A Grand Idea For North Dakota’s Legacy Fund

Self perpetuation fund

One of the chores North Dakota’s leaders are tasked with is what to do with the state’s Legacy Fund. Per a constitutional amendment approved by voters in 2010, since June of 2011 30% of the state’s oil/gas production/extraction taxes have been deposited in the fund.

The fund’s balance has soared past $700,000,000, putting it on track to far exceed the $860 million balance that was projected by June of 2013, and will soon be measured in the billions of dollars.

The question now is, what does the state do with all this money? We’ve locked it away, and provided strict guidelines for accessing it, but now what?

So far the fund has been invested very conservatively. An Associated Press report in May of last year noted that the fund was earning just 2.5% from investments mostly in short-term government bonds. But at some point, state leaders are going to be expected to do more with this money.

I can report to you that there is one idea that will be before this legislature that could allow the Legacy Fund truly live up to it’s name.

Here are the broad strokes:

The Legacy Fund would be used to invest in North Dakota by securing bonds issued to the state and local governments for infrastructure projects. Right now, a lot of the infrastructure the state is building is being paid for up-front with tax revenues. This might make sense, most of us believe that avoiding debt is a positive, but anyone familiar with how a large business operates knows that there are advantages to financing large expenditures. Ask a rich person why they carry a home mortgage when they could have just bought it outright, and they’ll probably tell you that they got the interest rate they’re paying on the loan is lower than the return on investment they’re getting from putting that money which would have gone to the home purchase to work.

The Legacy Fund could work the same way for North Dakota. By bonding infrastructure through the Legacy Fund, the state could use the money saved in other ways. Such as for another sort of investment in the state’s future, tax relief.

If the state isn’t paying for all infrastructure projects up front, that means more revenues available in the near term for tax reductions. Rep. Scott Louser’s idea for a two-year suspension of the personal income tax is one idea. Lowering the state sales tax might be another idea.

But the investment in North Dakota would be two-fold. What better investment could the Legacy Fund possibly make than investing in our own state? What better use could there be for the Legacy Fund than to build a true legacy of infrastructure to facilitate the expansion of our state’s population and economy? What’s more, we’d be doing it in a way that also clears the path for tax relief by diminishing the up-front costs of that build out.

There are other advantages to this plan too. The state would essentially be doing its own financing. Meaning that if something happened which would make it difficult for a local government to pay back its bonds, such as flooding or other natural disasters, the state could help by modifying the terms of the bond.

There is no doubt that we are living in special times in this state. It is rare that a state has the opportunity to both invest in infrastructure and lighten the burden of taxation. Why not avail ourselves of that opportunity when we have the chance?

Again, there will be legislation before the legislation to put this in motion. You’ll be hearing more about this in the future, and there will be much debate about the specifics, but for now take this idea to heart. It’s a good one.

It’s what is right for North Dakota.

Rob Port is the editor of SayAnythingBlog.com. In 2011 he was a finalist for the Watch Dog of the Year from the Sam Adams Alliance and winner of the Americans For Prosperity Award for Online Excellence. In 2013 the Washington Post named SAB one of the nation's top state-based political blogs, and named Rob one of the state's best political reporters. He writes a weekly column for several North Dakota newspapers, and also serves as a policy fellow for the North Dakota Policy Council.

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  • Dustin Gawrylow

    This was Paul Sorum’s idea, just so ya know.

    • http://sayanythingblog.com Rob

      No, it wasn’t.

      • http://Sayanythingblog.com The Whistler

        He invented ice cream too.

    • Drain52

      Umm…no, it wasn’t.

  • http://Sayanythingblog.com The Whistler

    So we are going to spend the money anyway and probably not actually get paid back the money.

    I’m going to do the same thing. I’ll save a ton of money and loan it to my wife for shopping.

    • http://sayanythingblog.com Rob

      I think that’s a silly way to look at it.

      Plenty of businesses work like this. There’s no reason why we can’t put the Legacy Fund to work securing bonds for the state, growing on the interest, and clearing the way for tax relief.

      What’s not to like?

      • http://Sayanythingblog.com The Whistler

        Were supposed to save the money not spend it. Playing accounting shell games doesn’t mean you aren’t spending it.

        I could see us loan the money to the cites and then give them the money to pay us back.

