Issue: April, 2009
Author: Buck McVeigh
Printable Version (PDF)
Forecasting Wyoming's Financial Future
The Consensus Revenue Estimating Group (CREG) is the official estimating body for all revenues received by Wyoming State Government. Created in the fall of 1983 by a mutual informal agreement between the executive and legislative branches, the CREG is responsible for developing a single consensus estimate of state revenues to aid in the budgeting process. Prior to its existence, each branch developed its own independent forecast of revenues, and as you might imagine, the variance was quite dramatic at times.
I serve as the Administrator of the Economic Analysis Division of the Department of Administration & Information. Along with Steve Sommers, who heads up the Budget & Fiscal Division of the Legislative Service Office, we serve as the co-chairs of CREG. Between the two of us, there lies nearly 60 years of experience in state government finance. Additional members of CREG include representatives from the State Auditor's Office, State Treasurer's Office, Department of Revenue, Department of Education, Wyoming Geological Survey, Wyoming Oil and Gas Commission, and the University of Wyoming.
The CREG produces its official forecast report in early October of each year and reconvenes after the holidays to re-evaluate its assumptions and projections. Following its January meeting, a revised report is released, reflecting any new information that could enhance the forecast. Occasionally, an unusual event or economic shock may occur that significantly impacts revenues to the state. If the situation is severe enough, the co-chairs may call for a special meeting of the CREG and, if necessary, revise the forecast.
The group doesn’t claim or attempt to reach pinpoint accuracy. In fact, we know we’ll likely be wrong. Rather, by using the expertise of individuals representing mineral valuation, earnings on investments, and general fund revenue sources, we try to get as close to actual as we can be, having earned a notorious reputation for being on the conservative side. Obviously, the consequences of erring on the long side of a forecast are horrendous, so we tend to be extra cautious, especially when it comes to the mineral portion of the forecast.
When it comes to accuracy, the CREG has a solid track record. Comparisons of actual General Fund revenues to CREG forecasts for the October forecast for fiscal years 1984 through 2008, reveals an overall accuracy rate of +9.0%. In 1986, a process allowing for a January revision of the previous October forecast was implemented for the first time, thus improving accuracy to +7.3% for the fiscal years 1986 through 2008. The accuracy study also evaluated each of the major sources of General Fund monies since 2004. Those categories are “Sales & Use Taxes,” “Mineral Severance Taxes,” “Investment Income,” and an “all other” category. Over this five-year period of time, the “Sales and Use Taxes” forecast has been the most accurate of the different General Fund projections, averaging 4.7%, while the “Investment Income” component has seen the greatest variance at 41%.
Although Wyoming has seemingly weathered the major effects of the national and global recession better than most states, up to this point, recent economic data are signaling the worst is yet to come.
This year has been most challenging for the group. Since January 2008, we have seen it all, from record high oil and natural gas price levels, to seemingly rock bottom levels for both. Supply and demand levels for energy, particularly natural gas, are in tremendous imbalance, and the outlook for the near term (the next two years or so), is for much of the same. The real question is what is going to happen with demand, and with the economy. It’s just a big question mark at this point.
The CREG met on January 6, 2009, and revised its October 2008 forecast and assumptions to reflect the current economic conditions. Following are some highlights of the January 2009 CREG forecast.
Mineral income projections were revised downward to reflect the current economic downturn and accompanying demand destruction for energy commodities. Price levels for crude oil, natural gas, and coal were reduced from the levels forecasted in October 2008. Those changes resulted in a $253.2 million decrease to the fiscal year 2009-2010 estimate of severance taxes to the General Fund and Budget Reserve Account. Additionally, the Budget Reserve Account saw a reduction of $234.7 million for the same timeframe as a result of lower federal mineral royalties.
Sales and use tax estimates were also lowered to reflect anticipated reductions in oil and gas employment and a lower rate of income growth. This revision resulted in a $16.7 million decrease to the General Fund fiscal year 2009-2010 forecast.
Challenged by continued market deterioration and growing uncertainty, investment income from the pooled investment accounts and the Permanent Wyoming Mineral Trust Fund (PWMTF) were reduced by $146.0 million over the fiscal year 2009-2010 forecast period.
The bottom line resulting from these revisions: fiscal year 2009-2010 General Fund revenues are expected to be $247.1 million less than projected in October, while fiscal year 2009-10 Budget Reserve Account revenues are projected to be $403.5 million lower. The reduction to total traditional funds available for appropriation for the fiscal year 2009-2010 biennium is $650.6 million, as compared to levels shown in the October 2008 report.
We made some major downward revisions in our mineral tax and investment income projections to reflect current conditions. Our hope with these revisions is we have held up our conservative nature. I sense people have become too accustomed to the CREG’s usual conservative forecasting.
The complete Wyoming State Government Revenue Forecast report can be accessed from the Economic Analysis Division website at eadiv.state.wy.us/creg/GreenCREG_Jan09.pdf.
Buck McVeigh is a 29-year employee of the State of Wyoming and has worked as an economist in four state agencies. He has worked for four governors over this time. McVeigh is the administrator of the Department of Administration & Information’s Economic Analysis Division, a position he has held since May 1998. He serves as the executive branch co-chair of the State’s Consensus Revenue Estimating Group. Born and raised in Cheyenne, Wyoming, McVeigh is a graduate of the University of Wyoming. He earned a B.S. in agricultural economics in 1979. Along with being a small business owner, McVeigh serves on numerous volunteer boards in the Cheyenne area.
Copyright © 2009 – Wyoming State Bar