in the budget process. This includes the entire judicial branch; the state supported portion of the university; the Community College Commission’s administrative budget — including state aid from the General Fund to the community colleges; the School Foundation Program’s expenditures (K-12 education); and all state agencies and departments except Game & Fish and the maintenance and operations budgets of the Department of Transportation.
There are also elements of Wyoming’s fiscal picture that are not considered part of the state budget. They are excluded by state law:
— Budget decisions made by the Wyoming Highway Commission for the maintenance and operations portions of the Department of Transportation, and those made by the Wyoming Game and Fish Commission.
— Appropriations for Water Development accounts.
— Revenue that statutorily flows into various accounts, including the Highway Fund, Water Development accounts, and state funds for cities, towns and counties.
WHAT THE CODES MEAN
How do you know where to look for information about agency expenditures in the state budget?
This is done through major groupings of line item expenditure codes used in the budgets. Here’s a description of what each series contains:
- 100 series – All costs associated with personnel, salaries and benefits for all employees. At-will-employee-contract (AWEC) expenditures are also counted here.
- 200 series – Support costs such as equipment, communications, supplies and travel.
- 300 series – Essentially this is cost allocation.
- 400 series – These are charges from Enterprise Technology Services (ETS) or computer services.
- 500 series – Space rental, charged to non-generally funded agencies that are housed in a non-state-owned
- 600 series – Grants and aid payments, which includes Medicaid payments, welfare payments, contract payments to local providers of health services, and transfers to local governments.
- 700 series – Capital construction expenditures.
- 800 series – Non-operating expenditures, such as items purchased for resale.
- 900 series – Contractual expenditures.
LONG SESSION FOR JAC
How does the Joint Appropriations Committee make its budget recommendations to the full Legislature?
The LSO’s budget and fiscal staff uses the governor’s budget recommendations to analyze the agency requests and prepare detailed reports that help the JAC learn what each agency is seeking. Combined, the information in these reports assists members of the JAC get a better understanding of what the overall state budget looks like.
In December or early January prior to the budget session, the JAC begins agency biennial budget hearings. Each agency presents its overall achievements, goals and requirements, followed by a more detailed explanation of its budget request. JAC members may ask questions but do not take any formal action at these hearings.
Once the hearing process is completed, the JAC starts working through each agency’s budget, unit by unit, with individual committee members making specific recommendations to approve, deny or adjust an agency’s funding request. The JAC discusses and votes on each one whether there are recommended changes or not.
The committee’s hearing/working budget process usually takes about five weeks to complete, with generally a week left before the budget session begins. The LSO budget/fiscal staff uses this time to draft a general appropriations bill to be introduced in the Legislature.
The chairmen of the House and Senate Appropriations Committees assign members to present different sections of the proposed budget bill to the respective chambers. Previously the House and Senate worked on and approved separate versions of the budget bill, and sent the other chamber their version to see if changes made to the bills in the House and Senate could be reconciled.
But this process proved to be too cumbersome and time-consuming, so lawmakers abandoned it in favor of having the House and Senate consider “mirror” budget bills at the same time. Conference committees appointed by the House Speaker and Senate President attempt to reach an agreement on any differences in the budget bills. Both chambers must accept the changes the conference committees make to the bill to be approved as part of the budget, and both chambers have to pass a single version of the final budget bill.
POWER OF THE VETO
What ability does the governor have to change the state budget?
The Legislature sends the final budget bill to the governor, who has three days to sign it, make changes or let it become law without his signature. The chief executive has line-item veto authority, so any provision or footnote in the entire bill can be struck from the budget. Generally the vetoed item is sent back to the House or Senate with an explanation from the governor about why an expenditure was rejected.
The Legislature can override a gubernatorial veto if both the Senate and House have a two-thirds majority vote for such action.
The governor also has “flex authority” that overrides existing statutes and enables the state’s top elected official to transfer General Fund monies between agencies and between programs that he would not otherwise be able to do.
Such flex authority is usually contained in Section 300 of the biennial budget bill and is in effect for the two years in the budget. The amount of flex authority varies from one budget session to another. In the 2015-16 biennium, the governor can transfer up to 10 percent of an agency’s General Fund appropriation between divisions within the agency, and up to 5 percent for any executive branch agency — excluding the university — to another agency.
