North Dakota tax revenues fell short of lowered expectations for the second straight month in February, raising the prospect of another round of budget cuts and prompting a warning from an industry official Tuesday that the worst is yet to come as slumping crude prices continue to stall activity.

“I think it’s going to be more dramatic than what we’ve seen, and the next round’s going to be rough,” North Dakota Petroleum Council President Ron Ness told the Legislature’s interim Government Finance Committee.

State tax revenues were down $5 million, or 3.5 percent, in February compared with the Feb. 1 revised forecast that spurred Gov. Jack Dalrymple to order 4.05 percent budget cuts for most state agencies to help offset a projected $1 billion revenue shortfall.

Combined with a $1.4 million shortfall in January, revenues are more than $6.4 million behind the revised forecast.

Office of Management and Budget Director Pam Sharp said it’s too early to say if another round of budget cuts will be necessary, noting the next revenue forecast in August will provide a clearer picture.

“Certainly it’s a possibility,” she said.

The bulk of the shortfall stems from reduced sales tax collections as a result of slowed oil activity, with 945 wells waiting on completion and 1,334 wells inactive as of January because they’re not profitable at current prices, Department of Mineral Resources Director Lynn Helms said. The number of active drilling rigs in the nation’s No. 2 oil-producing state has dropped from 190 two years ago to 30 on Tuesday, the lowest since 2007.

Sales tax revenues were $36.4 million below forecast in February. That was partly offset by individual income taxes arriving $17.9 million above forecast, but officials cautioned they won’t see the whole income tax picture until after the April 15 filing deadline.

If sales tax revenues continue to fall so short, the committee’s chairman, Rep. Jeff Delzer, R-Underwood, predicted there will be “some pretty hard choices to make.” Neither the oil nor agricultural sectors show signs of a quick rebound, he said.

Looking ahead to the 2017 legislative session, Rep. Chet Pollert, R-Carrington, said the $245 million in budget cuts and $498 million being taken from the Budget Stabilization Fund to help cover the shortfall will leave the state with about $750 million to come up with through additional revenue or cuts.

“So I guess we’ll have to hang onto the saddle,” he said.

Ness estimated the oil and gas industry has shed 20,000 to 22,000 jobs in North Dakota during the current downturn, cutting into tax revenues from income taxes and royalty payments, and secondary businesses are seeing the impacts, as well. Oil companies that are major players in the Bakken are “in a struggle for their survival, and every employee knows it,” he said.

The effects on the state so far have reflected $40-a-barrel oil prices, but the next few months will reflect sub-$30 oil, Ness said.

He and Helms predicted oil production will continue to drop after back-to-back months with decreases of roughly 30,000 barrels per day, down to 1.12 million barrels per day in January. In one bright spot, Helms noted production is still about 3 percent above forecast going back to July 1.

Rep. Craig Headland, R-Montpelier, asked how the new revenue forecast could already be so far off. Tax department research director Kathryn Strombeck said no one anticipated that sales tax revenues would be down $153 million, or 18 percent, during the first eight months of this biennium compared with the same period the previous biennium.

“Year after year after year we’ve had growth in sales tax. It’s surprising to all of us the depth of the drop here,” she said. “We hope we’ve got it all covered in this January forecast, but it’s entirely possible that we don’t.”

State agencies will receive their budget guidelines for 2017-19 next month. House Majority Leader Al Carlson, R-Fargo, implored Sharp to consider using the agencies’ reduced budgets and the money taken from the stabilization fund as a starting point because it better reflects the current situation than their original 2015-17 appropriation.

“If your starting point is ’15-17, Lord help us when we get here,” he said.

Sharp said OMB plans to use the original 2015-17 budget but will still arrive at the same bottom line.

“We need to balance that budget, so there will be decreases. There will be cuts,” she said.

When oil prices recover, Ness said the state will have to convince developers, investors and employees to return, suggesting a new approach to economic recruitment “because we are no longer the crown jewel.”

“This is not just going to bounce back the other direction immediately,” he said.

Reach Mike Nowatzki at (701) 255-5607 or by email at mnowatzki@forumcomm.com.

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