Protecting the Nest Egg: Legislature to Debate Money Allocation

North Dakota 63rd Legislative Assembly - Money AllocationThe three answers former speaker of the North Dakota house, Representative David Drovdal, gives when asked what the big issues coming down the pike in the upcoming legislative session are going to be don’t vary. They are: money, money and money.

Who gets it, who doesn’t, and who pays for it.

For the 63rd Legislative Assembly session in North Dakota, finding the money is a done deal.

“The state has an enormous amount of money coming in largely from the oil industry, so there are going to be a lot of efforts from all corners of the state to utilize those funds,” said Robert Harms, owner of The Harms Group. “That’s going to be the biggest challenge for the Legislature: how to allocate those funds, what parts should be allocated, what should be saved for a rainy day, what should be given back to the taxpayers.”

As many as 1,000 bills are likely to be introduced during the 80-day session, many having to do with hopeful and likely necessary requests for funding and allocations. However, it’s not necessarily easier to work with more money in a budget than there is to work with less.

Allocating all of it is a nice challenge to have, but it’s still a challenge.

Following The Money

Most states face putting together a budget with less funds than what’s needed to cover everything that needs funding. For North Dakota, finding the funds isn’t the issue. The economic boom triggered by the energy industry, the oil and gas boom in the Bakken, means the state doesn’t need to find new revenue sources.

But the amount of revenue the state currently has triggers concerns about funding programs and projects not because there aren’t enough funds, but because legislators are looking forward to long-term sustainability of funding.

“I was the state budget director back in the ‘90s when there wasn’t a lot of money to spend,” said Rod Backman, CPA/CFP, Covenant Consulting Group. “There’s more pressure to spend when they know you have it. When they know you have a lot of revenue, everyone is going to be going after it.”

“I guarantee you it was a whole lot easier when I first was down here and there wasn’t all that money,” said Representative Robin Weisz. “It’s a lot easier to make decisions because the risks that we take and the fear is that if we have the money today, it’s very easy to hand it out. But can we sustain it 10, 20 years down the road? That’s the issue. I’ve always been a believer if we fund something we’d better be able to sustain it, not just have a Christmas list today and two years later you’re Mr. Scrooge, taking it all away.”

One of the fears about sustaining funding set up during a surplus is that the Environmental Protection Agency (EPA) may shut down fracking going in the Bakken oil fields. “We have to be able to sustain funding, especially if the economy begins to soften or changes in fracking regulations occur. We’re aware the EPA has already proposed and is seeking comment on three different regulations of fracking that could have a substantial effect on the North Dakota oil industry,” said Weisz.

Obviously the state’s economy would change drastically in that case, but even if fracking and the oil economy are shut down, agriculture is still the number one industry in the state, with commodity prices high and lots of equipment being bought, generating revenues back to the state, said Representative Dennis Johnson.

Tourism is the third largest industry in the state. “Those economies are still there, and we still need to ensure their growth,” said Weisz. “Then manufacturing will become even more critical to try and expand and grow that economy to take up any slack the oil industry might incur.”

“We want to keep in mind while budgeting this money that we’re able to sustain the spending level of money being spent down the road. Federal legislation changes as well as those governing the Bakken could virtually shut down the oil industry,” said Johnson.

The concern has a certain basis in realty. Despite its recent strong economy, North Dakota is no more immune to boom and bust than any other state, as the 1980s oil bust showed. There’s also concern that as personal incomes rise across the state, federal monies may lower in response.

If federal monies drop off, that will throw the whole budgeting process into turmoil. The state relies heavily on federal funds per capita, and with personal incomes going up, there’s a possibility federal funds could go down.

“If that does happen, all these numbers have to be looked at again,” said Drovdal. “Because we’re basing our budget on best guess projections from the federal government and somehow get the feeling everybody thinks they’ll find a way to bail out.”

Human services are always a challenge for states to fund and with the growth in North Dakota, the challenge is significant. Then as incomes rise per capita, federal allocations can drop. Federal Medical Assistance Percentages, FMAP, matches funds with states funds. If those percentages change, North Dakota could find itself with a $100 million-plus bill to supplement services, even though the state isn’t obligated to replace those federal dollars with state funds.

Traditionally the budget breaks down to one-third to K-12 education, one-third to higher education, and one-third to human services, with roughly 10 percent going to the state government. But higher education is looking for about a 15 percent increase in funding.

Senator Tim Flakoll, chairman of the standing education committee, believes there will be two bills for education that will be of major significance. One of the bills deals with the k-12 funding mechanism through the property tax relief bill; the other proposes a new formula for funding higher education that will provide more transparent, reliable, outcome-based funding methodology.

No New Taxes – Really

The issue of taxes reverberates through most budget discussions and state legislative sessions. For the North Dakota Legislative Assembly, recent biennial sessions have been about reducing the tax. Measure 2 on ballots in 2012 would have abolished property taxes in the state. While voters chose not to do that, the measure shows there’s a tremendous amount of concern that something be done.

Proposals before the Legislature would drop property taxes in the state by one-third, approximately the amount they were dropped during the last session, said Drovdal. The measure would return some $800 million to the school districts, double what was returned two years ago.

But it’s not just property taxes. There are also proposals to drop individual income tax by one-third, the same amount it was dropped in 2011. Other proposals aim to eliminate personal income tax, according to Harms. “I don’t know if they can get there in one fell swoop, but that’s going to be on the table and another piece of legislation, a reduction of the sales tax, will be a part of that package. Likely there will also be a reduction of or elimination of corporate income tax, as well.”

Business Friendly

Another proposal puts forth the idea of dropping corporate income taxes by one-third, again mirroring a drop made in 2011.

