Introduction: North Dakota has long touted itself as a state with a pro-business attitude, aversion to governmental regulation and home to a citizenry who possess a “can-do” independent spirit. Interestingly this sense of individualism and aversion to governmental intrusion has not prevented North Dakota from owning and running its’ own grain mill and elevator, utilizing America’s only state-owned bank to stimulate economic development activities around the state and being one of the largest net recipients of per capita federal transfer payments!
Minnesota, in contrast to North Dakota, had been criticized as a high tax, high spend, and high regulation state. Minnesota responded to critics by comparing its population and economic growth rates to those of several other states in the Midwest Region. Minnesota grew while others lagged, providing quality infrastructure and facilities, diversity of its economic base, investment by several Fortune 500 companies, the University of Minnesota and MNSCU, the cutting edge healthcare from Mayo Clinic and the availability of a highly skilled and educated workforce throughout the state.
Border City Legislation 1982: During the 1970s and into the 1980s, while Minnesota’s prosperity exceeded that of other states in the Midwest, that had not been the case for several northwest Minnesota cities situated along the North Dakota border. Moorhead and the cities of East Grand Forks, Dilworth and Breckenridge have struggled to compete with their North Dakota neighbors. What had been believed to be the product of vastly different public policies between Minnesota and North Dakota, primarily in the areas of property and income tax policy and regulation was causing these Minnesota communities to experience a loss of population, loss of business and loss of overall economic vitality to their neighbors across the border. Pursuant to Chapter 523, Article 42, Laws of Minnesota, 1982, the Minnesota Department of Energy, Planning and Development was directed to study what was characterized as a “growing public discussion and controversy concerning the implications of disparate state fiscal policies on Minnesota’s western border.” The study identified seven Minnesota cities that shared corporate boundaries with cities in other states and the February 1983 final report became the foundation for Minnesota’s Border City Program.
Fast Forward to Present Day: One could argue that over the past few years Minnesota may have lost a little of its edge or reputation as the go-to state when it comes to effective governance and enlightened public policy and “getting the job done.” Wild swings in state budgets, ranging from surplus and rebates to spans of budget shortfalls took its toll on investor and consumer confidence, as did government shut-downs. There is now, however, reason for optimism. Signs point to a recovering and growing state economy, and it appears the building blocks are in place and the state is on the right track. Will the state’s stable, predictable fiscal policy provide the foundation for sustained economic growth by encouraging private sector investment and stimulating consumer confidence? Only time will tell. Yet, with respect to Minnesota’s Border Cities, the competitive challenges from their North Dakota neighbors will likely increase and these Minnesota cities will rely on the state’s Border City Program to maintain a semblance of equilibrium in the market.
Black Gold: Are we to conclude that North Dakota will simply be North Dakota, capturing some of the economic activity along the border and will remain of modest relevance and limited threat to the State of Minnesota? And, Minnesota, having once led the region with a robust economy only to experience a period of turbulence, is now returning to the top? The answer would likely be yes, if all things were equal. But, things are far from being equal. One factor seems to have changed everything and that factor is oil.
With the advent of new technologies (hydraulic fracturing and directional boring) to extract shale oil, in a period of only ten years North Dakota has increased oil production 11-fold from 83,000 barrels of oil per day to 900,000 barrels of oil per day. The State of North Dakota will soon become the number one oil producing state in the country! Every major oil company in the world is currently drilling in western North Dakota and projections are that given the quantity of recoverable oil, this boom will last at least three decades. Oil is yielding tax revenue and a lot of it, at all levels. While North Dakota must continue to make significant public expenditures in the “oil patch” to provide the basic infrastructure necessary to support the oil industry and the communities and residents of the area, it appears North Dakota can and will meet the challenges presented by the oil boom as revenues are pouring into North Dakota state coffers. Even accounting for dedicated “trust funds” that receive direct contributions from oil extraction taxes with state/constitutional use restrictions; the state’s general fund is experiencing surplus after surplus. For example, at the beginning of the 2013 North Dakota biennial legislative session, the state’s general fund had a surplus of approximately $1 billion. To place in perspective the magnitude of this years’ $1 billion surplus it would equal nearly $1,500 for every resident in the state of North Dakota. In Minnesota, with a population of 5,000,000 the equivalent level of budget surplus would be $7.5 billion! These funds were used by the Governor and legislature to fund many important initiatives, one of which was to continue a program of state-financed buy-downs of local school property taxes. As North Dakota approaches the next biennium, the North Dakota Office of Management and Budget projected yet another surplus in the state’s general fund on June 30, 2015 of nearly $200 million. Will these North Dakota surpluses continue to occur? Will they occur frequently? Periodically? Once in a while? Just how significant is a $1.6 billion surplus anyway? Maybe it’s like Senator Everett Dirksen once quipped “a billion here, a billion there and pretty soon you’re talking about real money!”
Certainly, Minnesota Border Cities are feeling a demonstrable change due to the effects of North Dakota oil. The “border” market place appears to lack a degree of confidence in Minnesota. Private investors point to the extended periods of Minnesota budgetary problems and question the likelihood that these problems are now solved and whether the state is positioned to achieve sustainable long-term economic growth. These observations are being made against the back-drop of a neighboring state which many believe has found the pot of gold at the end of the rainbow. In a scenario too often repeated, investment capital is flowing to western North Dakota attracted by little risk, little regulation and significantly above-market rates of return. As a Border City, this lack of investment capital is extremely problematic. Without question, the North Dakota oil boom is drastically and negatively changing Moorhead’s ability, and that of all Border Cities to maintain a reasonably level playing field on which to compete with our North Dakota neighbors. What’s especially scary is we haven’t seen anything yet! What fiscal, tax and regulatory policies will North Dakota implement over the next thirty years as oil revenues keep flowing? Minnesota’s Border Cities will require “super-sized” tax relief and financial incentives along with regulatory relief at various levels to maintain a degree of competitiveness.
Next Steps: The purpose of this report and today’s meeting is to focus on the question:
- Has anything or has everything changed because of North Dakota oil?
- Specifically, has the economic threat of disparate state policies which thirty years ago prompted establishment of Border Cities legislation, now expanded to the entire state? If something (or everything) has changed, what specifically is it that has or may change and who is affected by the change?
- Is the change for better or worse?
- Does the change constitute both a threat and an opportunity?
- Is the change sustainable?
- Over what period of time?
- What variables influence the change?
- What is Minnesota’s response to the change?
To answer complex, critical questions such as these will require extensive and sophisticated analysis, conducted by an organization with the expertise and credentials to understand both Minnesota’s economic and fiscal position as well as the complexities of the oil industry. Please consider the work of IHS Global Insights (www.IHS.com) in this regard. Furthermore, recognizing the reach of the North Dakota oil boom is well into Minnesota already, a survey of Minnesota businesses to determine how they are affected is suggested. This would be particularly important in identifying private sector opportunities, public policy revisions, if any, to support same and to assure these opportunities can stay and possibly expand in Minnesota.
Thank you all in advance for attending this important meeting and for your continued commitment to the great state of Minnesota!
Deputy City Manager/Director of Community Services – City of Moorhead
- Category: News
- Published: 20 November 2013