DALLAS -- North Dakota will tap its $572 million budget reserve to the tune of $497 million to help cover a $1 billion shortfall in revenue triggered by falling crude oil prices.
The state also intends to implement across-the-board budget cuts of 4.05% to make up for the shortfall in a $6 billion general fund budget for the current two-year cycle that began in July 2015.
The state's economic health of recent years and flush reserves in its Budget Stabilization Fund can be traced to the development of shale oil fields; recent extended oil price declines have negatively affected sales tax and other revenues.
The Nymex benchmark for West Texas Intermediate crude oil was below $30 Monday, according to Bloomberg, down from $52.86 a year earlier and more than $100 per barrel as recently as August 2014.
For the first five months of the current biennium, general fund tax revenue was $152 million, or 8.9% below budget, with a 26.5% decline in sales tax revenues being the primary driver of lower revenues.
Office of Management and Budget director Pam Sharp said that the cuts go beyond the state's requirement of 2.5% before the stabilization fund can be tapped.
"We went to 4.05% because we knew we needed to go further than 2.5%," she said. "We didn't feel we could go more than that because it would just cut too deep into our life human services budget – these are services that would affect people."
Sharp added that deeper cuts would have impacted funds going to the Department of Corrections and Rehabilitation. "They need to house prisoners and they need to feed them and we felt that cuts deeper than 4.05% would be problematic," she said.
Another $75 million remains in the reserve fund, which Sharp said will come in handy if the economy hasn't turned around by the state's next revenue forecast, which is scheduled for the summer.
"We have that money to access before we would have to make any deeper cuts," she said.
"All of the oil-producing states are feeling some degree of budgetary pressure from low oil prices," said John Lombardi, a Moody's Investor Service analyst. Moody's rates North Dakota Aa1.
Lombardi said North Dakota is dealing with collapsing oil prices from a relatively strong position for two reasons.
First, it built up large financial reserves in anticipation of a decline in energy prices.
Second, the state limits the amount of oil tax revenue that flows through to the general fund at $300 million per biennium. For the current biennium that runs through until June 30, 2017, the state has already reached two-thirds of that limit through December 2016, or the first 6 months of the 24-month period.
The state can also count on $875 million in surplus cash in various reserve accounts, according to Sharp, which doesn't include the oil tax-funded Legacy Fund.
The Legacy Fund was approved by voters in 2010, and receives 3% of the state's oil and gas tax collections, though none of the money can be spent until 2017. The fund currently holds more than $3.4 billion.
Sharp and others are optimistic that oil prices will gradually increase. The new forecast assumes a crude oil price of $42 a barrel through May.
According to Sharp, Moody's Analytics, which provides economic projections for the state, projects oil prices will rise to $50 a barrel. "We lowered our expectations because we felt that it was more prudent to be conservative," she said.
Ron Ness, president of the North Dakota Petroleum Council, said it's difficult to predict oil prices or how long the price will stay at levels that are insufficient to attract and stimulate exploration.
"The recovery time will take longer than most think and the new normal may look different…," he said. "In the meantime, producing over 1 million barrels a day still requires many inputs, investments and people."
Standard & Poor rates the state's general obligation bonds AAA and its appropriation backed bonds AA-plus.
