Housing affordability is dinging the state budget

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The Josiah Bartlett Center has warned for the last few years that local government inaction on housing might prompt legislators to restrict local zoning authority. But legislators might have an even stronger incentive to act than the growing public frustration with local land use regulations: Falling revenue.

A combination of high interest rates and an extreme shortage of homes on the market has pushed housing affordability to a two-decade low in the state. Though interest rates clearly play a role, the New Hampshire Association of Realtors points out that supply remains the primary culprit. “It’s a lack of inventory that continues to push pricing to record heights,” the association wrote last month.

Home prices have fallen a bit in New Hampshire since hitting a record in October. But that’s not because the market has improved. Rather, interest rates are keeping some potential buyers on the sidelines, causing a decline in the number of aggressive bidding wars. When interest rates ease, buyers will return to a market still plagued by a severe inventory shortage.

No one knows how long interest rates will remain high. If the squeeze of high rates and low inventory continues to push buyers out of the market, New Hampshire could see a prolonged home sales slump. And that will be felt in Concord. In fact, it already has been.

For the first five months of the 2024 fiscal year, real estate transfer tax revenues are down 20%, or $23 million. That’s the largest decline of any state tax this year. 

We know what some are probably thinking right now. “But what about Interest & Dividends tax revenue?” Eliminating that tax, as state law does by the end of next year, will have a larger impact on the state budget. 

But the I&D tax phaseout is part of a strategy to make New Hampshire more economically competitive. The anticipated tradeoff is that making the state more attractive to investors, retirees and entrepreneurs will generate greater economic activity, and thus greater economic growth, in the long term. 

There is no such tradeoff with falling home sales. A $50 million annual decline in real estate transfer tax revenue caused by falling home sales is simply lost revenue. 

Worse, it reflects shrinking economic activity in an important industry, which will have ripple effects in the broader economy. Lawmakers have made clear that they want state policy to stimulate economic growth. Local policies that hurt economic growth, such as overly restrictive land use regulations, are increasingly being scrutinized by legislators. 

Though state lawmakers and local boards are unable to affect interest rates, they can do something about the housing supply. They can lift regulatory burdens that block or restrict new home construction. 

So far, legislators have been reluctant to preempt local regulations. Yet with  polls showing that most Granite Staters want government to address the state’s housing shortage, pressure is increasing on legislators to act. Falling state revenue by itself probably wouldn’t trigger state action. Combined with rising political pressure to act, though, it becomes another incentive for legislators to do something. 

So local boards (and voters at town meeting) have another warning sign. The longer local governments wait to clear the way for more home construction, the more likely it becomes that legislators will do it themselves. 

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Markets, not judges, set prices, even for education

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There is one and only one way to determine the “true cost” of an adequate education. That is to create a competitive education marketplace. Alas, that is not the approach New Hampshire has taken.

Instead, legislators have tried to set the cost by decree. Public school districts, asserting with some justification that the amount is too low, have asked courts to… set the cost by decree.

Now a court has done so, and the results are as absurd as one would expect.

On November 20th, Rockingham County Superior Court Justice David Ruoff ruled that the Legislature’s decreed amount ($4,100 per pupil; he excluded differentiated aid) was unconstitutionally low. But, he said, the plaintiff school districts’ asserted amount ($9,929) was too high. The actual minimum constitutionally permissive state per-pupil expenditure was, he figured, $7,356.01. 

Note the penny. Such precision carries the weight of both mathematical and legal certainty. 

Except, the entire number, including the penny, is merely a guess offered as a suggestion for legislators to consider because the court lacked enough information to find the true figure. So says… Justice David Ruoff.

“Although the evidence demonstrates that a base adequacy aid level of $7,356.01 would be constitutionally insufficient, the Court cannot set a higher threshold at this time,” Ruoff wrote. “Such a step is precluded by the limitations of the evidence presented at trial, as well as the involvement of certain policy considerations. The Court is confident, however, that the guidance offered here will empower the legislature to meaningfully consider and appropriately respond to the relevant issues.”

Well, glad that’s cleared up. 

How did Justice Ruoff conclude both that $7,356.01 was the minimum threshold of constitutionality and that he had too little information to make such a conclusion?

