Value of ND 'budget stabilization' fund sinks

It's a good thing North Dakota's state budget has plenty of cash, because the value of a $200 million reserve set aside by the Legislature two years ago has been sinking along with the nation's financial markets.

It's a good thing North Dakota's state budget has plenty of cash, because the value of a $200 million reserve set aside by the Legislature two years ago has been sinking along with the nation's financial markets.

The shortfall has become caught up in the Legislature's debate about whether to squirrel away even more money in the reserve -- called the "budget stabilization fund" -- and make the fund easier to tap should North Dakota run into future budget problems.

"When people's intelligence reaches a point where they think they're being very, very clever, sometimes we get some pretty dumb results out of it, and I think this is a classic example," said Rep. Merle Boucher, D-Rolette, the House minority leader. "This is not running government like a business."

State law now limits the money that may be shunted into the fund to 10 percent of the state's two-year general fund budget. Transfers are made at the end of the budget cycle. North Dakota's current 2007-09 budget period ends June 30.

Gov. John Hoeven, in his budget recommendations to the Legislature, anticipated switching $111.1 million into the fund on June 30, which would normally increase its balance to $311.1 million.


Lawmakers are wondering whether the transfer may need to be fattened because of losses in the fund's investment portfolio.

About 43 percent of the fund's cash is invested in corporate bonds that have been declining in value. On Jan. 31, the fund was worth almost $183 million rather than $200 million, said Steve Cochrane, director of the state Retirement and Investment Office.

The Legislature also is considering whether to raise the fund's maximum balance from 10 percent to 12.5 percent of the state's general fund budget. The Senate Appropriations Committee is reviewing the proposal, which would increase the June 30 transfer from $111.1 million to $188.9 million.

"With the national economy, we need to be more cautious," said Rep. Rick Berg, R-Fargo, who suggested the percentage increase. "It's important to have an adequate reserve, and nobody really knows what that number is."

Boucher and Rep. Lee Kaldor, D-Mayville, believe the change is unnecessary. A 10 percent ceiling is more than adequate, Kaldor said.

"We can find a better investment return than zero," Kaldor said. "We've got a circumstance where the budget stabilization fund isn't really that stabilizing any more."

The debate reflects a broader argument in the Republican-controlled Legislature about North Dakota's true budget picture and the strategies being used by some lawmakers to restrain the generous spending increases Hoeven has proposed.

Should lawmakers agree to stash more money in the budget stabilization fund, less cash will be available for state spending increases.


The North Dakota Senate and House appropriations committees also have attempted to dampen spending expectations by cutting tax collection estimates offered last month by the state's economic forecaster, Moody's

Cochrane and Pam Sharp, the state budget director, said the budget stabilization fund was showing a loss only because accounting standards require its value to reflect the worth of its corporate bond holdings if they had to be sold immediately.

Cochrane said the bonds will be held until they mature, and the fund will get their full value unless there is a default.

"If you stop the football game in the middle of the third quarter, is that the final score?" Cochrane said. "That's kind of where we are right now."

Sharp said the budget stabilization fund has ample cash reserves at the state-owned Bank of North Dakota, as well as its corporate bond holdings. She said she does not believe state law requires its short-term investment losses to be made good.

"You could argue it both ways, but I would say no," Sharp said. "We don't need to sell those (bonds) right now. We are not going to realize those losses."

Copyright 2009 The Associated Press.

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