November 18th, 2015 Leaner Times Ahead Will Require Leadership On-paper shortfalls should be used as an opportunity to develop budgets that include

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November 18th, 2015

Leaner Times Ahead Will Require Leadership

On-paper shortfalls should be used as an opportunity to develop budgets that include 10%-20% reductions in ongoing spending

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It is no secret that many conservatives have been worried about the path the state has been on fiscal – starting as far back as 2009, it was already obvious that an unsustainable course was being paved when it came to state spending – it was just a matter of when it would become clear to the world.

The 2015-17 budget-cycle has only just begun, but in the first four months there is already a $111 million shortfall compared to the previously reduced revenue projections. With the economic consensus that commodity prices will stay depressed for some time to come, if this trend continues into next summer, there may be some tough choices that need to be made prior to the 2017 legislative session.

OMB Nov 2015
Spending Graph

The writing was on the wall during the last session, and while the legislature did account for lower revenues from oil, they were relying on overly optimistic assumptions that the decline in oil was a blip rather than a cyclical multi-year monetary event.

However, the last thing we want to do is say “we told you so” that does not help the situation, instead we need to make it clear that it is more important than ever to implement the types of reforms that will allow our growth to depend less and less on oil prices and commodities. The need to diversify is as important now as it was in the 1980s.

Not Really A Revenue Problem

In the last 10 years our lawmakers have been spoiled with the riches generated by oil activity – via the oil tax, as well as sales and income tax.

The positives that have come from this time period have been the reduction of personal and corporate income taxes by almost 50% (even though revenues are still through the roof).

There will be some who claim that this shortfall is a revenue problem - that will be a lie. This is a spending problem as illustrated by the fact that revenues are actually ahead of last biennium's collections by $75 million.

OMB Nov 2015 YoY

What Needs To Happen?

The first thing that needs to happen is that our lawmakers need to admit that they let spending get out of control. A budget cannot be increased 278% over 10 years and be called "sustainable" or "conservative" by any stretch of the English language.

The 2015 legislative session did manage to cut spending by 12% on the general fund - however, if current revenue trends hold for the rest of the biennium, that reduction should have been closer to 20%.

General Fund Budget Increases

Tax Shifting Schemes Will Likely Be Curtailed

Political Sub Funding

There is considerable agreement that the area of spending that will be rolled back is the very area that the biggest effort was made to shift burdens around – local property taxes.

Whether this consensus will result in the rolling back of spending designed to hold local property taxes down is up in the air. It will be politically painful to start this process because local backlash will result from property taxes increasing even faster due to the reduction in state spending for this purpose. The state’s property tax buy-down strategy can only last as long as there is continual growth in state revenue.

Once that ends, as it now seems it will, the resulting return to high-level property tax growth will look a lot like the health insurance premiums have since Obamacare. It will take a lot of political fortitude by the next governor and the 2017 Legislature to get this under control. Banking on luck and hoping that oil and commodity prices skyrocket is not a plan, and it certainly is not a fiscally prudent way to govern.

Over the next election year, our lawmakers need to be told that will not suffer a backlash as long as they recognize what needs to be done. Kicking the can down the road is no longer an option.

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-Dustin Gawrylow, Managing Director

North Dakota Watchdog Network

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