SAVINGS VS. SPENDING
How does the Legislature decide how much money to put into permanent savings and how much can be spent during a biennium?
This question is one of the biggest points of contention each session. The Republican legislative leadership has maintained for years that the State of Wyoming needs to put as much money into savings as possible, for two reasons.
First, the more the state grows the corpus of the Permanent Mineral Trust Fund (PMTF), there is potentially more state investment income from higher realized capital gains. Second, money put into the Legislative Stabilization Reserve Account (LSRA) — which now has balance of about $1.8 billion — will be available whenever a drop in mineral severance taxes and royalties creates a “rainy day,” or shortfall for state government expenditures. In general, Republicans believe the Legislature should grow the LSRA enough to cover Wyoming’s state biennial budget, which is $3.9 billion for FY 2015-16.
But Democrats maintain that while it’s good to save during times when Wyoming’s minerals-based economy is doing well, the state needs to spend a portion of its Rainy Day Fund on building and fixing infrastructure, including Wyoming’s rapidly deteriorating highway system.
At an October JAC meeting in Casper, Co-Chairman Sen. Steve Harshman (R- Casper) said legislators should be able to survive the state’s projected $617 billion shortfall over the next three years through a combination of savings, investment income and cuts to state programs and agencies.
The two Democrats on the JAC, Rep. Cathy Connolly of Laramie and Sen. John Hastert of Green River, offered other alternatives. Connolly said the state could adopt legislation to stop the automatic flow of some tax revenues into permanent savings accounts, because once the money is transferred to the PMTF and other accounts, the Wyoming Constitution says it can’t be touched.
Hastert said if the GOP is worried that funds not saved will lead to excess spending, lawmakers could put a portion of funds normally diverted to permanent savings into a short-term holding account like the Permanent Mineral Trust Fund Reserve Account. That would give lawmakers the time and opportunity to review possible spending measures or put the money into permanent savings at the end of the session.
Connolly argued that all options for using the revenue should be on the table. She noted that in 2015, $210 million was automatically diverted to savings so there was never an opportunity to consider it for state government expenditures.
She compared the budget decisions state legislators must make to what each Wyoming household has to do annually. “Do you want to put $10,000 into your savings account, or do you want to fix your roof?” she asked. “Right now it might be time to fix the roof.”
Harshman, though, said while JAC members are free to discuss the issue of savings vs. spendings, he’s already decided that socking away as much money as possible is in the best interest of the state.
“If we are going to embrace this [PMTF] as a trust fund, and really count on it as an investment, you can’t take out the inflation proofing [from automatic savings sweeps],” Harshman said. He added Wyoming is in good shape to cover a large shortfall because of its decision to keep building up its permanent funds.
Connolly said the state has already adopted a hiring freeze to save up to $18 million in 2016, and GOP leaders have no intention to make it easier to access budget lifelines to ease immediate cash flow problems that have resulted in a $159 million shortfall during the current fiscal year.
“Wyoming has literally saved its way into the current deficit,” the Laramie lawmaker said.
GOOD SCORES, BAD SCORES
How does Wyoming’s budgeting process compare to the systems in place in other states?
The Center for Public Integrity (CPI), a national nonprofit government watchdog organization, annually rates state governments after assessing their level of public integrity. In 2015, it gave Wyoming an “F.” But it still found good things to say about the state’s budgeting process, which earned an “A” grade.
The CPI applauded the Wyoming Legislature’s transparent budget process, the ability for public input at budget hearings, and the Continuing Revenue Estimating Group (CREG) for publishing a pre-budget statement presenting assumptions, such as expected revenue, expenditure, debt-levels, and broad allocations among sectors.
In 2012, CPI singled out the JAC’s audio-taped sessions for special praise, despite the state’s overall “F” grade that year, too.
“There is some good news on the transparency front. For example, Wyoming’s budgeting process is widely accessible,” the CPI noted. “It involves the governor, department heads and Joint Appropriations Committee operating mostly in open sessions. And the Legislature has started broadcasting and providing recordings of the audio of Appropriations Committee hearings and discussions on the Internet.”
IT COULD BE BETTER
Does everyone think Wyoming’s budget process works well?
The Center for Public Integrity may give Wyoming an “A” for its budgeting process, but not everyone agrees that it works that well — even state lawmakers.
