|July 2, 2019||Affirmation||AA+||Stable|
|September 26, 2018||Affirmation||AA+||Stable|
|February 18, 2016||Downgrade||AA+||Stable|
|December 13, 2013||Upgrade||AAA||Stable|
|May 12, 2011||Outlook change||AA+||Positive|
In S&P Global Ratings' view, the State of North Dakota's credit fundamentals will be challenged amid the COVID-19-induced recession and our projected slow economic recovery, despite more recent stability in oil prices. The abrupt dual economic shock wrought up by a global pandemic and oil-price rout created steep revenue declines which we expect the state will have to grapple with for the current biennium. However, in our view, its deep reserves, very low debt levels and fixed costs, and history of sound budget management practices will help address the near-term fiscal challenges. Also, the federal aid received with implementation of the Coronavirus Aid, Relief and Economic Security (CARES) Act will help offset pandemic-related expenses. While North Dakota has significant balances in various reserve funds, in our view, should it use large and repeated drawdowns in the current and next bienniums, it could face more severe fiscal pressures. (See our article, "North Dakota’s Deep Reserves, Structural Budget Allow Near-Term Credit Stability While Longer-Term Pressures Persist," published May 14, 2020 on RatingsDirect.)
Prior to the collapse in oil prices and the recession, North Dakota experienced solid revenue growth in prior years and through the first half of fiscal 2020. As of January 2020, its year-to-date general fund revenues were up 7.6% when compared to biennial legislative forecasts, exhibiting strong increases in income and sales tax collections. Thereafter, the state experienced significant revenue declines following the recession, eliminating most of its earlier revenue gains. As of June 2020, year-to-date individual income tax collections were down by 11.7% compared to initial forecasts, mainly due to a spike in unemployment levels and an extension in state income tax filing dates from April 15 to July 15, 2020. Additionally, the oil and gas tax collections as of July 2020 experienced a negative variance of 15%. However, as a lesson from prior oil price declines, the state has exhibited less reliance on oil for its main operating fund in the last decade. Its current budget projects $4.9 billion in direct oil-related revenues, of which only about $400 million (9% of biennial general fund expenditures) are deposited into its general fund.
The state ended its 2017-2019 biennium with an ending balance of $1.3 billion, or about 30% of appropriations across its general fund, budget stabilization fund (BSF), and strategic investment and improvement fund (SIIF). Additionally, its legacy fund totaled $5.85 billion at the end of fiscal 2019. North Dakota further added to its reserve levels in the current biennium that started with strong revenue growth prior to the onset of the recession. As of May 2020, the state's BSF and SIIF had a combined balance of $1.5 billion with an additional balance of $6.6 billion in the state's legacy fund. We view the state's high reserve levels in various funds as providing very strong flexibility to manage challenges as they arise.
North Dakota's economy continues to have an above-average dependence on its cyclical oil sector. The economic pressures for the state will translate to a dampening effect on its fiscal outlook over a longer horizon than 2021. With West Texas Intermediate (WTI) oil prices falling below break-even prices in April, the immediate shutdown of production wells may become permanent and suppress economic and employment growth for the Bakken Shale region. As observed during previous periods of depressed prices, the linkages among the state's oil industry, broader economy, and general fund revenues (though delayed) are strong. We expect the energy sector to remain an anchor of North Dakota's economy in the coming years and the ability of the state's economy to recover from the current shock will have a significant bearing on its rating over time. The state is also significantly reliant on its agricultural sector, which has experienced slow growth due to lower commodity prices.
North Dakota's economic indicators currently support our rating, although limited population growth (outside of energy sector workers) dampens its long-term economic potential. The state's wealth and income indicators remain consistently higher than U.S. averages and its GDP growth has outpaced the nation in recent years.
Environmental, social, and governance factors
North Dakota's significant reliance on its oil and gas sector elevates the state's environmental risks due to increasing regulatory challenges, risks of unanticipated remediation costs, and slower demand as parts of the global economy transition to more renewable energy. However, the state's reserves and reduced reliance on oil revenues for its general fund could mitigate some of its challenges. We view its social and governance risks as being in line with the sector.
Biennium 2019-2021 Budget Highlights
- The general fund adopted budget totaled at $4.84 billion, an increase of 12.3% compared to previous biennium appropriations.
- The adopted budget primarily focuses on education and health and human services spending with increases of 15.7% and 9.3%, respectively.
- The sales taxes at 45.3% form a major source of general fund revenues, followed by income taxes at 19.4%. The direct oil tax allocation to general fund totaled at $400 million, about 8.3% of general fund revenues.
- The Legislative Council estimates to end the 2019-2021 biennium with a combined balance of $1.4 billion in its BSF and SIIF. Additionally, the state's legacy fund balance is projected reach $7.15 billion at the end of the current biennium. However, we view the state's expectation to add to legacy fund reserves as optimistic, given that the estimates are prior to the ongoing recession and recent drop in oil prices.
What We're Watching
- We believe the state's economic recovery will remain muted or below its full potential due to oil productivity declines and the current recession. Also, the continued softness in the agricultural sector will likely limit personal income and economic growth.
- Although oil prices have stabilized in recent months, the state remains vulnerable to boom-and-bust cycles as a large energy producer.
- Any large and repeated depletions in reserve levels due to budgetary pressure caused by the decline in revenues associated with COVID-19 pandemic could challenge the state's finances.
- Strong executive ability to reduce expenditures and demonstrated willingness of the legislature to realign appropriations with estimated revenue collections.
- Very strong budgetary reserves, including a legacy fund at $6.61 billion, providing North Dakota with sufficient flexibility to weather economic cycles.
- Low debt burden with rapid amortization and no plans to issue new debt within the current biennium.
- Manageable but growing pension liabilities due to the state's recent history of underfunding.
|Historical Financial Data|
|(Thou. $ unless otherwise noted)|
|Audited GAAP Basis||2019||2018||2017|
|General fund revenues||2,971,289||3,216,546||2,590,430|
|General fund expenditures||1,881,086||1,883,105||2,113,015|
|Net transfers & other adjustments||(172,817)||(141,890)||(325,504)|
|Net general fund operating surplus (deficit)||917,386||1,191,551||151,911|
|Unobligated fund balance*||1,250,076||468,252||378,767|
|Unobligated fund balance as a % of expenditures||66.5%||24.9%||17.9%|
|Legacy fund balance **||5,853,095||5,696,316||4,754,604|
|*Unobligated fund balance includes Budget Stabilization and Strategic Investment and Improvments funds. **The principal and earnings of the Legacy Fund may not be spent until after June 30, 2017, and an expenditure of principal after that date requires a vote of at least two-thirds of the members elected of each house of the legislative assembly. No more than 15% of the principal of the Legacy Fund can be expended during a biennium.|
This report does not constitute a rating action.
|Primary Credit Analyst:||Ladunni M Okolo, Farmers Branch (1) 212-438-1208;|
|Secondary Contact:||Oscar Padilla, Farmers Branch (1) 214-871-1405;|
|Research Contributor:||Vikram Sawant, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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