- Associated Press - Friday, January 22, 2016

BISMARCK, N.D. (AP) - A dramatic drop in North Dakota tax collections due to declining oil activity will force cuts in state government and a likely raid on a rainy day fund to make up for millions of dollars in shortfalls, the state’s top budget writer said Friday.

“It’s obvious that will happen,” Office of Management and Budget Director Pam Sharp said.

The Legislature’s record high $14.4 billion budget for the two years that began July 1 was built last year on economic assumptions that have proven far too rosy. Sharp told the Legislature’s Advisory Council on Revenue Forecasting that overall tax revenues through the first six months of the budget cycle already are about $215 million less than projected.

Sharp last month ordered a new revenue forecast. The advisory council, a 17-member group made up of lawmakers, state officials and business leaders, set new oil price and production assumptions that will be used to craft the new forecast being done by the economic consultancy Moody’s Analytics.

Oil prices, a key contributor to the state’s wealth, have slid by half over the past year and dropped more than expected since the Legislature adjourned in April. The Legislature planned its budget on analysts’ projections that assumed North Dakota oil production would hold at about 1.1 million barrels daily and would sell for $45 to $65 per barrel. Oil has lingered at or below the low end of the threshold since the budget cycle began.

Oil was fetching about $31 a barrel on Friday. The advisory council set new prices for oil to base the forecast on $30 to $43 a barrel over the next 18 months, and predicted oil production would slip to about 900,000 barrels a day by the end of the current budget cycle.

Ron Ness, president of the North Dakota Petroleum Council and member of the advisory council, called the drop in drilling activity in the state “nothing short of ugly.” He said no one in his industy “is real bullish on what oil’s going to do.”

The new forecast that’s expected to be unveiled Feb. 1 will show state revenues falling more than $400 million short of initial projections and enough to trigger budget cuts of 2.5 percent for most state agencies, Sharp said. The state’s Budget Stabilization Fund, which currently holds about $572 million, can be tapped by the governor when tax collections fall short of expectations, though only after agencies endure across-the-board cuts of up to 2.5 percent.

Sharp told reporters “it’s a safe bet” the savings fund also will be tapped by the governor, though some Republican lawmakers have called on deeper agency cuts before attacking savings.

Then-Gov. John Hoven tapped the savings fund in 2002 and former Gov. George Sinner did so during the 1980s, due to depressed prices for crops and oil.

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