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Tuesday, October 25, 2016

Biennium Revenue Down $466 million

(Updated. Kudos to Brad who caught a clerical error.)
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The much-anticipated October CREG report was released on Monday. The story is that the state has to deal with a $156 million revenue shortfall. Here is what the Casper Star Tribune said:
Wyoming lawmakers are short $156.6 million for the current two-year funding cycle, according to a report released Monday morning. That means when legislators convene in January in Cheyenne, they will have to make up the difference through program cuts, tax increases or spending the rainy day fund. The current revenue shortfall is the result of a decrease in revenue in recent memory.
I thought it was a decrease in revenue in the minerals industry. But be that as it may. Governor Mead's comment

A Monday report from the state’s Consensus Revenue Estimating Group (CREG) projects state revenues will fall about $156 million dollars short of covering the two-year $3-billion general fund budget that started July 1. But the governor says he thinks the real target number for the shortfall is about $52 million because $104 million of the $156 million figure is actually money that must go back into a state savings account and is something the state has a degree of flexibility on. As for the remaining $52 million, the governor says it’s important to note the state’s ”rainy day fund” (formally known as the Wyoming Legislative Stabilization Reserve Account, or LISRA), has gained an additional $26 million as of October 17. He also says cuts he has previously made to the state budget haven’t been fully felt yet in many cases.
I have a lot of respect for Governor Mead. I also hold the Casper Star Tribune in high regard. But with all that respect in mind - has nobody at the governor's office, or the newspaper, even opened the CREG report?

Let us take a look at the actual revenue accounted for in the report. Table A, on the second page of the report, explains that:
FY 2017-2018 Biennium GF Revenue Forecast Comparison
Forecast ($million)

Revenue Source
Jan-16
Oct-16
Difference

Sales and Use Taxes
$949.6
$833.0
-$116.6

Severance Taxes
$360.8
$317.3
-$43.5

Investment Income
$490.4
$510.6
$20.2

All Other
$417.0
$400.6
-$16.4

Total General Fund
$2,217.8
$2,061.5
-$156.3


Compare, now, this table to last year (Table C):

FY 2015-2016 Biennium GF Revenue Forecast Comparison
Forecast ($million)
Revenue Source
Jan-15
Oct-15
Difference
Sales and Use Taxes
$1,106.7
$1,010.8
-$95.9
Severance Taxes
$406.0
$375.6
-$30.4
Investment Income
$461.0
$837.1
$376.1
All Other
$274.8
$304.3
$29.5
Total General Fund
$2,248.5
$2,527.8
$279.3
Source: CREG October 2015 Report

The number to watch here is not the one in the lower right corner - that is just a forecasting accuracy checkpoint for CREG itself. It is the difference between two revenue forecasts for the same biennium. It tells us nothing about the state's actual revenue trend.  

No, the real number to watch is the bottom line in the middle column. It says that in October 2015 the revenue forecast for the 2015-16 biennium was $2.53 billion. In the October 2016 report the same number is $2.06 billion. That is not a decline in revenue of $156 million. That is almost half-a-billion dollars. $466.3 million, to be exact.


Suppose this is spread evenly across the biennium. This means that the decline in revenue for this current fiscal year is just over $233 million, 149 percent of the number that media and Governor Mead are throwing around. 


But the bad news does not stop there. CREG also offers a breakdown of revenue for fiscal years (Table 1 of the report). They divide their FY revenue reporting into "Historical" and "Projected" revenue. FY 2016 is in the "Historical" category, with a reported total General Fund Revenue of almost exactly $1 billion. 


For FY 2015 the reported total revenue is $1.5 billion. 


CREG actually projected this shortfall in October 2015, though the actual revenue number for 2016 came in slightly below forecast. Which brings us to another, related point: CREG is notoriously optimistic in its revenue forecasts. In October 2015 they predicted that by 2020 General Fund revenue would be up 6.7 percent over their 2016 level. In October 2016 they predict a decline in revenue of 1.5 percent. 


This might seem like a technical, basically irrelevant point. After all, forecasting is notoriously difficult. I agree - I have done forecasting professionally. But the problem with the CREG reports in general is that they have a built-in methodology that up until this year always predicted rising revenue, even as all macroeconomic signs pointed to stagnant or declining revenue. 


Therefore, when CREG now changes its revenue outlook from a baseline pointing upward to a downward sloping baseline, it is worth taking them very seriously. If their upward sloping forecasts were overly positive, we should expect them to report a smaller decline in revenue than we will actually experience. 


Put bluntly: the future is grimmer than CREG tells us. 


One indicator of the future that media reports has overlooked is the trend in sales and use tax revenue. In the October 2016 report, Table 1, the money coming into the General Fund from this tax is down from $521 million in 2014 to $432 million in 2016. That is, largely, traceable back to the decline in minerals activity in the economy. However, that decline has spread widely through the Wyoming economy and is en route to causing a more than $1 billion drop in wage earnings in our state this year. For every job we lose in the minerals industry we lose one more private-sector job in other industries. 


In other words, the Wyoming economy as a whole is trending steadily downward. It would be surprising if sales and use tax revenue flatten out and even rebound in the next couple of years, as CREG predicts. 


Overall, the CREG reports are important for our legislators. The problem is that with a track record of unwarranted optimism they do not provide our elected officials with accurate information, thus delaying necessary legislative action to turn around our state's economy. For this, CREG deserves to be criticized. 

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