After reviewing the statutory and regulatory requirements for adequacy, and examining actual school district spending, he undertook the following policy analysis: 

He used “common sense” to guess that some district spending wasn’t essential for adequacy, lopped off an arbitrary percentage from some figures (without examining others that would be relevant, such as public charter school spending), and wound up with a back-of-the-envelope guess that can’t quite be called educated, but probably could pass as educated at a cocktail party if it didn’t talk too much. 

Justice Ruoff tasked himself with deciding three questions:

“[T]here are three inquires before the Court: (I) what are the necessary components or cost-drivers of a constitutionally adequate education, as defined by the legislature, exclusive of additional services provided to students eligible for differentiated aid?; (II) what funding is necessary for school districts to provide those components and cost- drivers?; and (III) how does that amount compare to the funding currently provided via base adequacy aid? As the third inquiry is a matter of simple mathematics, the evidence presented at trial largely focused on the first two inquiries.”

To answer these questions, Ruoff considered state requirements and district expenditures. At no point did the court consider whether there might be other, more effective, more efficient and less costly ways to satisfy the state requirements.

Damning for the decision is that the word “market” appears just nine times in the 69-page ruling. Plaintiffs use it to argue for higher teacher compensation, as competition for good teachers drives up wages, and the court uses it to argue that professional development funds are part of adequacy. 

The word is used to justify higher spending, never lower. That’s odd, given that competitive market forces have been shown to improve productivity and drive down costs in K-12 education. 

  • A 2010 Harvard University Graduate School of Education study found that “competition from private schools boosts achievement and lowers costs.” According to the study, “a 10 percent increase in enrollment in private schools improves a country’s mathematics test scores on PISA by almost half a year’s worth of learning. A 10 percent increase in private school enrollment also reduces the total educational spending per student by over 5 percent of the OECD average.”
  • A 2012 study of open enrollment policies in Wisconsin found that “schools respond to competitive forces by improving quality.”
  • A 2003 study found that “regular public schools boosted their productivity when exposed to competition.” That productivity increase typically took the form of higher performance rather than lowered spending. Nonetheless, the study shows that schools can produce better results without higher spending when competition is introduced.
  • A 2019 study of private schools participating in Wisconsin’s voucher program found that “private and independent charter schools tend to be more cost-effective than district-run public schools in the state overall and for the vast majority of individual cities.” Particularly, private schools received 27% less funding than district public schools overall but generated “2.27 more points on the Accountability Report Card for every $1,000 invested than district-run public schools, demonstrating a 36 percent cost- effectiveness advantage for private schools.”

Any examination of school spending that ignores chartered public schools and non-public schools is incomplete at best. And any that doesn’t even consider the effects that competition could have on the system is negligent. 

The understatement of the ruling came in Justice Ruoff’s caveat that he was hindered by the “limitations of the evidence presented at trial.” Those limitations, he acknowledged, prevented him from determining with certainty how much an adequate education should cost. But the limitations were greater than he realized. 

Not only did the court lack sufficient school district data to make an accurate cost determination, but it lacked equally important data on the efficiency gains created by competition. Going forward with an analysis despite such huge gaps in available data was a critical error. 

The ruling was plagued with numerous problems, the first being its roots in the wrongly decided Claremont decision. But even accepting the Claremont fallacy, the ruling was doomed by fatal methodological flaws and a devastating shortage of information. 

The information problem should have been obvious from the start. Prices are information. Prices absent competition are woefully inadequate information. Since no competitive education market exists in New Hampshire, the court is left applying legal analysis and back-of-the-envelope math to discover something that only the market can discover: the best available cost of a service. 

It’s clear that legislators set a low figure in the hope that this will press district spending downward. Districts, however, encourage local voters to approve ever higher budgets, which counters the Legislature’s intent. Districts then use those higher levels of spending to claim that the state appropriation is too low. Given these dynamics, it’s impossible to determine with any accuracy just how low district spending could go while meeting the state mandates for adequacy.

Until New Hampshire introduces some form of robust market competition, Granite Staters will never know what an adequate education really should cost. 

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Revenues end year half-billion over budget as unemployment hits record low

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Lost amid all the political and economic news this month was an important bit of data that’s particularly noteworthy as the 2024 governor’s race gets under way. (Yes, already.)

