With 324 of the state's 426 precincts reporting, voters were rejecting Measure 2 by 77 percent to 23 percent, the Grand Forks (N.D.) Herald reported.
Andy Peterson, president of the North Dakota Chamber of Commerce and a spokesman for Keep it Local -- a coalition of interests that opposed Measure 2 -- told the newspaper voters "understand that government isn't free."
"They didn't want to sacrifice local government and they didn't want to sacrifice their schools," he said.
Backers of Measure 2 blamed the loss on having been outspent by opponents during the campaign.
North Dakota voters also rejected Measure 3, which would have amended the state Constitution by adding: "Government may not burden a person's or religious organization's religious liberty." As of late Tuesday, the amendment was being rejected 65 percent to 35 percent.
Voters voted overwhelmingly in favor of a measure allowing the University of North Dakota to drop its Fighting Sioux nickname. The university faced NCAA sanctions if it retained the nickname, which the collegiate athletics governing body had determined was hostile and abusive to minorities.