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North Dakota faces devestating budget shortfall amid oil slump

The 2015 North Dakota State Legislature probably wishes they could take back those congratulatory handshakes they exchanged following the completion of a budget for the 2015-17 biennium that was suppose to  have had  a surplus of over $200 million by the end of the biennium in June of 2017.

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Posted on 2/6/16

By Melissa Anderson

Lawmakers left Bismarck in the spring of 2015 after creating  a record $14.4 billion budget for the 2015-17 biennium, up from the $13.7 billion budget for 2013-15. This budget was created amidst reports of low oil prices and billions less in projected revenue when the session began in January of 2015.

During that same session a total of $397.2 million in tax cuts were passed. Of this, $274.2 million consisted of property tax cuts and $123 million in individual and corporate property taxes. The legislatures made little note of the plunging price of a barrel of oil which, to date, has fallen more than 70 percent since June 2014.
Prices seemed to be on the road to recovery a few times last year, but the price for a barrel of oil has already sunk this year to its lowest level since 2004.  Many in the oil business think it will be years before oil returns to $90 or $100 a barrel, prices that were a boon to many and the average price for the last 10 years. .

As the oil industry continues its downturn so too has other revevune earning sectors in North Dakota, including what has been the backbone of the North Dakota economy, agriculture. North Dakota Tax Department records show the state’s economy is slackening due to low crop prices and a continued oil industry slump.

North Dakota’s taxable sales and purchases are key indicators of economic activity in the state. The North Dakota  State Tax Commissioner’s office released the third quarter report on that showed the taxable sales and purchases were $5.7 billion for July, August and September. That’s a drop of almost 25 percent compared to the third quarter of 2014 and the lowest since 2011.

The report also showed that 10 of 15 industries reported decreases during the third quarter of 2015 with mining and oil extraction having the biggest drop at nearly 53 percent.

As a result the State of North Dakota must tighten its belt and dig into the rainy day funds it set aside when the boom first started to cover the billion dollar shortfall.

By James McPherson
Associated Press

North Dakota Gov. Jack Dalrymple ordered deep cuts to government agencies and a massive raid on the oil-rich state’s savings on Monday to make up for a more than $1 billion budget shortfall due to a drop in oil drilling and depressed crude prices.

The state had more than $2 billion in various reserve accounts just one year ago, but oil prices — a key contributor to the state’s wealth — have taken a nosedive in the past year.

North Dakota is the nation’s second top oil-producing state, behind only Texas, and has the lowest unemployment rate in the country at less than 3 percent. But the Legislature’s record-high $14.4 billion budget for the two years that began July 1 was built on oil prices and economic assumptions that have fallen “much greater than anyone would have predicted,” the governor said.

“After 15 years of receiving almost entirely good news about the growth in revenues for North Dakota, it seems strange to hear that things have gone in the other direction,” Dalrymple, a Republican, told state agency officials at the state Capitol in Bismarck.

Oklahoma’s budget hole also is expected to exceed $1 billion because of poor state revenue collections and dropping oil and natural gas prices. Oklahoma Republican Gov. Mary Fallin on Monday proposed increasing the cigarette tax and expanding the sales tax to a variety of services to help.

In North Dakota, Dalrymple ordered agencies to cut their budgets by 4.05 percent, which will save the state about $245 million through the two-year spending cycle. The governor also will take more than $497 million from the state’s Budget Stabilization Fund, a surplus stash of cash that has been built up over the past decade largely from past oil bounty.

That means about $75 million will be left in the fund, which has only been tapped by two other governors: then-Gov. John Hoeven in 2002, and former Gov. George Sinner in the 1980s, due to depressed prices for crops and oil.

Rep. Al Carlson, the North Dakota House majority leader, said he would have preferred across-the-board agency cuts of at least 5 percent instead of taking more money from the rainy day fund.

“Thank God we had the money,” the Fargo Republican said. “It served its purpose, but now it’s gone.”

The remainder of the shortfall will be made up by using the previously anticipated ending-fund balance of about $331 million.

Still, North Dakota has a sizable financial cushion. The state will have about $875 million in surplus cash in various reserve accounts, according to Pam Sharp, the state’s budget director. That doesn’t include the oil tax-funded “Legacy Fund,” which holds more than $3.5 billion. The fund was approved by voters in 2010, and receives 30 percent of the state’s oil tax collections, though none of the money can be spent until 2017.
Senate Minority Leader Mac Schneider said the GOP-led Legislature should have set aside time for lawmakers to return to address the shortfall, rather than leaving it to the governor. The Legislature doesn’t reconvene until January 2017.