Sen. Cale Case (R-Lander) served for four years on the Joint Appropriations Committee. In a June 3, 2014, guest column for the public policy website WyoFile, he charged that the budgeting process is broken and needs fixed.
As an example, Case said some legislators added a controversial educational policy footnote as an amendment to the state’s budget bill at the last minute, so it could not be carefully considered.
“Amendment 14” was offered by Rep. Matt Teeters (R-Lingle), chairman of the House Education Committee, to prevent the Wyoming Board of Education from approving, funding or even discussing the Next Generation Science Standards (NGSS).
The standards, which state that burning fossil fuels causes climate change, had already been recommended to the board for implementation by a committee that worked on the issue for months. But opponents said the state should not have standards that criticize the energy industry, which pays the majority of taxes responsible for operating state government. They also want the NGSS to include creation theory.
The House considered a whopping 50 budget amendments during its final reading, and approved Amendment 14 after only a 10-minute debate. It was OK’d on a standing vote that was not even recorded, so no one knows how anyone voted.
The Senate and House reached a consensus on all of the differences in the two chambers’ budget bills, including Amendment 14, and passed the final version of the budget with a single vote in each chamber. Gov. Matt Mead has line-item veto authority that he could have used on Amendment 14, but he didn’t do so. It took several days for supporters of the standards to discover the anti-NGSS footnote was now part of the budget, and it dictated exactly what the board could do about the standards — nothing.
Case said Amendment 14 should have been considered as a stand-alone bill and gone through a committee in each house to allow the public to testify.
Under that process, a recorded vote would have been taken on final passage in each house.
“By tacking it onto the budget bill, none of these checks and balances happened and the proud Wyoming Legislature slipped a little bit closer to emulating one of the worst aspects of Congress – bills with more than one subject that can increase the tendency towards log rolling or vote trading.”
Before the Legislature adopted the mirror budget process, which has both houses consider the same budget bill simultaneously, one chamber would work on the budget, approve its version, and send it to the other side. When they were both done, conference committees worked out the differences.
Case thinks the old system was better.
“This was a better way for the public to have access and it allowed better scrutiny of the work being done,” Case said. “It was less likely that the budget would be Christmas-tree’d with legislation that more properly belongs in a stand-alone bill.”
Case noted that from a strategy perspective, what Teeters did circumvented the requirement in a budget session for non-budget bills to get at least two-thirds approval of both houses to be introduced.
“First, let’s get rid of the mirror bills for the budget and even more radically start allowing public testimony in the budget hearings,” Case suggested. “Next, let’s stick to the strict use of the budget as a funding and not a policy vehicle.”
Case maintained that while the mirror budget process was adopted to save time, it really doesn’t. “It still takes four days dedication by each house,” he noted. “That would not have to change, only that the days would not be simultaneous.”
“Christmas-treeing” the budget bill with non-budget items is something even he has engaged in, Case admitted. But getting rid of such proposals, he added, would significantly reduce the time needed to consider the budget.
“The current mirror bill process failed us,” the Lander lawmaker said. “It failed the people of Wyoming, and it failed the good people of the Wyoming legislature. This needs to be fixed.”
But a former House member and co-chairman of the JAC, Rick Tempest of Casper, thinks the mirror budget concept is actually better than the old way, primarily because it’s faster than the method of waiting for one house to finish the budget bill before sending it to the other side of the Capitol for three or four more days of consideration.
“Each house works the bill at the same time, and like amendments are considered at the same time,” he said. “I understand what Cale is saying, but I still think it would get the same scrutiny on both sides.”
Marguerite Herman, a lobbyist for the Wyoming League of Women Voters, said she believes the footnote amendment was “an ambush — a few people blowing past the deliberative process and public debate, exploiting a committee chairman who is supposed to be trustworthy. In fact, the science standards were ready to go out for public comment when the footnote stopped everything in its tracks.
“So people who contend they just wanted a chance to be involved are either dishonest or ignorant,” she concluded.
Maybe even both.
WYOMING HAS POTENTIAL TO BRING HOME EVEN MORE INVESTMENT INCOME
Excellent returns on its investment of permanent funds has unquestionably kept the State of Wyoming in reasonably good financial shape in recent years.
