Wyoming State Budget: Using the Past to Inform the Future Prepared by LSO Research Staff October 12, IP001R

Setting the Groundwork: Definition I “Type 3 Funds” include all discretionary revenue that is deposited into the General Fund or other funds and accounts traditionally used to support the general operations of Wyoming state government, e.g., Budget Reserve Account (BRA), Legislative Royalty Income (LRI), etc.

Definition II “Boom Years” includes all fiscal years after, and including FY01, i.e., FY “Pre-boom” years are defined as FY – Technically, the state experienced a substantial reduction (33%) in mineral severance taxes in FY02 from FY01 levels; however, for purposes of this presentation all years after FY00 are included as “boom years.”

Historic Budget Trends: Current Dollars BienniumTotal "Type 3" Budget Biennial Percent Growth 93-94$999,170, $1,040,500,4974.1% 97-98$1,046,806,6260.6% 99-00$1,138,334,3638.7% 01-02$1,406,533, % 03-04$1,580,074, % 05-06$2,374,076, % Average Biennial Growth: BY94 - BY0616.6% Average Biennial Growth: "Boom Years"28.7%

Historic Budget Trends: Constant Dollars (inflation adjusted to 1993 dollars) BienniumTotal "Type 3" Budget Biennial Percent Growth 93-94$999,170, $986,560, % 97-98$942,460, % 99-00$987,330,0004.8% 01-02$1,147,620, % 03-04$1,240,870,0008.1% 05-06$1,746,710, % Average Biennial Growth: BY94 - BY0610.7% Average Biennial Growth: "Boom Years"21.7%

Where Does It Go? (BY05-06 Breakout of “Type 3” Budget)

Category Growth (in millions of dollars) Ave. 1a. Education (K-12)$7-$9$33$6-$121-$39-$21 K-12 Guarantee with Leg. Funding Enhancements*$19$6$246$60$118$163$102 1b. Education (U.W. & Colleges)$19$6$13$75$55$182$59 2. Health$28$12$0$66$98$109$52 3. Justice, Corrections$13$17$25$76$40$209$63 4. Family Services$1-$1-$3$1$24$6$5 5. Employ., Econ. Dev.-$1-$6$6$8$13$73$16 6. Natural Resources-$5$2 $3$20$89$19 7. Transportation-$3$0 $22$3 8. General Government-$18-$16$15$33$45$144$34 Total "Type 3" Appropriations$41$6$92$268$173$794$229 Note: * Includes state and local resources, including funding beyond type 3 funds. K-12 funding changed from class room unit to cost based block grant model in SY (99-00 biennium); 1/2K correction payment of $13 million was made in July 2002 but added to SY98-99 (99-00 biennium) for illustration.

Category Growth: Percentage Change Over Prior Biennium Ave. 1a. Education (K-12)5.4%-6.2%24.3%3.5%-69.1%-72.5%-19.1% K-12 Guarantee with Leg. Funding Enhancements*1.9%0.5%23.8%4.7%8.8%11.1%8.5% 1b. Education (U.W. & Colleges)7.7%2.4%4.9%26.2%15.4%43.9%16.7% 2. Health11.0%4.3%-0.2%22.7%27.4%23.8%14.8% 3. Justice, Corrections15.7%17.8%21.7%54.9%18.5%82.2%35.1% 4. Family Services1.6%-0.7%-3.4%0.8%30.6%5.5%5.7% 5. Employ., Econ. Dev.-1.5%-14.6%17.7%19.5%25.4%113.5%26.7% 6. Natural Resources-17.4%9.0%8.7%11.8%62.6%174.4%41.5% 7. Transportation-99.0%-64.3%-2.2%-100.0%0.0%NA 8. General Government-14.9%-14.7%16.6%31.6%32.7%78.5%21.6% Total "Type 3" Appropriations4.1%0.6%8.7%23.6%12.3%50.3%16.6% Note: * Includes state and local resources, including funding beyond type 3 funds. K-12 funding changed from class room unit to cost based block grant model in SY (99-00 biennium); 1/2K correction payment of $13 million was made in July 2002 but added to SY98-99 (99-00 biennium) for illustration.

Investment Earnings BY PWMTF Income Pooled Income Total Investment Income Investment Income as a Percent of "Type 3" Appropriations PWMTF Income as a Percent of "Type 3" Appropriations 93-94$174,000,000$48,000,000$222,000, %17.4% 95-96$172,000,000$54,000,000$226,000, %16.5% 97-98$193,000,000$48,000,000$241,000, %18.4% 99-00$224,000,000$52,000,000$276,000, %19.7% 01-02$188,000,000$64,000,000$252,000, %13.4% 03-04$157,000,000$48,000,000$205,000, %9.9% 05-06$175,000,000$62,000,000$237,000, %7.4% Average Biennial Percentage: BY94 - BY0618.9%14.7% Average Biennial Percentage: “Pre -boom Years"22.8%18.0%

PWMTF Corpus and Anticipated Growth FY06FY07 Beginning Balance$2,465,395,645$2,749,145,645 Constitutional Severance Tax *$140,600,000$138,400,000 Statutory Severance Tax **$93,800,000$90,900,000 Appropriation$51,550,000NA Ending Balance$2,751,345,645$2,982,045,645 * Reflects the January 2005 CREG projections of the constitutional 1.5 percent severance tax. ** Reflects the additional PWMTF deposits resulting from 2005 SF 25 ('05 Laws, Ch. 80).

