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While most states were forced to make severe cuts in the face of budget shortfalls during recent sessions, North Dakota looked forward to an estimated budget surplus of 1.2 billion dollars. For just about any state, much less one with fewer than 700,000 residents, that’s no small feat.
And why not? North Dakota had a fabulous ag commodity yield in 2008. It benefits from oil reserves at a time when global oil prices are rising. It didn't suffer the flip side of the housing boom because there was no housing boom there; the subprime home mortgage market never rose above 2.7 percent. Unemployment is less than half the national average in North Dakota.
Yet North Dakota’s success has is do to more than luck alone—prudence and planning played an indispensable role.
“I’m not comfortable calling this a windfall,” said state senator Judy Lee in a recent interview during her two and a half hour long commute back home from Bismarck to West Fargo. “Texas is in the hole and they’re ag and energy too."
North Dakota’s ‘windfall’ then, according Senator Lee is a combination of fortune and foresight. For sure, North Dakota benefited from the high price of oil: As long as the price per barrel remains above 50 dollars, industry can continue to extract oil from the shale formations found in the western portions of the state using a relatively expensive horizontal drilling technique. And 2008 was good for crops too, “unbeatable,” Lee says. But in terms of North Dakota’s response to these market conditions, the state left nothing to chance. North Dakota was ready to take advantage of the situation, having previously made the necessary investments in infrastructure to capitalize on the shift in oil prices.
In his 2009 State of the State address Governor John Hoeven stressed the fact that the state benefited from long-term planning, “eight years ago North Dakota didn’t have funding in its reserve account. Together with purpose and a plan, we not only took the steps necessary to grow and diversify our economy, but also to build our financial reserves.”
But the state—home to more than visionary leadership—appears to have another trick up its sleeve: North Dakota is the only state in the nation to operate and own a state bank—a tool some say was essential to North Dakota’s ability to remain above water during the credit freeze following the collapse of Wall St. financial firms. Governor Hoeven served as the Bank of North Dakota’s president and CEO from 1993 to 2000, so he’s familiar with the capabilities of the institution.
It’s true, Eric Hardmeyer, the Bank’s current CEO explains, that the Bank plays an important role in providing liquidity to the market, but that’s not its primary purpose. Acting as a “banker’s bank,” the Bank of North Dakota is an important player in North Dakota’s secondary loan market, buying up loans originating with banks within the state, in turn allowing the banks to make more loans, and facilitating the circulation of money within the state.
However, the principle mission of the Bank, Hardmeyer says, “is economic development, to enhance and provide financing for industry throughout the state.” And unlike other banks, “profit is secondary.”
Governor Hoeven reflects these statements in a recent interview in Forbes Online, noting that the state must have a “customer-service oriented approach” to economic development. Rather than coercing business to fit within a certain plan for development, Hoeven understands his role to be exactly opposite: “Historically the bank and its program were always trying to come up with a certain program and the ideas was everyone could fit that program and use that program,” and instead the Governor has shifted, “the key is to provide the financing [customers and businesses] need.”
Recently Hardmeyer has fielded a lot of questions from other states about the potential benefits of a state run bank, “the idea of state banks has gone through a sort of renaissance,” he says. Can state banks serve as an “elixir to cure state budget problems?” His answer is direct, “probably not.” But his reasoning less so: Hardmeyer doesn’t think the political will exists today that could match the storm of populism that brought the bank into existence 90 years ago, “getting similar legislation passed through another state’s legislature would prove difficult.”
Besides, a state bank could easily turn out to be a mixed blessing. Like any tool, simply having the institution at the state’s disposal does not guarantee prosperity. And after speaking with Hardmeyer, it’s apparent that what counts is management.
Like a number of banks throughout the country that have collapsed, the Bank of North Dakota could have used complex instruments like credit default swaps, extremely profitable but risky tools for spreading financial risk. But it didn’t. The Bank “didn’t see the need,” Hardmeyer says, instead relying on more conservative and prudent ways to manage its capital. Other banks and Wall St. financial firms, “were playing in areas they didn’t fully understand.” Hardmeyer’s response to that kind of behavior is simple, “if you don’t get it, don’t do it.”
So what keeps North Dakota on track? For Hardmeyer it isn’t fortune, more like a sense of responsibility to the state. From a banker’s perspective, Hardmeyer describes his job as existing in a “fishbowl, with the weight of the whole state looking at you […] making sure he’s doing things right.” A sentiment that resonates with Governor Hoeven’s own “service-oriented” approach.
For a state that’s experienced its share of hard times, it’s understandable why prudence seems to have played an important role in North Dakota’s success. Rather than a shield against hardship, the state’s “never-fancy culture” may in fact be the key to North Dakota’s prosperity.
Even amidst the prospect of a $1.2 billion surplus, North Dakotans’ aren’t letting the money go to their heads. While unwilling to attribute the state’s prosperity to serendipity alone, many are wary of profligacy that could lead them to trouble should there be an unforeseen downturn in the state’s future. When asked whether he thought North Dakotans would put pressure on legislators to spend the money quickly, Randy Schwartz, a real estate agent based in Fargo, mentioned the failure of a recent proposal to mandate spending, “we didn’t go for it.” When pressed, Mr. Schwartz fell back on North Dakotans’ sense of prudence and practicality, “there’s no other way to explain it […] it’s good today, yet there’s no guarantee for tomorrow.”