“I think it’s very important we continue to create an environment where we can recruit and maintain businesses, and that includes having a very friendly tax climate,” said Flakoll. Over the past four years the state has lowered personal income tax by just over 30 percent, and lowered corporate income tax by more than 20 percent.

“Now we need to be sure the state continues to head in the right direction,” Flakoll said. “We want to stay away from the roller coaster, yo-yo type taxes where we’re down two years and then have dramatic increases and then down again. That doesn’t inspire the confidence we’re looking to see in businesses looking to come to the state of North Dakota. We need to be viewed as a favorable tax state.”

There’s also a need, according to Flakoll, to ensure policy committees don’t impose unnecessary regulations that cause hardships for businesses, and to create through education the workforce businesses need.

Another issue coming before the Legislature in 2013, which doesn’t initially seem business-related, is child care. With the population growth across the state and especially in the West in the oil and gas producing counties, one of the big challenges facing the state is workforce. For young adults who have children, a lack of child care facilities can mean the difference between two contributing members of the workforce and one. Grants for child care should help businesses as the available workforce increases.

“All these things are vitally important, even in terms of flood prevention – we want to insure that people investing in a bricks-and-mortar business don’t have to worry about being flooded our or work stoppage because of floods,” said Flakoll.

In addition to no new taxes, proposals before the Legislature would just about double the amount of tax dollars being returned to the oil and gas producing counties, bringing the total up to around $540 million, Drovdal indicated. Along with that, grant programs of $142 million will continue to help counties and townships with road projects.

There’s More to it Than Just Money

While such concerns are still budget-related, some of the issues coming up in front of the 2013 session members will include safety statewide. Some $214 million is slated to go to public safety needs impacted by the energy industry, like more ambulances, fire departments and other emergency services.

In addition, there are plans to increase employment at state level for safety purposes. This would add approximately 15 new state troopers and safety workers to check out industrial conditions. They would check wells for safety concerns or health issues for the health department, ensuring everything is being done to protect both North Dakota’s environment and people.

The energy industry may be seeing some changes as well. Several issues will appear before the Legislature that are aimed at protecting landowner rights and another bill being proposed deals with so-called stripper wells, or lower-producing wells. Currently, once a well is declared a stripper well, any new wells that go in the same area qualify for the same status, based on the existing low-producing well. Because stripper wells are taxed at 5 percent rather than 11.5 percent, proposed legislation would mean every well had to stand on its own and be judged on its own production, not on the production of another nearby, lower-producing well.

“That’s going to end up raising taxes on oil companies a little,” said Drovdal. “But there’s going to be some legislation to offset that and to make it revenue neutral, because we don’t need the money right now.”

Another issue with the oil wells that has captured public attention is the amount of flared gas at wells, which is natural gas released during drilling which then burns away. “The power commission is looking at spending or suggesting the state put several million dollars toward solving natural gas flares,” said Harms.

With wells being drilled so quickly, the infrastructure to capture the natural gas produced isn’t always keeping pace, so some 32 percent of the natural gas is flaring.

“No one wants that,” said Harms. “For the state regulators and oil companies it’s a wasted resource. For the oil companies, that’s their bottom line. There probably will be some policy changes to reduce that flaring and incentives to bring new solutions into our market. Probably, [there will also] be some policy changes that reduce the likelihood of flaring in the future.”

Statewide, there’s an ongoing concern with highways and infrastructure due to the rapid population growth occurring. The state is putting a lot of money into its state highway system, whereas once it relied heavily on federal dollars.

“We’re putting a billion dollars into four-laning some oil and gas roads, and some for bypasses for quality of life on those roads, because in one town we have up to 12,000 trucks going through a town of 1,500 per day,” said Drovdal. So the state is putting $325 million into bypasses, $300 million to state highways, $142 million in grants to townships and counties, and $214 million in impact grants.

Other infrastructure, in this case buildings on higher education campuses which have been overlooked for years, will finally get caught up with one-time spending programs, said Johnson.

Water’s an issue statewide, too – delivering it in some cases and warding it off in others. On one side of the state, there’s need to finance a public water delivery system, the Western Area Water Supply (WAWS), which is looking for at least another $40 million in loans and $80 million in grants, and “they could spend $350 million on that project,” said Harms. WAWS is a state-funded public entity.

Flood control is another water-related issue. There’s rebuilding in Minot after the floods of 2011, Bismarck and Fargo are looking at flood control projects with total costs of over $1 billion, and the good news is that flood control projects at Devil’s Lake may have turned the corner finally after 20 years and millions of dollars in infrastructure.

“The Governor has proposed for the Fargo area $102 million towards flood prevention. That would be on top of the already set aside $75 million for various flood-related things, whether that’s a buy-out of homes in high prone flood areas, or dikes that can protect the city up to a certain level to moving some vital infrastructure like water lift stations to higher areas so they aren’t as susceptible to being swamped under by floods,” said Flakoll.

“It should be an interesting session,” Harms said. The state is poised to have very vigorous public policy discussions and there will be long-term impact of those policies. “The state is sitting on this enormous resource, the Bakken and the Three Forks oil formation, so the public policies we put in place are going to impact the very culture and fabric of the state for many years to come.”

“I think this session really sets up to be one that will be looked back at 20, 40 and 60 years and maybe beyond,” said Flakoll. “People will say that was an important point in the history of our state because right now we can really position ourselves to continue the amazing progress we’ve made and continue to diversify our economy.”

This session has the chance to set the stage for prosperity for generations to come.

“In many ways it’s unlike any session I’ve been involved in during my 14 years in the Legislature,” said Flakoll. “Because we have to make smart and strategic investments and smart and strategic policies so that we don’t waste this great moment in history. “

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