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Public Statements

2011-2013 Executive Budget Address

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The Honorable Jack Dalrymple
Governor of North Dakota

Good morning. I am pleased and honored this year to welcome the members of the 62nd North Dakota Legislative Assembly, Justices of the Supreme Court, Lt. Gov. Drew and Kathleen Wrigley, Senator-elect John and Mikey Hoeven, elected officials, cabinet members, state employees, First Lady Betsy, and my fellow North Dakotans.

At the outset, I want to thank the staff of the Office of Management and Budget, our cabinet agencies, and our staff in the Governor's Office for the hard work, diligence, and thoughtfulness they brought to the job of building our new budget.

Together, I believe we have produced a budget for the people of North Dakota that is farsighted and pragmatic, a budget that will continue to lead our state forward. (Chart 1, see URL link)

In drafting our last budget, we were guided by three key objectives that, I believe, have served us well in the current biennium. We have set those same objectives for our new budget as well. They include funding priorities; setting aside adequate reserves for a rainy day; and providing additional tax relief for the hard-working men and women of North Dakota.

At the same time, we have identified some new areas of emphasis designed to build on our progress. I will discuss those in the course of my address.

Today, I am pleased to present the results of our efforts -- the 2011-2013 executive budget.

The Big Picture

I'll begin with an overview of our budget plan.

Due to our growing economy, both our ongoing revenues and our reserves have shown gains since the beginning of the current 2009-2011 biennium, and that growth is forecasted to continue into the next two-year cycle, as well.

As always, we have carefully examined our revenues and expenditures, and we have taken care to ensure that our ongoing revenues exceed ongoing expenditures, as you can see in Chart 2 (see URL link).

In the 2011-2013 biennium, our General Fund ongoing revenues will total about $3.197 billion. At the same time, ongoing expenditures will total $3.185 billion, which is well within our means. Prudent budgeting maintains this structural balance, even as we provide tax relief and build our reserves.

The 61st Legislative Assembly wisely established a special fund, the Property Tax Relief Sustainability Fund, for the purpose of funding property tax relief. This is entirely appropriate.

Comparing the total legislative appropriations for the current biennium, and taking out the property tax relief of $295 million that was previously included in general fund spending, our budget recommendation for 2011-13 represents an increase of 5.6 percent per year.

In total, General Fund expenditures increase by $334 million over the current biennium; however, more than half of this increase is made necessary by having to replace $174 million in decreased federal funding in Human Services alone.

Of that $174 million reduction in federal funds, $105 million is due to a formula change caused by our state's significant increase in per capita personal income, and $69 million is due to the additional expense caused by the discontinuation of federal stimulus funding in the upcoming biennium. Excluding the $174 million in discontinued federal funding, our increase in General Fund expenditures would be 2.7 percent per year.

Our growing revenues are reflected in a projected $84 million ending fund balance for the current biennium. After a transfer of $4.6 million to the Budget Stabilization fund, as required by law, our actual General Fund cash balance going forward is about $80 million.

This Ending Fund Balance is largely the result of higher revenues from sales taxes, which represent approximately 45 percent of all General Fund revenues, and have been generated statewide by North Dakota's growing and more diversified economy. It is also a testament to our careful fiscal management in the current biennium. Remember that only $71 million of our oil and gas tax revenues is allowed by statute to flow to the General Fund.

One-time General Fund Expenditures

We also propose $110 million in General Fund one-time projects, which we can fund out of our ending fund balance and one-time revenues.

Some of our one-time projects are investments in flooded roads, communications equipment, and public safety; some are dedicated to educational infrastructure; and yet others fund innovative research, development, and commercialization of North Dakota products and services. They are investments that will further stimulate economic activity, make our state more competitive, and create more good jobs in the future.

As with our current budget, we exercise prudent fiscal management. We are able to fund our priorities, provide additional tax relief for our citizens, and set aside healthy reserves for the future. Our budget neither borrows nor bonds. And it imposes no new taxes or fees.

Reserves

Now let's turn to a discussion of our reserves, illustrated on Chart 3 (see URL link). On July 1, 2009, North Dakota began the current biennium with a balance of approximately $490 million in the Permanent Oil Tax Trust Fund. After appropriations, we are expecting an ending fund balance of $620 million on June 30, 2011.

