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Analysts’ memo to lawmakers predicts staggering revenue drops for Wyoming

The restored Wyoming State Capitol building is seen at night on Feb. 11, 2020, in Cheyenne. (Dan Cepeda, Oil City File)

April 13, 2020 by Andrew Graham, WyoFile

Wyoming state government revenues could plummet from anywhere between $555 million and nearly $2.8 billion over the next two years as a result of the COVID-19 pandemic and an oil price war, according to a memo the Legislative Service Office sent to lawmakers on April 10.

Though what will unfold in the coming months remains anyone’s guess, the revenue decline could be so dire that, as one lawmaker put it, it would require the most “painful change the state has had to ever deal with.” 

LSO fiscal analysts drew up revenue predictions for three scenarios — optimistic, intermediate and pessimistic. They looked at impacts across sales and use taxes, oil, gas and coal severance taxes and only some of the state’s investments — leading some lawmakers to predict the realities could be even worse in a time of stock market turmoil. 

The analysts urged lawmakers to view the estimates as “informed guesses,” given deep uncertainty about what the future holds. Still, even the best-case estimate is staggering. 

For the optimistic scenario of “a shorter economic downturn and a quicker recovery,” according to the memo, analysts predicted a loss of $555.8 million in revenue.

An intermediate scenario assumes “continued economic disruption throughout the summer and a modest recovery over the next year,” with a slower recovery rate than the optimistic scenario. The intermediate scenario anticipates a $1.76 billion hit. 

The intermediate scenario “is not necessarily the expected scenario,” the analysts wrote in the memo. “Nonetheless, it does use the timeliest information, e.g., current futures prices of major commodities.” 

A pessimistic scenario “incorporates a drawn out crisis with an extended recovery,” the memo said, “for example, a second wave of the virus, potentially next fall, and a much slower recovery compared to the other scenarios.”

Under that outcome, the state could lose nearly $2.8 billion in revenues. That number is comparable to the entirety of the general government spending budget for the next two years.

The budget lawmakers passed in March spends $2.9 billion of state funds on general government and $2 billion on public schools in fiscal years 2021 and 2022. It allots billions more in federal funding and other dollars. All told the budget prescribes more than $7 billion in spending for the next two years.

The Legislature has nearly $1.4 billion in its most accessible savings account, nicknamed the rainy day fund.

The April 10 memo from the analysts to the entire Legislature was obtained by WyoFile and has not been made public until now. 

The memo’s predictions come with considerable caveats, written at a time when people the world over begin each week unsure what the pandemic will bring. 

The memo is an LSO product, and was not crafted through the same process that sets the official revenue estimates used in budgeting. The Wyoming Legislature writes the state’s budget using projections of the revenues that will come in over the two-year budget period. Those projections are crafted by a group of fiscal analysts and economists from across state government called the Consensus Revenue Estimating Group, or CREG. 

The CREG did now draw up the memo to lawmakers, though CREG members offered input and Don Richards, a co-chairman of the group and the LSO’s top fiscal analyst, was one of its authors. CREG’s predictions are far more precise than the wide ranges included in the memo. 

Nationally it remains unclear when COVID-19’s spread will slow, allowing officials to lift the preventative measures to keep people apart — measures that have resulted in a near shutdown of the economy. Much also remains unknown about the virus itself, the potential development of vaccines, improved testing and many other factors that will shape the broader picture.

The federal government has already passed a bill pumping $2 trillion in aid into the country, and more stimulus actions are appearing on the horizon. The economic impacts of such legislation, including the potential to “over-stimulate” some sectors and drive up inflation, is unknown, the memo notes. 

“Given the lack of precedent, lack of reliable internal and external modelling [sic], and the diversity of both Wyoming anecdotal information and national forecasts – many of which have been regularly revised over the past month – the confidence one should place on these scenarios is limited,” the memo reads. 

In a stark description of the widespread uncertainty, the memo includes this caveat: “It is also possible that the world economy could deteriorate throughout the entire next [two-year period] without a meaningful recovery.” 