The state’s fiscal year ended in June. When it did, the state posted a General and Education Trust Fund surplus of $538.9 million. 

When revenues exceed budgeted expenses by more than half a billion dollars, that’s notable. Large budget surpluses have so commonplace, though, that they barely prompt a blurb anymore. 

And this is after multiple rounds of business tax cuts that critics said would devastate the state budget and leave New Hampshire with too little revenue to fund basic services.

The surge in business tax revenues (which we documented last year) is one of New Hampshire’s most important economic (and political) stories of the last decade.

It hasn’t stopped. Business tax revenues for the 2022 fiscal year were $323.2 million (or 33.7%) above plan and $68 million (5.6%) above the prior fiscal year.

Looking back to 2012, it’s remarkable how state General and Education Fund revenues have grown. Total revenues for both funds were $3.23 billion in the 2022 fiscal year. In 2012, they were $2.16 billion. 

Inflation (using the national Consumer Price Index) can account for $663 million of that $1.068 billion revenue increase. The rest, about $404 million, is new money.

The other big economic news this month was the achievement of a new record-low unemployment rate of 1.8%. New Hampshire’s economy is churning out jobs and revenue. This isn’t all because of the business tax cuts that have occurred since 2015, but they’ve helped. And the phase out of the Interest & Dividends Tax by 2025 will help more. 

While New Hampshire is enjoying these successes, other states are showing why punishing successful residents with high tax rates is a bad idea.

In Massachusetts, the new 9% income tax rate for millionaires helped to push Celtics star Grant Williams to seek a trade to low-tax Texas.

In April, a new 4% surtax on homes worth more than $5 million took effect in Los Angeles. Movie stars including Mark Wahlberg and Brad Pitt rushed to sell homes before the tax took effect, and since April 1 the supply of homes worth more than $5 million has plunged as owners pulled their listings, according to The Hollywood Reporter. 

California legislators in June had to cover a $32 billion budget shortfall caused by rising spending and falling revenues. Massachusetts is dealing with declining revenues, and current spending proposals for the new fiscal year exceed revenues by about $500 million. 

Keeping taxes and spending low is paying off for New Hampshire’s economy and the state budget. Having the latest state data confirm that fact yet again, as poster-child progressive states spend beyond their means and send rich residents fleeing, is a good starting point for the governor’s race.

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Flush with revenue, Legislature raises spending while cutting taxes

State appropriations grew substantially this week as legislators passed a $15.2 billion state budget for fiscal years 2024–25. The budget appropriates $6.25 billion in the General and Education Trust Funds.

Crafted by the Senate Finance Committee from a House version that passed earlier in the session, the budget raises total spending by more than 12% from the $13.5 billion FY 2022–23 budget. 

The governor’s proposed FY 24–25 budget spent $15.7 billion and the House’s spent $15.9 billion.

In General Fund and Education Trust Fund spending (the portion financed by state taxes), the FY 24–25 budget appropriates $6.25 billion, a 16% increase from the FY 22–23 budget ($5.39 billion).

By contrast, legislators cut General Fund and Education Trust Fund appropriations by 3.1% between the FY 20–21 and FY 22–23 budgets. Total spending between those budgets grew by a little more than 2%, from $13.2 billion to $13.5 billion. 

So the FY 24–25 budget represents a substantial increase in budgeted state appropriations. It spends about $566 million more in the General Fund and nearly $299 million more in the Education Trust Fund than the previous budget did. In total, the budget allocates nearly $3.8 billion in the General Fund and close to $2.46 billion in the Education Trust Fund.

The governor’s version had $6.29 billion in approved spending in both funds, while the House’s had $6.42 billion. 

Across all the line items, the Senate cut nearly $50 million in approved General Fund and Education Trust Fund spending from the House’s version. After adjustments and lapses are accounted for, the final budget spends $163.7 million less than the House and $33 million less than Gov. Sununu in General and Education Trust Funds.

Combined General and Education Trust Funds
Senate (FY 24–25) $6.25 billion
House (FY 24–25) $6.42 billion
Governor (FY 24–25) $6.29 billion
Current Budget (FY 22–23) $5.39 billion

One-time and off-budget spending

All versions made additional, off-budget appropriations in the current fiscal year. The final budget spends about $80.2 million more than the House and $133.4 million more than the governor proposed in FY 2023.

