Delayed Decisions Dig a Deeper Fiscal Hole

Governor Mead announced he will cut approximately $200 million from the current fiscal year's spending. This apparent burst of fiscal conservatism came as a result of a clause in the 2014 budget bill directing the governor to review agency budgets and reduce them if it looks like the fall in tax revenue will result in a deficit. Revenue has been on a downswing for a year now, but Governor Mead's main solutions will only dig a deeper fiscal hole.

Last February, after months of warnings about falling minerals tax revenue, the Legislature diverted money from the Rainy Day Fund to maintain windfall-elevated spending levels and fund a long list of projects such as golf course repair, instead of bringing agency budgets into line with taxpayer's ability to pay. Now, with continued low oil and gas prices, and falling sales tax revenue, the governor finds himself $200 million short to finish the fiscal year.

What happened to tax revenue? It continued to head south.

The General Fund supplies most of the cash for government spending. Almost 50 percent of General Fund revenue comes from the sales and use tax, about 25 percent from investment earnings and about 20 percent from the state severance tax.

But agencies don't cash checks against a big wad of dough sitting in this account. The legislature appropriates for agencies an amount the Consensus Revenue Estimating Group (CREG) forecasted would flow into it over the biennium. That's why falling minerals prices have now resulted in a revenue shortfall even though the budget was already passed. With oil prices hovering around $45 per barrel, compared to the CREG's January 2015 forecast of $55 per barrel, and natural gas prices sitting at $2.29 instead of $4.00, the revenue the state thought it could spend in 2014—for 2016—is just not there.

Recall that for every $5 reduction in the price of oil state revenues fall by $35 million. That means the state currently has a $70 million shortfall in severance tax revenue from oil production. For every dollar per BTU reduction in natural gas prices, the state loses $100 million in revenue, or currently a $170 million shortfall.

Sales tax revenue is also on the decline.

In the first three months of fiscal year 2016 (July-Sept), sales and use tax revenue was $32.5 million lower than the same period last year. The sales tax revenue retreat is likely to accelerate because minerals industry activity continues on a downswing and—here's the kicker—the minerals industry accounts for about 30 percent of sales tax revenue. Lower sales tax revenue follows from lower severance tax revenue in a domino-like effect.

Investment income is running ahead of expectations by about $44 million, but even that may not last. The state treasurer is currently working on an investment income volatility report for the legislature to show just why it should not rely on investment income to fund bloated government, as it has been doing under Governor Mead's administration.

Governor Mead's headline proposals will do little about the shortfall.

The hiring freeze will save a reported $18 million. Computer purchases will be 're-evaluated' or delayed, and agencies are to return any money haven't already spent for this fiscal year. As the governor said no staff will be laid off, this money will probably come from reversions. Reversions for 2013-14 totaled $34 million, so for 2016 be a mere $15 million. Governor Mead's suggestions total about $32 million plus whatever short-term savings come from delaying computer purchases.

Where will the remaining $170 million or so come from?

Governor Mead is talking again about a Rainy Day Fund raid, expanding Medicaid but more quietly, diverting the one-percent severance tax contribution from the PWMTF to the General Fund. If the governor uses savings to prop up past bad spending decisions he is merely delaying and probably worsening the pain from inevitable cuts.

The Legislative Stabilization Reserve Account, commonly known as the Rainy Day Fund, has $1.8 billion in it. The one-percent severance tax diversion would give the governor about $100 million per year. No one seems to know how luring more society's most vulnerable into a poorly run government program will save taxpayers money.

As we've seen before, these fixes may work for a year or two, but what then? The previous economic downturn lasted about 17 years. According to an analysis presented to Wyoming's Revenue Committee last month by the Pew Foundation, the state would need a Rainy Day Fund with $3.3 billion to cover off nine out of ten possible downturns and its cumulative effect for 10 years. The Rainy Day Fund is too small to bail out the state for long and diverting $100 million from the PWMTF will deprive future generations from the earnings from money spent to prop up bad spending decisions.

Let's face it; the government has a spending problem, not a revenue problem.

Without defining the role of government and cutting away the fat, short-term fixes will merely waste more money. Governor Mead and the Wyoming Legislature must make real spending reductions. Otherwise, our children and grandchildren will be left with a legacy of debt and higher taxes.