State Net Capitol Journal – September 2, 2013; North Dakota Leading Energy Tax Trust Fund Trend

State Net Capitol Journal – September 2, 2013; North Dakota Leading Energy Tax Trust Fund Trend

Budget & Taxes

ND LEADING ENERGY TRUST FUND TREND: When North Dakota officials created a fund in 2010 to set aside a portion of the state's oil and natural gas tax revenues for the future they predicted there would be about $600 million in the savings account by this summer. But the Legacy Fund has grown more than twice as fast as that estimate; it now stands at $1.3 billion. And by law the state can't begin tapping it until 2017.

"It is growing very fast. It's going to become much bigger," said North Dakota Gov. Jack Dalrymple (R).

The state isn't the first to establish such an account. That distinction belongs to Texas, which created its $14 billion oil-and-gas-production-driven Permanent University Fund in 1876. And Alaska's $45 billion Permanent Fund is better known, largely because it provides annual cash dividends to the state's residents, $878 each last year. But the Legacy Fund's success is helping fuel a trend in other resource-rich states.

Utah voters approved a ballot measure last fall directing the state to deposit a portion of the severance taxes it collects from mining, oil and gas companies into a trust fund instead of the general fund beginning in 2016. West Virginia recently sent a group of lawmakers to North Dakota to learn more about the Legacy Fund so they can propose establishing a similar account in next year's legislative session. And fracking, the extraction of natural gas from shale, could provide other states the opportunity to set up similar accounts.

The establishment of North Dakota's fund has a lot to do with the state's Nordic roots; a third of the state's residents are of Norwegian descent, and the state's lawmakers say they patterned the Legacy Fund after Norway's $740 billion sovereign wealth fund, the world's largest energy-driven trust fund. Norwegian officials conceived of the fund as a way to extend limited revenue resources, namely oil and gas, into the future, and North Dakota lawmakers seem to have the same idea in mind.

"I'm a firm believer that when you harvest a one-time, finite resource, you have to put away some of that wealth for future generations," said North Dakota state Sen. Dwight Cook (R).

Thirty percent of the state's yearly oil extraction and production taxes go into the Legacy Fund, and any spending of the fund's principal after 2017 has to be approved by two thirds of both houses with the amount of principal that can be disbursed in a two-year state budget cycle limited to 15 percent.

In keeping with the state's fiscal conservatism, lawmakers initially placed the fund's resources in short-term, fixed-income investments generating average returns of 2 percent per year. But after financial consultants advised that a return of 6.6 percent was needed to maintain the fund's buying power, state officials voted to put half of the fund into stocks and the rest in real estate and fixed-income investments.

The state's lawmakers are now starting to talk about how to spend the money, with education a distinct possibility but annual dividend checks to residents as in Alaska unlikely because of the much smaller size of North Dakota's fund.

"You have to be very careful about this. It's a one-time resource," said House Majority Leader Al Carlson (R).

Gov. Dalrymple pointed out that Norway, with "the granddaddy of all endowment funds," still hasn't determined what to do with all of that cash.

"They've really been accumulating money for 20 years, and they're still trying to decide whether to run the country on the money, to give the money back to people, invest a whole lot of money in infrastructure, eliminate all taxes," he said. "If you have a state endowment fund, how do you manage it? We're not really far along either. We're really just beginning to talk about what we're going to do with it." (STATELINE.ORG, STATE NET)

'AMAZON TAX' UPHELD IN CO: Colorado scored a major victory last month in its effort to compel large online retailers like Amazon to collect taxes on Internet sales. A federal appeals court ruled that a lower court had overstepped its bounds last year when it blocked the so-called Amazon tax passed by the state in 2010, imposing extensive reporting requirements on Internet retailers that don't collect the state's 2.9 percent use tax on purchases.

A federal district court had imposed a permanent injunction on the law because it placed an "undue burden on interstate commerce." But the U.S. Court of Appeals for the 10th Circuit ordered the district court to lift the injunction, citing the federal Tax Injunction Act, which directs federal courts not to interfere in state tax matters that can be resolved by lower courts.

"We are satisfied that Colorado provides avenues for remote retailers to challenge the scheme allegedly forcing them to choose between collecting sales tax and complying with the notice and reporting requirements," the appeals court ruled.

The ruling referenced a report indicating that Colorado's state and local governments stood to lose over $172 million last year in un-collected use taxes on Internet purchases by state residents. Consequently, it was no surprise that the state welcomed the decision.

"We are pleased with the court's ruling that DMA's claims should be dismissed and that the state's law should remain in effect," said Carolyn Tyler, a spokeswoman for the Attorney General's office. "We will continue to work with the Department of Revenue to evaluate the implications of [the Aug. 20] decision."

The Direct Marketing Association, which filed the legal challenge to the law, requested and was granted a 15-day extension to appeal the ruling last week. The trade group, which represents about 2,000 businesses, now has until Sept. 18 to file a petition for a rehearing by the full Tenth Circuit Court. (DENVER POST, STATE NET)

CREDITORS OBJECT TO DETROIT BANKRUPTCY: Scores of retirees and creditors, including the American Federation of State, County and Municipal Employees, have challenged Detroit's historic Chapter 9 bankruptcy filing, arguing that it is unconstitutional because it could be used to slash retiree pensions and that Emergency Manager Kevyn Orr didn't negotiate in good faith with creditors before filing for bankruptcy in July.

"The City, led by its unelected, politically appointed Emergency Manager, Kevyn D. Orr, hastily commenced this unconstitutional, unlawfully authorized chapter 9 proceeding seeking the haven of bankruptcy to illegally attempt to slash pension and other post-employment benefit obligations and cram such reductions down the throats of current and former City employees," Sharon Levine, an attorney for the AFSCME, the city's largest union, wrote in a court filing."

Chief U.S. District Court Judge Gerald Rosen, the head mediator in Detroit's bankruptcy, has assigned Portland, Oregon-based U.S. Bankruptcy Judge Elizabeth Perris to mediate the dispute between the city and its creditors. A former bankruptcy appeals judge, Perris has evidently been instrumental in mediating the municipal bankruptcy in Stockton, California.

"She has been invaluable in the [Stockton] case and we have reached some agreements with her help," said Marc Levinson, an attorney for the city. "I'm a huge believer in mediation generally and Judge Perris in particular." (DETROIT NEWS, STATE NET)

BUDGETS IN BRIEF: After five years of recession and recovery, ratings agency Moody's upgraded the outlook for U.S. states from negative to stable last week. State tax collections have risen year-over-year for 13 quarters and strong stock-market performance has bolstered state revenues, Moody's reported (WASHINGTON POST). • President Barack Obama laid out a plan last month to rein in rising college tuition costs by establishing a system for rating colleges on the basis of affordability and graduation rates and eventually tying federal aid to the institutions' performance (WALL STREET JOURNAL. • The U.S. Treasury Department has granted OHIO permission to divert up to $60 million from a fund created to help homeowners avoid foreclosure to the demolition of nearly 5,000 vacant homes instead. The Thriving Communities Institute has estimated there are 100,000 vacant homes statewide that are holding down property values and creating a self-perpetuating cycle of blight (CLEVELAND PLAIN DEALER). • The U.S. Department of Health and Human Services says ALABAMA was overpaid $88.1 million in Medicaid funds because the state's Medicaid agency miscalculated the number of children enrolled in its program in fiscal years 2009 and 2010. The state plans to meet with the Centers for Medicare & Medicaid Services to resolve the issue (MONTGOMERY ADVERTISER).

- Compiled by KOREY CLARK

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