WV Center on Budget and Policy > Blog > Economic Development > Giant Step for Future Fund, but More Work Ahead

Giant Step for Future Fund, but More Work Ahead

Late Saturday night, the Legislature passed SB 461 that created the West Virginia Future Fund. While this is an important step forward, the bill included the adopted house changes that I focused on last week. The most significant changes included a new funding mechanism and several conditions that have to be met in order to deposit money into the Future Fund. Unfortunately, these changes will very likely preclude any deposits made into the Future Fund for several years.

Instead of adopting the Senate version which deposited 25 percent of all natural gas and oil revenue above $175 million, the Future Fund will now receive three percent of general revenue severance tax collections on coal, oil, natural gas, limestone and sandstone. The three percent will not include local severance tax distributions or the $23 million that goes into the infrastructure fund in calculating the share that would be deposited into the Future Fund. In addition, the three percent does not include “natural gas liquids” which are expected to grow from $10 million to at least $35 million over the next few years. 

As discussed earlier, deposits into the Future Fund can only happen if Rainy Day Fund A (Revenue Shortfall Reserve Fund) is above 13 percent of the General Revenue Fund budget. As Senator McCabe said on Saturday night, this condition will not likely be met for many years because of the state’s revenue problems – which are mostly due to self-inflicted tax cuts. To give you an idea of why it will be so hard to meet this trigger, the chart below looks at a couple of scenarios.

RDF Projections

Currently, Rainy Day Fund A is 13.3 percent of the General Revenue Fund Budget for FY 2014. This will most likely drop significantly after the end of the week when the Legislature passes its final budget for FY 2015. The House plans to use at least $84 million from the Rainy Day Fund A for its FY 2015 budget (per the Governor’s request) to pay for Medicaid, while the Senate version of the budget would use $125 million from the Rainy Day Fund. This would put Rainy Day Fund A at 11.1 percent or 10.2 percent, respectively. So this means no deposits in the Future Fund in FY 2015.

What about in later years?  In order for Rainy Day Fund A to be at 13 percent in FY 2016 it will need an additional $140 to $181 million. Usually the only way money grows in the Rainy Day Fund is through deposits made from budget surpluses (80% of surpluses will now go into the RDF A) or interest accrued in the fund. The interest income from the fund would likely be no higher than eight percent, so it will take at least a surplus of $110 million next year (unless there are deep cuts to the budget) for a deposit to be made in the Future Fund. The same goes for the outer years. The only foreseeable way this could change is a boom in shale development beyond beyond what is baked into future budgets or some other type of economic miracle.

How can we fix this problem? Two actions: 1) the state desperately needs to increase its revenue base (e.g. increase tobacco products’ taxes) so it can fill in current and future budget gaps in order to stop depleting the Rainy Day Fund. Without this action, it doesn’t look likely anything will ever flow into the Future Fund; 2) combine both Rainy Day Funds (A & B) or alter the language in the code to include both funds in the trigger. That way, it meets the 13 percent threshold trigger. To strengthen the Future Fund, it also needs to include “natural gas liquids” or it could just say “all severance taxes” collected.

This all being said, the Legislature should be commended for taking a great step toward creating the Future Fund. Now we just need to be sure that it gets the funding it deserves and that it’s constitutionally protected.

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