These current-year allocations make the difference in total spending between the Senate’s and the House’s budgets much closer than the FY 24–25 numbers would suggest. 

The Senate shifted several spending items to FY 23 that the House appropriated for FY 24–25, making it appear that the Senate made larger cuts to the House’s budget. For example, the Senate shifted $1.2 million in moving and fit-up costs to FY 23, as well as $3.6 million in building maintenance funds and $9.2 million in episodic treatment payments in education.

The increases in FY 23 spending were fueled by increased revenues. The budget pegs FY 23 revenue at $3.17 billion, which is $486 million higher than legislators had estimated when writing the FY 23 budget.

As we pointed out here, legislators used higher than anticipated revenues to approve hundreds of millions of dollars in additional FY 22–23 spending. 

Based on budgeted appropriations, the FY 24–25 budget is about 16% larger than its predecessor. But when actual spending is tallied at the end of the current budget, the difference will be much smaller. That’s because legislators spent most of the big budget surpluses accumulated in the last two years. 

Higher revenues 

The budget projects that state revenues over the biennium will be $121.1 million higher than the House’s estimated revenues and $59 million higher than the governor’s. 

The budget’s $6.359 billion in projected revenues are $868.7 million higher than the previous budget’s projected revenues, which explains how legislators were able to raise spending so much without raising taxes.

Some of this extra revenue goes to savings. The final budget ends the biennium with $231.9 million in the Rainy Day Fund, while the House set aside $200.7 million and the governor saved $341.3 million in the fund.

Education funding

Each budget proposal changed the state’s adequate education grant formula. The final budget uses the formula offered by the Senate, which was a compromise between the governor’s and the House’s numbers. 

Per-pupil adequate education grants are set at $4,100 under the Senate’s version, compared to $4,000 in the House’s version and $4,700 in the governor’s draft. 

This represents a $313 increase (8.3%) in base adequacy spending from FY 22–23 ($3,786.66).   

In addition, the Senate’s budget increases funding for differential aid. It includes $2,300 for each student eligible for free or reduced-price meals, $2,100 for each student receiving special education services, and $800 for each student who is an English language learner. 

In the FY 22–23 budget, those levels were $1,893 for students eligible for free or reduced-price meals, $2,037 for students receiving special education services, and $740 for English language learners. 

The following table shows the per-pupil adequacy spending within each proposed budget compared to adequacy spending under the FY 22–23 budget.

Senate 

(FY 24–25)

 House

(FY 24–25)

 Governor

(FY 24–25)

 Current Budget

(FY 22–23)
Base $4,100 $4,000 $4,700 $3,786.66
Free/Reduced Meals $2,300 $2,100 $2,500 $1,893.32
Special Education $2,100 $2,100 $2,079.89 $2,037.11
English Learner $800 $1,000 $756.43 $740.87
3rd Grade Reading Score* N/A N/A N/A $740.87

*This appropriation was for each 3rd grade pupil whose reading score on the state assessment was below proficiency. It has been cut from all three versions of the FY 24–25 budget.

State aid to public charter schools also gets a boost. The per-pupil adequate education grant for charter school students goes from $3,561 to $4,100, and the additional per-pupil grant (given because charter schools don’t receive local property tax revenue) goes from $3,411 to $4,900, for a combined per-pupil total of $9,000.

In total, the FY 24–25 budget increases state education spending by $169 million in the biennium and a projected $1 billion over 10 years.  

The Senate restored about $187.6 million to the Education Trust Fund that the House had moved to the General Fund (though it would’ve continued to be spent on education). 

Medicaid

The House budget provided for a two-year extension of the Granite Health Care Advantage Program, the state’s expanded Medicaid program. The Senate’s proposal, adopted in the final budget, extends this program for seven years.

In FY 2022, with the federal government funding 90% of the program, the state was responsible for paying the remaining 10% of the Granite Health Care Advantage Program, or $56.2 million. If this total stays relatively steady, this Medicaid program is expected to cost the state roughly $393 million over the next seven years.

The budget increases Medicaid provider payments by $134 million, a $110 million increase from the governor’s proposal.

