State’s Financial Future Seems Bleak

Members of the State Leglsiature’s Joint Appropriations Committee Listen to
testimony on Oct. 22 during its meeting in Casper.

By Tom Lacock

Wyoming Medical Society

CHEYENNE – Don Richards, the co-chair of the Consensus Revenue Estimating Group (CREG), which offers estimates of future state budgeting, presented his estimate of state revenues to the Wyoming Legislature’s Joint Appropriations Committee (JAC) on Monday morning in Casper.

In short, the report suggested the state doesn’t have as much money as it thought it did, the state is likely not to have any more next year, and it is likely that the current economic outlook for the state could be closer to normal than an anomaly.

“This is potentially a long-term problem, not a short-term blip,” Richards told a packed house in the Wyoming Oil and Gas Conservation Commission’s meeting room.

In all there is a $156 million shortfall for the remainder of the 2017-18 biennium. According to Governor Matt Mead’s news release on Tuesday, the Governor reiterated he will not submit further budget reductions prior to the 2017 legislative session and he asked the Legislature to create guidelines for using the Legislative Stabilization Reserve Account, also known as the Rainy Day Fund.

“There is an appropriate amount of the Rainy Day Fund that can be used during this time to ensure we take care of our roads, healthcare and other important services. Additional cuts to the Departments of Health and Corrections, for example, will be very difficult,” continued Governor Mead. “My hope is that we can work closely with the Legislature to smooth out this downturn by using some of our savings – especially as those funds are growing.”

The issue for the state’s finances is a common one – continued low severance taxes that companies pay when they mine for minerals such as coal, or drill for crude oil, and natural gas.

According to the Richards, severance taxes make up around 20 percent of the state budget – with all mineral-based state funding, such as sales tax on mining raising that number up to nearly 40 percent. When oil prices dropped as low as $26.21 in Feb., and coal production dropped dramatically around the same time, it meant a disastrous effect for a state which depends on its mineral wealth.

According to the CREG report, severance taxes, which had been as high as $257 million in 2008, dropped to just $185 million in 2016. That number is expected by CREG to reduce to $151 million by 2022. That contributes to a nearly $300 million less available for the state than even two years ago.

“Among the revenue categories directed to the General Fund or the BRA that fell short of January 2016 projections, several missed the CREG forecast by sizable margins, as follows: sales and use taxes ($34.8 million, 7.5 percent), severance taxes ($67.7 million, 18.6 percent), and federal mineral royalties ($52.5 million, 21.8 percent),” the report reads.

Monday, Richards told the JAC that the CREG’s revenue estimate presented in January 2016 for the fiscal year of 2016 was optimistic and turned out wrong due to lower production of oil, natural gas, and coal production than expected. Coal has been a big contributor to the state’s budget woes as surface coal production in Wyoming declined by 58 million tons. That has led to three of Wyoming’s four largest coal companies filing for bankruptcy and cut Wyoming severance tax collections from coal nearly $80 million in 2016 from a high of $294 million the state took in due to coal in 2014. The combination of market forces and concerns brought on by the US Environmental Protection Agency’s Clean Power Plan have CREG pessimistic that the coal market will recover. The US Energy Information Association (EIA) agrees with that assessment suggesting nationwide US coal exports this year will decline 26 percent to the nation’s lowest levels since 2006 with another 5 percent decline expected in 2017.

“Dozens of electric utilities consuming Wyoming coal have either closed or announced plans to close coal fired electric generation units within the forecast period (2017-2022),” the report reads. “In the absence of new energy demand, facilities or exports, total coal demand will be suppressed.”

Richards said there were some silver linings to report as the recent upswings in the price of oil has resulted in more drilling in the state. The He said in June of 2016 there were just seven drilling rigs in the state. Last week that number was up to 16, however, it continues to perform poorly when compared to previous years, such as the 25 rigs operating in Wyoming in Aug. of 2015 and the 56 the state saw in 2014.

The future doesn’t appear to hold much hope for renewed revenues, either. In January the CREG had suggested the state general fund would receive 2.217 billion in revenue for the fiscal biennium  2017-18. This week they adjusted those estimates to $2.061 billion. with much of that ($116 million) coming due to changes in sales and use tax estimates.

Due to the downturn in the mineral economy the CREG reduced anticipated prices on  future crude oil by $5-10 per barrel. It also reduce the number of barrels by 3 million per year. Natural gas prices and production were also reduced for the estimations.

Richards suggested these financial findings were similar to those offered in a 1986 CREG report in which the findings of the report highlighted Wyoming’s dependance on world energy prices. At that point, Richards said the state was struggling due to oil prices lingering below $18 per barrel, a glut of natural gas, and resulting low sales tax collections.

The Governor will release his proposed budget on Dec. 1.