        • http://sayanythingblog.com Rob

          Loaning it is not spending it. We’re already investing in bonds. Why would this be any different?

          • http://Sayanythingblog.com The Whistler

            Because we’d wind up having to pay it off ourselves.

            Again I think my example is fine. If I save some money and then lend it to my wife to spend it’s not saving.

          • Andrea Toman

            How is that any worse than paying for it ourselves now?

        • Drain52

          There’s a difference between investing the money and spending it. Look it up: the amendment to the state constitution that established the Legacy Fund mandated that it be invested. The Legacy Fund is already buying bonds from other states. Why shouldn’t we be investing in Williston instead of Waco? If cities are going to be paying interest on bonds, why not pay the interest to ourselves?

          • http://Sayanythingblog.com The Whistler

            I expect that we’ll get paid back from Waco. I don’t expect Fargo to ever pay their bills back to the state. They’ll be looking for the state to give them the money to pay off the loan from the state.

          • http://sayanythingblog.com Rob

            That could be easily fixed with legislation.

            You’d rather our money be invested in Waco than here? I don’t see the wisdom in that.

            Let’s not let the perfect be the enemy of the good.

          • http://Sayanythingblog.com The Whistler

            That could be easily fixed with legislation.

            Which can easily be broke in the next session with legislation. The reason why we had to put the legacy off limits is because the big spending Republicans are irresponsible.

            You’d rather our money be invested in Waco than here? I don’t see the wisdom in that..

            If I were to lend money to my kids I wouldn’t expect to be paid back. If I lend my money to other peoples kids you can bet I will be.

            Let’s not let the perfect be the enemy of the good.

            Having MORE money for the state to add to the their spending spree is a “good?”

          • SusanBeehler

            So what are we saving the money for if we cannot invest in the people of North Dakota, why are outsiders a more worthy investments than our communities?

          • http://Sayanythingblog.com The Whistler

            We’re saving so that we have future revenues for when the oil money goes out.

            What this plan is is spending the money so that we can pay it back to ourselves in the future. That’s spending, not saving.

            What is it with you guys that you can’t stand not spending every single nickel you can grab from us?

          • http://Sayanythingblog.com The Whistler

            This scheme sounds more like the social security trust fund where our savings was “invested” in T-Bills. Now we’re broke.

          • SusanBeehler

            “You” guys, I am not sure who you are lumping into that category. Maybe you do not fully understand bonding, neither do I. I do understand when we bond for property tax or infrastructure it is done by using the property as collateral that you will make “good” you will pay back with interest to those who are doing the bonding. I am not sure if I am for or against, but it sounds better to me to use the fund rather than my property as collateral. It would be nice if the state would make available other means of funding the increase growth communities have had without having just property owners bear the costs. I would think this could give more options to address the rapid growth without burdening one segment of the taxpayers to pay for the growth.

          • http://Sayanythingblog.com The Whistler

            You’ve got quite a few issues there. First of all if a locality legitimately needs to bond a project I don’t know why we need to involve the legacy fund at all. What I don’t want to see is all kinds of frivolous projects thrown in there because we have a new credit card.

            Now if the people in Fargo want a new schoolthey shouldn’t be against paying for it yourself.

            Now it’s legitimate to pay for infrastructure items in the oil patch out of the oil revenues. After all the localities are providing services enabling further growth in oil revenues. But there’s no reason at all to tap into the legacy fund. The state still has plenty of money. Governor Dullrymple thinks he has enough money to expand the welfare state in a state that is begging for workers.

            Williston has enough money to build themselves a seventy million dollar community center so I don’t even know if they need any help from the state.

          • SusanBeehler

            There is a difference between wanting a new school and needing a new school. Do communities want more jail space or do they need jail space? Mandan and Bismarck is not in the oil patch but we are being effected by it. I am not talking about just Williston or east or west we do have a whole central area of the state which cannot support the growth with just property tax. Where do you live?

          • http://Sayanythingblog.com The Whistler

            well if Bismarck and Mandan need to build new jails they can bond for it. Grand Forks County did that a long time ago.

            If you think the state should build it (I don’t really know why they should) then they should appropriate it out of their general fund not steal the money out of our savings account.

            I would suspect though the there has been enough growth in the Bismarck Mandan area that they have the tax revenues already to pay for a new jail. They’d just rather spend it on special interests rather than necessities.