But now that falling mineral prices for oil, natural gas and coal have left the state with an estimated General Fund shortfall of $618 million through 2018 — $1.3 billion when education is included — officials are looking more than ever at Wyoming’s investment income to help keep state government above water.
In Fiscal Year 2014, the state gained $395.3 million by investing up to its statutory limit of 55 percent of the corpus of the Permanent Mineral Trust Fund (PMTF). Since the PMTF was created in 1975 thanks to legislative action and the voters’ approval of a constitutional amendment, its investment income has generated $4 billion to help operate state government.
If another constitutional amendment is OK’d by voters in the November 2016 general election, the state stands to increase its investment income even more. Given the state’s sudden budget woes, it’s a difficult proposal to turn down. State Treasurer Mark Gordon told legislators he will lead the effort to sell the amendment to the public.
In 2015, the Legislature’s Joint Appropriations Committee sponsored a joint resolution to allow the state to also invest temporary funds in equities. This would include the state’s “rainy day fund” — officially called the Legislative Stabilization Reserve Account (LSRA) — that has grown to about $1.8 billion since it was created in 2002.
Currently temporary funds can be invested in bonds, which are considered more stable than equities but have less potential for large returns.
If Gov. Matt Mead’s proposal to borrow $448 million from the rainy day fund to help the state make up a portion of its three-year shortfall is approved by the Legislature during its 2016 budget session, the state must promise to put the entire amount back by 2018. However, the reduced funds during this period means the emergency account would probably grow at a much slower rate.
If the state is authorized by voters to invest a portion of its temporary money in the stock market, though, the move could net the state millions of dollars in extra revenues.
“That is a big chunk of money (in the LSRA) to have sit idle,” explained Gordon. “So we have an opportunity here to get a bit bigger return.”
Mead has proposed a total of $159 million in budget cuts to state agencies and programs to help make up the projected shortfall for FY 2016. But the governor said if stock market investments are approved for temporary funds next year, it could reduce the need for future budget reductions.
In addition to the rainy day fund, the amendment would also apply to other funds, including the Wyoming Wildlife Natural Resource Trust Fund and the Wyoming Cultural Trust Fund.
But even if the amendment receives final approval from voters, another two- thirds vote in each chamber would be required for lawmakers to authorize the change in investment strategy for a specific account.
Each chamber of the House must approve the amendment by two-thirds, which was accomplished in 2015 when the Senate voted 27-3 and the House approved it 50-9. To become part of the state constitution, the public must also approve the ballot measure by a two-thirds vote in 2016. If it passes that hurdle, the Legislature must vote again to change the state’s investment strategy for a specific temporary account.
A $19 BILLION PORTFOLIO
What is the state’s investment strategy?
The State of Wyoming’s investment portfolio totals $19 billion in non-pension funds. The state employs a variety of strategies to meet its major investment goals of 1) protecting funds and 2) predictable returns within acceptable risk.
The state invests in fixed income, equities, alternatives and cash.
The use of active managers in charge of the state’s fixed income portfolio is designed to provide the state with consistent income with low overall volatility, and to protect the portfolio from rising interest rates and inflation.
Wyoming uses a “core-satellite” structure with most of the portfolio in “core” strategies, along with selected “satellite” managers in specialist roles.
SLIB, STATE TREASURER SPLIT DUTIES
Who sets the state’s investment policy?
The State Loan and Investment Board (SLIB), which is comprised of the five state elected officials, with the governor serving as the board chairman, sets the state’s investment policy. It also hires investment consultants to work with the Treasurer’s Office to develop the portfolio and produce performance reports, and hires and fires managers based on the recommendations of the State Treasurer.
The State Treasurer’s Office is responsible for the day-to-day administration of the state’s portfolio. The State Investment Officer, who is appointed by the state treasurer, runs the show.
Michael Walden-Newman, the State Investment Officer for 10 years until he accepted a similar job for the State of Nebraska in December 2014, said he maintained regular contact with the Legislature, especially its oversight panel, the Select Committee on Capital Financing and Investments.
“I always found them engaged and supportive of anything I felt was best for the portfolio,” he recalled.
Asked about the large return to the state from its stock investments, Walden- Newman noted, “The markets were on our side in recent years.”
