North Dakota's constitutional funds balloon in oil boom

After tough economic times in the 1980s, North Dakota voters wanted to make sure education funding would be spared by future budget constraints.

To that end, they agreed in 1994 to create a fund to cushion the state’s K-12 education funding using oil extraction tax revenue. Today, the size of the Foundation Aid Stabilization fund has ballooned to $473 million and is expected to surpass $1 billion in the next biennium, much more than what state legislators had originally anticipated or now say is necessary, thanks to energy development in western North Dakota.

“It has much more money in it than the need would be,” said Sen. Ray Holmberg, a Grand Forks Republican and chairman of the state’s Senate Appropriations Committee.

The Foundation Aid Stabilization fund is one example of about 20 funds written into the state’s constitution, some of which have grown significantly in the past few years thanks in part to the oil boom. Many of those funds are considered trust funds and trace their roots to statehood in the late 19th century, and others were created with the approval of voters over the past few decades.

Roughly 40 percent of the oil and gas tax revenue the state expects to receive this biennium is already spoken for in the state’s constitution. The largest portion of that is the voter-approved Legacy Fund, which is expected to reach $3.8 billion in June 2015. Lawmakers won’t be able to touch legacy funds until 2017, and even then they’ll have to reach a two-thirds majority to make decisions on how to spend the money.

And in November, voters will decide whether to create another trust fund aimed at conservation. Measure 5 would create both a trust and a fund using 5 percent of the state’s oil extraction tax revenue.

Growing trust

Most of the state’s constitutional funds came from Congress’s passage of the Enabling Act in February 1889. The federal government provided land grants to the state of North Dakota to support education and other public institutions, according to a report from the North Dakota Department of Trust Lands.

Those trusts are overseen by the state Land Board, which is made up of the governor, attorney general, secretary of state, treasurer and superintendent of public schools. Money raised for the land trusts comes from investments and revenue generated by use of the land, like land or mineral rentals.

For instance, the Common Schools Trust, which benefits K-12 education, owns 635,000 acres of surface land that’s leased to farmers mainly for cattle grazing. It also owns 1.5 million acres of mineral rights leased for production of oil and gas, coal, potash, gravel and other minerals, according to the state Department of Public Instruction.

Other trusts benefit higher education institutions like UND, Mayville State University and NDSU. The largest of the permanent trusts under the Land Board’s purview is the Common Schools Trust Fund. It posted a balance of $2.4 billion in net assets in 2013, up from $900 million in 2009.

Permanent trusts now total more than $3 billion, according to Lance Gaebe, commissioner of the state Department of Trust Lands.

In perpetuity

Still, only a portion of the money is allowed to be distributed. Between 2011 and 2013, $92.5 million was distributed from the Common Schools Trust Fund. State officials expect the trust will provide $204.3 million in the 2015-2017 biennium. 

Meanwhile, the Legislature might spend $2 billion on K-12 education in the next biennium.

Kelly Schmidt, the state treasurer, said most trust fund money isn’t spent in order to make sure it will last forever.

“Government doesn’t go out of business,” Schmidt said. “The goal is to keep the fund in perpetuity.”

The permanent trusts have seen their revenue grow thanks in part to rising investment income, but the biggest growth has come from mineral interests. Mineral royalty revenue alone grew from $53.5 million between 2005 and 2007, to $340 million between 2011 and 2013, according to a report from the state Department of Trust Lands.  

The Common Schools Trust Fund also receives 10 percent of the oil extraction tax thanks to the same 1994 vote that created the Foundation Aid Stabilization fund. The Common Schools fund is expected to get $282 million from the extraction tax this biennium, according to a July Legislative Council report.  

The state also has a litany of other “special” funds written into state statute. That includes nearly $25 million to insure state agencies and political subdivisions against fire and extreme weather, as well as one for providing loans to beginning farmers.

Changes?

While a significant chunk of new oil tax money is stashed away, legislators are considering freeing up some the Foundation Aid Stabilization fund for other uses. The fund has only been tapped once, in the 2001-2003 biennium, for its intended purpose.    

“Certainly, there’s been no need to stabilize foundation aid in every session that I’ve been there, not even close,” said Senate Minority Leader Mac Schneider, a Grand Forks Democrat. “I think we need to take a hard look at that, on whether there’s a more appropriate use for a fund like that,”

He suggested using some excess funds for an endowment fund for higher education.

Jeff Delzer, the Underwood Republican chairman of the House Appropriations Committee, said an interim committee is drafting a bill that would allow some of the foundation aid fund to be spent on other things. A draft resolution from August states that excess money from the fund can be used for unfunded benefit obligations of state retirement funds, low-interest loans for school construction projects or “other education-related purposes.”

The draft indicates that a ballot measure would go before voters in 2016.

“I think really because of the numbers…the Legislature would be irresponsible if they didn’t give the voters an opportunity to pass on whether they want to have that much money tied up in something that’s never going to be used for the purposes that it was put there for,” Holmberg said.

 To see a list of constitutional and special funds the state of North Dakota manages, click here