“There will be cuts that people disagree with, and who do they hold responsible?” said Schneider, a Democrat from Grand Forks.

All but about half a dozen of the state’s 73 agencies are subject to the cuts. The unaffected agencies are those that are largely unsupported by state funds, such as the state-owned Bank of North Dakota, which is supported by profits, and the Game and Fish Department, which is supported by state licensing fees and federal tax money from the sale of firearms, ammunition and other sporting equipment.

Sharp, the state budget director, noted that almost $72 million in cuts to K-12 education will be covered by a special reserve fund that is a financial backstop for elementary and high schools.

State agencies must submit their planned cuts by Feb. 17. The Legislature and the state’s judiciary branch also will make the governor’s suggested budget cuts, officials said.

North Dakota’s general fund can take in no more than $300 million in oil tax revenues per two-year budget cycle, and the remainder is split among an assortment of reserve funds. But the general fund also is financed by taxes on income and sales, which also are affected by depressed oil prices.

A one-time spending bill signed by Dalrymple last February fast-tracked $1.1 billion for highways and communities affected by the state’s exploding growth, nearly depleting the Strategic Investment and Improvement Fund, which is funded in part with oil and gas taxes. Most of the money was spent in western North Dakota, which has been overwhelmed with spending needs on roads, utilities, housing and schools.

Additional information gathered by Cavalier County Republican

The federal government estimates that U.S. production of oil will fall to an average of 8.7 million barrels a day this year from the 9.4 million produced in 2015. This decrease in production is hitting many oil-dependent states especially hard. North Dakota is not the only state facing budget shortfalls as a result of the plummeting oil prices. Oklahoma is also facing a $1 billion deficit and Alaska’s gap is an estimated $3.5 billion.

With the low cost of crude, national gasoline prices are expected to average at just $2.03 a gallon this year, down from $2.43 that was previously projected, according to the Energy Department.

This is not good news for the 2015 North Dakota Legislature decision to spend $1.1 billion in “surge” funding from the Strategic Investment and Improvements Fund for statewide infrastructure projects. That fund is now projected to end the 2015-17 biennium with only $200 million. Governor Dalrymple will also use all but $75 million of the $572 million Budget Stabilization Fund to help cover the revenue shortfall, and K-12 schools will draw $72 million from the $670 million Foundation Aid Stabilization Fund to cover its share of the cuts. That will leave an overall surplus of about $875 million in the three funds combined.

North Dakota State Superintendent Kirsten Baesler says the schools of North Dakota will receive money that was budgeted for them. To ensure the needs of schools are met, $71.8 million will be transferred from the Foundation Aid Stabilization Fund, according to a press release. The department is slated to divvy up $2 billion to school districts this biennium, most of which is allocated to schools based upon enrollment.
Baesler stated the Department of Public Instruction’s administrative expenses is what will be affected by the budget cuts and the department is being reviewed. DPI intends to cut $2 million in administrative expenditures. State Superintendent Kirsten Baesler said in a statement that she will identify cuts that have the least impact on student education services.

Higher education is being especially affected by the call for budget cuts. North Dakota University System Chancellor Mark Hagerott has directed campuses around the state to scrutinize spending in particular categories, including hiring, travel, and equipment purchases; to consider shared services that yield efficiencies; to evaluate efficiencies in course delivery, specifically annual faculty course loads; and to prioritize building repairs and maintenance based on safety and well-being.

The University of North Dakota (UND) was already facing a $5 million deficit partially due to a legislatively mandated tuition increase cap of 2.5 percent when the school needed a 3.7 percent increase to cover costs. Vice President for Finance and Operations Alice Brekke said efforts to find long-term solutions are ongoing for fiscal year 2017, and on top of that, the state has stated a 2.5 percent budget cut to UND’s allocation for fiscal years 2015 to 2017 is possible. Brekke told the press that this means UND may have to cut another $8 million and “nothing is off the table,” including the School of Medicine and Health Sciences budget.

North Dakota State University Provost Beth Ingram has informed employees of an outline on how NDSU plans to trim $6.4 million from its budget, which does not include tuition or fee increases to offset the budget cut.

Ingram’s approach will focus on using one-time savings to the greatest extent possible including:
• Delay funding for the Grand Challenge Initiative until Fall 2017
• Intensify the level of review of requests to hire for open faculty and staff positions
• Evaluate the feasibility, efficiency gains, and value of shared service across units (departments, programs and colleges)
• Reduce spending on some professional development activities that are funded centrally.