DALLAS -- The outlook on North Dakota's issuer credit rating was lowered to negative, as Moody's Investors Service took note of economic and budget struggles triggered by falling crude oil prices.

Moody's affirmed North Dakota's issuer credit rating of Aa1, and its Aa2 rating on outstanding appropriation-backed debt issued by the North Dakota Building Authority and the North Dakota State Water Commission

"The negative outlook reflects the magnitude of the current budget gap, the risk of continued economic and revenue volatility and the potential challenges of balancing any additional budget gaps that arise from lower-than-expected revenue," Moody's stated in a report Monday.

North Dakota dipped into its $572 million budget reserve for $497 million to help cover a $1 billion shortfall in revenue for the 2015-2017 biennium triggered by falling crude oil prices. The budget forecast assumes West Texas Intermediate crude oil prices of $30 per barrel as of January 2016 that gradually transition to $43 per barrel by June 30, 2017.

The state had already implemented 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.

North Dakota primarily issues appropriation-backed debt through the North Dakota Building Authority. The debt burden is low and cannot exceed 10% of the sales use and motor vehicle tax revenues which is currently forecasted to total $230.7 million during the 2015-17 biennium. A portion of the North Dakota Public Finance Authority debt also carries the state's moral obligation pledge, with that debt going to fund projects across the state. The state's tax supported debt totals $290.8 million including moral obligation bonds and $67 million without the moral obligation.

Moody's warned that continued economic deterioration could further decrease revenue expectations for the state.

"While the state has a reasonable plan to balance the existing 22% budget gap, additional revenue shortfalls could result in further depletion of reserves," the report said.

The North Dakota Department of Transportation's $23 million of grant and note anticipation bonds are rated higher at Aaa due to strong coverage ratios. About 20% of debt service is paid from state sources and 80% from federal funds. Although the rating agency expects debt service coverage to remain ample for the bonds it cautioned that "reduced economic activity could result in fewer transportation projects and lower federal grants."

Moody's action follows Standard & Poor's Feb. 19 downgrade of the state to AA-plus from AAA and corresponding drop of the state's appropriation debt to AA from AA-plus. Moral obligation-backed debt was dropped two notches to A-plus from AA. S&P's outlook on all the ratings is stable at the lower level.

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