Squeeze Spares Some States

By: - July 8, 2008 12:00 am

Devils Lake , North Dakota, is as remote a place as there is in America . Canada lies about 60 miles to the north, Minnesota about 80 miles to the east. It is here, on farms such as Eric Aasmundstad’s, where you begin to understand why surprising North Dakota is so well-off compared to most of the rest of the country.

Aasmundstad grows corn, soybeans and wheat on a 3,000-acre farm. Timely, soil-soaking rains have helped produce two years of bumper crops at a time of record high prices paid to farmers. More money in Aasmundstad’s pocket – and those of his neighbors – ripples through North Dakota ‘s economy in the form of additional sales and income taxes.

“I think this is as nice a year as it’s ever looked,” says Aasmundstad, 50, who predicts that his gross income will rise by 50 percent between 2006 and the end of this year.

The state is also blessed with an oil deposit estimated at 400 billion barrels that is producing at record levels. With the price of oil over $140 a barrel, it’s no wonder North Dakota led the nation in personal income growth in first three months of the year.

“We feel extremely fortunate,” said Pam Sharp, the state budget director.

North Dakota represents the flip side of the budget crisis gripping many state and local governments as the July 1 fiscal year gets under way. Though nearly half of the states have had to deal with budget shortfalls and other troubles this year, North Dakota officials say their state has a $740 million surplus, a staggering figure for a state that ranks 48 th in population and whose general fund budget is about $1.2 billion a year.

“That’s quite an anomaly when you are that small,” said Scott Pattison, executive director of the National Association of State Budget Officers in Washington

Other energy and agriculture states are escaping the national economic downturn for the most part, although budget officials are not at all certain their states will be completely immune from the impacts of a sustained slump in the housing market, high fuel prices and the rise in unemployment. Alaska , Colorado , Idaho , Louisiana , Montana , New Mexico , Oklahoma , South Dakota , Texas , Utah , West Virginia and Wyoming have benefited from high energy and farm prices.

North Dakota doesn’t have the largest surplus-Alaska and Texas each could be as much as $10 billion in the black in January-but what is striking about its success is how well the state is doing compared to others in its own region. A report released July 1 by the Creighton Economic Forecasting Group in Nebraska said that Midwestern states as a whole were “teetering on recession” in part because of pressure from inflation and the impact of the spring floods and storms.

“Contrary to the region and the nation, North Dakota has not experienced a downturn in economic activity,” the report said.

Besides the agricultural and energy windfalls, the stars have aligned for the state in other ways. Home values are going up in North Dakota , in contrast to many areas, because the state economy is growing and the labor market is strong. The state also has other relatively stable employers in two Air Force bases and more than 20 colleges and universities. Its jobless rate is close to 3 percent, compared to 5.5 percent nationally.

North Dakota has not been swallowed by the subprime mortgage crisis. The state does not attract large numbers of new residents, so there is not much demand for housing loans. Many of the victims of the subprime loan fiasco were low-income minorities, but fewer than 1 in 10 North Dakota residents are minorities. Because of their small size, North Dakota ‘s banks generally do not engage in the practice of creating mortgage-backed securities and selling them to investors, the practice behind the subprime debacle.

“There’s just a more cautious lending environment here,” said David Flynn, director of the University of North Dakota’s Bureau of Business and Economic Research .

The state’s proximity to Canada has turned out to be another advantage. Canada is North Dakota ‘s largest export market, which at $1 billion last year is a reason that the state is among the national export leaders. Shoppers from Winnipeg , lured by the weak dollar, have been pouring across the border to stores in Grand Forks and Fargo to buy items made in North Dakota , such as food and personal-care products, eat in local restaurants and stay overnight.

The question for Gov. John Hoeven (R) and the state Legislature is what to do with the $740 million or whatever the surplus turns out to be when lawmakers return to Bismarck in January.

About $200 million will be stowed away for an emergency. That leaves the rest to be spent in a state with no pressing financial need.

Mark Berntson, a music teacher in Fargo , said part of the surplus should be distributed to education. Surveys consistently show North Dakota teacher salaries among the lowest in the country. Rachel Pederson, a server in a Fargo diner, says the money should be put into renewable energy such as wind. “We have so much extra land-and so much wind,” she said.

Tax relief seems likely, though low-tax North Dakota ranks 39 th in the most recent CNN-Money magazine survey of state and local tax burdens. A year ago, the Legislature approved $115 million in property tax relief, but the sentiment for additional relief is still strong. Efforts are under way to collect signatures to put initiatives on the ballot this fall slashing personal income taxes in half and capping state spending at the annual rate of growth of the federal consumer price index.

Hoeven, who is seeking a third term as governor Nov. 4, will no doubt benefit from the state’s roaring economy as Democratic challenger Tim Mathern of Fargo tries to unseat him.

“In North Dakota we don’t throw people out of office unless there’s a reason,” said Lloyd Omdahl, a former lieutenant governor and retired political science professor at the University of North Dakota .

Mathern, a state senator, said he is trying to convince people the state’s prosperity is a double-sided coin. “Too much money in the bank is an indication of mismanagement,” he said. “It should not have been taken from citizens or should have been invested more creatively.”

He said the surplus should be spent three ways: reduce property taxes, increase aid to education and improve roads, bridges and public buildings. Mathern’s view is not that different from the governor’s, who said the state should divide the money among a reserve fund, tax relief and priority programs, such as education and health care.

Whether North Dakota sustains its economic momentum, Hoeven said, depends on diversifying its economy beyond energy and agriculture. State economic development officials are recruiting industries such as technology and tourism, with some success. Microsoft recently opened a branch in Fargo , hiring about 1,400 workers.

If the industries come, though, the state will need more people to fill jobs. After years of decline, North Dakota ‘s population has increased 1 percent since 2003 to 639,715, according to Census Bureau estimates.

” North Dakota ‘s tight labor market may restrain the state from reaching its potential,” said Patrick Schmid of Moody’s Economy.com , which provides economic forecasting information for the state.

Hoeven and other officials also are monitoring the national economic downturn, which could extend to North Dakota if it is prolonged.

“The really big question mark is the price of fuel,” Flynn said. “Transportation costs will affect the price of goods. There’s a risk, too, if energy prices stay high that people will spend more of their income on fuel.”

For now, though, North Dakotans are reveling in their good fortune. The number of millionaires has risen 46 percent in the most recent two-year period.

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.