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N.D. cities struggling with big drop in state aid as revenue slides

BISMARCK -- North Dakota cities are wrestling with a steep decline in state aid funding as they craft their budgets for next year, with some experiencing a "double whammy" because of a change in how population is used to calculate the payments. T...

BISMARCK - North Dakota cities are wrestling with a steep decline in state aid funding as they craft their budgets for next year, with some experiencing a "double whammy" because of a change in how population is used to calculate the payments.

The head of the North Dakota League of Cities said he's concerned the substantial drop in state aid and highway tax revenue could put added pressure on local property taxes.

"Because cities have fixed costs, and you have to be able to pay for those fixed costs," Executive Director Blake Crosby said. "And one of the downsides to the oil boom was fixed costs got extremely high."

When comparing January through May with the same period last year, state aid payments to cities decreased between 28 percent and 49 percent, with an average drop of about 35 percent.

"We want the citizens to understand that the reduction in revenue coming through the state has an effect on communities," said state Treasurer Kelly Schmidt, whose office distributes state aid.

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Slump hurts state aid

State aid is paid to cities and counties on a varied scheduled and comes from revenue from sales taxes and motor vehicle excise taxes.

Currently, 8.7 percent of that revenue goes into the State Aid Distribution Fund, while the state's general fund receives the rest, according to the treasurer's office.

From the distribution fund, 53.7 percent goes to counties and the other 46.3 percent goes to cities, based proportionately on population.

The League of Cities projects state aid will drop from about $59.3 million last year to $44 million in both 2016 and 2017, according to a memo based on state data and sent to member cities last week.

Payments from the Highway Tax Distribution Fund, which is supported by fuel taxes and motor vehicle registration fees, also are projected to decrease by about 17 percent this year and 19 percent next year.

The downturn reflects a continued slump in North Dakota's oil and agriculture sectors brought on by low prices for crude and farm commodities. During the first 11 months of the biennium that began July 1, 2015, revenue from sales and motor vehicle excise taxes was down $266 million, or nearly 22 percent, compared with the same period last biennium, meaning less money flowing into the state aid fund.

"This isn't just oil. This is agriculture and this is sales tax," Schmidt said. "Farmers aren't out buying a half-million-dollar combine."

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Population approach changes

But many cities also saw an additional decrease in state aid because the 2015 Legislature passed a bill requiring the state treasurer to use the most recent U.S. Census data available when calculating state aid distributions.

That benefited cities such as Williston and Watford City, where the oil boom has spurred unprecedented growth since the last decennial census was taken in 2010. But it dealt a blow to dozens of other cities that have lost residents since then.

"Some really got the double whammy," Schmidt said.

In the northeastern corner of the state, Cavalier saw its population of 1,302 residents in 2010 drop to an estimated 1,244 as of July 2015. That contributed to a 40 percent year-over-year decrease in state aid for the January-May time frame, from $83,131 to $49,775.

Crosby said cities with large budgets such as Bismarck, Grand Forks and Fargo are better able to absorb the loss of state aid.

"Does it hurt? Yes. But not to the same extent that it might for a smaller city with a smaller budget," he said.

In the oil hub city of Williston, City Auditor John Kautzman said using annual census estimates to determine state aid is a "much better approach, much better system and, I would argue, a much fairer approach."

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Williston's state aid for January-May was up about 4.2 percent over last year. This year's census estimates haven't been released yet, but Kautzman said based on sewage flow, the city estimates its current population is about 29,500 people, down from a peak of about 33,000 in 2014.

"I believe it's a whole lot more accurate than what used to be done ... particularly in our situation, with our wild swings up and then even during the down cycle," he said.

'We will be better, smarter'

The city of Wahpeton, with a $3.5 million general fund budget and $12.1 million total budget for this year, is a good example of how the state aid changes have played out.

In 2015, Wahpeton received $890,792 in state aid. Based on the Legislature's decision to use census estimates, the city reduced its projected state aid to $869,330 for this year, said Darcie Huwe, the city's auditor and finance director.

In April, after seeing a sizable dip in its first two state aid payments of 2016 because of plunging tax revenues, Wahpeton further lowered its state aid projection to $629,899 - a decrease of $239,431, or 7 percent of its general fund.

Huwe said the city went through its budget line-by-line looking for savings. Two full-time positions are being held vacant - one in public works and the other in public utilities - and lower-than-expected fuel prices and some uncommitted reserves have helped soften the blow, she said.

"When you look at the mix and sources of our revenue, we were probably getting too dependent on state revenue, so I guess I would consider this as sort of a financial correction," she said.

It affected more than just city operations. The city shares 25 percent of its state aid with Wahpeton Parks & Recreation and 2.5 percent with the Leach Public Library, so those entities saw decreases of $59,858 and $8,486, respectively. Such sharing arrangements are common, resulting in trickle-down effects of state aid fluctuations, Crosby said.

Huwe said Wahpeton is considered a high property tax city, and while there's been pressure in recent years to find alternatives to property taxes, now there's also pressure to find alternatives to state aid.

"We will be smarter, better with the resources we have," she said.

Crosby said that while cities' costs have come down with the state's economic slowdown, "there's still a tail on there," and it will take a year or two to see where costs plateau.

"There's a lot of pieces to the puzzle that are probably not going to come together real well until the middle to the end of 2017," he said. "I have confidence in the cities that they'll be able to adjust and weather it."

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