          • http://sayanythingblog.com Rob

            If you think the state should build it (I don’t really know why they should) then they should appropriate it out of their general fund not steal the money out of our savings account.

            If we’re not going to use it for that purpose, then WTF are we saving it for?

            For crying out loud.

  • kent

    First for all the legacy fund does not have a lot of money in it. In essence it can fund 6 weeks of the states operations. So before we start doing anything with it, lets accumulate some substantial savings, versus immediately spend it because we have a whole in our pocket. Everyone wants to think the legacy fund is loaded and we should use it. Its not. Alaska if you want to compare has $40 billion banked. That is a rainy day fund. They funded first, then started to spend and cut taxes. Let’s establish the fund first.

    Second, and Rob this is what I want to chat with you more about when i get to Minot, infrastructure bonding. There is a relatively simple fix to fee up assess to capital to build streets, sewers, water, etc. Its changing what can be used for private activity bonds in ND. You can’t do water and sewer. If you could utilize PAB’s, the developer could get 2-3% financing on infrastructure, versus currently having to pay cash or borrowing at a higher rate. Note the financing rate is the same as what the lecacy fund is earning today, so then no need to use the Legacy Fund.

    Another question. No one will answer, because they don’t like the answer. How much money as ND saved with all the Billion dollar surpluses? My understanding is next to nothing. As they spend last years surplus in the next fiscal cycle. So the perception is billions and billions saved. When in reality it might be 2 billion which will be earmarked this legislative session.

    But what other funds are there beside the legacy? Smokers fund? School fund? How much money has the state really saved? I think the reality is much different that perception.

    • http://sayanythingblog.com Rob

      First for all the legacy fund does not have a lot of money in it. In essence it can fund 6 weeks of the states operations. So before we start doing anything with it, lets accumulate some substantial savings, versus immediately spend it because we have a whole in our pocket.

      This is not spending. This is issuing bonds that will be repaid, with interest. It’s not unlike the bonds the fund is already being invested in. Nobody is talking about running the state’s operations from it.

      • http://Sayanythingblog.com The Whistler

        So you want to take the money out of our savings account, SPEND IT, then pay it back with future tax payments.

        And you’re saying this isn’t spending and it will cut our taxes? LMAO!

        • kent

          I’m not saying that at all. I think we should get 15 to 20 billion saved before we start even thinking about touching the money. What I am saying is we can get the same impact of using the legacy fund and getting infrastructure built in which it is developer risk, versus Legacy fund risk by changing the private activity bond rules. Also, North Dakota is the only state that I am aware that limits the use that water and sewer can’t be bonded in this manner.

          I also think 2.5% in this market is a good to excellent return on an investment that needs to be low risk.

          • http://Sayanythingblog.com The Whistler

            My comment was to Rob. I think it will make more sense to you.

      • kent

        But based on this, the money is invested. If it earned 2.5% for a fund that is to invest low risk, this is a good return and probably working as expected. In addition, the fund is probably sitting on a large cash position earning less than 2.5% since it takes time to invest and money is flowing in faster.

        Again, you don’t need to borrow from yourself to get fund ND infrastructure. And you get the rate of return shown.

    • Andrea Toman

      This kind of investing in bonds will grow the legacy fund.

      • http://Sayanythingblog.com The Whistler

        Right raiding the fund to spend the money so the legislature can spend the other money on special interests is really going to grow the fund.

        Or something.

        Like for example taking the Social Security fund and using it to buy treasury securities REALLY grew our retirement accounts. After all the trust fund is holding trillions of dollars of US obligations. Now all we have to do is tax ourselves silly to pay back those obligations so that we have the money that’s owed to the codgers.

        It just shows how investment works.

  • camsaure

    I am sure that the retirement funds have their eye on this when that bubble bursts, due to our legislatures lack of guts to address this problem. When the retirement funds go bust who wants to bet this is one of the first places they will come with their hands out?

    • http://Sayanythingblog.com The Whistler

      The problem is that even if the legacy fund is left alone and we have money to spend the special interests will see this as a way of getting more money for themselves.

      • camsaure

        I agree wholeheartedly

      • Andrea Toman

        It should be a way to cut taxes. With a plan like this, there is room in the budget to eliminate personal income tax, corporate income tax, and take sales tax from 5% to 4%.

