Posted 3/31/15 (Tue)
By Neal A. Shipman
The plummeting price of oil is taking a huge bite out of North Dakota’s revenue picture this coming biennium. According to the latest forecasts, the state is expecting to see oil tax revenues drop another $870 million from the January forecast, and be a staggering $5 billion below what Gov. Dalrymple projected in his budget in December.
Those lost tax dollars will seriously challenge the State Legislature in the coming weeks as the session draws to a close for another two years. The challenge will be how legislators fund state agencies, education, new programs, and still provide for the property tax cuts that they want to make.
While the legislators struggle with coming up with a balanced budget with billions of dollars no longer flowing into the state’s coffers from the oil-producing region of North Dakota, one would hope that they keep in mind that even though oil prices are low, the oil industry isn’t going away. And for the four major oil-producing counties in North Dakota, namely McKenzie, Williams, Mountrail and Dunn, that means that the impacts from the continued drilling and production of the wells aren’t going away.
For the past three legislative sessions, the state has done a poor job of helping the oil-producing cities and counties meet the demands that have been placed upon them by oil development. Cities, like Watford City, have been asked to bear the lion’s share of the cost to build the needed water and sewer systems to handle its growing population. And counties, like McKenzie County, have had to spend hundreds of millions of dollars to build new roads and upgrade existing roads to accommodate the heavy oilfield traffic. With the increased enrollments, our school systems have been asked to build new buildings, hire more teachers and build teacher housing with very little or no assistance from the state.
While billions of dollars in oil tax revenues were flowing into North Dakota’s treasury and into “rainy day” accounts, as well as helping to fund needs across the state and to provide property tax relief to every landowner in the state, a mere pittance of those oil revenues were making their way back to the oil-producing counties.
By state law, 75 percent of the Gross Production Tax (GPT) is currently kept by the state, with the remaining 25 percent of those oil and gas revenues being returned to the oil-producing counties based on a preset formula that works against the largest oil and gas producing counties.
Going into this legislative session, the Governor, as well as many state legislators, recognized that a change in the GPT formula was warranted in order for these oil-producing cities and counties to have a chance at meeting their infrastructure needs. Working with city and county leaders, the Governor was recommending that the GPT formula be changed to provide that 60 percent of the revenue would go back to the oil-producing cities and counties, while 40 percent would remain with the state.
But the slump in North Dakota oil prices from over $100 a barrel to less than $50 now has the Legislature thinking that the best that they can do for the oil-producing region is to increase their share of the GPT to possibly 35 percent.
What is tragic at this point in the legislative process is the realization that for Watford City and McKenzie County, which remains at the center of the oil development, the demands on our local governmental units aren’t going to go away. There is still the demand from the increase in population and new development in the city for more water storage towers and waste water treatment plants. And even though oil prices have fallen, the county still needs to build more county roads and a new jail facility. But the money that is really needed to help the city and county isn’t going to be there. And in reality, because of the lower oil prices, even if the GPT formula was changed to 35 percent, Watford City and McKenzie County stand to get less money than they did before.
There is no question that the Legislature is going to be facing tough challenges as it tries to finalize the state’s funding package for the next two years. But hopefully, they will keep in mind that they can’t keep delaying fixing the needs being faced by the oil-producing region of the state. While low oil prices may be slowing down energy development in some areas of the state, that is not the case in others.
Oil prices will rebound, and drilling activity will return to record levels. The state needs to recognize that and continue to make the investment in the oil patch.