Interest & Dividends Tax

Despite a razor-thin majority in the House, Republicans were able to include an accelerated repeal of the Interest & Dividends Tax in the budget. The tax was scheduled to phase out by 1 percentage point a year, ending with its elimination in 2027. The FY 24–25 budget pushed the elimination date up to January 1, 2025.

Overall, the FY 24–25 budget ratchets officially budgeted state appropriations up by 16%, which sets a new baseline for state spending, without raising taxes. This was made possible by the relatively steady flood of revenues, particularly from business taxes. Thus, to maintain this new, higher level of spending, the state will need those revenues to solidify into a new baseline too. If they trend downward for more than a brief period, the next Legislature could face some tough choices.

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State budget on track for a large double-digit increase in 2024-25

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The big story of the 2024-25 state budget has lurked just below the surface of most media coverage. It’s not the $99.6 million in employee pay raises, the increase in adequate education aid or the shifting of some Education Trust Fund line items to the General Fund. 

The big story is that lawmakers and the governor have incorporated at least $850 million in new revenues into the budget — and spent it. 

For the last decade, state revenues have exceeded projections in every fiscal year except for the pandemic year of 2020. Gov. Chris Sununu and legislative leaders have tended to categorize most of these annual surpluses as happy accidents (“one-time money”) rather than permanent funds to be counted on for future budgets.

That has changed. 

Legislative leaders and the governor this year incorporated the higher revenues into future revenue projections, and into the budget. 

The governor’s 2024-2025 budget projects revenues that are $912 million higher than those in the 2022-2023 budget. The House Finance Committee projects revenues $850 million above the previous budget. 

In Fiscal Year 2022, revenues were $435 million above budget. So far in Fiscal Year 2023 (through March), they are $323.7 million above budget. Lawmakers made quite conservative revenue estimates for the 2022-2023 budget. When the large surpluses materialized, most of the money found its way into appropriations.

Based on actual spending levels, then, the final 2024-2025 budget might not be that much bigger than the one before it. But measuring from one official budget to the next, the increase is very large. In practice, the main difference between the two budgets is the increase in baseline revenue assumptions, which are then used to fund ongoing spending. 

The question is not whether budget writers should accept, with caution, a higher baseline budget. It’s whether to spend that money or cut taxes. The follow-up question is how to prioritize those dollars if spending is the chosen option. 

Both the governor’s proposal and the House Finance Committee budget opt primarily for spending, though both contain some additional tax relief.

There are clear inflation-related reasons to raise state spending in some areas. The Department of Administrative Services notes, for example, that since 2018, state employee cost of living raises have totaled 5.4% while inflation has totaled 20.7%. With large vacancy rates in many departments (51% for entry-level positions at the Department of Corrections, according to the department), the market is sending a signal that state employee pay is too low. 

The state’s rates for medical providers who offer services through Medicaid also have been eroded by inflation, as has state adequate education aid. 

But both budget proposals raise General Fund and Education Trust Fund spending (money that comes from state taxes) above the rate of inflation.

The governor’s budget increases General Fund and Education Trust Fund spending by $889 million over the biennium, or 16.6%. General and Education Trust Fund spending under the governor’s plan totals $6.285 billion.

The House Finance Committee budget increases General Fund and Education Trust Fund spending by $981.4 million, or 18%. General Fund and Education Trust Fund spending under the House Finance Committee budget totals $6.37 billion. (Again, those represent increases from the approved 2022-2023 budget, rather than from actual appropriations.)

House Finance Committee Chairman Ken Weyler said during a budget presentation on Tuesday that the committee strives to keep spending below the combination of the inflation rate and population growth, which is best practice. The current budget, he acknowledged, exceeds that combined growth.  

The House Finance Committee used an inflation rate of 12.7% and a population growth rate of 1.5% to reach an optimal maximum budget growth rate of 14.2%, Weyler said. 

Had the committee kept spending to that level, the growth would be approximately $765 million. Instead, the committee proposes increasing spending by $981.4 million, which is $216.4 million above the combined inflation and population growth rate. 

The final percentage increase over the current state budget remains subject to negotiation. But the big takeaway is that a decade-long growth in state revenues plus a huge inflation spike have combined to ratchet state General Fund and Education Trust Fund spending to a level in excess of $3 billion a year. 

