North Dakota voters had the foresight in 2010 to create the Legacy Fund, which gleans 30% of the state’s oil and gas revenues to set aside for future needs.
Everyone recognizes that oil and gas are finite resources. Some day, they will be depleted — and when the wells stop producing, the revenue stream will dry up.
It’s sobering to realize that at least 55% of the state’s general fund budget — essentially the checkbook that pays for essential state services — is derived from oil and gas revenues. That doesn’t count the income taxes derived from the petroleum industry, which also are significant.
So it will be a real shock when oil and gas production starts to decline as the reserves diminish, as they will.
The Legacy Fund is supposed to be a perpetual funding source to pay for future programs and services. It now has a balance of almost $8.5 billion.
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That’s a hefty sum, but the problem is that legislators, responding to public pressure to tap such a rich pot of money, have been spending liberally from the fund’s earnings — $1.3 billion since 2017, the first year earnings could be tapped.
They have been burning through earnings at a rate of 75% or even 80%, instead of banking most of the earnings to allow the Legacy Fund to keep growing significantly and therefore be well positioned to provide enough future earnings to sustain services when the petroleum wells run dry.
State officials are spending Legacy Fund earnings like sailors on shore leave, without any kind of a strategy. That’s governmental malpractice — here we are, 13 years after voters gave the OK for the fund, and there is no coherent, guiding strategy.
The committee behind the ballot measure to create the Legacy Fund proposed saving 75% of the earnings and spending 25% in order to keep steadily growing the fund for the future. An advisory assembled by the Great Plains Institute came up with a similar recommendation.
Unfortunately, legislators have failed to heed that advice.
The Legacy Fund, which is appropriately conservatively invested, has been achieving an annual return of around 6%. Meanwhile, general fund spending has been increasing in the neighborhood of 7% or 8%.
Although lawmakers maintain that most of this spending is not ongoing, that’s not necessarily the case. Once constituencies grow accustomed to receiving money, especially for worthy projects like roads and bridges, there is pressure to keep the money flowing.
The path is unsustainable over the long term. And the long term could come sooner than we like.
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North Dakota leaders must also plan for the very real possibility that the growing demand for electric vehicles will reduce future demand for oil. Although North Dakota’s cold climate and long distances mean many motorists here will be slow adopters, many consumers elsewhere are eager to make the switch.
So North Dakota leaders should be looking with clear eyes to the future and regain the fiscal discipline that they’ve shown in the past. Has anybody tried to project general fund spending trends out 20 or 30 years into the future — and then calculated how big the Legacy Fund would have to be to help sustain that level of future spending?
If not, they should. And they should do so sooner rather than later.
If leaders don’t, the legacy of the Legacy Fund could fall short of the need.
The Trust Project