In addition, you will recall that the people of North Dakota decided in the last election to establish a Legacy Fund to retain some of our current oil expansion revenues. The Legacy Fund measure sets aside approximately $619 million throughout the upcoming biennium. Beyond that, it will provide revenues for worthy programs and projects indefinitely into the future.

We anticipate total reserves at the end of the current biennium of just over $1 billion. At the end of the 2011-13 biennium, you can see that reserves will have continued to grow an additional $200 million, to a healthy reserve of $1.237 billion, including the new Legacy Fund.

Expanded Tax Relief

With our ongoing and one-time expenditures accounted for, and our reserves secured, our financial position still provides us with the resources necessary to provide additional tax relief for North Dakota citizens, as shown on Chart 4 (see URL link).

In the last biennium, we reduced property taxes by $300 million through a reduction of approximately 75 mills in school district levies, simultaneously raising the state's share of school funding from about 48 percent to the long-sought goal of 70 percent.

We also reduced income taxes by $100 million, resulting in an average 12 percent saving for North Dakota taxpayers.

But we can and should do more. So in the new biennium, we propose expanding the $300 million in property tax relief passed in the last session to a level of $350 million in the upcoming biennium. We also propose expanding the $100 million in income tax relief to a total $150 million in the upcoming biennium. This produces a total of $900 million in cumulative tax relief over two bienniums.

As you'll recall, the 61st Legislative Assembly established the Property Tax Relief Sustainability Fund. Property tax relief in the 2011-13 biennium will be paid for with special fund dollars already deposited there by the Legislative Assembly. We are proposing to use that special fund again to set aside funding for property tax relief in the 2013-2015 biennium.

It is important that the hard-working men and women of North Dakota see a substantial share of our economic gains reflected in their tax bills.

Now that we've reviewed the overall structure for our budget, let's take a closer look at the individual funding priorities within the budget that will help us to maintain and support our growth.

A good place to begin is with North Dakota's emerging infrastructure needs.

Statewide Infrastructure Needs

New economic growth cannot be supported without robust investments in infrastructure, and our budget addresses infrastructure needs in every region of the state. Transportation investments alone come to $1.7 billion statewide. In addition, we are committed to flood prevention in the Red River Valley, control of water levels in Devils Lake, water supply projects throughout the state, and many other public and private sector infrastructure investments. Let's review the statewide plan, beginning with western North Dakota.

Infrastructure Support for Western North Dakota

The remarkable and rapid growth of oil and gas development in western North Dakota, and its associated revenues for the state, has been a welcome, but challenging, element in our economic growth. While jobs and population growth have been a significant benefit to this largely rural part of our state, the extreme wear and tear on roads, and the need for housing and water, demand a response. Chart 5 (see URL link) illustrates what we have in mind.

From the Permanent Oil Tax Trust Fund, we have set aside $229 million solely for state road construction and maintenance in the 17 Oil and Gas Producing Counties. The Department of Transportation will set priorities for its expenditures according to the Statewide Transportation Improvement Program, which has been drafted in cooperation with local officials and engineers.

In addition, we propose dedicating $142 million in funding for county and township roads in oil country, also from the Permanent Oil Tax Trust Fund, to address extraordinary road reconstruction needs.

These funds will be distributed to counties based on road conditions identified by a comprehensive study, which was just recently finalized by the Upper Great Plains Transportation Institute, and also by the DOT's observed conditions of the roads. Further, we recommend that the legislature approve these funds with an emergency clause to enable the affected communities to commence projects immediately.

In addition, we propose an increase in funding for the Oil and Gas Impact Grant Fund to $100 million. This fund would fall under the authority of the State Land Board, advised by the Energy Development Impact Office. All entities experiencing impacts from oil and gas development can apply for funding to help mitigate those effects.

Of this $100 million, we would like to see a large share, $35 million, reserved for the largest and fastest growing cities. The balance of $65 million would be available to the smaller cities, counties, townships, and other entities in the oil and gas producing areas of the state. It's important to note that this funding is also available to address the pressing need for housing infrastructure, including municipal water lines, sewer lines, and other residential construction needs.

Also, the Oil and Gas Gross Production Tax formula will generate an additional $80 million for the affected counties over the course of the next biennium, for a total of about $247 million. This funding is allocated to counties, cities, schools and townships.