Going forward, this will be considered the new normal. Experience suggests that once a new baseline budget level is reached, returning below that level is extraordinarily difficult. 

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Medicaid can’t continue expanding forever

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As legislators consider more proposals to expand Medicaid eligibility or services to specific populations, they ought to consider that Medicaid is both like and unlike the universe.

Like the universe, Medicaid is expanding faster than it should be. Unlike the universe, there’s no scientific possibility of Medicaid expanding forever. (Maybe the universe can’t either.)

Two bills moving through the Legislature this session are based on increasingly questionable assumptions about federal spending commitments. House Bill 282 would end the five-year waiting period for Medicaid eligibility for “lawfully residing” children and pregnant immigrants. House Bill 565 would extend Medicaid benefits for new mothers from two months after birth to a full year. 

These expansions come as New Hampshire enjoys a temporary, pandemic-related increase in its Federal Medical Assistance Percentage (FMAP), which is the share of Medicaid spending the federal government covers. For the duration of the federally declared COVID-19 emergency, 56.2% of New Hampshire Medicaid spending is covered by the federal government. When the emergency declaration ends on May 11, New Hampshire’s FMAP rate reverts to its normal level of 50%. 

(Incidentally, the additional 6.2 percentage points of additional federal funding during the pandemic emergency was given on the condition that the state not conduct eligibility determinations. That waiver of eligibility requirements will end when the emergency ends, which will affect an estimated 72,500 current enrollees. The pandemic enrollment increase has been so costly to the state that it has pumped additional federal funds into the Medicaid program.)

Legislators tend to assume that the default 50% rate will continue indefinitely. But the federal budget situation could prompt reductions in the federal contribution, something the Congressional Budget Office (CBO) recently suggested. 

The CBO this month projected that the federal deficit will nearly double from $1.4 trillion to $2.7 trillion in the next decade, and the federal debt held by the public would reach a record 118% of Gross Domestic Product. 

This record debt is driven by historically high federal spending, which is projected to increase from 23.7% of GDP to 24.9% of GDP by 2033. Federal spending has exceeded 24% of GDP only during World War II, the 2008 financial crisis, and the COVID pandemic. The CBO projects it to reach this level again within the next decade simply due to regular budget outlays. 

Federal revenues, meanwhile, are projected to remain around 18% of GDP through 2033. 

That unsustainable course will put pressure on Congress to cut costs or raise taxes or both. Anticipating this, the CBO in December offered suggestions for reducing the federal deficit. In the area of health care spending, the CBO suggested that Congress “establish caps on federal spending for Medicaid” and “reduce federal Medicaid matching rates.” 

Such actions are not out of the question. As the Congressional Research Service puts it, “Medicaid was designed to provide coverage to groups with a wide range of health care needs that historically were excluded from the private health insurance market.” But the program has grown over the years to cover people who could find coverage in the private market. 

By routinely expanding Medicaid benefits and eligibility, lawmakers have grown the program’s outlays from $206.2 billion at the turn of this century to $748 billion in federal fiscal year 2021. Medicaid accounts for 17% of U.S. health care expenditures. 

These expansions are unsustainable for both the state and federal governments. Eventually, some level of financial discipline, however small or limited, will have to be imposed. Clawing back Medicaid spending is politically easier than touching Social Security or Medicare. That is especially true after Medicaid has grown to cover people who could find alternative insurance coverage. Given those realities, current levels of federal Medicaid spending cannot be taken for granted.

Any discussion of expanding Medicaid coverage or eligibility should start with the understanding that current spending levels are unsustainable, and increasing those levels just accelerates the date of reckoning.

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With electricity rebate, legislators could spend more than 75% of the 2022 budget surplus

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Gov. Chris Sununu has proposed tapping $60 million of the state budget surplus to give $100 rebates to electricity ratepayers. The plan requires approval by the Legislature and could come up for a vote this Thursday when legislators return to take up bills vetoed by the governor.

In the spring, a gas tax holiday was floated by both Republicans and Democrats. At the time, we wrote that a gas tax holiday was just a holiday from reality. A state-funded rebate on customer electricity bills is reminiscent of a gas tax holiday. Both offer a small dose of relief for individuals without addressing the underlying cause of rising prices, and both come with substantial opportunity costs.

