The North Dakota Office of Management and Budget, OMB, released updated revenue projections on Aug. 29 for the 2013-15 biennium and preliminary revenue projections for the 2015-17 biennium. The upcoming biennium looks to have a $293 million increase over the revised 2013-15 biennium forecast. Though the additional dollars are appealing, legislators are not on the same page about the projections.
The revised revenue projection for the 2013-15 biennium, excluding transfers, lists General Fund revenues of $4.88 billion, which is about $285 million over the legislative forecast prepared in February 2013. Based on this updated forecast, the state’s General Fund is projected to have an ending balance of $614 million on June 30, 2015. The General Fund covers the general operations of state government. Looking into the 2015-17 biennium, the General Fund revenues are projected to total $5.17 billion. Updated projections will be released in November and again in February.
“We continue to enjoy strong growth among a wide range of business sectors in all regions of the state,” Gov. Jack Dalrymple said. “The diverse and growing number of career opportunities available today and our rising income levels reflect the great economic progress we are making. Our economy also continues to generate strong state revenues that can support the priorities of our growing and prosperous state.”
The legislature is required to hold to the projection estimates when they begin to appropriate funds during the session, but the revenues have been greatly underestimated in the past two bienniums and Senate Minority Leader Mac Schneider is questioning the forecast model.
“There are people who are trained in making these projections who I think we need to consult and find a more accurate formula,” Schneider told Petroleum News Bakken. “Some inaccuracy in these forecasts is understandable but it’s not like we’ve been inaccurate on the high side in one session and on the low side the next. It’s been routinely low and that’s affected policy.”
But Senate Majority Leader Rich Wardner said while the forecasts may be conservative, when the last two legislative sessions finished, unexpected revenue windfalls erupted shortly thereafter to throw off projections, and they weren’t from oil taxes.
“It came out of income tax,” Wardner told Petroleum News Bakken. “It was a combination of income and sales tax. Even the people who do our forecast for us didn’t see it coming.”
OMB Director Pam Sharp told Petroleum News Bakken that in 2013, income tax revenue saw a hike across the entire country, not just North Dakota, due to many people taking advantage of a more favorable capital gains tax rate that was expected to expire. She said those kinds of revenues are hard to predict.
A new model brings projections closer to reality
Sharp explained that the projections are prepared by OMB in conjunction with Moody’s Analytics, the North Dakota Tax Department and the state’s Advisory Council on Revenue Forecasting. She said Moody’s Analytics recently revised the forecast model to get the state closer on its projections, which she insists is working because the current biennium revenue is only running about 10 percent ahead of projections whereas it was over 40 percent off in the last biennium. A key aspect of the estimates is something no one can predict - the price of oil.
“We’re never going to get the price of oil right,” Sharp said. “This forecast is not going to be right so we know we’re going to be off but we’d rather be off on the conservative side and overshoot it then have to have drastic reductions in the budgets after they’ve been passed.”
The advisory council which is also consulted on forecasts consists of oil and agriculture industry leaders, bankers, retail and motor vehicle representatives and some legislators. Wardner sat in on the council’s meeting and said discussion revolved around oil prices, an area where he prefers to play it safe.
“You’re afraid you might plan for revenue that you’re not going to have, and is it warranted?” Wardner said. “I think the estimate was high.”
The OMB projects total tax revenues from North Dakota’s oil extraction tax and gross production tax to generate $9.7 billion in the 2015-17 biennium, compared to an estimated $7.5 billion for the current biennium.
Wardner crunched some numbers on his own and admits he wasn’t as optimistic as the state.
“I’m pleased that they estimate that, but I’m also very cautious,” he said. “We’re starting to come to a point in this country that we are almost self-sufficient (on oil) and I’m afraid we may have an oversupply of oil which will drive the price down, which affects revenue. If we plan to spend all of it, we come up short, and we look foolish.”
Time to make hay
Schneider said the “tremendous good fortune” the state has experienced calls for long-term planning, something he said has been lacking. He would like to see a focus not just on the next biennium, but a 20-, 40- and 60-year outlook.
“What kind of economy is North Dakota going to have when we can no longer count on oil as much as we are now?” he said. “With this one-time development of our natural resource and this revenue bonanza we are currently experiencing, we have the opportunity to make permanent investments that will pay off long after the last drop of oil has possibly extracted from the ground.”
He would like to create a permanent endowment to fund access to college and technology schools in the state.
“Not a line item that may not be sustainable in the long term,” he explained. “This is an endowment that as long as it is prudently invested will be there for generations.”
Both senators are in favor of addressing the impacts to oil producing counties with immediate funding at the start of the 2015 legislature and adjusting the gross production tax formula, which currently gives counties 25 percent of the tax revenue and 75 percent to the state, to a 40/60 split weighted to the counties.
“It’s much more efficient to allow oil-impacted communities to keep a greater share of the oil production tax locally than it is to suck up that revenue, hold it in a sleepy fund in Bismarck and two years later when the legislature meets again we go through the appropriations process and by then the needs have changed, they’ve multiplied, and they’ve increased significantly,” Schneider said.
He believes the 2015 legislative session needs to be about immediate needs but then move beyond that to ensure “a lasting harvest” from oil revenue.
“The good times aren’t always going to roll as smoothly as they are now. So let’s embrace the good times, enjoy the good fortune that North Dakota is experiencing,” Schneider said. “The state deserves it. Let’s make hay when the sun is shining.”
