Funding changes

North Dakota considers bill to put more money into oil impacted areas

Maxine Herr

For Petroleum News Bakken

What has been referred to as the “formula bill” working its way through the current North Dakota legislative session, House Bill 1176 would give counties impacted by oil development a larger share of the gross production tax revenues.

The state currently receives a 5 percent gross oil and gas production tax. Four-fifths of that, or 80 percent, is divided among political subdivisions in oil and gas counties. HB 1176’s biggest adjustment - the change western North Dakota is pleading for - is for counties generating more than $5 million of oil and gas production revenue to receive 60 percent of any earnings above that. Under current law, the counties only receive 25 percent with the other 75 percent going to the state.

Rep. Keith Kempenich is the prime sponsor on the formula bill and presented it to the House Appropriations Committee Jan. 29. The bill would provide western North Dakota with the resources to deal with oil development impacts. House Minority Leader Kenton Onstad has said the formula change should have been addressed in 2009 or 2011 to avoid being in “catch-up mode.”

“It’s hard,” Kempenich told the committee. “There’s always 20/20 hindsight.”

The other 20 percent

The other side of the equation is the one-fifth of the 5 percent which is used to fund hub cities - currently Williston, Dickinson and Minot - and hub city school districts. The proposed bill would increase the hub cities allocation from $375,000 to $500,000 and raise the school district funds from $125,000 to $150,000 for each full or partial percentage point of the community’s population that reports oil or gas related employment. The previous language required the percentage points to be determined based on the number of people directly employed by “the mining industry,” which includes oil and gas, but by changing the language to specify employment “related” to the oil and gas industry, the number of hub cities could easily expand.

From this one-fifth, school districts that receive $5 million or more of the oil and gas production revenue would also get another $1.75 million. Additionally, the Oil and Gas Impact Grant Fund, the Outdoor Heritage Fund and the Reclamation Fund each receive allocations, but the proposal would decrease the amount sent to those funds.

The history of the formula

The state’s gross production tax was enacted in 1953. At that time, the tax was 4.25 percent and rose to 5 percent in 1957 where it has remained ever since, but the distribution formula has seen plenty of modifications over the years. From 1957 to 1981, the formula provided the first 1 percent to the general fund and the remaining 4 percent to counties in a tiered fashion. For instance, the counties received 75 percent of the first $200,000, 50 percent of the next $200,000 and 25 percent of the remaining revenue. In 1981, 2007 and 2009, the legislature changed the thresholds giving greater allocations to the counties considering that tax collections increased from $306,000 in 1954 to more than $1.49 billion in fiscal year 2014. In 2013, the formula was amended to give 100 percent of the first $5 million of tax revenues to counties and 25 percent of the revenues thereafter. But because the legislature had also put caps on how much a county could receive, the counties’ percentage share of the tax revenue has never been as robust as it was from 2005 to 2007 despite the growth in production simply because of the way the formula was designed.

“With the formula change as proposed, the numbers for the counties and communities is variable with the price of oil,” said Brent Bogar, spokesman for the North Dakota Association of Oil and Gas Producing Counties. “In the end, the new revenue forecast has lowered the dollars going to the oil and gas political subs by just over 600 million.”

Dividing the money

The money to counties has always been split between cities, school districts and the county’s general fund with 20, 35 and 45 percent, respectively, regardless if it was the first million or the last. But in 2013, the legislature made a change in which those percentages were applied to the first $5 million, and if a county received more than that, the general fund earned 60 percent, the school districts got 5 percent and cities were given 20 percent. Townships also entered the mix each taking an even share of 3 percent of the money then splitting another 3 percent based on road miles. The three hub cities received the final 9 percent.

The state also instituted some distribution limits in 1981 on how much total annual revenue a county could receive from oil and gas production tax collections. While amended the following session, the limits were not removed until 2009.

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