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Less than six years after North Dakota residents voted to sock away oil and gas tax collections for future generations, the Legacy Fund has topped $4 billion in value, a “phenomenal” feat the state’s chief investment officer said speaks to the state’s fiscal conservatism.

The pile of unencumbered cash presents a tempting option for state lawmakers who face a bleak budget situation when they convene in January. But House Majority Leader Al Carlson, R-Fargo, said the Legislature must be “very cautious” about dipping into the trust fund’s earnings.

“If it is spent on things, it should be things that look to the future of North Dakota, not just a way to balance our day-to-day general fund budget,” he said. “I don’t think that was the intent that people had when they set it aside.”

The 2009 Legislature passed a resolution with large bipartisan support to put the constitutional amendment creating the Legacy Fund on the November 2010 ballot. Voters approved it by more than 60,000 votes, establishing the trust fund by setting aside 30 percent of the state’s taxes on oil and gas production and extraction starting in 2011.

The value of Legacy Fund assets totaled $4.012 billion at the end of August, based on preliminary valuations that are unaudited but deemed to be materially accurate, said David Hunter, executive director and chief investment officer for the state Retirement and Investment Office.

“The fact that the state has been able to effectively put $4 billion away over the last five years, that’s phenomenal,” he said. “That just speaks to how fiscally conservative the state is. Not to say that you don’t have to tighten your belt, but you’ve done a lot to save already, which is great.”

An additional $31.9 million was deposited into the fund in September. That was slightly above this year’s average but below August’s deposit of $35.3 million and a far cry from the record high deposit of $117 million in August 2014, when crude oil was fetching more than double current prices.

Fifty percent of the Legacy Fund’s assets are invested in stocks, 35 percent in fixed-income assets and the remaining 15 percent is in diversified real assets, with 5 percent in real estate and 10 percent in infrastructure and inflation-linked securities, Hunter said.

The fund has generated a return of about 2.8 percent annually since its inception, Hunter said. A revised investment strategy adopted in 2013 set the long-term goal at 6.4 percent, but returns have fallen short so far, just exceeding 1 percent for the fiscal year that ended June 30.

“The markets were tough last year when China devalued its currency, but we’re off to a much better start this year,” Hunter said, noting returns averaged 2.5 percent in July and August.

About $3.6 billion in oil and gas tax revenue has flowed into the fund, along with nearly $400 million in earnings in the form of interest income, dividend income, realized gains and losses and unrealized gains and losses on securities that haven’t been sold yet, Hunter said.

To help balance the 2017-19 budget, Gov. Jack Dalrymple and state lawmakers have signaled a growing willingness to tap the fund’s earnings but not its principal, which requires two-thirds approval in both the House and Senate.

Lawmakers can’t spend the Legacy Fund until July 1, 2017, when the state treasurer must begin to transfer its earnings to the general fund. The Legacy Fund is expected to generate about $120 million in earnings during the 2017-19 biennium, Senate Majority Leader Rich Wardner of Dickinson said recently.

Treasurer Kelly Schmidt has asked for an attorney general’s opinion on whether earnings accrued so far will also be available for lawmakers to spend with a simple majority vote, or whether they’ll be considered part of the principal and require a two-thirds vote.

The Legacy Fund contained about $250 million in realized income as of July, which Hunter said could easily be transferred to the general fund if the Legislature so desires.

“We’re well-positioned. For the vast majority, our investments are very liquid,” he said.

Carlson sees no appetite to spend the fund’s principal, and “at least in the House, we’re not eager to take those past earnings to balance a current budget,” he said.

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