What Factors Impact the Future Revenues, Budgets, and Related Analyses? 1.Energy prices remain strong and have outpaced January 2005 CREG projections. Estimated revenues for FY07-08 will increase. (Therefore, this analysis will change after the October 2005 CREG update.) 2.Potential changes to the severance tax and federal mineral royalty (FMR) distribution formulas 3.Growth of appropriations 4.Investment performance

Analysis #1: Investment Earnings and PWMTF Corpus In order to estimate whether historical contribution levels of PWMTF investment earnings as a percent of the Type 3 budget will continue, three variables are present:  Investment earnings – assumed to be constant at five percent.  Level of appropriations growth – assumed to be (a) no growth; (b) BY94-06 average growth, 16.6%; or (c) “boom years” average growth, 28.7%  Ratio of PWMTF earnings to budget – assumed to be (a) BY94-06 ratio, 14.7% or (b) Pre-boom ratio, 18%.

Scenario #1: No Budget Growth; PWMTF Income 14.7% of Budget Hypothetical Budget$2.4 billion Needed Income$350 million Needed PWMTF Balance (7/07), assuming 5% return each year $3.5 billion Projected PWMTF Balance (7/07), Jan. ’05 CREG $3 billion Difference$ 500 million

Applying the Same Methodology: ScenarioDifference from PWMTF Balance #1. No Growth in budget; PWMTF Income = 14.7% (BY94-06 average) $500 million #2. BY94-06 average budget growth; PWMTF Income = 14.7% (BY94-06 average) $1.1 billion #3. No Growth in budget; PWMTF Income = 18% (Pre-boom average) $1.3 billion #4. Boom years average budget growth; PWMTF Income = 14.7% (BY94-06 average) $1.5 billion #5. BY94-96 average budget growth; PWMTF Income = 18% (Pre-boom average) $2 billion #6. Boom years average budget growth; PWMTF Income = 18% (Pre-boom average) $2.5 billion

Analysis #2: Mineral Taxes The previous analysis considers the rate of growth of the PWMTF investment earnings (and associated corpus size) needed maintain historical levels ratios, given various levels of budget growth. The same methodology can be applied to consider the rate of growth needed in severance tax and FMR collections necessary to maintain similar historical ratios to total appropriations, given various levels of budget growth.

Severance Taxes and FMRs as a Percent of Type 3 Budget BY GF Severance Tax BRA Severance Tax & FMRs "Type 3" Severance Taxes and FMRs Severance Tax and FMRs as Percent of "Type 3" Appropriations 93-94$131,000,000$104,000,000$235,000, % 95-96$118,000,000$73,000,000$191,000, % 97-98$140,000,000$99,000,000$239,000, % 99-00$143,000,000$114,000,000$257,000, % 01-02$256,000,000$287,000,000$543,000, % 03-04$334,000,000$617,000,000$951,000, % 05-06$383,000,000$784,000,000$1,167,000, % Average Biennial Percentage: BY94 - BY0633.4% Average Biennial Percentage: “Pre-boom Years"21.8%

Scenario #1: No Budget Growth; Mineral Tax Component = 33.4% (BY94-06 average) Hypothetical Budget$2.4 billion Needed severance tax and FMR collections to type 3 funds $793 million Projected severance tax and FMRs to type 3 funds for BY07-08, Jan. ’05 CREG $1.025 billion Difference-$ 232 million

Applying the Same Methodology: ScenarioDifference from PWMTF Balance #1. No growth in budget; Mineral tax revenue directed to Type 3 funds = 33.4% (BY94-06 average) -$232 million #2. BY94-06 average budget growth; Mineral tax revenue directed to Type 3 funds = 33.4% (BY94-06 average) -$100 million #3. Boom years average budget growth; Mineral tax revenue directed to Type 3 funds = 33.4% (BY94-06 average) -$4 million In other words, all January ’05 CREG projections provide for sufficient mineral tax growth to maintain the prior 12-year average contribution of mineral revenue to the budget, under multiple budget growth projections.

Notes Presentation does not consider dedicated or earmarked revenues such as those flowing to the School Foundation Program (SFP) or School Capital Construction Account (SCCA); that is not to say these are unimportant (see next slide.) Recent appropriations to local governments inflate the growth in “general government” as a percent of the budget in recent years.

K-12 Guarantee Plus Enhancements (in $/ADM) vs. 1/2K Enrollments

Potential for Structural Deficit The Rockefeller Institute of Government (a state fiscal policy think tank) projects substantial structural deficits for states with a heavy reliance on federal funds in future years. Assuming a projected decline of an average of 3.3% per year in real per-capita federal revenue, the Rockefeller Institute projected a 12.9 percent state & local shortfall after 8 years as a percent of revenue for Wyoming. [LSO Note: if projected federal revenue cuts do not fall proportionally across states, the Rockefeller Institute model will not be accurate. Wyoming’s low current Medicaid reimbursement (FMAP) rate and revenue from the extraction of federal minerals could be cause for the significant shortfall; however, the researcher from Rockefeller Institute has not responded to LSO inquiries.]