Wyoming reconsiders investment strategies

When you don’t have much new income, it’s great if you can pay your monthly bills using money coming in from smart investment of your savings.

Not a lot of people have that. But public budgets in Wyoming have enjoyed some of that kind of security.

Now the state is looking for the best strategy to make sure that Wyoming continues to have that investment income – for spending by school systems and state agencies. A major University of Wyoming conference in Jackson, and a legislative committee meeting in Buffalo, slated for Sept. 14, will focus on strategy to shore up the state’s financial security. Other states – and countries — with public funds built by mineral wealth will join in the conference to share experiences and ideas.

Mineral revenues have been key to the structure of Wyoming’s public budgets for decades. It’s been true ever since the 1970s, as Wyoming coal, oil and gas became big players in national energy markets, and state political leaders worked to ensure that Wyoming got tax and royalty payments from the industry.

Wyoming has seen its revenues decline, prompting State Treasurer Mark Gordon in 2015 to say “this coming year will be an interesting one.”

Now, as everyone in Wyoming knows all too well, both jobs and revenue from minerals are dropping.  As State Treasurer Mark Gordon put it in his annual report late last year, “Diminishing mineral revenues put a crimp in Wyoming’s ability to build schools and infrastructure. It has also shrunk the rate of growth our trust funds have enjoyed and challenged Wyoming’s ability to fund all that Wyoming government does. That is my way of saying this coming year will be an interesting one.”

In such a situation it’s crucial to be able to turn to investment income to support basic public services, state leaders agree. Some might say it’s also crucial to use that investment income to help the state inch towards a future that can be bright for the next generation without so much reliance on a mineral-based economy.

In recent years, that income from investments has played a big role in Wyoming’s public budgets. In 2015, investment income topped $1 billion for the first time, becoming the second highest source of revenue, Gordon said in the annual report.

So investment income can be a big deal. It’s the natural thing to turn to now; it’s what the people who put together the state’s prized savings accounts and slated them for investment, starting back in the 1970s, foresaw as the bequest they could leave to Wyoming for times when mineral revenues dwindle.

But that investment income may not be so big in coming years. It may, in fact, have peaked last year. And already, last year, Wyoming was spending most of its investment income, Gordon noted in his annual report.

Two sources of income decline

Since last winter, when Gordon looked at the “interesting” year now upon us, he and others monitoring public finances in Wyoming have given voice to a major concern about future prospects. It seems, they say, that the payoff from the state’s many investments looks likely to drop at the very same time that mineral revenues are dropping.

That does not make for a rosy picture. And it’s an unusual picture for Wyoming — a new situation that requires careful management, and, some argue, a new strategy.

Though Wyoming people and governments are accustomed to the booms and busts of the mineral industry, this time might be different, state officials and the state’s financial analysts say. In the past, the ups and downs of mineral revenues and of the investment market have complemented each other. Wyoming’s prized savings accounts, and many of the other state funds, are invested in national and global markets. When mineral prices, and therefore state revenues, were high, national and international markets were often not doing so well; when mineral prices and revenues dropped, the national economy and national markets have often prospered.

Although investment income and mineral revenue have been on opposite tracks historically, today growth in both arenas is in decline, as illustrated by the graph of revenue growth from the Permanent Wyoming Mineral Trust Fund and the S&P 500. Some say that’s a call for Wyoming to reanalyze its investment strategy. (Wyoming Treasurer)

So Wyoming has been able to fare pretty well through nearly 40 years of minerals boom and bust due to its ability to benefit from either the local or the national scene — via mineral taxes, royalties, and related sales taxes at home, or via investments in financial markets nationally and abroad. That has helped make it possible for state politicians to boast of a balanced budget, particularly when they leave home and compare Wyoming to other states or the federal government.

But now things could be quite different.

Gordon and the state’s independent investment consulting firm warned legislators this summer that in coming months and years the national market is likely to perform poorly at the same time as mineral revenues are down.

That is not good news for Wyoming, when budget cuts are already being instituted in almost every agency at both the state and local levels, due to falling mineral tax revenues.

Some insurance has been built into the state’s savings and investment system. The state’s five elected officials, who set state investment policy, and the Legislature, which puts key guidelines in law, have worked to be conservative. For the Permanent Mineral Trust Fund, for instance, Wyoming has a firm cap on the percent of income from investments — 5 percent — that can be spent. Income above the cap goes into an additional special reserve account, and sometimes back into the fund. Overall, there’s been an effort to try to ensure state funds are not eaten away by inflation. And the state’s separate “Rainy Day Fund” (formally known as the Legislative Stabilization Reserve Account) was set up to confront exactly the situation when a slide in mineral revenues coincides with a slide in national investment returns, Gordon said in his 2015 report.

