As North Dakota enjoys the largest oil boom in its history, counties and cities struggling to provide the infrastructure needed to support the growing industry are turning to the state for help.

The state is crafting a pilot housing-bond program to partner with cities to issue debt to accommodate the tide of workers flowing into the state. Oil-producing counties are pushing for a bigger piece of the state’s oil-related revenue to help repair roads that are taking a beating from oil rigs and supply trucks. Local governments also want to tap into the Missouri River to address a water shortage across the region.

The oil boom is transforming western North Dakota, where the 17 oil-producing counties are located. The region historically is the least populated part of the state. But sleepy farming communities are now hubs of activity for workers and supplies, most shipped in from Texas and Oklahoma. Housing is often more expensive than in the state capital of Bismarck, and schools accustomed to enrollment declines are now seeing an influx of new students.

The Bakken Formation, which covers 25,000 miles across North Dakota, eastern Montana, and Saskatchewan, Canada, is the largest oil field in the U.S. About two-thirds of it is located in North Dakota. The oil pool is expected to be large enough to sustain drilling for decades and the recent oil spill in the Gulf of Mexico could increase focus on the area as offshore drilling is more closely scrutinized, experts said.

“This is easily a 30-year [oil] play,” said Vicky Steiner, executive director of the North Dakota Association of Oil and Gas Producing Counties. “It’s a huge international play. It’s a huge deal for North Dakota because it gives us something to look forward to in the future.”

“We’re moving from an agricultural community to a Bakken oil development industrial complex,” Steiner said. “We have to take care of the infrastructure for the industry.”

The bulk of oil-related revenues, which are generated by two taxes and related funding, flow to the state. Boosted by the rising price of oil and increased production, North Dakota has seen oil-related revenue quadruple over the last five years, according to Pam Sharp, director of the Office of Management and Budget.

The state received $802 million in oil-related revenues during the 2007-2009 biennium, up from $199 million during the 2001-2003 biennium. In the first nine months of the current biennium, the state has already collected $342 million, Sharp said.

As other states struggled with the recession, oil revenue has helped North Dakota build a budget surplus that last year reached $1.2 billion. State law dictates that only the first $71 million of oil revenue goes into the general fund, and that the rest goes into other funds, including a special projects fund, school funds, and a water fund.

In 2007, the Legislature created the North Dakota Pipeline Authority and gave it the power to issue up to $800 million of bonds for oil-related infrastructure work. But that does not help local communities deal with the increased traffic and housing needs directly related to the boom. So far the state has not directly issued any of the debt and doesn’t anticipate doing so, according to Karlene Fine, executive director of the North Dakota Industrial Commission, which oversees several of the state’s bond-issuing agencies.

“We do have it there as an ability, but the private sector has been able so far to provide the infrastructure,” Fine said.

The state does distribute a chunk of oil revenues to local governments, including cities, counties, and schools. It recently increased the amount of transportation funding partly to address highway needs in the oil-producing counties. It has increased the amount of water funding it distributes to several oil-producing counties.

The state is also working with the city of Williston to craft a pilot program for a partnership to issue bonds to finance housing. If it succeeds in attracting developers willing to finance half the project, the state expects to use it as a model to craft legislation during the 2011 legislative session, said Shane Goettle, commissioner of the North Dakota Department of Commerce.

“We’re piloting it with Williston and are willing to visit with other cities in oil-producing counties that have the same issues,” Goettle said. “During the upcoming session, we’ll talk more at length about appropriate share of risk for the state and what that would be. It’s too early to speak about, but we need some mechanism [to partner with cities].”

Located in the center of the Bakken oil patch, Williston has seen its population increase to up to 17,000 from roughly 12,500 over the last few years. Many oil workers sleep in their cars or on campsites because of the lack of housing, said John Kautzman, the city’s auditor.

The city got hurt during its last oil boom in the 1980s, and has now turned to the state to assume some of the risk in building the needed infrastructure, Kautzman said.

In the early 1980s, Williston issued $26 million of special-assessment backed bonds to finance above-ground infrastructure for new housing developments. But when the bust came in the late 1980s, the city found itself facing a 40% delinquency rate on the debt, Kautzman said. The city levied a “deficiency tax” and then voters approved a sales tax increase to pay off the debt.

“Everyone in town got to help pay for those bonds,” he said. This time around, “we’re asking for shared risk. We don’t want unilateral risk.”

Under the program, the state and city would partner to issue up to $10 million of special assessment bonds to finance infrastructure related to new housing. Either the city or the North Dakota Public Finance Authority would issue the debt, and the Bank of North Dakota would back it with a letter of credit.

The debt would likely carry some type of pledge from the state, such as the LOC from the state-owned Bank of North Dakota, Goettle said.

“If the risk needed to be called on, then the bank’s reserves would back up the state’s share of the bond issuance,” he said.

North Dakota is rated AA-plus by Standard & Poor’s and Aa2 by Moody’s Investors Service. Fitch Ratings has no underlying rating on the state, which does not issue general obligation debt.

On the county side, advocates like Steiner said an uptick in locally distributed oil tax revenue has not been nearly enough to offset a steep increase in road expenses stemming from increased industry activity. County officials recently told a legislative committee that they would need $113 million in additional revenue over the remaining biennium to cover costs related to the oil boom.

“There are a lot of nice things about the oil industry, but we really feel responsible to make sure that the trucks on the roads are safe and that our public is safe,” Steiner said.

Counties are asking the Legislature to increase the amount of money they get from oil production taxes and boost the state’s “energy development impact” funding.

Counties are also asking the state to make Highway 85, a main oil industry artery, a four-lane highway. Goettle said the state recently agreed to a $60 million investment to make the road a “super-two-lane.”

“If we’re going to have a 30-year oil play,” Steiner said, “that should be a four-lane highway. We used to be a quiet agricultural community, and now we have accidents because people forget to look both ways and you have a long line of trucks in front of you. Our people are adjusting to this as well.”

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