“But we also made money by sticking to our investment principles and keeping a long-term perspective,” he added. “As much as anything we had a very good, diversified asset allocation on non-correlated asset classes that work well together across varying market conditions.”
Walden-Newman was succeeded as Chief Investment Officer by Patrick Fleming, 55, a native of Cheyenne.
Fleming’s resume includes time at major financial firms including Salomon Brothers, Lehman Brothers and as CEO of Barclay Investments, as well as time running his own hedge fund. He’s worked in financial centers including New York, Tokyo, Hong Kong and London.
Fleming said he plans to analyze the performance of outside investment managers hired by the state. If they’re not beating industry benchmarks, he said, the state could bank their fees and invest on its own.
As Wyoming braces for lower revenues over at least the next three years, Fleming said the challenge puts even more pressure on the state to realize income from its investments. He said three tenants guide the Wyoming Treasurer’s Office: “Number one is risk, two is liquidity and three is the return.”
Fleming said he’s looking at risk-adjusted returns, “Not only from the portfolio, but also from the revenue stream, which I think is different from what other people are doing.”
He said that includes the risk of investing state funds in energy markets. Wyoming will receive additional income from energy production if those markets rise, Fleming noted, but he is pondering whether the state should double its risk by also investing cash in them in case there is a downturn.
STRONG ETHICS POLICY
What prevents conflicts of interest in state investments?
The State of Wyoming has a strict ethics policy that prevents conflicts of interest in all phases of investing the state’s portfolio. Disclosure reports are public and on file with the State Lands Office for staff and any elected officials who touch the investment program.
Members of SLIB, its staff, the State Treasurer’s Office and consultants are responsible for investment decisions or anyone who influences those decisions.
Individuals have a duty to avoid financial, business or other relationships that might cause a conflict with the performance of their duties or their ability to make unbiased and objective recommendations and decisions. They need to avoid even the appearance of conflict between their personal interests and their duties as public officials or state employees.
They cannot accept gifts, payments or services from those seeking to do business with the state. They cannot own or have a personal interest in any company that is a vendor of the state, own any security purchased directly by the State Treasurer’s Office or SLIB.
Confidentiality rules require individuals to not disclose to any personal information obtained through or in connection with their duties, unless the information is available to the general public or authorized by law.
The ethics policy states: “The work of the board and its staff should always be free from even the inference or perception that favorable treatment was sought, received or given on the basis of the furnishing or receipt of gifts, benefits, entertainment, favors, hospitality or other gratuities.”
WHERE MONEY IS INVESTED
What markets can the State of Wyoming invest in now?
The broad fixed income market is comprised of these primary sectors:
— Treasuries, which are debt obligations secured by the U.S. government’s full faith and credit. These generally can’t be redeemed by the issuer for redemption before they mature.
— Agencies, which are securities issued by federal agencies like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank (FHLB). They may be redeemed by the issuer prior to maturity under terms agreed to prior to issuance.
— Corporates, also called Credits, are debt issued by corporations. Corporate bonds carry default risk directly tied to the credit-worthiness of the corporation. Rating agencies report the relative degree of credit risk.
— Mortgage-backed securities are debt securities that represent ownership in a group of mortgages, such as those issued by the FNMA and the Government National Mortgage Association (GNMA). Mortgages carry a high degree of pre-payment risk and general uncertainty about the speed at which the principal will be repaid.
— Asset-backed securities are a type of debt security based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets. The asset pools are most commonly credit card payments, auto loans and mortgages.
Other types of fixed-income securities often used by opportunistic active fixed income managers include:
— Below Investment Grade, which are non-investment grade bonds often called high yield.
— Bank Loans, which are floating rate, short-term loans used to finance mergers and acquisitions, capital expenditures and leveraged buyouts.
— Foreign/Global Debt, which are bonds issued by foreign governments, agencies, and public or private companies.
— Emerging Markets Debt, or bonds issued in less developed countries in most or all of Africa, Eastern Europe, Latin America, Russia, the Middle East and Asia (excluding Japan). They tend to have a lower credit rating because of the increased economic and political risks.
Since 2011 Wyoming has had a AAA credit rating from Standard and Poor’s, the highest rating possible.
The state’s equity mandates are designed with a goal of broad market exposure, while reserving the additional cost of active management for only the highest conviction strategies.
