Wyoming PBS - Capitol Outlook Week One (2016)

Leadership Web Extra

Feb. 12, 2016 - CHEYENNE, WY

Craig Blumenshine:        We're continuing our conversation with the President of the Senate, President Phil Nicholas and the Speaker of the Wyoming House of Representatives, Speaker Kermit Brown.

        One thing I wonder about and the Speaker, off camera, and I visited about this briefly, that regardless of where you stand on the war on coal, the fact is that there is a war on coal. Does that make this a little bit different in that regard, that there are some pressures that haven't been affecting that commodity in the past that are certainly affecting it now?

Kermit Brown:        It depends on your perspective. Coal wasn't really a large component until, in relative terms, modern times.

Craig Blumenshine:        It is today for sure.

Kermit Brown:        It is today but it hasn't always been. Yes, we're going to miss coal a lot to the extent that it's not there. Have we been there before when we subsisted without coal? Yes, we have.

Craig Blumenshine:        Mr. President, any thoughts about that?

Phil Nicholas:        I would add to that that nobody is saying ... There is a war on coal, we understand that, but the experts are not telling us that coal production is going to stop. When you look at the decrease in coal use and burning coal, it is a fractional, a proportionate reduction you're seeing. The state of Wyoming is interested in trying to pick up that proportionate amount by shipping coal overseas. We think that would be best for the states, all of our sister states, and we think it's best for the world to have clean Wyoming coal enter these plants where there's dirty foreign coal being used at this time and we're looking at coal convergent technologies. Coal will be here for a long, long time but the incremental changes are dramatic.

        When we look at the coal, you look at the power side which is consuming the coal for power. They're changing but what is really driving it as much as anything, that price, is $2.00 national gas and the volume, the amount of natural gas throughout the United States. That is what's driving this current issue. The good news is we produce all types of energy and coal is not going away. We need to help it. We need to protect it. There is so much natural gas throughout the United States. That's driving all of these and have probably greater influence than anything individually.

Kermit Brown:        It's kind of like real estate: location, location, location. With coal, it's low sulfur, low carbon, the best coal. We have the best coal. I can't predict exactly how it's going to play out but when you have the best coal in the world, then there's going to be a demand for it. It may be decreased. We may have to be really flexible and use a lot of creativity about how we market it but when you've got the best product in the world, there's going to be a market for it.

Craig Blumenshine:        Revenues certainly are falling. What discussion, if any, has there been to enhance revenues, either in the short-term or perhaps in the longer-term, Mr. President?

Phil Nicholas:        The discussion with respect to what we can do to enhance revenues, one is production. What can we do to increase the volume of production of coal? We want to make sure that we're still working with our sister states on the Pacific side, on Oregon and Washington. We want to make sure those resources, to bring those legislators out to Wyoming so they can see what a coal mine looks like, see what a coal train looks like, make sure that they understand that this is not as intrusive as they believe. We need to continue to educate them that we've been to these coal facilities, these plants throughout the Pacific Rim. We've been on the ground. What we're learning is that Wyoming coal is not looking to displace 100% of the burning fuel.

        Australian coal is high BTU, low moisture, but they do use a fraction or a portion of their operation, they blend in with lower-grade coal. Currently they're taking it from Malaysia and it's really a poor quality of coal. Their production, we believe, and their capacity would be immediately benefited. The emissions would go down by supplanting or exchanging Wyoming coal for that Malaysian coal. Malaysia is in a political turmoil so they want a politically safe partner. Those are efforts we do to work on those.

        We need to keep our infrastructure, the Pipeline Authority, keeping our oil and gas infrastructure healthy so that when the commodity prices do come back the volumes come back commensurate with the prices.

Craig Blumenshine:        Other revenue opportunities, Mr. Speaker?

Kermit Brown:        I don't know, economic diversification. Our state's probably more diversified than it's been. We certainly don't have the diversification that we want but we have a lot more than we used to have. Can we do more of that? I think so. I think we try to enhance that. We try to broaden our tax base and broaden our economic activity in the state.

Craig Blumenshine:        Some ask if we bring in new jobs, jobs are wonderful but how does that expand our tax base directly?

Kermit Brown:        That's a tricky question. There's an old economist at the University of Wyoming, Shelby Gerking, we were talking about him. He used to drive people crazy. There's this phenomenon in Wyoming which has been reinforced lately by a statement from the Business Alliance to the effect that the average family of 4 in Wyoming pays something in the order of $4,000 a year in taxes, state and local taxes and gets, the Business Alliance says maybe in the order of $120,000 of benefits. Shelby Gerking used to look at that and he used to drive people in the state crazy because he'd say, "Why do you want to grow? Every time somebody moves into the state you have to take that state contribution which is far in excess of the tax base and cut the pie another way."

Craig Blumenshine:        Are we a welfare state then? Is that the implication?

