State Budget Challenges in the Wake of the Coronavirus Pandemic

We are living through an unprecedented time that will forever be etched in our memories. It is a time of uncertainty and rapid change. The factors that cause us anxiety and concern in our personal lives ripple through our economy and cause uncertainty for business owners, employees, and all levels of government. It is, of course, an incredibly difficult time to predict the future and develop revenue forecasts for the upcoming biennium. We are, nonetheless, forced to develop a revenue forecast that is conservative and reasonable, as well as an executive budget plan that makes the best use of those resources, balances planned expenditures and revenues, funds essential government services, and invests in new initiatives that create efficiency and improve government services.

The budget challenges we face are significant, and not always easy to explain. There are many different factors that together create the challenge ahead for the 2021-23 biennium. Here are some answers to questions I am frequently asked that may add clarity to the budget challenges we face:

• If the budget situation is so dire, why are we not seeing budget reductions for the current biennium? The legislative appropriation was based on a very conservative revenue forecast. Prior to the pandemic, the state was on pace to exceed this forecast by a significant margin. Through March 2020, eight months into the 2019-21 biennium, sales tax revenues exceeded the forecast by 9%. This gave us a sizeable cushion that has allowed us to weather some of the COVID-19 downturn. Although major sources of ongoing state revenues are expected to decline for fiscal year 2021, some revenue sources, such as gaming taxes, interest income, and legacy fund earnings, are expected to increase and offset decreases in other areas.
• Oil price and production seems to have recovered, so why is the revenue forecast down for the 2021-23 biennium? Oil and gas tax revenue is expected to decline for 2021-23. Despite some recovery in price from the extreme lows experienced in early 2020, prices are expected to remain much lower than prior to the pandemic. The original forecast for 2019-21 was $4.9 billion, the revised forecast is $3.4 billion. For the 2021-23 biennium, oil and gas tax collections are estimated to be around $3 billion, roughly 60% of the original 2019-21 forecast and only 50% of the 2013-15 biennium peak.
• What is the impact of COVID-19 on state revenues? There is no clear answer to this question. Our revenue forecast assumes the most severe impact from now through the first quarter of 2021, then a diminishing impact and an economic recovery beginning in the second quarter of 2021. This corresponds with an expectation that a vaccine will be widely available by the second quarter of 2021 and the impact of the virus will be mitigated. We expect sales and use taxes, our largest source of general fund revenue, to decline about 18% during fiscal year 2021 compared to 2020. Fiscal year 2021 declines are also expected in motor vehicle excise tax, due primarily to supply chain issues, and individual income tax, due to higher unemployment, lower self-employment income, and lower royalty income.
• What is the cause of the budget gap for the 2021-23 biennium? There are varying estimates of the potential budget gap for the 2021-23 biennium. A recent Legislative Council memo identifies it as potentially $735 million. The reasons are manifold and include the projected decline in 2021-23 revenues. A significant factor requires a historical perspective on the state budget. Between the 2009-11 biennium and the 2013-15 biennium, state ongoing general fund revenues grew from $3 billion to $4.4 billion, an increase of almost 50% in just a 6-year period. Although those increases appeared to be on a continuing upward trajectory, declines in the oil and gas industry and other factors combined to reduce ongoing general fund revenues in the 2017-19 and 2019-21 biennium. Now, due to the pandemic, they are expected to be even lower during the 2021-23 biennium. For example, state general fund sale and use tax revenue peaked in 2015 at $1.3 billion. For fiscal year 2023, sales and use tax collections are expected to total $880, million, only 70% of the 2015 collections. For the last two budget periods, the resulting gap in general fund revenues has been filled by transferring available oil and gas tax revenues to the general fund. Due to the current oil and gas downturn, the revenues available to transfer will be significantly reduced.

With these challenges come the opportunity to look at what we do with a new focus on efficiency and continuous improvement. Although these budget challenges are significant, North Dakota is still in an enviable position, with an oil and gas industry that will recover and a diverse economy with many stable areas poised for growth. We are a state with strong reserve balances, including a fully funded budget stabilization fund and a Legacy fund that now tops $7 billion and continues to grow in perpetuity. We will meet these challenges with a budget that is balanced, focused on the reinvestment and reprioritization of existing resources, and invests in tools and processes that make us better and more efficient over time.

RISK MANAGEMENT

Workers Compensation Coverage Across State Lines

State agencies who have employees working in states other than North Dakota (telecommuting), must obtain workers’ compensation coverage in that state. WSI is unable to write coverage for employees that do not work in North Dakota. The Risk Management Workers Compensation Program coordinates the purchase of this required coverage for all state agencies.

As a state agency, and not an insurance company, WSI cannot write coverage for exposure outside the state. WSI may be able to provide limited coverage for North Dakota based employees for a period of not more than 30 consecutive days. See North Dakota Administrative Code § 92-01-02-22.

It is the responsibility of every state agency, whose business operation extends beyond 30 consecutive days into other jurisdictions, to comply with the workers’ compensation requirements of that jurisdiction. State agencies who do not ensure their compliance with the other states workers’ compensation requirements run the risk of being uninsured in another state. If a state agency is deemed uninsured in that other state, the financial repercussions and penalties could be substantial.

Risk Management notified state agencies on July 1 of the need to secure workers compensation coverage for employees working remotely in another state. As the employer, the state of ND must ensure that employees working in another state have workers compensation coverage. Agencies were asked to submit the employee information required to secure the needed out-of-state coverage. Surprisingly, many agencies reported employees that had been working in other states pre-pandemic for extended periods of time and were not previously reported to Risk Management. These employees were working without workers compensation coverage. Again, the cost of noncompliance premium, penalty, and interest fees can be substantial if the regulator of another state finds that coverage should have been secured.

More information can be found on OMB’s website or contact Risk Management at 701.328.7583.

FACILITY MANAGEMENT

Events

Many special events are scheduled throughout the capitol complex this fall and winter, including:

• Veterans Day ceremony
• Decorating the state Christmas tree
• Governor’s official tree lighting ceremony; the Capitol tower window tree lighting will begin immediately after the Governor’s official tree lighting and end on December 31.

For detailed information concerning the date, time and location of these events, as well as all the events scheduled for this fall and coming legislative session, visit OMB’s website.

Projects

Multiple projects around the capitol grounds are in various stages of completion with all projects scheduled to be completed by December 21. The most visible of these projects is the redesign of the south entrance to the capitol. Other projects include:

• Installation of touchless fixtures in all public restrooms
• Installation of a new touchless slider door at the capitol’s west entrance
• Installation of ionizers in all mechanical equipment
• Redesign of the visitors’ parking lot