The West Virginia Senate has unanimously passed SB 461 that creates the West Virginia Future Fund and an accompanying resolution (SJR 14) to make the natural gas and oil severance tax fund constitutionally protected (inviolate). As most readers know, the WVCBP has championed the idea for several years and we are excited the state is moving forward in ensuring that it will always benefit from its rich nonrenewable resources.
What I would like to do below is answer some common questions about the West Virginia Future Fund and explain how it could potentially work and how the balance of the fund will grow over time. At the end, I will also put forth several ideas for future consideration that would make the fund stronger and provide more bang for the buck.
What is the West Virginia Future Fund?
It’s a permanent mineral trust fund that is funded by 25 percent of natural gas and oil severance tax revenue over $175 million. For example, if the state collected $200 million in natural gas and oil severance revenue next year, approximately $6.25 million (25% of $25 million) would be deposited into the fund.
What is the purpose of the fund?
The purpose of the fund is to take revenue from a nonrenewable natural resource that is depleted over time and replace it with a renewable source of permanent wealth for the state. Otherwise, severance tax revenue will decline along with the nonrenewable natural resource itself. The fund would also ensure that future generations benefit from the state’s rich natural resources.
What makes the fund permanent?
It’s permanent in that the principal or corpus of the fund is inviolate and can never be spent. Only the interest income from the fund can be used. The only way to make the fund permanent is to constitutionally protect it, otherwise legislators could raid the fund each year.
How will it be used?
The revenues deposited in the fund will be invested and grow larger over time. After fiscal year 2020, it could begin to pay out dividends or interest income to fund to a range of activities, including education, workforce development, economic development and diversification, infrastructure improvements, and tax relief.
Who will manage the West Virginia Future Fund?
The revenues deposited in the fund will be managed much like a state pension fund or an endowment at a foundation or university. The account will be in the WV Treasurer’s Office and will be invested by the West Virginia Investment Management Board.
How is the Future Fund different from the Rainy Day Fund?
The Rainy Day Fund is usually only used by the governor in a time of emergency (he has to repay the fund within 90 days) or by the legislature whenever there is a a severe decline in revenue or a crisis that needs immediate funds. The Future Fund is better thought of as a sunny day fund that will grow each year and be used each year to make investments in the state. One similarity is that both funds help with the state’s bond rating or credit score by building assets.
How many state’s have future funds?
While many states have land mineral funds where they collect royalties from mineral extraction (e.g. Permanent University Fund in Texas), several states dedicate a portion of their severance tax revenue into a permanent trust fund that is used every year. These states include Alaska, Wyoming, North Dakota, New Mexico, and Montana. For a more detailed look at these states, see this handout.
How big will the Future Fund be in the coming decades?
As Yogi Berra once said, it is tough to make predictions, especially about the future. That being said, we can say with some certainty that we are only in the beginning stages of the shale revolution and that natural gas and oil severance taxes will continue to grow for some time. According to the West Virginia Department of Revenue, natural gas and oil taxes will grow from $83 million in FY 2013 to $270 million by FY 2019. Based on these figures, and a 7.5 percent annual investment rate of return, the Future Fund would have a balance of about $127 million by the end of FY 2019. I would also stress that these figures are most likely very conservative.
How can we make the West Virginia Future Fund stronger?
To be clear, the first order of business should be to pass SB 461 and SJR 14 and then work over the next few years to make sure the fund builds enough wealth to begin investing in crucial areas that will help our state grow. To strengthen the fund, it would need to include a larger share of gas and oil severance tax revenue and it would need to include revenue from coal production. One option for accomplishing this would be to maintain the Workers’ Compensation Debt tax on coal (56 cents per ton) and natural gas (7.7 cents per MCF) that will expire in 2016. This could add at least $100 million per year to the fund. Another route would be to look at raising the severance tax by one percent, like we proposed in this report, or by levying a tax on midstream natural gas products like ethane.
A share of the dividends or interest income payments from the fund could also go back to the communities of origin. One fantastic model for this would be creating a regional board similar to the Iron Range Resources and Rehabilitation Board in northeast Minnesota that invests in companies, non-profits, and workforce development in the area to help create economic opportunity.
Lastly, the state could take steps to ensure that the Future Fund is as transparent and accountable as possible. This would need to include building a website that would give citizens details on how the money is be investing and used each year. One model for this would by the Alaska Permanent Fund Corporation.
Most importantly, however, we must create the West Virginia Future Fund this year and start building a better future.
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