The opportunity cost is best seen in context of the state surplus from which the spending would be drawn.

Legislators have already spent 60% of the state’s record $430.1 million budget surplus. 

A change in the way businesses apportion net operating losses, also passed this year, could consume another $42 million of the surplus.

With $261.7 million of the state budget surplus spent, the proposed $60 million in electricity rebates would bring the total to $321.7 million. That would represent 75% of the total surplus.

If the $42 million from the apportionment change is included, the sum rises to $363.7 million, or 85%.

So, after boasting that their frugality left the state with a record budget surplus, Republicans would have to explain to voters how they spent 75%-85% of that surplus in nine months. 

By any measure, that would be an impressive spending spree. 

If legislators simply want to transfer a portion of the state surplus to consumers, electric utility rebates represent one way to do that. We’re certainly not against returning money to the private sector. 

However, the state does have obligations, and surplus revenue can be used in a way that returns money to taxpayers in the long run while simultaneously reducing the cost of state government. 

As we pointed out in May, the state’s unfunded pension obligations cost taxpayers money. Using the surplus to pay down those obligations reduces state debt service, saves taxpayers money, lowers the overall cost of government, and reduces a debt owed by taxpayers.

That’s not as politically attractive as a utility bill rebate. But it would achieve several conservative goals while leaving the state in a better financial position. 

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Legislators have spent (at least) 60% of the state’s record budget surplus

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New Hampshire collected a record $430.1 million budget surplus in the 2022 fiscal year, which ended June 30th. Most of it is already gone. 

From January to June, legislators spent $261.7 million — or 60% — of the surplus.

For context, the amount of new spending in 2022 was just a bit larger than the $257.8 million stored in the state’s Rainy Day Fund (also a record).

The $430.1 million surplus is not what the state saved in the last fiscal year. It’s the amount by which state revenues exceeded budgeted spending. Lawmakers didn’t save even half of it.

Legislators passed 29 bills this year that appropriated money from the state budget surplus, according to a tally compiled by the Office of the Legislative Budget Assistant (see the list here: Appropriation Bills 6-30-22). 

The spending ranged from $60,000 over two years to fight cyanobacteria blooms to $71.1 million over two years to fund road and bridge work as well as body and dashboard cameras for law enforcement.

The next largest allocation came from House Bill 1587, which spent $42.9 million to increase retirement pay for 1,824 police officers and firefighters.

Another $21 million was put toward funding a dental benefit for Medicaid recipients, and $9.4 million went toward construction of a legislative parking garage.

Smaller items included $150,000 for a Hampton Beach pier feasibility study and $250,000 in capital improvement funds for state fairs and agricultural fairs.

The total appropriations of $261.7 million, per the Legislative Budget Assistant’s count, does not include the effects of tax law revisions approved this year.

The Office of Legislative Budget Assistant counts tax cuts as revenue reductions based on a simple static scoring of tax rate changes. We did not include these in the spending tally because (a) they aren’t spending, and (b) past calculations have been wildly off. 

For example, the LBA in 2017 projected that business tax cuts passed that year would reduce state revenues by $11 million. Instead, business tax revenues shot up, ending the year $151.6 million over budget rather than $11 million under budget.

The LBA estimated a total revenue reduction of $59.5 million through fiscal year 2024 due to tax law changes. 

Of those revenue reductions, $17.5 million through FY 2024 is projected to come from a tiny reduction in the Business Profits Tax. That’s the type of projection that has proven incorrect in the past.

The remaining $42 million, however, represents losses through FY 2024 that come from a change in the way the state requires businesses to apportion net operating losses. This projected loss is more likely to materialize because it eliminates what is effectively a double taxation of business.

If this $42 million is included, then legislators can be said to have reduced the budget surplus by $303.7 million.

That would leave only $126.4 million of the $430.1 million surplus in state coffers. 

The total could be even lower, as the LBA was unable to determine a cost for a few bills. 

This is not to condemn all of this spending as wasteful or unnecessary. Financing delayed bridge repairs, for example, can be a very good use of unexpected revenues. The spending was focused on one-time uses that won’t be written into the baseline budget going forward, which was also responsible. 

But the spending is haphazard, with money thrown to various projects that proved politically popular, rather than focused on, say, a priority list of state needs. 

