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Monday, May 8, 2017

Standard and Poor Downgrades Wyoming

Standard & Poor's Global Ratings lowered its issuer credit rating for Wyoming to AA+ from AAA ... The agency primarily cites the reason for the AA+ as what they view as “an economy based on mining, tourism, agriculture and governmental employment that is now experiencing a downturn as the result of a decline in energy prices, following a previous energy-related economic boom,” the agency's report said. The agency cited that annual retirement contributions have been “somewhat less that the actuarial annually determined contribution” and also cited the $8.2 billion Wyoming Retirement System's 7.75% return assumption as aggressive. It said those combined factors have contributed to a “relatively low three-year average pension funded ratio of 78%.”
Before the United States took a beating in credit ratings during President Obama's first term, the very thought of a U.S. downgrade was little more than the punchline of a joke to many. To others, though, who had spent some time studying the federal government's notoriously weak finances, the downgrades were just another "see I told you so". 

This downgrade for Wyoming is not nearly as alarming as the U.S. downgrades under Obama. That, however, does not mean that it is just fine to ignore it. Quite the contrary: when we put the downgrade in the context of our state's bad macroeconomic situation, it becomes a red flag. When we add to that the agenda for this week's revenue committee meeting, that red flag grows exponentially.

Put bluntly: this is just about the worst possible moment in our state's recent economic history to impose any new tax. It is definitely a really, really bad point in time to impose a major new tax like a gross receipts tax. This is a tax that will - not could, but will - cost thousands of more private-sector, tax-paying jobs, on top of the 12,000 private-sector jobs we lost from 2014 to 2016. If our state lawmakers decide to go down that path; if they decide to ignore what I have been telling them about our state's economy since I started this blog in October, and if they refuse to hear the profound message in the S&P downgrade, then they are indeed putting our state on a downslope that will end in a very bad place. 

How bad?

Well, if Barbara Hutton were around today she would tell our lawmakers that no money in the world can shield you from bankruptcy if you really set your mind to spending it all. As of today, the risk is very small that Wyoming will end up in the same dire fiscal straits where California, Illinois and Puerto Rico have found, and find themselves. Yet if the gross receipts tax - or an income tax - were to become the law of the land here in Wyoming, an already weak economy would be subjected to a destructive fiscal policy with the capability of bringing us all the way down the long slope into the dungeons of fiscal ruin. 

No, this is not a rhetorical trick. It is a real threat. It is by no means imminent, it is definitely not urgent, and it is probably up to a decade out today. But for every year that the budget deficit is left growing; for every year that our legislature tries to close it with higher taxes rather than structural spending cuts; for every year they refuse to improve the regulatory landscape, cut property taxes and open up K-12 education to the private sector; for every year that passes, our state will inch closer and closer to the point of fiscal panic, financial ruin and - as the ultimate humiliation - bankruptcy. 

Higher taxes destroy jobs. Higher taxes eliminate taxpayers. Higher taxes tell entrepreneurs and high-income, big taxpayers who spend big money in our state, that they are valuable primarily as a source for protecting government against spending cuts. 

Higher taxes perpetuate deficits. You cannot tax a taxpayer who gives up and moves. As deficits are perpetuated, so are the drawdowns of our state government savings. And since you can only spend a saved dollar once, it is a mathematical certainty that, just like Ms. Hutton, one day you wake up and find that you are broke. 

That is what happened to Puerto Rico. Again, their fiscal situation is probably a decade ahead of Wyoming, but there are also worrisome parallels. For one, just like ours, their politicians consistently ignored the structural imbalance in their government budget. Instead of making the necessary long-term, permanent changes to spending; instead of doing the hard work necessary to turn Puerto Rico into a power house of economic freedom, small government, strong growth and abundant prosperity, they went out of their way to protect their government against anything beyond token reductions in spending. 

As time went on and "nothing bad" happened; as everything seemed perfectly fine on the surface; as their government patch-worked its way through the irritating, gradually growing challenges presented to them by a slowly decaying economy; as they kept looking the other way; the underlying fiscal bomb kept ticking. 

And now - bang. The Economist reports:
The government of Puerto Rico said in 2015 that the island could not pay its debts. Yet it was only on May 3rd that it kicked off the biggest bankruptcy case in America’s history. Public-sector debts total almost $74bn (around 100% of GNP). The drawn-out fiscal crisis has both imperilled [sic] Puerto Rico’s economy and upended the island’s politics.
Our pension liability, as mentioned first in this blog article, is only about 25 percent of our state GDP. Our savings are far bigger, so again - let me again stress this point - our situation is probably as much as a decade away from Puerto Rico. But let us keep in mind that a decade ago, today's dire fiscal straits were as unthinkable as is the Puerto Rican situation today. 

The chronically irresponsible fiscal policies of the Puerto Rican government have brought the territory to a situation that is nothing short of a catastrophe. The Economist again:
The government’s latest fiscal plan, approved by the oversight board in March, seeks to balance the budget over three years. Doing so requires austerity cuts worth about 10% of GNP by 2020. 
To compare, ten percent of the Wyoming GDP equals approximately $4 billion. (GDP is marginally different than, and preferable to, GNP.) That, of course, means $1.3 billion in government spending cuts per year, for three years. Again, nothing that is even on the radar for Wyoming.

But it is what awaits us at the end of the road if our elected officials continue to try to protect a destructive fiscal status quo. 

There is more. Tomorrow I will present the jobs numbers for Wyoming for the first quarter of 2017. Let me say right now that it is not going to be a happy reading. A teaser: 
  • The minerals industry reduced its employment by more than 2,500 workers over the first quarter of 2016; 
  • Non-minerals industries reduced their workforces by a total of more than 3,100 employees over the first quarter of 2016.

In short: the job loss continues. Check back tomorrow for the full story.

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