Oil revenues exceed forecast, but state budget boost unlikely

Oil revenues exceed forecast, but state budget boost unlikely

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GRAND FORKS -- Oil production and revenue for North Dakota is trending above forecast, but don’t expect the state to restore funding that was cut in recent years, leaders said.

“Is it going to open the door to a bunch more spending? No,” said Lynn Helms, director of the North Dakota Department of Mineral Resources. “It’s not that good yet.”

Allocations from oil and gas revenue for June equaled $217 million -- that was 72 percent ahead of the forecast, according to the most recent monthly update from the North Dakota Legislative Council.

The state produced more than 36.7 million barrels of oil in April, according to the most recent DMR report. Preliminary reports say April produced about 2,500 barrels per day less than the record set in December 2014, Helms said during a June 15 news conference.

It also was 300,000 barrels of oil per day, or 32 percent, ahead of the state forecast, according to the Legislative Council.

“We were not expecting that surge until May or early June,” he said.

Oil and gas revenue for the state began to exceed monthly forecasts in October, according to a report from the Legislative Council. Some have been hopeful the rise in oil prices in recent months would allow the state to give local entities additional funding.

“It’s clearly going to provide a little touch of optimism,” Helms said. “I think what these numbers do for us is they begin to refill the savings accounts.”

Savings that were used to balance the budget were expected to be diminished again for the upcoming two years, Helms said. Because oil production and revenue is above the forecast, it’s possible legislators will have more flexibility to look at some needs.

The budget still is “functionally unbalanced,” Lt. Gov. Brent Sanford said, meaning the revenues don’t match the expense. Money had to be moved from other accounts to balance the budget for the 2017-19 biennium.

“Long story short, if we don’t see a huge spike in sales tax, then that means our revenues are very flat from the previous biennium heading into 2019-21,” he said.

Guessing game

For the most part, oil sold for more than $100 per barrel between December 2010 and June 2014. North Dakota’s oil price averaged $90 per barrel in July 2014, according to numbers from the state Office of Management and Budget, or OMB.

But those numbers began to drop rapidly in late 2014, with North Dakota’s average monthly price bottoming out in February 2016 at $22 a barrel, according to the OMB. The price mostly stayed below $40 per barrel between August 2015 and November 2016.

Oil prices started to creep up in mid-2017, hitting an average monthly price of $61 in April 2018. Oil and gas tax collections for the 2017-19 biennium through April were at $1.4 billion, or 22 percent above the forecast, according to the Legislative Council.

“What we saw coming in through the (2016) primary and the general election and what we inherited, that was pretty rough,” Sanford said, adding it is nice to see a rising curve instead of watching prices drop. “Hopefully, we have found the bottom and we are coming out of it. It really does feel like it.”

But that doesn’t mean the budget is balanced, Sanford warned. Only $400 million can go into the general fund, and the remaining goes into “buckets” for other funds, he said.

Technically, the general fund is only 2 percent ahead of the forecast. Sales and use tax, which contributes to about 40 percent of general fund revenues, was behind the forecast for the biennium through March by 0.5 percent, according to the Legislative Council’s latest quarterly update in April.

One question remains, Sen. Ray Holmberg, R-Grand Forks, said: Will the upward trend in oil and gas revenue continue?

“How much does the state rely on a very volatile industry to build budget?” the Senate Appropriations Committee chair said. “Bottom line, we considered this income as one-time income, and we don’t like to get locked in too much to using it for ongoing expenses.”

That’s why only a portion of oil and gas revenue goes into the general fund, he said.

If oil revenues continue on the current trend for the rest of the biennium, North Dakota would come “pretty close” to refilling its trust funds so it could pay for the 2019-21 biennium at the same level as the 2017-19 biennium without making cuts, House Minority Leader Corey Mock, D-Grand Forks, said based on analysis with his legislative team.

Cuts still could be possible, especially since expenses keep going up, Mock said. That means the Legislature will have to set its priorities, he said.

Meeting needs

K-12 education didn’t lose funding in recent years, but it didn’t see an increase in funding to coincide with rising expenses. Terry Brenner, who will take over as the Grand Forks Public Schools superintendent next month, said the message coming from the state is, don’t expect a dramatic increase in funds to school districts.

Planning for that will require educating the public on steps needed to pay for employee raises, programs and facility projects, Brenner said.

He said he feels residents want to support K-12 education, but they shouldn’t be overtaxed to support it.

“We have to operate on the premise that we’re working with a flat budget over the course of the next four years,” Brenner said, adding the district needs to communicate with residents on the matter.

Mock said education should be a priority, and the state needs to find other industries to depend on if it wants a dependent stream of revenue.

“I hate relying on any one commodity too much,” he said, adding oil pays for large portions of the general fund, education and infrastructure. “That’s putting a lot of eggs in one basket.”

Changing the economy, and what industries North Dakota relies on for tax revenue, is a long-term effort, Sanford said, one he feels the state has worked hard to do in recent years.

He also said the oil industry is becoming more efficient. As of Wednesday, there were 65 drilling rigs in North Dakota compared with 193 four years ago, according to the DMR.

“The reason we have oil production where we do is because of their further innovation and their further investment,” he said of the oil companies, adding it is “absolutely amazing” North Dakota could hit a record this summer with a third of the rigs compared to 2014. “That’s innovation.”

There is a person behind each job cut, Sanford said, and the memories of laying employees off still is strong. He noted criticism after Gov. Doug Burgum asked in April that state agencies craft smaller budgets, some with cuts of 10 percent.

It’s too early to say if those cuts will come to fruition, Sanford said, but it’s not too early to prepare.

“In an environment where the revenues have not taken off, there’s no other way to start that process than to see what first might be cut, where there is still room and harvest some of those savings and move forward,” he said. “There are needs that are not met today.”

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