Petrodollars: The oil cash piles up in North Dakota's Legacy Fund

— North Dakota's Legacy Fund continues to grow, no surprise given gains in that state's oil output and a healthy commodity price. In this week's Oilgram News column Petrodollars, Starr Spencer looks at the fund and its future.

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In a little over a year North Dakota’s Legacy Fund, created from revenues generated by the state’s massive Bakken Shale oil play, has doubled in size. And the state’s conservative forecasters predict it will rise a further 50% a year from now.

The Legacy Fund, which started up July 1, 2011, was established to preserve a portion of the state’s vast oil wealth for future public projects. According to law, 30% of North Dakota’s oil and gas production and extraction taxes are set aside for the Fund. After June 30, 2017, its interest earnings will be transferred to the state’s general fund every two years. Apart from that, the law stipulates no more than 15% of the Fund’s principal can be spent in a two-year period, subject to approval of two-thirds of the legislature.

The Fund hit the $2 billion mark in April and is projected to hit $3 billion by July 1, 2015, according to Sheila Peterson, director of the fiscal management division of the North Dakota Office of Management and Budget. However, new Fund targets will be issued in August, based on then-current production, oil price levels and forecasts, Peterson said.

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The $3 billion projection, made early last year, was based on a previous forecast of 850,000 b/d of oil production by July 2015 and an oil price of $80/barrel. The state’s March 2014 output was 977,000 b/d and an oil price around $87/b. Production there has now topped 1 million b/d and the current price for North Dakota light sweet crude was $91.75/barrel according to data released last week.

Peterson said the state works with a revenue forecast advisory committee comprised of its major industries, including agriculture, banking and crude oil production. “I guess this is the level they were comfortable with, based on what we knew” during the original forecasts, she said.

Sizeable amounts of oil money in recent years have found their way into the state’s general fund for road improvement, education, and property and income tax reductions, Joe Morrissette, North Dakota’s deputy tax commissioner said.

Last year, over $1 billion went for road projects earmarked for the 2013-2015 biennium, Morrissette said: “It might not sound that significant, but in terms of North Dakota, the whole general fund’s budget is not quite $7 billion for the two years,” he said.

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In addition, a 20% reduction in property tax rates characterized each of the last two legislative sessions was made possible from oil, he added.

Education spending has gone up by $1 billion in the current 2013-2015 biennium to $1.7 billion, from $715 million in 2007-2009, Peterson said, chiefly because of oil.

As more residents spend increased wages, the state’s take from sales taxes has also risen — from $840 million in 2005-2007 to $1 billion-plus in 2007-2009, and $2.5 billion projected for 2013-2015, said Morrissette. Moreover, “we’re running slightly ahead of that forecast,” he said.

And even while Peterson said for 2013-2015 the state has estimated a total $100 million reduction paid by residents in individual income taxes from amounts paid in the previous biennium, the state’s total take from income taxes has shot up because more residents have moved into the state and wages have gone up with good-paying Bakken jobs, officials said.

In 2009-2011, North Dakota collected $730 million in individual income taxes; in 2011-2013 the amount was over $1 billion, Morrissette said. In 2010, North Dakota’s population was 672,591; in 2013 it was 723,393 — up 7.5% in three years, according to the US Census Bureau.

Direct industry jobs in oil and gas extraction and production totaled 40,856 jobs in 2011, up from 5,051 in 2005, according to Kari Cutting, vice president of the North Dakota Petroleum Council.

While North Dakota residents generally enjoy lower taxes, some home and building owners in the state’s prolific oil-producing northwest counties have seen soaring property tax bills (despite lower tax rates) as housing values rise in lockstep with an expanding population, Morrissette said.

“We hear discussions on proposals to reduce income taxes further” in those areas, he said, adding the state’s Governor Jack Dalrymple has established a task force to study the issue for introduction in the 2015 legislative session. But he added it might be “tough” to do without eliminating local control, a measure which would “not be popular in North Dakota.”

According to the North Dakota Department of Mineral Resources, North Dakota’s first barrel of oil was produced in April 1951. Its billionth barrel was hauled from the ground in October 1989—more than 15 years before the Bakken boom. The second billionth barrel was produced in November 2011, and the third billionth barrel should emerge in 2015-2016.

—Starr Spencer in Houston