CHICAGO - As most states grapple with looming deficits, North Dakota appears as a bright spot on the national landscape, heading into a new biennium with a projected $1.2 billion surplus.

Republican Gov. John Hoeven last week unveiled a $7.7 billion budget for 2009-2011 that boasts $500 million in tax cuts, a slew of spending hikes for everything from education to children's health care, and $600 million set aside in reserves.

The budget includes no new debt or borrowing - North Dakota has one of the lowest debt burdens in the U.S. - and instead taps a current cash surplus to finance a number of capital and infrastructure projects across the state.

The unusually positive fiscal picture comes as most states across the country, including North Dakota's neighbors, are struggling with dwindling tax revenue, weak housing markets, and regional fallout from a national recession. North Dakota, in contrast, is enjoying record revenue - 2008 revenues so far have climbed nearly 20% over initial estimates - and one of the lowest unemployment rates in the country.

As an indication of the state's fiscal health, Hoeven has proposed cutting income tax rates across the board, despite the fact that voters rejected a similar proposal that appeared on the state ballot less than a month ago.

"This year has been a roller-coaster ride for every state," said Moody's Investors Service analyst Kimberly Lyons. "But if you look at how North Dakota manages overall, they don't go sky high and they don't fall as low as the rest of the country. It's a very slow and steady state, which protects it from the wild fluctuations of the rest of the country."

While the state is not immune to economic weaknesses, analysts predict its fiscal health will continue, at least over the near term, as it continues to benefit from three key economic factors: a boom in oil production, a strong agricultural market, and a conservative fiscal philosophy that has been its modus operandi for years.

"Our budget does not borrow or bond. It does not impose any new taxes," Hoeven said in a presentation to the state's Republican-controlled House and Senate last week. "We have grown and diversified our economy, which gives us the resources to fund our priorities, provide real tax relief, and build stronger reserves than ever before."

A steep rise in oil prices has driven much of North Dakota's fiscal good fortune. But the more recent decline in oil prices will not necessarily drag the state down, analysts say. Dependence on the high price of petroleum is mitigated by a state law that caps the amount of oil tax revenue North Dakota can use in its general fund at $71 million annually.

At the same time, officials have built lower oil prices into their revenue estimates for the new biennium. And finally, while rising oil prices have fueled strong revenue, the growth of the oil production industry has benefited the state in others ways, according to analysts.

Hoeven's budget estimates the price of oil will hover for the next two years between $40 and $60 a barrel. Depending on the price, North Dakota expects its reserves to grow to between $800 million and $1.2 billion, after setting aside $600 million at the beginning of the period.

A large part of that reserve comes from the state's oil tax trust fund, which holds all oil revenue over $71 million. The trust fund could reach between $428 million and $829 million by the end of 2011, according to the budget. That's a significant jump from the $143.3 million the fund totaled in 2007 and the $50 million it totaled in 2006, Standard & Poor's noted.

Beyond the surge in oil prices, North Dakota's fortunes have been boosted by related benefits ranging from an increase in employment to sales and income tax collections, which account for most of the state's revenue.

Analysts said one of the most important components in North Dakota's fiscal health over the years has been its ability to withstand the ups and downs affecting the rest of the country.

Standard & Poor's cites the state's "remarkable stability throughout economic cycles" as one of its chief credit strengths. For example, it has escaped the current housing bust largely by avoiding the market bubble of recent years that finally burst. And Moody's Lyons notes that North Dakota's conservative fiscal management - including setting aside most of its oil tax revenue and planning for lower oil prices in its budgets - will help it weather the national recession over the near term.

In total, Hoeven's budget estimates general fund revenues and transfers of $2.784 billion, with expenditures totaling $2.754 billion. The budget proposes dipping into the current ending fund balance of $392 million to finance $375 million in capital projects. In addition to $100 million in income tax cuts, Hoeven's budget includes another $300 million in property tax cuts.

The state has no direct general obligation debt or tax-supported revenue debt. Its appropriation debt, all of which is issued through the North Dakota Building Authority, totaled $110.6 million in 2007, with tax-supported debt totaling $273 million at the end of 2007.

The North Dakota Housing Finance Agency is another top issuer, as is the North Dakota University System. Both issue debt backed by their own revenue. Outside of an already-approved $200 million authorization for a veteran's project, the state is unlikely to issue debt for awhile, said Karlene Fine, executive director of the North Dakota Industrial Commission, which oversees the state's debt.

"I think we're going to be pretty quiet," she said.

By restricting borrowing through 2011, Hoeven's budget would make an additional $12.1 million available for debt service payments after 2010, he said.

Earlier this year some lawmakers suggested using surplus funds to pay off all the state's debt in 2009. The proposal - which reportedly received a cool reception from debt officials - could be revived after lawmakers convene for a new session on Jan. 6. Lawmakers have until the end of April to craft a final budget. The state's fiscal year ends June 30.

Standard & Poor's rates North Dakota's credit AA and Moody's rates it an equivalent Aa2. Fitch Ratings assigns a AAA rating to the state's Building Authority debt.

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