Weighty responsibility lies upon North Dakota lawmakers who must develop a successful two-year budget in light of volatile commodity markets. While the latest revenue projections provided some potentially good news, several legislators scrutinized the outlook.
Moody’s Analytics and the state’s Office of Management and Budget unveiled revenue projections for the current and next bienniums before a joint meeting of the state’s House and Senate Appropriation committees on March 18.
“These are the most conservative assumptions that we have ever put into the forecast,” Dan White, an economist with Moody’s Analytics told the legislators.
The new revenue forecast reflects a $419 million cut from the state’s 2015-17 executive budget presented in December. In contrast, when the Legislature updated projections in January, it showed a $550 million drop from December. The difference means the state could have $130 million more to spend than previously anticipated.
It was good news for Gov. Jack Dalrymple who laid out funding plans for a record $15.7 billion budget for the 2015-17 biennium at the start of the session.
“We knew there would be a time when commodity prices would drop for a period of time; therefore, our state government has been very careful to not build a general fund budget based on the prosperity of the oil and gas industry,” Dalrymple said. “Because our general fund still is going to hold up fairly well, I believe most of what we have proposed in our general fund revenue budget is still very possible.”
In addition to the $130 million increase for the next biennium, OMB Director Pam Sharp showed a $45 million net increase for the current 2013-15 biennium over the January numbers. The difference is primarily within sales tax projections where the Legislature had made an $87 million adjustment whereas OMB only made a $36 million adjustment. White said that sales taxes stayed fairly strong because of taxable activity from the construction industry making major infrastructure improvements.
“This is not a bubble-like scenario where they’re building roads or they’re building houses for people who they hope will move here five years from now,” he said. “This is for building roads or houses for people who are already here.”
Projections questioned
But some lawmakers took White to task on the 15 percent increase year-over-year in sales tax projections, saying rig counts continue to plummet and agriculture in the state is the weakest it’s been in years. Rep. Roscoe Streyle of Minot questioned the indicators Moody’s used to calculate the forecast.
“From the people I’ve talked to it’s not even close to as rosy as you’re saying right now,” Streyle said.
House Majority Leader Al Carlson agreed, struggling to understand how sales tax revenue could be higher if all the assumptions are lower.
“I’d rather start lower and work up than start too high,” Carlson said. “And I think today, we’re too high.”
But White said North Dakota’s economy is not declining like one would expect - doing even better than fellow energy states Texas and Oklahoma.
“As an economist, I can make these calculations based on the data and our economic forecast, and these are the numbers we came up with,” White said. “We didn’t try to gauge what industry is telling us; we didn’t try to gauge anecdotal evidence. We took the data as we know it … and took a more conservative view of that.”
A shifting workforce
A significant factor in tax collections is a transition of laid-off oil rig workers into construction jobs. The state’s employment statistics released on March 17 show that job growth was accelerating in January, White said.
“You’re sure not going to find another energy job anywhere in the United States,” White said. “So if you have a relatively low skill set, your number one choice is going to be construction. If you need a construction job in the United States today, there’s no better place to be than North Dakota.”
While workers are not leaving the state’s labor pool, he said they are tending to move out of western North Dakota’s high cost of living. Over the past three months, White said, Bismarck and Fargo saw the strongest labor force growth in the state.
Global markets and the U.S. dollar
White explained three factors that “shocked oil markets” in recent months and said any shift in them will further affect North Dakota’s revenues. First, Saudi Arabia “has been willing to inflict much more fiscal damage upon themselves” than anticipated, White said. It slashed $60 billion from its 2015 budget while also implementing a $40 billion deficit.
“What that’s saying to the rest of the world and the rest of the oil markets is that Saudi Arabia is willing to forego a third of its tax revenue in order to maintain its market share of the world,” White explained. “In the process of doing so, it is actually tripling its public debt.”
Another consideration is the strength of the U.S. dollar. Since June 2014, value is up about 20 percent, and White said if the dollar was still at June’s value, oil prices would be at $70.
“So dollar impacts are huge,” he said. “It will be very closely watched.”
Finally, geopolitical risks haven’t met expectations. Despite the recent turmoil and violence in Iraq, oil production has not dropped. Libya, already in the midst of a civil war, can have production swings of nearly 1.5 million barrels on any given day, White said. But the country carrying the most potential to move oil markets is Iran if a nuclear deal lies ahead (see related story on page 12). For now, the sanctions on Iran prevent them from exporting oil.
“If Iranian sanctions are lifted by the U.S. … that’s roughly a half a million barrels of oil that could spill out on the global oil markets within a few months of that deal being signed,” White said.
The days of $100 oil are gone, White said, and oil prices are not expected to rise above $55 a barrel before May 2016. He admits that Moody’s projections are more aggressive than the consensus, but they “very prudently capture the risks.” Moody’s was also conservative in production estimates, assuming a flat 1.1 million barrels per day throughout the biennium despite the state’s Department of Mineral Resources’ estimates of reaching 1.3 million per day. Moody’s under-predicted North Dakota’s revenue forecast by 50 percent in the 2011-13 biennium, but after adjusting its models for accuracy, it only under-predicted by 7 percent in the 2013-15 biennium.
