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Facing $1 billion shortfall, ND Gov. Dalrymple orders agencies to slash 4 percent from budgets

BISMARCK -- North Dakota Gov. Jack Dalrymple on Monday ordered most state agencies to slash their budgets by just over 4 percent to help cover an unprecedented $1 billion revenue shortfall blamed on slumping oil and farm commodity prices.

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Gov. Jack Dalrymple announced a projected budget shortfall of just over one billion dollars for the remainder of the 2015-16 biennium on Monday, Feb. 1, 2016, in the Brynhild Haugland Room of the state capitol in Bismarck. Gov. Dalrymple also order directors of state agencies to reduce spending by 4.05 percent. (Tom Stromme/Bismarck Tribune)

BISMARCK –- North Dakota Gov. Jack Dalrymple on Monday ordered most state agencies to slash their budgets by just over 4 percent to help cover an unprecedented $1 billion revenue shortfall blamed on slumping oil and farm commodity prices.

After years of good news about state revenues, “it seems strange to hear that things have gone in the other direction,” Dalrymple told agency heads at the Capitol as he unveiled a bleak revenue forecast by Moody’s Analytics.

“Fortunately, we took into account in the last session the possibility that commodity prices could fall without warning,” he said. “As a result, the Legislative Assembly wisely set aside cash reserves to deal with this very situation.”

The new forecast predicts general fund revenues will fall $1.074 billion short of the March forecast that state lawmakers relied upon when crafting a $6 billion general fund budget for the current two-year cycle that began July 1. Revenues were already $215 million below forecast from July through December.

To make up the shortfall, Dalrymple announced across-the-board cuts of nearly $245 million, or 4.05 percent, for state agencies that receive general fund dollars, which is most of the 73 agencies. That’s deeper than the 2.5 percent cut required by state law when an updated forecast predicts that revenues will be 97.5 percent or less of what was projected in the legislative forecast.

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Dalrymple also will draw $497.6 million from the state’s Budget Stabilization Fund, leaving roughly $75 million in the rainy day fund for what he called the “unlikely event” that the July revenue forecast would be even worse.

The rest of the shortfall will be covered by the $211 million ending fund balance that lawmakers built into the current budget and $131 million from higher-than-expected revenues and more money turned back from agencies at the end of the last biennium.

Agencies have until Feb. 17 to decide where to make the cuts, which Office of Management and Budget Director Pam Sharp said are the largest by dollar amount in state history.

Salaries, operating expenses and one-time projects will all be considered, and it’s unclear if layoffs will happen, Sharp said.

“Everything is on the table,” she said.

Opinions on cuts mixed

House Majority Leader Al Carlson and some fellow Republican lawmakers had called for deeper budget cuts of 5 percent or more before tapping the stabilization fund, which was created in 1987 but didn’t grow significantly until the last decade when oil revenues generated large budget surpluses.

The fund is capped at 9.5 percent of the general fund budget, and it grows when the ending fund balance exceeds $65 million.

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Carlson said the $75 million that will remain in the fund “isn’t much of a reserve. On the other hand, that’s what it was set up for.”

Dalrymple said officials carefully analyzed the numbers and concluded that 4.05 percent was the biggest cut they could make without harming sensitive areas  such as medical services and prison security.

Senate Majority Leader Rich Wardner, R-Dickinson, called the cuts “a good compromise” and predicted that lawmakers will carry a more austere attitude into the January 2017 session.

“Everybody’s going to have to hunker down and make do with what we have,” he said, adding that while lawmakers cut $500 million from Dalrymple’s proposed budget last session amid falling oil prices, “We would have never dreamed it would be this drastic.”

Senate Minority Leader Joan Heckaman, D-New Rockford, said the budget cuts go too far and that the forecast assumptions set by an advisory council last week were too conservative on oil prices. She also said she’s disappointed that agency heads and not lawmakers will make the budget decisions.

“No matter how they cut, it’s going to hurt families and children,” she said.

Unaffected agencies will include the state Game and Fish Department, which is funded with license and fee revenues, the state-owned Bank of North Dakota and State Mill and Elevator, the Insurance Department and Workers Safety and Insurance.

Sharp said K-12 education also is safe because its $72 million in cuts are covered by the $670 million Foundation Aid Stabilization Fund.

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Dalrymple said some money may be restored to budgets and reserve funds if the next revenue forecast in July is brighter.

“However, do not count on any possible improvements in the revenue picture,” he said.

The budget for the Legislature itself, Legislative Council and the judiciary aren't subject to the executive action, but those bodies are going to voluntarily match the budget cuts, officials confirmed.

Oil revenues down $967M

Some lawmakers complained in March that Moody’s forecast was too rosy on oil prices. While OMB lowered the assumptions, some still felt it wasn’t enough, though the Legislature ultimately adopted it.

“This is not the time to say I told you so, but I told you so,” Carlson said.

Moody’s warned at the time that the pending Iran nuclear deal was a potential downside risk, and crude prices dropped sharply after the deal was reached last summer, even before Iran’s oil hit the market, Sharp noted.

“That messed up our forecast big-time,” she said, adding reduced global demand and investors betting against crude prices also hurt prices, she said.

Revenue from North Dakota’s oil production and extraction taxes are now forecast at $3.4 billion for the biennium, down $967 million from the March forecast. The general fund will still get $300 million in oil tax revenue it receives every two years.

Dalrymple called the drop in oil prices from $100 per barrel in summer 2014 to $30 per barrel “much greater than anyone would have predicted.”

Last week, the state’s Advisory Council on Revenue Forecasting lowered the oil price and production assumptions proposed by Moody’s, settling on the benchmark price of West Texas Intermediate crude oil increasing from $30 a barrel to $43 a barrel by the end of the biennium.

The new forecast also assumes oil production will drop from November’s level of 1.18 million barrels a day to 1 million barrels days by the end of this year and 900,000 barrels a day by June 30, 2017.

Department of Mineral Resources Director Lynn Helms said “the news has been worse and worse and worse from oil companies on their earnings and plans for 2016,” he said.

In his department, Helms said the cuts will mean that vacant inspector positions for oil wells and facilities will get “a hard look.” He said the department will likely fill three open pipeline inspector positions because the Legislature made it a priority.

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