        • http://Sayanythingblog.com The Whistler

          The state has had the money to eliminate the income taxes and more but they’ve chosen to spend money like it was going out of style. How is spending a lot more money to be paid for by us with future tax revenues going to reduce our taxes?

          • Andrea Toman

            That’s why it’s key to support legislation like Louser’s HB 1182 to put a 2 year moratorium on income tax. Until we take the revenue away, they are going to continue to find ways to spend it.

          • http://Sayanythingblog.com The Whistler

            I think they should do that as an emergency measure to make up for Obama tax hikes.

      • SusanBeehler

        If the safeguards are put in place to use it for bonding only certain types of projects for our local government entities such as the jail space needed or other infrastructure needs, roads etc. that is not a “special interest”, that is a local government interest. We instructed the legislature to invest it with our vote, now we can ask the legislature to invest back in our local communities.

        • http://Sayanythingblog.com The Whistler

          You don’t get it. This is a savings account not a spending account.

          The state has plenty of money to do what’s need. So much that Governor Dullrymple wants to expand the welfare state in a state where employers are begging for workers.

          • SusanBeehler

            This is not being suggested by the Governor it is being introduced by the Legislature NOT at the request of the Governor. Do you think your money in a savings account is just sitting there? Do you think banks just let the money sit there or do they take an use it as an assets giving loans at a higher rate interest than the savings account, thus acquiring a profit? The Legacy Fund was not made to set in a fault, it was established to be invested. I think why not invest in our municipalities or counties if that is what is decided by our legislative representatives? Our existing demographics has contributed to the lack of workers, people in retirement usually do not apply to work when the oil jobs come in. Not everyone wants to be a rigger, a driver, a pipe fitter, not everyone has the capabilities to do the type of work in the jobs created.

  • Andrea Toman

    I firmly believe that long term infrastructure should be bonded over the lifespan of the infrastructure. There’s no reason for me to pay cash for something that will last 30 years, when someone coming in two, 10 or 20 years from now will have the use of that infrastructure for free. Won’t they be shocked when it comes time to rebuild and suddenly they have to pay for it!

    • http://Sayanythingblog.com The Whistler

      I can’t help but notice that everytime bonds are paid off the taxing entity fails to reduce our taxes. They always find a way to spend the money. Then when we need to replace the structure that the bonds were for they say we need to raise taxes to pay for more bonds.

      It’s like a never ending spend more money machine.

  • sbark

    So we want to have a Legacy Fund Lockbox, essentially filled with IOU’s (bonds)….
    where have we heard this concept before………..SS?……..Everytime you hear a govt talk about “investment”—they are controlling the language to simply say more spending, but hey it sounds like its for our own good.
    and now we find, since the Govt is Fed 16 trillion in debt…….the IOU’s are essentially worthless……..but hey, we are told it is solvent for the time being, so the problem is inherited by those who cant vote yet.

  • awfulorv

    That much money, just laying around, is bound to attract some unsavory characters, not the least of which are those in Washington, by way of Chicago. But, of course, Ole and Lina are honest and, as we all know,”You can’t cheat an honest man”. Yah shure, you betcha…

  • Lynn Bergman

    The legacy fund is set aside to fund state government in the distant future… when the oil and gas revenues are gone. Meanwhile, it burns holes in the pockets of those who want it for themselves instead of their grandchildren.

    Shameful generational greed.

  • Andrea Toman

    The Legacy Fund is already invested 100% in bonds. They’re just not North Dakota bonds. The rate of return (per SIB) is 1.78%. Now, when the Legacy Fund is invested 100% in bonds (like it is now) through 2 large investment firms (like it is now) who charge upwards of half a million dollars annually in administrative fees (like they do now), is that saving, or spending?

  • Common Sense North Dakota

    Talking to the State Investment Board the $$ is invested with J P Morgan and Babson. They are in short term low yielding Treasury and mortgage bonds. The rate of return has been 1.78% from now since Oct,2011. As of Dec there was 714 million. we can pay back the bonds with a very small amout of our 166 million a year (and growing) gas tax revenue.We can bond what ever is need. The Department of ND Trust Lands new audit showed a growth this year of 528 million bringing that balance of over 3 billion. This under article 9 of our constitotion is to pay for our shools. It says we must spen at least 5% each year. I does not say like the Govenor would have you to believe we can only spend 5%. Just read the constitution.

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