Finally, in addition to the special needs projects I have just outlined for you, an additional $240 million in regular state and federal highway funding will be dedicated to projects in the Williston, Minot and Dickinson DOT Districts, to address construction and extraordinary repairs. This includes "Super-two" construction on U.S. 85 along with other projects in these western districts. Counting the regular highway funding committed to these Western Districts, we are providing $958 million altogether for infrastructure in oil country. Most of this funding is, appropriately, from revenues generated by oil and gas development in the western part of our state.

This region of North Dakota is doing their share to build North Dakota's economy, and we need to do our share to help them with their challenges of growth.

Statewide Infrastructure Support

While western North Dakota's infrastructure needs are clearly pressing, no less important are the infrastructure needs of other parts of our state, notably the Devils Lake region and the Red River Valley, where flood waters threaten homes, businesses and livelihoods on an annual basis.

In the Red River Valley, flood protection is an essential, long-term priority. We need to end the annual anxiety caused by chronic flooding, especially in the Fargo-West Fargo area.

As they work to design a flood diversion project, today we reaffirm Governor Hoeven's commitment to fund one half of the non-federal, non-Minnesota share of the cost of the project. We expect the total project cost to be in the vicinity of $1.5 billion, depending on the final design, and the state of North Dakota's share to be about $300 million over 10 years.

To cement that commitment, our budget sets aside an additional $30 million from the Resources Trust Fund for a total of $75 million in initial funding. This will ensure that state resources are readily available to begin flood protection work as soon as a plan is finalized. We cannot expect our citizens in the Valley to endure every year the stress and hardship of battling the Red River

Similarly, we need to address continued flooding and the potential for an uncontrolled release of water from Devils Lake. This is vital not just for the City of Devils Lake, but also to protect downstream communities, including Valley City, Fargo, and people in Minnesota and Canada.

We propose to commit up to $120 million from the Resources Trust Fund for a major expansion of our flood protection efforts around Devils Lake. This funding will be used to construct a second outlet on the east end of Devils Lake, expand the existing outlet on the west end of the lake, and build a control structure on Tolna Coulee, the most likely site of an uncontrollable release. The combined capacity of the two outlets would be approximately 600 cubic feet per second.

Additionally, we have budgeted significant one-time sums to mitigate impacts in the lake region, such as improvements to the Grahams Island road and other roadways. We have worked hard to protect the residents of Devils Lake from continued hardship, and the new plan we have developed will help. With cooperation from the federal government and our neighbors, we will implement it as soon as possible.

Water Supply Infrastructure Projects

Our infrastructure plans also include measures to protect beneficial uses downstream of Devils Lake. Last year the state awarded nearly $15 million to Valley City to expand and improve its municipal water supply facility. Currently, the city's water treatment plant does not remove sulfates and other minerals.

The new facility will use a reverse osmosis filtering system that will result in significantly higher water quality, and will provide enough reserve capacity to allow for community growth. We will also support additional funds for water discharge facilities.

We have also identified substantial water supply needs in western North Dakota, where oil and gas development is creating new demands on water supplies in the Williston area. We propose committing $25 million for the Williston region toward the building of a new municipal water supply system that will serve not only the local community but also growing industry needs in the region.

To support these and other water projects, we recommend committing more than $235 million primarily through the Resources Trust Fund for essential water projects throughout our state, plus another $149 million of carryover funds for existing projects. New projects include the Valley City and Williston water supply projects that I just mentioned, as well as future projects in Fargo-West Fargo and elsewhere.

Additional Infrastructure Support

We must be mindful that all areas of our state have important infrastructure needs, including the south central region and the northern Red River Valley. These needs may not be as obvious as others, but they are no less important, and our budget is committed to addressing them in the Department of Transportation budget.

We propose dedicating 25 percent of the state Motor Vehicle Excise Tax to the State Highway Distribution Fund, rather than the state Highway Fund. That represents an additional $46 million for roads, $17 million of which will flow directly to counties, cities, and townships.

Industry Infrastructure

Finally, encouraging private-sector infrastructure investments in projects like oil and gas pipelines, electrical transmission lines, and other infrastructure necessary to get our energy products to larger markets are central to maintaining our economic strength.

Over the past decade, we have helped to build North Dakota's energy industry across all sectors using a comprehensive energy plan called Empower North Dakota. We also established a Transmission Authority and Pipeline Authority to facilitate new projects. Our budget continues to support these important tools.

