We Shouldn’t Use the Legacy Fund to Prop up Boom Time Spending

A letter write to the Fargo Forum today asks a question that’s probably going through the minds of a lot of North Dakotans. As lawmakers engage in a painful budgeting process to finish out this year’s session, why aren’t they tapping into more of the state’s prodigious reserve funds? The Legacy Fund, specifically, which was created in the state constitution by a Legislative resolution in the 2009 session and approved by voters on the statewide ballot in 2010.

“If North Dakota has a budget shortfall of $46 million, why won’t our governor and legislators use $46 million out of our Legacy Fund which has $4.78 billion rather than cut services for our citizens?” asks Jackie Tarpinian of Jamestown. “Isn’t that what the Legacy Fund is for?”

I’ll answer that question in a moment, but we should first understand the somewhat complicated reality of the Legacy Fund.

For instance, there are already revenues from the Legacy Fund already being considered for the 2017-2019 biennium, which is the one lawmakers are writing the budget for right now.

[mks_pullquote align=”left” width=”300″ size=”24″ bg_color=”#ffffff” txt_color=”#000000″]…the 2017-2019 biennium will be the first in which the state’s General Fund gets a revenue infusion from the Legacy Fund.[/mks_pullquote]

The Legacy Fund, per the most recent report from the state’s Retirement and Investment Office, had more than $4.3 billion in net assets as of January. Lawmakers can spend the interest from the Legacy Fund in the coming 2017-2019 biennium, which begins July 1, with a simple majority vote. They can spend up to 15 percent of the fund’s principle The Legacy Fund is not for helping lawmakers avoid making tough decisions on the budget.

In addition to that, the 2017-2019 biennium will be the first in which the state’s General Fund gets a revenue infusion from the Legacy Fund. “The state treasurer shall transfer earnings of the North Dakota legacy fund accruing after June 30, 2017, to the state general fund at the end of each biennium,” Article X, Section 26 of the state constitution reads.

I spoke with Treasurer Kelly Schmidt this morning, and she said the rough estimate of that transfer her office is working with is about $160 million. That’s subject to change – it will depend on the performance of Legacy Fund investments, of course – but lawmakers are already taking those funds into account in their budgeting.

Lawmakers are also tapping into a lot of other reserve funds, too. For instance, the Budget Stabilization Fund was pretty much depleted to make ends meet in the current 2015-2017 biennium which ends June 30. Lawmakers will be spending roughly $300 million out of the Foundation Aid Stabilization Fund to avoid cuts to the K-12 budget in the coming biennium.

But back to the question of whether lawmakers should tap into more of the Legacy Fund to make ends meet, the answer is “no.” The Legacy Fund is not for bailing out legislative profligacy.

It’s useful to think of the state’s budget situation as in need of a correction. What we saw over the last decade was an absolute boom in revenue collections as this graph from Legislative Council shows:

From the 2007-2009 biennium to the peak of the oil boom in 2013-2015 we saw sales tax collections increase nearly 137 percent. Personal income tax collections went up 54 percent, and corporate income tax collections went up more than 81 percent, and that despite lawmakers cutting income tax rates in successive legislative sessions beginning in 2009.

The problem is that lawmakers appropriated a spending boom to match this revenue boom:

In that same time window, General Fund appropriations increased 175 percent. Spending from the state’s special funds – which is to say spending directly from the state’s various reserve funds which bypassed the General Fund, increased nearly 150 percent.

And, you’ll note, the trend line on that special fund spending is still going up even as the trajectory of General Fund spending has matched our new revenue realities.

The problem our state faces is that lawmakers budgeted as though the surge in revenues from the oil boom (not to mention years of high crop prices) was going to last forever.

Surprise! It didn’t.

Fixing the problem means cutting down the budget to something sustainable by the state’s post-boom revenues.

Fixing the problem does not mean dipping into state reserve funds to try and prop up spending which can’t be sustained by on-going revenues.

Again, the Legacy Fund will already be contributing to the General Fund in the coming biennium as it was designed to. Beyond that, dollars from the Legacy Fund should be used for a better sort of purpose than helping lawmakers  avoid the painful consequences of their own profligacy.