Kermit Brown:        Some people would say that. I don't believe that. I think our people work hard. I think our people are bound and determined to make this state succeed. We do need to understand that in the context of broadening our tax base we need to get away from that ... If we can find a way, we would do well to lessen our dependence on commodity-based taxes and get ourselves more oriented towards taxes that are proportional to the productivity of our citizens and our businesses in our state.

Craig Blumenshine:        Mr. President, how will we discuss that? How will we look at that?

Phil Nicholas:        We look at it in different ways throughout the budget and what we can do to look forward. In specific areas we have to recognize that Wyoming has reduced the mill levy tax that's been assessed against private property owners since the Campbell County cases in the 1990s. The way those cases worked out is the state picked up the lion's share of funding not only schools and education, doing that through principally federal mineral royalties. We also picked up the responsibility to construct school facilities which we've been using our coal lease bonuses. Going back in the 90s, for me it was a disappointment that we would remove all of the property tax assessments against property owners and then shift that entire burden to coal lease bonuses because I felt at the time that coal lease bonuses, wouldn't it be wonderful to use that for economic diversification, going out and doing what other states do where we actually create incentives, large incentives for large companies to come here.

        On the one hand, we look at our tax base and eventually you're going to have to acknowledge that we've been very fortunate and spoiled, if you will, that coal lease bonuses have been paying for all of the school construction throughout the state. If we begin to lose those coal lease bonuses, we have to look for other revenue sources. A little while back I argued that we ought to look at it quickly. The sooner you begin to look at that problem the easier the problem is to solve. The later you wait, the more the obligation grows. You defer that and it then becomes a massive solution.

        One area where I vastly differ with the governor is the governor makes the point of saying, "Why would you raise taxes now because it's a hard time on the mineral industry?" The mineral industry has been paying for our schools. They paid it through the coal industries. They've been paying it through coal lease bonuses. We've augmented that by about one billion dollars from federal mineral royalties. When you go out to tax, whatever the solution is, whether it's a sales tax, whether it's a property tax, even were it an income tax, I'm not suggesting that's what we would ever do but all of those taxes, the largest burden falls on the energy industry because they have the assessed valuation that we tax.

        When I meet with the folks in the energy industry, they know they're paying that share. They know that if we defer it, it's going to be a bigger problem on their books later. They do want stable taxing policy. Right now, we're engaging in a very unstable solution to the problem but I think when people see that there's this large, vast savings that we've put aside, they're simply not ready to tax themselves, even though it's a small amount. That's the issue of the revenue. We continue to look at it.

        On the economic diversification, Kermit's absolutely right. We know that when we recruit businesses, it may create increased local revenues, property taxes for cities, towns, and counties. Unless there is some massive sales tax, it's not going to really hit the pockets of the state for operating our budget. Having said that, we want our children to stay here. We want our grandchildren to stay here. We would like them to have great jobs. We want them to have high-paying jobs, so recruiting businesses that have diversification with strong wage performance and the potential to increase your economic status in life, that's important to us.

        The governor has had a series of round-tables where he's brought industry folks from Fortune 500 Companies from around the United States to Wyoming and asked them, "What does it take to invest in Wyoming? Why aren't you building some of these facilities in Wyoming?" If you go to any of the universities around, you go to Stanford, you go to CSU, you go to Boulder, you go to Montana, you see these great hubs of economic activity built around their universities. In fact, if you look at Stanford, you see the Silicon Valley and all of that wealth that was created in massive amounts not too long ago. When those companies look at Wyoming they simply say, "You do not have the employment base that we need."

        What takes me back is that we need to continue our investment in education. It does make a difference if you live in a high school where you have modern equipment. When you leave that, you're comfortable with and you're working with the same type of equipment that you might find in the labor force at that time. For the University of Wyoming, we've met with companies and they say, "Look, our laboratories are turned over every 5 to 6 years. We have the top lab equipment. We're looking for graduates. We're looking for workforce-trained people from your universities that are working with the same kinds of equipment and the same kinds of environment that our employees are working and Wyoming just hasn't met the grade. We're hiring petroleum engineers from Oklahoma State, from Texas A&M, Colorado School of Mines." When you go to those schools you see that they have much more modern equipment.

        You look at one of the biggest, largest growth areas in the United States is in healthcare. We should be having more healthcare research at UW and creating opportunities for faculty to develop their products. One of the areas that we are looking at is the engineering initiative. We're now looking at the science initiatives and all of the STEM programs, the science-technology-engineering-math programs at the university, building them into the community colleges, building them into the high schools and increasing the quality of our trained workforce, our graduates, our scientists so we're prepared that when these great opportunities come to Wyoming we can seize them because we have the educated workforce to get there.

Craig Blumenshine:        Back to something that you said, just briefly, Mr. President, you talked about we need to have this discussion sooner rather than later, are there any plans? Is there a roadmap here on how that discussion is going to occur in the state of Wyoming?

