It's no surprise to anyone that North Dakota suffers from revenue volatility that makes it difficult to manage the state budget, but there are policy tools at our disposal.
My coauthors and I chronicled the persistent boom-and-bust cycles customary in a commodity-driven state such as ours in a new report, "Prairie Prosperity: An Economic Guide for the State of North Dakota," published by the Mercatus Center.
While we all know that economic diversification is a key ingredient to overcoming our dependence on commodity prices, there are other policies we can enact to safeguard our state's future.
One such policy is having a Budget Stabilization Fund. North Dakota created a BSF in 1987 to address unexpected revenue shortfalls in the state's budget (N.D. Century Code Chapter 54-27.2). The BSF acts like a savings account for the General Fund.
Typically, BSFs have a cap that limits investment earnings and requires excess funds to be deposited into the General Fund. Initially, the cap for North Dakota's BSF was set at 15 percent of the General Fund budget. It was later cut to 5 percent in 1991, then raised to 10 percent in 2009. This was the cap during the recent budget crisis in 2015-2016. When the BSF could not make up the shortfall, its balance was subsequently depleted, leaving the state over $200 million short. This forced drastic spending cuts.
The cap was raised back to 15 percent during the 2017 legislative session, but the damage was already done. With commodity prices bouncing back, will state lawmakers again be tempted to divert funds away from the BSF?
This temptation can be removed by solidifying the terms that govern the BSF and writing them into the state constitution. Researchers at both the Center on Budget and Policy Priorities and the Tax Foundation support a cap of 15 percent, which is what we advocate in our report.
A related problem is the temptation for state expenditures to grow alongside rising revenues. Another tool states can use to mitigate issues caused by revenue volatility is a Tax and Expenditure Limit. A TEL restricts government spending growth by either capping it at a dollar amount or tying it to population growth, the inflation rate or some other formula.
As with BSFs, TELs are most effective when codified in the state constitution. Research has demonstrated TELs help protect a state from unexpected revenue volatility, especially when used in conjunction with a BSF.
To reduce the possibility of painful pending cuts or loss of services in the future, North Dakota should consider implementing these policies. Further analysis of North Dakota's economy and the use of BSFs and TELs is available in our report.
Jackson is the director of the North Dakota State University Center for the Study of Public Choice and Private Enterprise and an associate professor of agribusiness and applied economics. His views are his own.