Diversification efforts within the equity portfolio emphasize total return, capital appreciation, protection against inflation risk and consistent returns.
All-Cap U.S. Equity strategies invest in stocks issued by companies with market capitalizations across the broad market spectrum in the U.S., generally between $170 million and $550 billion.
Small Cap U.S. Equity strategies invest in stocks with a market capitalization between $170 million and $4 billion in the U.S.
Global Equity strategies invest in stocks from companies based within and outside the U.S. The strategy provides exposure to both domestic and international stocks with the flexibility to over-/underweight the state’s portfolio based on relative variations.
International Equity strategies invest in stocks issued by companies outside the U.S. Wyoming is invested in both developed and emerging markets.
Alternatives are non-traditional investments that exhibit low correlation with most traditional asset classes, and are utilized as a way to reduce the plan’s overall volatility of returns and/or enhance overall performance.
Absolute Return strategies refer to hedge fund investment approaches such as long/short equities, arbitrage, and event-driven strategies that seek to deliver positive returns, regardless of market direction.
In a hedge fund structure, a manager invests in a group of single manager hedge funds or managed accounts which may utilize a variety of investing strategies, creating a diversified investment vehicle for its investors. Absolute return strategies strive to deliver consistent positive returns, as opposed to equity or fixed income investments that seek to outperform relative to a market benchmark.
Core Real Estate refers to investments in well-leased, high quality, income- producing institutional properties in high barrier-to-entry markets. Core Real Estate investments seek to deliver consistent returns driven primarily by rental income, with an opportunity for long-term price appreciation. Common property types associated with core real estate investing are apartments, office buildings, retail centers and industrial parks.
Non-Core Real Estate refers to investments in real estate properties in need of rehabilitation, redevelopment, or re-positioning for alternative use or upgrade, which result in a higher risk-adjusted return potential. Non-Core Real Estate strategies include investment in and opportunistic origination of debt instruments collateralized by real estate properties.
The underlying investments in Private Equity include limited partnership interests and direct equity/debt investments in private and/or public portfolio companies. Investments in Private Equity are generally illiquid and often take 10 to 12 years to realize full value.
Private Equity sectors include:
Venture Capital — Equity investments in companies that are still in the process of developing products and revenue.
Buyout Investing — Purchase of significant portion of companies to effect change (management, strategic or operational).
Mezzanine Financing — Investments in the subordinated debt of companies often with equity participation through rights, warrants and options.
Distressed Debt — The purchase of troubled companies’ debt (high yield, bank loans, trade claims) at a fraction of face value.
CASH AND CASH EQUIVALENTS
Cash Equivalents are investments in highly liquid instruments, primarily U.S. Treasurys, targeted to provide safety of principal. Two-thirds of the cash portfolio is invested in securities that have a maximum maturity of one year. The other third is in an extended cash portfolio that has an average duration of less than three years.
The following is a list of the various funds and the classification to which each fund belongs:
Permanent funds that dispense income and capital gains include the Permanent Mineral Trust Fund, Permanent Land Fund, Common School Permanent Land Fund, University Permanent Land Fund, Hathaway Scholarship Fund and the Higher Education Endowment Fund.
Workers’ Compensation, the State Agency Pool, Tobacco Settlement Trust Fund and WYO-STAR are non-permanent funds that dispense income and capital gains.
The State Board of Land and Investments requires equity managers to be fully invested at all times, except in anticipation of large withdrawals. Equity managers should maintain less than 5 percent of their portfolios in cash equivalents except for periods of short-term portfolio repositioning not to exceed five trading days, unless the contract with the equity manager specifically provides otherwise. Fixed income managers can maintain higher cash balances. An exception will be made for Alternative Investments.
CHANGES ON HORIZON?
What changes could be made in Wyoming’s investment strategy?
Walden-Newman said he thinks Wyoming could benefit from establishing an Investment Council that would combine the state retirement portfolio with the state’s permanent funds. In Nebraska, he is in charge of $22 billion in pensions, endowments and operating funds.
The former Wyoming official said the most challenging part of his job in the Cowboy State was to ensure its asset allocation process was the best for Wyoming.
“That took research to put together and guts to maintain no matter what was happening day-to-day in markets,” he explained. “In other words, hard work to put it in place and conviction to keep it in place when others panic.”