Kermit Brown:        Let me defend the president a little bit. The president said in view of the reduced revenues that we're experiencing that maybe it's time to think about a tax right now or maybe a statewide mill levy. The thought there is that we could institute a fairly nominal tax right now. It's back to this idea that the expenses in this state have to move sympathetically with the revenues, the ongoing revenues and not the one-time revenues. If we get over in the ongoing stream, if that's on a glide-path on a decreasing rate, we can allow that to go, and cut the expenses with it. At some time the two are going to converge in a way that revenues just aren't going to be sufficient.

        That's exactly what he talked about in the 90s. He floated out the idea, which he just got massacred for, but he floated out the idea that maybe we ought to think about a nominal tax now which when you understand the compounding of it and you put it forward in time, a nominal tax now could make a big difference in how much tax we're going to need later.

        We wouldn't be doing any more than going back to the way we used to be before we had this coal lease bonus money and all school were built on the backs of taxpayers. Schools were built on the back of the assessed valuation in this state. Then we went to this equalization thing, figured out this deal where we could pay for schools with this coal lease bonus money and it's been years and years since the taxpayers have paid a dime out of their pockets to build schools when in fact back in the 20s, 30s, and 40s, all of these schools in the state were built without of any of that mineral income. The president said maybe if we just put in a nominal tax now and if you look at the compounding going forward it will make it much easier and it gives us a way longer glide-path to wait this thing out until the oscillation goes the other way. As I say, he just got massacred for it which is a shame because the fact of the matter is there's really good logic in doing that.

Craig Blumenshine:        Is the discussion over? Will it continue?

Kermit Brown:        I don't think it's over.

Craig Blumenshine:        How will it continue?

Kermit Brown:        I think it's just a matter of how long it takes him to recover from getting beat up and see if he wants to stick his head up out of the foxhole again.

Phil Nicholas:        I think the solution to moving forward and how you implement the budget and you're going to see a number of efforts out of the legislature. We are going to be looking at the tax base. We will assign it to the revenue committee to look at that and be sure that they're attending the notion that the principal large energy firms are going to be paying the tax. The longer you wait the more tax you're going to have to throw on them. The more quickly you respond the more modest the increase.

        We have other studies at the University of Wyoming that tell us how much we need to spend on schools just to maintain the quality of the school at a relatively modest condition. That's going to be about 200 million for biennium. We're not going to raise that much or we're not going to receive that much. Our major maintenance alone is about 120 million dollars. You need 200 million on top of that. I suspect that we will invade rainy day accounts a small amount just to make sure that we're working forward on finding solutions.

        We need to have parallel paths of having the revenue committee go back and look at it and have them do a serious look. They need to be talking to the mineral industry to say, "Look, reality is is that you pay these taxes. You are the largest tax base. The longer we wait, the bigger the problem." We begin to look at those 6, 10-year solutions. We begin to look at our economic development projects.

        In this budget, you're going to be saying, "Look, the state of Wyoming itself lends about 36, 38% of our gross state product so that your standard of living and what generates is largely a function of the state of Wyoming." Because of the size of the state and the amount of roads, infrastructure and projects, people don't necessarily realize that much of that, the wealth of the state is generated by state spending. We're not going to put the brakes on one-time projects and say. "Well, we'll defer those." That creates not only the deferred maintenance cliff that you get down later but it also creates even a greater hammer or hit to your economy because people that are doing highway construction, people that are doing school capital construction, families that are reliant on all types of construction look to those state projects.

        This argument has never changed since I began in legislature, and that is what about one-time projects? Even when we had 1 1/2 billion dollar surpluses we had massive and intensive arguments about what do you put in savings for the short-term savings? What do you put in the permanent mill trust fund? What one-time projects do you get and fund? The other agencies are all wanting to grow. If you have 30% more revenue, they want 30% more growth.

        We've kept those spendings down. Partly we did that by allocating money for one-time projects, for savings, things like that. What that does is try to keep your operating costs down low. We do have to recognize that in a large budget like this, it's just as important to somebody that's a state employee and whether they're getting a raise and how they view their employment as it does that industry that relies on state investments to operate. If your oil and gas community is shutting down, they're laying down rigs and they're looking for jobs, we can compound that problem by saying, "We're not going to do any one-time projects." We're not going to do that.

Kermit Brown:        We'll add insult to injury and shut down construction.

Phil Nicholas:        Right.

Craig Blumenshine:        Gentlemen, it's a pleasure. I appreciate your willingness to visit with our viewers. I think your message is important. I look forward to visiting with you both again. Speaker Kermit Brown and President Phil Nicholas, thank you for joining us on Capitol Outlook.

Kermit Brown:        Thank you.

Phil Nicholas:        We appreciate it. Thank you very much. Thank you for having us.

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