That “Rainy Day Fund” currently holds, however, about $1.8 billion. That’s only enough to cover a little more than one year of current spending, and not enough to make up for a serious loss in investment income for more than a few years, state reports show. Meanwhile, putting a percentage cap on how much income from fund investments can be spent in state budgets has held down spending. But the key funds are managed with the goal of achieving only a 4 percent return — less than their current spending “cap.” And even a 4 percent return is probably not achievable as the funds are currently invested, the state’s investment consultant warned.  Ultimately, the capacity of the state’s major funds to be “inflation-proof” in recent years has been the product of high mineral revenues to the funds, not management policy to keep spending down and reserves high, Gordon told legislators in June.

So the prospect of a fall in both mineral revenues and national investment market revenues is a major threat to the well-being of Wyoming’s government budgets.

Concern about how best to manage the future of Wyoming’s invested funds affects the entire array of funds the Treasurer’s office manages. Those include the state’s prized savings accounts — the Permanent Mineral Trust Fund and the Permanent Land Funds. Investment strategy issues also affect the five other funds Gordon oversees — for University of Wyoming scholarships and key UW faculty, workers’ compensation, tobacco settlement, and a pool of funds invested for state agencies.

That means investment income prospects affect major state initiatives that depend upon them for part of their spending money. Those include the state’s “general fund” pocket book, which the Legislature appropriates to a variety of purposes in every biennial budget; the K-12 schools, fueled by income from the largest of the Permanent Land Funds; and the Hathaway Scholarships that help finance top Wyoming students attending community colleges and UW.

New strategies under consideration

The treasurer’s office, the five elected officials, and legislators are now considering three possible strategies to deal with new mineral revenue and investment market conditions:

  •  Allowing more leeway in how funds are invested. Wyoming’s current policy puts limits, by statute, on what percentage of the major funds that can be invested in equities, or corporate shares of stock. The current limit is 55 percent for most of the major funds. But imposing such limits is an “artificial’ and relatively old-fashioned policy among large-fund investors today, state investment consultants told legislators in June. While that policy could be changed by the Legislature, voters are facing a choice in November of whether to approve Amendment A to the Wyoming Constitution, to allow investment in equities — subject to limits imposed by the Legislature — with the State Agency Pool and the Tobacco Settlement Fund.
  • Wyoming might use what are called “alternative investments,” of the kind that state consultants say other major funds invest in: hedge funds, “core real estate,” and private-traded “over-the-counter” stock not listed on the stock exchange.
  • Wyoming also could review how the state treats funds’ capital gains and losses — the increase or decrease in the value of investments (as distinct from the interest or dividends the investments may pay).

Legislators have been most interested in learning what the funds in other states are doing, to get a sense of what strategy options they should consider. The legislative committee considering these issues will hold another meeting Sept. 14, in Buffalo, to discuss them. Draft minutes from the committee’s June meeting, and the reports presented to the committee then, are available for public review.

Despite legislators’ penchant for looking to “state” peers, the State Treasurer, the state’s investment consultants, and the University of Wyoming suggest that Wyoming should look to the strategies and experience of a much broader group of big investors worldwide, including other countries that have trust funds fed by mineral revenues. Representatives of that group are assembling, at the instance of Gordon and UW, for an invitation-only workshop August 23-24 in Jackson. The workshop will be followed by a public session with an expert panel and opportunity for audience questions the evening of the second day.

The meetings in Jackson underline the fact that Wyoming does have global peers to look to. Wyoming’s Permanent Mineral Trust Fund is one of the 100 largest such “sovereign wealth funds”  in the world — though it is very small compared to many of them. Funds held by Norway or by Abu Dhabi, for instance, each totaled more than $750 billion last year (the most recent figures available); Wyoming Permanent Mineral Trust Fund amounted to only about $7 billion last year – less than 1 percent of the size of those major “sovereign wealth funds.”

Many sovereign wealth funds – including those in Norway and Abu Dhabi – are based on mineral revenues, and are therefore facing investment strategy dilemmas similar to Wyoming’s right now.  That common problem is apparently leading to what the organizers say will be packed attendance at the closed Jackson workshop later this month. Fund managers from New Zealand and Alaska (where the sovereign wealth funds in 2015 totaled nearly $30 billion and more than $50 billion, respectively) are among those who will attend the private workshop. They will also speak at the public forum.

University endowments and private foundations, Wyoming’s investment consulting firm urges, can also be looked to as funds whose investment experience and strategies are worth comparing to Wyoming’s.

Given the perennial cry for diversification of Wyoming’s economy, it is worth noting that for some of the sovereign wealth funds among Wyoming’s global peers, investment strategy can be a question of finding a balance between income needs and other kinds of long-term payoffs. Some observers recommend that countries holding such funds could look for other things to do with their investments. Those include ways to invest in ventures that might not offer top financial returns, but can pay off in other ways.  Such investment prospects could include companies that might help build a different economy in the home country of the fund. They could include companies abroad that are developing technology that would boost a new economy in the home country. Or they might be companies that are building infrastructure that will bring the home country new trading partners.

From Wyoming Business Report