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Report on rainy day funds ranks N.D. 2nd in tax volatility, but doesn’t consider Legacy Fund

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Report on rainy day funds ranks N.D. 2nd in tax volatility, but doesn’t consider Legacy Fund
Dickinson North Dakota 1815 1st Street West 58602

BISMARCK – A new report on state governments’ rainy day funds ranked North Dakota as the second most tax-volatile state in the nation, but the analysis didn’t consider the state’s more than $2 billion Legacy Fund from oil and gas tax revenues.

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The report released Tuesday by The Pew Charitable Trusts, titled “Building State Rainy Day Funds,” focused only on budget stabilization funds that states use to manage ups and downs in tax revenue.

Volatility was measured as the standard deviation of year-over-year changes in total tax revenue from 1994 to 2012, said Brenna Erford, a manager at the independent nonprofit organization.

The report gave North Dakota a volatility value of 14.6 percent, second only to Alaska at 34.2 percent. Minnesota ranked 20th at 6.1 percent, Montana 26th at 5.6 percent and South Dakota 50th at 2.6 percent.

“A lot of that has to do, of course, with the energy expansion and severance tax activity that your state has experienced in more recent years,” Erford said of North Dakota’s high ranking.

The state’s Budget Stabilization Fund is capped as a percentage of general fund appropriations set by state lawmakers every two years, and that percentage has fluctuated from 5 to 10 percent over the years. But Erford said changes in tax policy weren’t part of the ranking criteria.

State Treasurer Kelly Schmidt said the ranking’s focus on tax revenue fluctuations “completely explains” North Dakota high rank. The state is experiencing record-breaking tax revenue collections and fund balances, fueled by a strong economy led by the state’s booming oil and gas industry.

The state Legislature created the Budget Stabilization Fund in 1987 as a way to offset projected shortfalls in general fund revenues. At the end of each biennium, the state treasurer must transfer any dollars in the general fund exceeding $65 million to the stabilization fund until it reaches its maximum balance, which is currently capped at $583.5 million, according to the treasurer’s office.

Many states have other types of savings funds, the report’s authors noted, including permanent funds for long-term savings such as the Legacy Fund approved by North Dakota voters in 2010.

While such funds can be useful for confronting state-specific challenges, the authors explained that they focused on budget stabilization funds because they can be structured specifically to manage tax volatility and have been shown to boost state fiscal health.

The Legacy Fund, which sets aside 30 percent of the revenue generated by state taxes on oil and gas production and extraction, grew to nearly $2.1 billion by the end of May and is projected to hit about $2.68 billion by January 2015, though officials predict it will likely beat that projection. Lawmakers can’t tap the fund until 2017.

Schmidt noted the state also has the Foundation Aid Stabilization Fund, which contained nearly $460 million as of May 31, to offset a revenue shortfall.

“There have been pools of dollars set up to manage the change and to mitigate the change as we move forward,” she said.

The full Pew report can be found athttp://www.pewtrusts.org/en/research-and-analysis/reports/2014/07/15/building-state-rainy-day-funds-policies-to-harness-revenue.

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Mike Nowatzki
Mike Nowatzki reports for Forum News Service. He can be reached at (701) 255-5607.
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