Former Gov. Freudenthal Raises Timing, Prudence Concerns In Land Purchase

Feb 21, 2020

Credit Dave Freudenthal

Governor Mark Gordon announced this week that Wyoming is looking to buying a million acres of land across southern Wyoming and surrounding states along with 4 million acres of mineral rights.

The multinational oil and gas company Occidental Petroleum is looking to sell the checkerboard plots after recently acquiring them; the land was originally owned by Union Pacific. State leadership believes the purchase could help boost and diversify Wyoming's investment portfolio for years to come.

"There's a real opportunity here that is maybe a once in a lifetime kind of opportunity," said Gordon.

State leaders go on to mention the land could provide new opportunities in energy development, recreation, grazing, and land swaps. The area includes the largest trona deposit in the world along with a high quality wind resource.

Riverton Senator Eli Bebout said Wyoming has reaped the financial benefits of minerals for generations. This purchase would go be a way to reinvest it back into the land.

"We can look back with our grandkids down the road, and we can see that this really could be a game changer not only for revenues; revenues for the state, revenue for the schools, the access issue. There's just so many win-win things," he said.

There's little concrete information about the deal itself, though. Speaker of the House Steve Harshman said he expects questions.

"I know that this is kind of like the latest shiny object, but I'd want to be incredibly careful and skeptical about how far you go in."

"Should government buy land like this? Fair enough, is it a good investment? Is it a good use of our dollars? When we're running structural deficits, is this a way to help our school funding? All these questions are going to be out there and we're going to have to figure it out as we go," he said.

Former Governor Dave Freudenthal has his own concerns about the magnitude of unknowns, the value of the purchase, and prudence in what's been a difficult financial period in Wyoming history.

CM: Which is your experience dealing with these types of issues?

DF: Well, this is a kind of a spring it on everybody at the last minute bill for most of the members of legislature. I'm sure some of them and the five electeds have been involved in it. The legislation appears to authorize the purchase with an undisclosed price, yet-to-be determined, through some form of due diligence.

It's not clear to me that the legislation requires that they come back to the legislature for final approval. They may be able just to do it based on the statutes that's here. So, it sort of intuitively sounds like a good idea to diversify the state's investment portfolio. But, like everything else, the devils in the detail. What's the price? Does it meet any kind of legitimate investment threshold in terms of the projected income? And the level of uncertainty given the revenue source is primarily going to be mineral development and mineral development has not been - other than in kind of the Laramie County portion of the UP [Union Pacific] strip - is not proving terribly encouraging, particularly out in the southwest in terms of the number of rigs that are operating in that.

So, I think the the state has a difficult problem confronting it, which is how do you value it? And it's interesting that the state is looking to figure out the value of it.

It's too bad we couldn't take advantage of a lot of the other energy companies who've looked at the properties and decided not to buy them and to get a better understanding of Oxy's [Occidental Petroleum] interest in selling them.

"We should be nervous about obligating funds that may be needed to balance the budget going forward."

Most of this is going to come down to price, but there's also, I think, a legitimate question about whether the government wants to be managing more lands than it already does. The state manages about 3.6 million acres that came to us time of statehood. The public is, and I think legitimately so, kind of mixed on whether the states is a successful manager of the land.

And I know that this is kind of like the latest shiny object. But I'd want to be incredibly careful and skeptical about how far you go in. And we should we should do, and I assume they are, doing fairly serious diligence.

We should be nervous about obligating funds that may be needed to balance the budget going forward. You can tell them, legislature, is by and large kicking the can down the road on revenues, which is a pretty typical Wyoming approach.

And so we're now kind of off on this detour.

I get the notion that you want to diversify the state's investment portfolio, but if the return on the diversification is not sufficient to justify it, we need to be careful, because we are dependent on these investments for going forward.

CM: So the big question seems to be timing and price. If there were some sort of promise that maybe we don't know about, "this is when we will see a return on investment," would that make it more palatable?

DF: First of all, who can make that promise? I mean, the the variations within market which we've watched, you know, the coal in that portion of the state is not attractive. Arch minerals moved out of there a long time ago. There aren't many people left.

Trona is a reliable market and I think you can see that. But oil and natural gas prospects are not particularly good on the southwest end of the state. I think they're pretty positive over here on the southeast.

So there's this vast number of variables, including trying to figure out what the long term price is going to be on natural gas and oil.

Because, primarily, you'll get some revenues off of surface leases and some other properties. But primarily, you're looking at this as a mineral play. And the question is, how confident you are that the price of minerals is going to support the state's rate of return when at this stage, it does not appear to be attractive enough to support private sector buyers.

CM: From folks who really liked the idea, there's discussion about what a unique opportunity it is to be able to buy so much land at one time. Would that be attractive?

DF: Absolutely. I mean, the idea of being able to deal with the mess that the checkerboard has always been, for everybody. is really attractive. The question is: at what price and and what are you giving up? I mean, the opportunity cost of taking money that's currently invested and getting a yield, placing it into this more diversified portfolio has to be calculated, and it has to be calculated in terms of the risk.

Is it logical for the state to assume a risk that the private sector doesn't want to accept and make the purchase? It may be if the price is right. If the price is significantly discounted, that makes sense.

"Is it logical for the state to assume a risk that the private sector doesn't want to accept and make the purchase?"

And then you actually got: what are our administrative costs? I mean, what is it going to cost us to administer this land? You know, the bill provides for payment of local taxes, as it should, with there taken off the tax roll.

We are the product of migration from Europe. And most of our forefathers came to this country with the idea that having land is a really important thing. I mean, that's who we are. We believe in that. And so you can believe in that relative to the state but you've got an awful lot of unanswered questions and an awful lot of open ended... this legislation is a huge piece of "trust me."

It authorizes people to act without, near as I can tell, I don't see the legislative requirement to come back to the legislature in that. In fact, it looks to me like it appropriates and undefined sum of money to be used at the discretion of the elected officials within the context of the prudent investor rule.

CM: The last piece would just be what the average person would think and why they would care if they were a Wyomingite?

I'm kind of in that average person category at this stage and I just wonder about the the full assessment of the risk. Whether or not we want to make sure we don't get caught up in this sort of optimism of "Wouldn't it be great to own this land?" and end up either paying more than it's worth or end up underestimating the problems we're going to have going forward and expenses in terms of managing it. There's a reason people invest in other entities and other options, whether it's stock market or bonds, or whatever it is. This investment needs to be compared to that, relative to the income that it generates for the state.

CM: Any other pieces to keep in mind?

DF: I just hope that somebody's doing really serious diligence and number crunching. Because just like this session, they're drawing down on those reserves. And if those reserves get transferred into hard asset the ability to draw down on those reserves to fund the ongoing operation... the government disappears.

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