Whether it's wind power, biofuels, petroleum or coal-based electrical generation, we must continue to work hard to realize our energy potential, and in doing so, our potential for the entire state.

Preparing Our Youth For Tomorrow

The infrastructure projects we've just discussed are vital to a growing and dynamic state, but not all infrastructure consists of asphalt and concrete. Some infrastructure investments seek to build a strong intellectual and technical knowledge-base on which to build a productive and modern workforce.

Much of this work was begun by the Governor's Commission on Education Improvement, which I had the honor of chairing for Governor Hoeven, and our budget continues to make these kinds of investments. Our work brought about the greatest reform of K-12 funding in our history, and now we must finish the task. Chart 6 (see URL link) illustrates our plan.

K-12 Education

After completing our work on equity in 2007, the commission has continued to work on education adequacy, and will now propose significant improvements in the quality of instruction in our schools. To achieve this, our budget proposes an increase of $102 million.

That figure includes $54 million to finish the work on adequacy we began in the current biennium, as well as $32 million to fund an increase in the per student payment of $100 for each year of the biennium.

Now that we have strengthened our core curriculum and established scholarships for student performance, the Commission is bringing forward a voluntary system of Alternative Teacher Compensation designed to reward teachers for achieving improved student success by improving teacher proficiency.

Achieving student success means having a highly effective teacher in the classroom every day. An Alternative Teacher Compensation System will provide for supplemental teacher pay based upon multiple components including, for example: hard-to-staff positions; added knowledge, skills or professional development; student educational growth; and added responsibilities such as mentoring, coaching or instructional leadership.

The plan will be developed locally by teachers and school boards. No teacher will suffer a reduction in pay as a result of these voluntary plans for supplemental performance pay. The commission believes that we can no longer compensate teachers solely on the basis of years of service. We must take a first step in beginning to reward teachers for good performance in the classroom.

Higher Education

But in today's world, it is no longer sufficient to talk about K-12 education and higher education as though they were two discrete entities. Modern education is a continuum along which students acquire knowledge and skills that help them find not just jobs, but careers.

Our budget proposes an increase of $82 million in ongoing funding and $46 million in one-time funding for the 11 campuses of the North Dakota University System. This should enable the university system to hold the cost of tuition even at two-year institutions and to no more than a 2 ½ percent increase at four-year institutions.

We include in our ongoing budget $10 million in merit-based scholarships for students who perform well in high school based on grades and ACT scores. This scholarship, combined with the $19 million already in the base budget for needs-based scholarships, will provide nearly $30 million to help students cover the cost of a postsecondary education in North Dakota.

Our one-time expenditures include a shared system-wide data center on the University of North Dakota campus; funding for the Stoxen Library at Dickinson State University; and the final phase of the North Dakota State University greenhouse.

Additionally, our budget proposal includes a new science center at Valley City State University and a much-needed renovation of Old Main on the campus of the North Dakota State College of Science in Wahpeton.

The state-of-the-art greenhouse at NDSU is a farsighted investment our state has made in North Dakota's agricultural sector. D.C. Coston, North Dakota State University's vice president for Agriculture, told me that this facility is unequalled in the nation. It will attract the world's leading ag researchers and keep North Dakota farmers globally competitive far into the future. This is our commitment to our state's largest industry: agriculture.

Finally, our budget includes $5 million for a new and exciting approach to higher education funding, an approach based on the actual educational outcomes desired by education leaders and the citizens of North Dakota.

In the new biennium, the Board of Higher Education will be asked to develop a new methodology to distribute funds to campuses based on meaningful educational results, such as an increase in the number of degrees awarded; an increase in the number of students graduating on time; the number of degrees completed by low income students; and the number of students transferring from two to four year schools.

I will ask the Board of Higher Education to work with me in establishing a new Commission on Higher Education Funding to develop recommendations to improve the equity, the transparency, and the effectiveness of higher education funding.

Our recommendation for higher education also includes a salary increase of 3 percent and 3 percent, with 1 percent devoted to fortifying the teacher fund for retirement. We propose that the state of North Dakota match that 1 percent, and fully fund the increase in employee health insurance. Our proposal for K-12 education will also allow school boards to make a similar commitment to teachers and the Teachers Fund for Retirement.

