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ND tax revenues come up $36M short, rainy day fund likely to run dry

BISMARCK - North Dakota's bleak budget outlook suffered another blow Thursday with a report that state tax revenues came up $36.4 million short in May, increasing the chances of additional budget cuts and making it likely the state will drain the...

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BISMARCK – North Dakota’s bleak budget outlook suffered another blow Thursday with a report that state tax revenues came up $36.4 million short in May, increasing the chances of additional budget cuts and making it likely the state will drain the remaining $75 million from a rainy day fund.
“Obviously this is of concern. We’re basically right on the brink,” Office of Management and Budget Director Pam Sharp told the Legislature’s interim Government Finance Committee.

The May shortfall was the worst yet since Sharp’s office adopted a lower revenue forecast in January to adjust for plunging tax revenues blamed on depressed oil and farm commodity prices. Revenues are now $90 million, or 3.6 percent, below that forecast for the two-year budget cycle that ends June 30, 2017. The January forecast projected a $1.07 billion revenue shortfall, prompting Gov. Jack Dalrymple to order about $245 million in budget cuts for most state agencies. To cover the remaining shortfall, he also authorized the transfer of $497.5 from the $572.5 million Budget Stabilization Fund – which Sharp said won’t happen for several months – and used the built-in ending fund balance in the current budget.
But with May’s dismal numbers, the budget is now on track for an additional $69.5 million shortfall, which means the $75 million left in the Budget Stabilization Fund will likely be used, Sharp said.
“At the end, it would be zero left in that fund?” asked Sen. Ralph Kilzer, R-Bismarck.
“That is correct,” Sharp said.
Budget officials began working two weeks ago on a preliminary revenue forecast that will provide the first look at projected revenues for the 2017-19 biennium. Sharp said she hopes to have that forecast prepared with Moody’s Analytics by mid-July – about a month earlier than expected because of increasing concerns over revenue uncertainty.
Depending on what that forecast shows, she sees three options:
-- If the revenue outlook is positive, it’ll be business as usual.
-- If it shows a small additional shortfall, agencies could perhaps absorb a second round of small across-the-board budget cuts.
-- If it projects a large shortfall, the governor could call a special session of the Legislature, which could address the shortfall through targeted cuts or transfers from other reserve funds.
The committee’s chairman, Rep. Jeff Delzer, R-Underwood, asked if the budget would be considered balanced until the stabilization fund transfer, so that the Legislature could put off meeting until its scheduled organizational session in December and therefore avoid the cost of a special session, estimated at $80,000 per day.
“I don’t know that we can consider just having cash on hand as having a balanced budget,” Sharp said. “I think we need to look at our expected revenues for the biennium.”
With lower revenues from oil taxes and sales taxes expected to persist, Dalrymple has ordered state agencies to prepare general-fund budget requests equal to 90 percent of their original 2015-17 appropriation for ongoing expenditures, with the exception of the departments of Human Services, Public Instruction and Corrections and Rehabilitation.
The May revenue report show sales tax continues to take the biggest hit, falling $27.5 million, or 27 percent, short of projections last month and $103.8 million short since January.
Sharp said they discussed with Moody’s why the sales tax forecast has been so far off and found that it’s largely because they underestimated the impacts of lower farm commodity prices and the sharp drop in oil drilling rigs. The state had 28 active rigs on Thursday, down from 78 a year ago and 187 two years ago.
On a couple of positive notes, Sharp said higher-than-projected crude prices have oil tax revenues about $60 million ahead of forecast, and Delzer said soybean and corn prices have rebounded somewhat.
However, “Until we do a new forecast, everything’s up in the air,” Delzer said.

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