State has billions in trust, but it can't be spent the way simple cash can be

Jul 14, 2017 Mark Gordon, State Treasurer, Cheyenne


June 30 was the end of the fiscal year for the State of Wyoming. Unhappily, loans the state gave herself which were supposed to be paid off won't be. Wyomingites pride themselves in honoring our obligations, but this year we couldn't. And that, as the saying goes, is going to leave a mark.

I began a series of pieces about Wyoming's investment portfolio in May with an introduction of Wyoming's Permanent Mineral Trust Fund, that remarkably prescient idea years ago that Gov. Hathaway and several thoughtful Legislators ha. It set aside 1.5 percent of the value of Wyoming's depletable mineral wealth as it was extracted -- or "severed" -- from the state for future generations.

Often in times like these, citizens may be tempted to say, "We don't need to worry about revenues. We have plenty of money - over $20 billion. How can we be broke?" By law, only a portion of that pot is accessible, while the rest resides in various trusts which provide ongoing income to educate our kids, offset the taxes we pay, and take care of many of the services we sometimes take for granted. Even if we could spend the balances of our trusts, we would only further obligate our children to pay for our excesses.

In the 1990s when interest rates were much higher than they are today, Wyoming tried to spend the earnings from a smaller portfolio at a rate that proved to be unpredictable and unsustainable. Then-Treasurer Lummis, working with the Legislature, strove to find a mechanism that would provide -- in the words of the statute -- for a "consistent, sustainable flow of earnings for expenditure over time; protection of the corpus of the permanent funds against inflation; and to the extent practicable, increases in the earnings available for expenditure..."

How sensible! Income from investments varies with the market, so finding a way of stabilizing that flow is just wise. No matter how minimal inflation is, it still reduces what a corpus can buy year over year. Remember a 2 percent inflation rate means that about $160 million of the $8 billion value of the PMTF disappears each year because of inflation. Making up that loss is critical if we want the fund to be able to do next year what it did this year. But in practice, that is not what has happened. Actually, serendipitous excess investment income has been mostly spent (or pre-committed) to various projects. Whatever growth our portfolio has seen has come from mineral development, not through policy or reinvestment. Moreover, the spending policies have not been able to redress inflation consistently over the past decade. Our permanent funds earn less today than they would have if we had paid appropriate attention to inflation.

It is time we take a serious look at our spending policies to ensure they function as advertised. Making sure we have a dependable flow of income, not spending more than we earn, and paying off our debts, that is the Wyoming I grew up in. How to get back on track without too much pain that will be the topic of my final installment.