Quality of Life and Taking Care of People

As we focus on competitiveness and the details of building a strong economy, we must not lose sight of the fact that the ultimate objective is a higher standard of living and a better quality of life for all North Dakotans.

Law Enforcement and Public Safety

As North Dakota grows, in both commercial activity and population, we are determined to retain one of North Dakota's most valuable assets -- one of the lowest crime rates in America.

Our budget recommends $2.2 million for equipment on six towers to expand the communications infrastructure for state radio, our state's network for public safety. This will also benefit cell phone coverage in gap areas of our state.

In addition, our budget recommends committing $4.1 million for the construction and equipping of an expanded Highway Patrol Training Academy. And to cover the needs created by more traffic in our state, both commercial and private, we are recommending the addition of three new Highway Patrol Officers.

We will also welcome legislation from the assembly in regard to a tiered or graduated driver's license program.

The public safety of our citizens must always be foremost in our minds.

Health and Human Services

We also need to make investments that help take care of people. We have all been alarmed by headlines recently about teen suicide rates, especially on our Native American reservations. These highlight the need to make more resources available for critical mental health services for our citizens.

Our budget recommends an increase of nearly $8 million across several agencies to address the mental health challenges facing some of our citizens.

This funding includes $6.1 million for the Department of Human Services to fund psychiatric inpatient care; additional local resources to help stabilize patients suffering a mental health crisis; and more resources to treat chemical dependency.

We recommend $1 million in funding for the suicide prevention efforts of our Department of Health, including outreach, education, and administration of grants to communities for suicide prevention activities.

These funds will also be available to North Dakota's Native American Tribes, but separately, we recommend providing the Department of Indian Affairs with an additional $100,000 to help fight the tragedy of youth suicide on our reservations.

Our budget also provides approximately $900,000 in funding for our campuses and high schools to help address mental health problems among students. This will be used to establish at least one mental health officer per campus to help students, and to fund the "STOP the Violence" program at the Department of Public Instruction.

The physical and mental health of our citizens is always a top priority.

Long Term Care and other Healthcare Providers

Our budget also addresses the needs of our seniors, the men and women who built our state.

In the last legislative session, we worked closely with providers to rebase our Medicaid reimbursement rates and square them with providers' actual costs. This resulted in a $67 million cost adjustment for hospitals, doctors, dentists, chiropractors, and ambulance services.

To sustain that progress, we propose a 3 percent increase in each year of the new biennium for nursing homes and other health care providers, as well as for providers serving people with developmental disabilities and mental illness. This will help them to address rising costs, recruit and retain quality caregivers, and maintain the outstanding quality of service they provide to our citizens.

Military and Veterans

Over the generations, our men and women in uniform have faced unprecedented challenges, both here at home and abroad, most recently in the Global War on Terror. They have met those new challenges with the courage, dedication, and distinction that we have come to expect and admire in our military. We owe them our deepest gratitude.

We have worked to help them and their families meet the personal challenges they encounter when they get home. Over the decade, we have established a Veterans Appreciation program, including bonuses for overseas and domestic service, scholarships, counselors, and other initiatives that show our appreciation to these brave men and women in tangible ways.

Our budget fully maintains funding for all of these programs, and adds a new outreach center for veterans and service men and women in Fargo.

In addition, we continue to support our veterans of all wars in their senior years. In the last session, we also enhanced funding for the North Dakota Veterans Home in Lisbon, a beautiful new $35 million facility that is scheduled for completion in the spring of 2011.

Whether it's here in North Dakota fighting floods or tornadoes or overseas in a warzone fighting terrorism and extremism, the North Dakota National Guard and all of our branches of military service are there for us. We need to make sure we're there for them by showing our appreciation in real ways.

Would all veterans in the audience please stand so that we may express our gratitude for your service.

Public Employee Salaries and Health Insurance

In past bienniums, we have done our best to recognize the valuable contribution our public employees make to our state. They provide our citizens with a well-run, efficient state government.

Our budget proposes a 3 percent salary increase in each year of the new biennium, and in addition, fully funds the increase in public employee health care premiums.

Although North Dakota has not experienced the full brunt of the national recession, one important area where we have felt the impact is in our public sector pension funds, which are dependent on the performance of larger national and international financial markets.

