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North Dakota accumulates massive rainy day funds

North Dakota is sitting on one of the larger rainy day funds of any state in the nation, which state officials say is necessary to protect against an economic downturn like the rest of the country experienced during the recent recession.

As of June 30, the state’s rainy day funds for the full 2013-15 biennium equaled about 13.5 percent of general fund spending, the manner in which rainy day funds are traditionally measured.

According to the North Dakota Office of Management and Budget the percentage is calculated from two funds. The Budget Stabilization Fund is the first and has about $583.5 million, and the other is the Property Tax Relief Sustainability Fund, which contains $341.8 million.

Sheila Peterson, director of OMB’s fiscal management division, called it extremely important to build and maintain rainy day funds for the operation of government.

“It’s very challenging to forecast out two or three years as to what our revenues are,” Peterson said.

She pointed to the 2008 economic downturn and recession that wreaked havoc on nearly every state’s economy but North Dakota’s. Peterson said no one had anticipated the financial meltdown that occurred.

Peterson said when the 2008 downturn occurred the general rule of thumb for states was to have the equivalent of 5 percent of annual general fund spending.

“Many of them … they found that 5 percent wasn’t enough. I don’t think that is the rule of thumb (anymore),” Peterson said.

Peterson added that there have been no discussions that she’s aware of on the state level about how large the state’s rainy day funds should grow.

According to the nonpartisan Tax Foundation in Washington, D.C., North Dakota’s rainy day fund for fiscal year 2013 was at 12.64 percent as a percentage of its general fund budget.

Nationally, North Dakota was ranked fifth for fiscal year 2013 behind Alaska, Wyoming, West Virginia and Texas.

States neighboring North Dakota vary widely. South Dakota ranked seventh in 2013 with 10.38 percent, Minnesota 21st at 3.48 percent while Montana ranked 42nd with zero percent.

The Budget Stabilization Fund was created in 1987. It’s capped at 9.5 percent of the total general fund budget passed by the most recent legislative assembly.

The Property Tax Relief Sustainability Fund acts as a pre-paid allocation of money set aside to buy down property taxes over the biennium.

Gov. Jack Dalrymple said during his years in the Legislature and in the executive branch he’s seen or heard of political subdivisions that have run the gamut from zero percent in rainy day funds to about 100 percent.

He said part of any prudent budgeting process is to make sure you have financial reserves available. By ensuring that the state has strong reserves, any negative impact of an economic downturn “will be due to macroeconomic circumstances” rather than any fault of the state.

“Even though things look really positive, we are still very dependent on commodities of all kinds,” Dalrymple said

This was part of the reason for creating the Legacy Fund, Dalrymple said.

“The Legacy Fund is designed to be a long-term endowment fund,” Dalrymple said.

The Legacy Fund was approved by voters in 2010. Thirty percent of all oil and gas production and extraction tax revenue go into the fund, which can’t be accessed until 2017. A two-thirds vote of both houses of the Legislature will be required to spend any of the funds. No more than 15 percent can be spent per biennium.

As of June 30, the Legacy Fund had amassed more than $1.28 billion.

Senate Minority Leader Mac Schneider, D-Grand Forks, spoke of a need for addressing immediate needs rather than stashing as much excess cash away.

He said rainy day funds have an important purpose. However, Schneider believes with the state being flush in cash more can be done, especially in the western oil patch counties.

“You definitely want to have a budget cushion” Schneider said. “(But) I don’t think we need to fill our pockets with cash at the expense of addressing needs.”

Schneider added that leaving a higher percentage of oil tax dollars in the oil patch counties would reduce the amount of state funds coming to Bismarck. If they went straight to current infrastructure needs on the front end there would be less need to cycle money to oil country each biennium. This, he said, would be better for the state in the long run.

“I think we need to get to a point in North Dakota where success is not just defined by having a budget surplus,” Schneider said. “I think the size of these funds should be driven by the needs.”

Senate Majority Leader Rich Wardner, R-Dickinson, said having such funds in place is important in case there are unexpected shortfalls due to economic issues beyond the state’s control.

“It looks good now, like the sky’s the limit,” Wardner said. “What we’re doing is very responsible.”

Wardner added that the money isn’t just some large chunk the Legislature took from the current revenues.

“The money has been collected over several bienniums,” Wardner said. “It’s not like we’re stashing away a huge amount of money.”

The former educator used the Foundation Aid Stabilization Fund as an example.

“I remember the years when we fell short,” Wardner said.

He said districts had to cut costs and teachers were laid off due to lack of funds.

The fund was created in 1994 by a vote of the people as a constitutional amendment. It’s meant to be used in the event of a shortfall in foundation aid funding for schools.

Currently the Foundation Aid Stabilization Fund has more than $335.3 million.

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