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Thursday, February 07, 2013


In 2010, North Dakota voters approved the establishment of the Legacy Fund, a constitutionally mandated state savings account that would collect 30% of all oil tax revenues.  The fund, however, did not have a defined purpose.

House Majority Leader Al Carlson (R-Fargo) is the prime sponsor of HCR 3018, which would place another measure on the November 2014 ballot to start outlining the purposes of the legacy fund.

As written, HCR 3018 is a very good start to defining what the Legacy Fund should be used to fund.  It would place $10 million each biennium from the interest and earnings of the Legacy Fund into a college scholarship fund for North Dakota high school graduates.

Representative Carlson, as well as the other sponsors (Reps. Bill Devlin, Mike Nathe, Mike Schatz, and Don Vigesaa) should be commended for this approach.

However, given the projected balance of the Legacy Fund, and assuming a reasonable rate of return for its investment, this good first step could be made even better by taking a bold approach to reducing the burdens of North Dakota taxpayers and their student children.

According to state projections, the balance of the Legacy Fund by the end of the 2013-15 budget cycle will be nearly $3 billion; and balance of nearly $5 billion by the end of the 2015-17 budget cycle, when the interest can begin to be allocated toward appropriations.

If the fund was invested in a way to generate only a 4% annual return (which is half the expected return of the state’s pension funds), this would generate $200 million per year via interest and earnings (assuming a $5 billion balance starting in 2017).  At that conservative and minimalistic return rate, there would be enough revenue being generated by the fund to cover the cost of college tuition for all North Dakota high school graduates (assuming tuition costs do not return to the growth levels experienced before 2008).

Representative Carlson and the others are correct about where the earnings (tuition reduction) and where the interest of the fund should be directed, the only questions are how to achieve a safe level of return on investment, and the scale to which the fund will be directed.

Furthermore, with the speed to which the Legacy Fund is growing, it would be pragmatic to also look at where interest and earnings of the fund should be directed once college tuition for North Dakota high school graduates is eliminated. 

From a pro-growth standpoint, the state income tax would be the next logical target for elimination.  Since 2008, state personal income tax rates have been reduced by 28% via legislative action, and corporate tax rates have been reduced by 22%.  The legislature should maintain this current track of rate reductions, and also plan for Legacy Fund earnings to eliminate the remained of the income tax in the state, following the elimination of college tuition for North Dakota high school graduates.

The big assumption for this vision is a continuation of high-level oil tax revenue for the foreseeable future.  While this is probably wishful thinking given the volatility of the world markets, Governor Dalrymple overall budget trajectory also relies on this assumption for its overall sustainability.  Thus, if the assumption for continued high-level oil tax revenue growth is good enough for the overall budget, it should be good enough for the development of the Legacy Fund.

Based on these assumptions, it is conceivable that the interest and earnings at a meager 4% rate of return could facilitate the elimination of both college tuition for North Dakota high school graduates as well as the elimination of corporate and personal income tax at the state level, by the early part of the next decade.

If there is a better vision for the legacy of this oil boom, let the discussion start now.

Because the last thing we need is for the Legacy Fund to be used to bailout the failing pension funds.

Dustin Gawrylow

Managing Director,
ND Watchdog Network



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