Herald editorial board

Greater oil production and expected oil prices of between $50 and $60 per barrel are foundation stones supporting Gov. Doug Burgum's 2019-20 budget, which calls for an increase in state spending and a focus on "Legacy projects" the governor says are needed in North Dakota.

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Burgum presented his budget to the Legislature during a speech on Dec. 5, and then visited later that day with the Herald's editorial board. During that meeting, the governor expanded on various points from his earlier speech, and especially discussed his ideas for projects and use of dollars from earnings accrued from the state's Legacy Fund, a savings account approved by voters in 2010 that sets aside a percentage of oil and gas tax revenue.

The account now hovers near $6 billion; if the principal is left untouched, some predict the account could top $25 billion by 2031.

Overall, Burgum's proposed budget totals $14.3 billion, with a 5 percent increase in state spending.

The Herald published in its Dec. 9 edition most of the conversation between Burgum and the editorial board. A second portion of the interview is published here today, while the remainder will be published in the January issue of the Herald's business magazine, Prairie Business.

Q: There is a downtown in ag, and oil prices are trending back down recently. Where does the increase in revenue come from to build this higher budget?

BURGUM: One is from production. When wells get developed and start producing and they have all their costs behind them from creating that well, then even if you have a downturn, they likely will keep on pumping.

People that are doing energy development in North Dakota are getting triple the amount of oil out of wells today than they were three or four years ago. They are getting two or three times more oil and twice as much gas.

If we had all the takeaway capacity and we had higher prices, I think our forecasts would say we would be at 1.7 million barrels per day by the end of the next biennium.

So in a short time, this line that took us from 800,000 to 1.3 million would keep going. In our forecast that we have, we have it at basically 1.3 million. We don't have any of the upside of production built into the model. And then we have increased the discount after Dakota Access Pipeline went in. The discounts in our forecast shrank to $4 or $5 per barrel, but we have a forecast in there of $9 of discount between a WTI price and a North Dakota price.

We anticipate that if we get more oil and gas, we will have takeaway capacity issues, so we have been conservative on the discount. And on the per-barrel pricing, we have been conservative, too, where we think it's more in the $50s and $40s than $60s and $70s. ... We try to take a look at the futures prices when we do our forecasting. We take that, we discount volume, we discount price and we increase the transportation discount up. ... And then, the same thing, whether it's income tax, corporate tax, sales tax, what we might get on online tax, we bring that down.

But even still, we will end up with some pretty healthy ending balances. And what we've recommended with those ending balances is not to grow government, but if there is money left over? Pension fund, or rainy day fund.

Q: You're comfortable with using Legacy earnings?

BURGUM: This is really the first time that any team has been able to define what a Legacy project is. Constitutionally or by law when it was set up, the first the earnings could be tapped was last time. We were in the middle of this massive downturn. Our revenues didn't equal our spending, even after we cut from $6 billion to $4.3. We were still short hundreds of millions of dollars of revenue sources.

So $200 million came off of earnings and, sadly, went into covering general operating expenses.

The way we built this budget, the revenue sources equal the expenditures in the general fund, $4.6 billion in revenue and $4.6 billion in spending. Also, $300 million in Legacy projects on top of that.

This is one time, so if you had a downturn again, you just don't do Legacy projects, but you haven't raised your ongoing cost of government.

Everything on this list had to be regional, state or national in impact; it had to last more than a generation; and it had to be able to be leveraged.

So we have what we call "leveraged," such as the National Guard Camp Grafton enhancement and expansion. It's Camp Grafton South, which is a thousands-of-acres area where they do testing and military exercises. It can't be used for the weapons systems they have today because it's not big enough.

So our teams from North Dakota, we pay food, housing and everything else, and they go to Camp Ripley in Minnesota, they go to Nebraska and other places to train. We have to pay for all that.

Also, it's important for the BRIC and BRAC (base closing procedures) to have access to training.

Q: What is the appetite in the Legislature for taking dollars from the Legacy Fund?

BURGUM: I would say near zero to take money out of the principal. We were very clear in our address that our budget takes zero dollars out of the principal. It requires a two-thirds vote, and I don't think there is any possible way they could get two-thirds vote to pull it off.

Q: But they seem OK with earnings and interest?

BURGUM: Yes. But our idea was that there is about $300 million available from Legacy; and again, we put it into projects which all have high-impact and high-return and are leveraged. We call this a class of proposals and if these all get approved, then two years from now, there should be another class.

But if we get 20 years down the road and we don't have any oil revenues that are coming in, but we have a big Legacy Fund, maybe 20 years from now the earnings will have to go back to supporting core government services.

For now, when we can match revenues with expenses from other sources, we have a chance to do stuff that really sets us up for the long-term.

Q: Along with the Camp Grafton proposal, you've mentioned other military-related proposals. Can you expand?

BURGUM: We want to introduce, through the workforce council, the occupational licensing (proposal). Utah has signed into law that if you are a trailing spouse of someone in the military - a massage therapist, a physical therapist, an eye doctor, a licensed addiction counselor - when you move to Utah, then you're in business. You don't have to sit on the sidelines.

We actually met one whose husband is at Grand Forks Air Force Base. The spouse is a licensed addiction counselor and can't work. We have to tackle that.

We also announced (during the budget speech) 100 percent tax-free retirement income from military. One of the things that happens is people come here and love Grand Forks and want to live here and are going to retire. If they live in Minnesota, they don't have to pay tax on their pension.

Minnesota, of all places - the land of 10,000 taxes - doesn't have it. We have a border issue. We want them living in North Dakota and staying here.