The Legislature adjourned in early March without addressing the virus or its economic impact. At the time the pandemic was just beginning its surge in the U.S. Within days of lawmakers adjourning and heading home, however, the virus and the response to it had upended most aspects of Wyoming life and derailed the state and national economies.

(Dan Cepeda, Oil City)

Even the memo’s most optimistic scenario presents a challenge to a state that’s already responding to a sustained downturn in the energy markets with years of budget cutting and withdrawals from savings accounts. 

The memo was sent to lawmakers before legislative leadership convenes on April 16 to consider how the Legislature should respond to COVID-19. Leading lawmakers have said a special session is nearly inevitable at this point.

The state is slated to receive $1.25 billion in federal aid under the COVID-19 CARES Act passed by Congress. To what extent the Legislature can use that money to make up for shortfalls in revenue remains unknown, and is sure to become a critical question, several lawmakers interviewed by WyoFile over the weekend said. 

The Legislature’s researchers and other state officials are evaluating the CARES act to determine how the money can be spent, according to a March 27 email from Senate President Drew Perkins to the rest of the Senate. However, the initial assessment in his email was that without further law changes, the money can’t fill revenue holes.

“CARES relief is specifically not available to replace income or revenue,” Perkins wrote in the email, which was also obtained by WyoFile. 

Lawmakers react

Leaders of the Revenue and Appropriations Committee reached on Easter expressed awe at the size of the potential revenue hits, and said lawmakers will soon have difficult decisions to make.

“It is an overwhelming, massive shock to the way Wyoming’s operated for 100 years and it will be the most dynamic, painful change the state has had to ever deal with,” House Revenue Committee Chairman Dan Zwonitzer (R-Cheyenne) said.

The state has faced fiscal problems for several years, but stock market earnings and savings accounts have helped the Legislature avoid steeper cuts or increased taxes. With at least one and maybe more special sessions on the horizon to address COVID-19 impacts and the drop in oil prices, lawmakers won’t be able to push harder decisions further down the road, Zwonitzer said.

“There’s no more shell game, no more smoke and mirrors,” he said, “it’s a full blown armageddon to Wyoming’s budget.”

Leaders first must find out to what extent they can tap the $1.25 billion stimulus, Senate Appropriations Committee Chairman Eli Bebout (R-Riverton) said. Bebout expressed more optimism about the stimulus money’s potential than others. 

“I would hope we could utilize it to plug some of these holes,” he said. 

The federal government will have to consider the virus’s impacts to state economies and governments in a broad way, he said. Spending “$1.25 billion on health care only, I don’t know how we could do that,” he said. Bebout hoped to direct some of the money at struggling rural hospitals, he said.

The Joint Appropriations Committee did not have immediate plans for budget hearings or a deeper look on the budget that was just passed, Bebout said. First, the Legislature would look at the stimulus money, and then “let this thing shake out,” he said. 

House Appropriations Committee Chairman Bob Nicholas (R-Cheyenne) did not respond to an emailed request for comment sent Sunday evening. 

Zwonitzer, and Senate Revenue Committee Chairman Cale Case (R-Lander), said the magnitude of the predicted drops will require the Legislature to reconsider tax increases it has shelved many times. 

Case did not see the stimulus money as a chance to avoid tough decisions. “There’s bound to be gray areas, but I don’t think the gray areas are going to be so substantial that we can pretend like it’s a new source of money that we can spend however we want,” he said.

Case ticked off potential increases to property and sales taxes, a corporate income tax, a tax on electricity imported out of the state and other measures lawmakers declined to pursue last session. If more dire predictions in the revenue report hold, “it’s going to take all of these and as much cutting of government as we can stand,” he said. 

The drop in revenues also comes at a time when many areas in Wyoming will need state help both economically and via direct services, Zwonitzer said. “This is really a crisis that affects all parts of Wyoming.” 

Bebout worried about increasing taxes anytime soon. “What a terrible thing to do to business,” he said. “They’re struggling to keep their doors open and now you’re going to raise their taxes?”

At the same time, “we can’t cut $1.7 billion. There’s just no way we can do that,” he said. 

This article was originally published by WyoFile and is republished here with permission. WyoFile is an independent nonprofit news organization focused on Wyoming people, places and policy.