To fortify these funds, we have -- in conjunction with the Employee Benefits Committee -- allocated one percent of the salary increase each year to the Public Employee Retirement Fund, and matched it with one percent contributed by the state of North Dakota.

The men and women who serve in our agencies are hard-working North Dakotans, committed to providing quality services to their fellow citizens, and we truly appreciate their work.

Continued Aggressive Economic Development Is Vital

Finally, we would not -- could not -- be in a position to fund any of these important priorities, had Governor Hoeven and I not made economic development and job creation priority number one over the past ten years. Aggressive economic development is what makes all of our worthy programs possible.

By following a strategic plan for economic development; by building the strongest business climate possible; and by establishing effective tools like the Department of Commerce and the North Dakota Trade Office, we have been able to grow and diversify our economy. This strategy, combined with good fiscal discipline and a solid partnership with the private sector, are the reasons for our current surplus and solid financial situation.

In our budget, I propose that we continue to make the kinds of investments that will further grow our economy, some of which are tried and true, and others that break new ground. Let's start with energy.

New Office of Energy Development

Energy was designated as one of the five targeted industries in our strategic plan for economic development drafted nearly a decade ago.

As a result, we've grown wind energy in North Dakota from less than a megawatt when we started in 2000 to nearly 1500 megawatts built or under construction by 2009. The story is similar with biofuels. When Governor Hoeven and I began, North Dakota produced less than 40 million gallons of ethanol annually, and no biodiesel. Over the decade, we increased that capacity ten-fold; today, we can produce nearly 500 million gallons of biofuels every year in North Dakota.

When we began, oil companies were leaving the state. So we established the state Oil and Gas Research Fund and Council, established sensible incentives, and worked to cultivate North Dakota's oil patch. Today, we are second only to Texas in land-based drilling activity.

As a next step, we now propose establishing a new division within the North Dakota Department of Commerce. We recommend funding this division with $600,000 from the General Fund.

The division will be headed by a new Director of Energy, whose entire focus will be to promote the development of all of North Dakota's energy resources, work with communities on infrastructure, and administer energy programs to help the various energy producers move their projects forward rapidly for the benefit of all North Dakotans throughout our state.

The potential for energy development in our state is so great that we need a full-time director leading the energy effort.

ND Trade Office

Just as our energy industry has met with success so have North Dakota's exporters. North Dakota exports grew nearly 250 percent between 2000 and 2009. During the same time period, the nation's exports grew just 35 percent.

It has been my privilege to serve as chairman of the North Dakota Trade Office, and I must say it has more than paid its way in terms of increased economic activity and revenues for the state of North Dakota. Our budget, therefore, recommends increasing funding for the Trade Office by about $490,000 to continue its successful activities in marketing North Dakota businesses, products, and services to the world.

In particular, we recommend funds to acquire services in shipping logistics for all North Dakota exporters to master the great complexity of serving customers throughout the world. We also recommend supplying services to all entrepreneurs seeking assistance in capital formation.

Centers of Excellence

North Dakota's Centers of Excellence program is another success story. As you know, the Centers program is built on the concept of partnering the research capacities found in our public colleges and universities with private-sector companies to generate jobs and new business opportunities.

To perpetuate this success, our budget recommends extending the Centers of Excellence program with an additional $20 million. We also recommend structuring the centers by type to include Centers of Entrepreneurship Excellence, Centers of Research Excellence, and Centers for Workforce Excellence. This would correspond more closely with the missions of our various colleges and universities and enhance the effectiveness of each center.

Building a Budget for Continued Growth

Over the past ten years, we have stood together to make the kinds of investments that have helped us advance our state and meet the challenges of competing, and competing well, in the national and international economy. We have made progress even as other states have struggled just to hold their ground. Today, I ask you to work with me to build on that progress.

Our budget continues to fund our important priorities for growth and provide ongoing tax relief for our citizens. Further, it creates a strong reserve for the future so that we can better preserve our advances, even in challenging times.

This budget has been prepared with the help of my years of experience in farming, business, education, and state government. Furthermore, my 16 years in the House of Representatives, and 10 years in the Governor's Office, have given me a unique perspective on the needs and enormous potential of our state. I have developed a great faith in this process. As we prepare for the hard work ahead, I look forward to working with all of you.

Thank you. May God bless you as you undertake this important work for the people of our state.


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