WV Center on Budget and Policy > Blog > Natural Gas & Shale Development > What Did the House Do to the Future Fund?

What Did the House Do to the Future Fund?

Yesterday, the House Judiciary and Finance Committees both amended and passed out  Senate Bill 461 and Senate Joint Resolution 14 that creates the West Virginia Future Fund. The amendments made several modifications to how much revenue will flow into the fund over time, how the principal of the fund is protected, and how the state will use the interest income. For an overview of the Senate version of the bill and resolution see here.

The most significant change the House made to the bill was how severance tax revenue would be deposited into the Future Fund. While the Senate version of the bill allocated 25 percent of all oil and natural gas severance taxes collected over $175 million to be deposited into the fund, the House version instead dedicates three percent of annual severance taxes collected on coal, oil, natural gas, limestone, and sandstone that would otherwise be deposited into the General Revenue Fund. Currently, about 86 percent of total severance tax revenues are deposited into to the General Revenue Fund while nine percent are distributed to local governments and five percent goes into the Infrastructure fund (and a very small fraction goes to administration). 

The House version also included several conditions that have to be met in order for deposits to be made into the Future Fund in any given year, including:

1.  The balance of the Revenue Shortfall Reserve Fund has to be least 13 percent of the General Revenue Fund budget.

2. The Governor’s General Revenue Fund estimate cannot rely on using money from the Rainy Day Fund.

3. No mid-year budget cuts, hiring freezes, or allocations from Rainy Day Fund to fill budget gaps.

So how will these changes impact the balance of the Future Fund?

While it is uncertain if these conditions will be met over the next several fiscal years, there definitely will not be a deposit into the Future Fund in FY 2015 under the House version of the bill. This is because the governor has already recommended using $84 million from the Rainy Day Fund in FY 2015 budget.

The stipulation that the Revenue Shortfall Reserve Fund has to have a balance of at least 13 percent of the General Revenue fund could be problematic several reasons. First, because the language in the House amendment does not refer to both Revenue Shortfall Reserve Funds (A & B), it could be very difficult to meet this target. Today, the Revenue Shortfall Reserve Fund (Part A) has a balance of $558.9 million, 13.09% of the Governor’s proposed FY 2015 General Revenue Budget of $4,271 billion. Meanwhile, Revenue Shortfall Reserve Fund – Part B has a balance of $363.5 million. Altogether, the total a balance in the Rainy Day Funds is $922 million or 22 percent of the General Revenue Fund.

If the legislature uses $84 million of the Revenue Shortfall Reserve Fund (Part A) for the FY 2015 budget, the Revenue Shortfall Reserve Fund will only be 11.1 percent of the state’s general revenue fund budget. This means it will have to be replenished over the next few years to exceed 13 percent by raising taxes, cutting the budget or finding money from somewhere else (e.g. an unforeseen economic boom!). Of course, the legislature could increase taxes this year so they do not have to use the Rainy Day Funds but that is highly unlikely in the election year.

It is also important to mention that the the governor’s budget forecast shows a budget gap of $126 million in FY 2016 and $44 million in FY 2017. So this would mean more spending cuts or tax increases if the Revenue Shortfall Reserve Fund is not used. If these budget gap where overcome with tax increases or other revenue, the balance of the Revenue Shortfall Reserve Fund would have to grow dramatically to stay above 13 percent of the general revenue fund budget.

For example, the governor’s budget projects that the general revenue fund budget will be $4,727 billion in FY 2016 and $4,977 billion in FY 2017. This means the Revenue Shortfall Reserve Fund will have to grow to at least $615 in FY 2016 and $647 in FY 2017. If we assume that least $84 million will be used in the FY 2015 budget, this means the Revenue Shortfall Reserve Fund will need to grow by $140 million by FY 2016 and $172 million by FY 2017. Extremely unlikely unless we have giant surpluses over the next few years.

If we conclude that all of the above conditions will be met over the next several years – a big leap of faith, I might add – the future balance of the Future Fund will likely be much lower that it would have been without these changes. Based on severance tax projections from the West Virginia Department of Revenue, the fund will have a balance of about $72 million in FY 2019 compared to $127 million in the Senate version of the Future Fund. This is because the benchmark included in the House version – three percent of total severance tax revenues – is much lower than the benchmark in the Senate version of 25% of natural gas and oil severance tax collection of about $175 million. And because the House version benchmark begins with severance tax revenue deposited into the General Revenue Fund – and not the total amount of severance tax revenue included in the Senate version – it also depresses the amount of revenue flowing into the Future Fund.    

Hosue Version of Future Fund

Other House Changes

The House’s amendment also clarified that “tax relief” was an appropriate use of the money that could be spent from the Future Fund so it matched the language in the Senate Joint Resolution 14. The House Judiciary Committee also stipulated that “infrastructure” would include “post-mining land use.” All fine.

The only other significant change made by the House was to the constitutional amendment proposed on SJR 14. Instead of making the fund permanent – meaning that the only way to spend the principal of the fund was by a vote of the people – the House included an amendment that the legislature could spend the principal of the fund if two-thirds of each house of the legislature agrees. The problem with this amendment is that it hurts the integrity of the Future Fund by giving the legislature, instead of the people, the option to spend all of the money in the fund. This language also conflicts with the language in the bill that says the principal of the Future Fund “shall remain inviolate” and not be appropriated.

Conclusion

If the House amendments are not changed, it could significantly lower than amount of funds that are eventually deposited in the Future Fund and it could curb public support for making the fund constitutional. The one bright spot in the House amendments to the Future Fund is that it includes other nonrenewable resources like coal.

To strengthen the Future Fund, the Legislature should consider several options. First, it should clarify that deposits to the Future Fund are predicted on the balance of both Revenue Reserve Shortfall Funds. Secondly, it should consider increasing the amount of revenue that would be deposited into the Future Fund. This could include increasing the percent of severance tax collections dedicated to the fund or increasing the share on just natural gas and oil collections. And finally, the Future Fund should remain permanent, rather than allowing the legislature to spend the principal of the fund.

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