With a 424-member legislative body, it might be unfair to expect a more focused approach to spending a massive one-time windfall. But the chaotic nature of governing with such a large Legislature doesn’t negate the wisdom of trying to impose a strategic focus on state spending.

In May, we recommended dedicating a large portion of the surplus to cover unfunded state pension liabilities, which would pay down an existing state obligation and save taxpayers money in the long run. That’s the kind of strategic planning that didn’t shape this $261.7 million in spending.  

However, the record $257.8 million Rainy Day Fund was the result of strategic planning, and it remains untouched. Legislators deserve credit for filling that fund and leaving it alone. As recently as 2014, the Rainy Day Fund held just $9.3 million.

The current fiscal year started in July, and although revenues were $13.9 million above budget, they were $4.2 million lower than last July.

The next Legislature needs to keep a careful watch on revenues. If another surplus materializes, it would be wise to have a priority list of state needs ready to go. If one doesn’t materialize, it might not take long to burn through what’s left of 2022’s record windfall.

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Legislators push student loan forgiveness for one industry

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As Republicans in Washington fight Democratic efforts to forgive federal student loans, GOP legislators in New Hampshire are promoting $1 million in tax-funded student loan forgiveness for graduates in one high-tech industry — human organ manufacturing.

In 2018, legislators passed a package of subsidies and tax breaks sought by the Advanced Regenerative Manufacturing Institute, a Manchester organization founded to develop synthetic human organs in partnership with other companies, including new local startups. 

That package, Senate Bill 564, granted companies engaged in advanced regenerative manufacturing a 10-year exemption from state business taxes. At the time, ARMI was the only organization that qualified for the tax exemption. The Department of Revenue Administration’s most recent annual tax expenditure report states that multiple companies have filed paperwork to be deemed eligible for the credit, but there are so few that disclosing details of the filings would violate their privacy under state tax information disclosure laws. 

Included in the law was a Regenerative Manufacturing Workforce Development Program, through which the state would finance the repayment or forgiveness of student loans for qualified graduates. To be eligible, the graduates would have to work for a qualifying manufacturer in New Hampshire for at least five years. 

In the four years since its authorization, the Regenerative Manufacturing Workforce Development Program has never been funded. Lawmakers tasked the New Hampshire Business Finance Authority (NHBFA) with designing and administering the program, but made no appropriation. 

Legislators learned of the program’s unfunded status earlier in the legislative session, and Republican leaders took steps to find money for it. A $1 million appropriation was attached to House Bill 1256, a bill dealing with the Department of Military Affairs and Veterans Services. 

In the HB 1256 conference committee last Wednesday, the funding drew bipartisan support, with legislators noting that the $1 million was a fraction of what had been intended for the program. 

“This is a test run to see how much they actually need for this,’ Rep. Al Baldasaro, R-Londonderry, said.

Need is an interesting choice of words. ARMI initially received an $80 million Department of Defense grant for its regenerative manufacturing work and $214 million in other investment, according to a DOD press release from 2016. It has attracted other companies to Manchester’s Millyard, where work on human tissue generation is expanding — without the student loan subsidy.

It is not known how much of an employee’s student loans the program would repay or forgive, as the program has been on hold pending funding. A draft proposal the NHBFA gave to legislators in 2019, assuming full funding, stated that employees would have their student loans entirely paid off over five years. 

In general, loan repayments are considered taxable income unless otherwise exempted from taxation by law (as is the case with many federal student loan repayment and forgiveness programs). The NHBFA’s draft proposal stated that under federal income tax laws as of 2019, the forgiveness “would result in taxable income” to the employee.

The local forgiveness for regenerative manufacturing employees is supposed to help keep the industry in New Hampshire and facilitate hiring. But such favoritism hurts other employers who compete for the same workforce, and it transfers wealth from some businesses to others, based purely on which ones are politically favored.

And such subsidies clearly aren’t needed in an industry that has proven capable of raising hundreds of millions of dollars in startup capital.

In Washington, Republicans are moving in the opposite direction. U.S. Senate Republicans in April introduced the “Stop Reckless Student Loans Action Act” to end the Biden administration’s pause on student loan repayments and block future loan forgiveness. 

One stated reason for opposing federal student loan forgiveness is that most Americans don’t have college degrees, and they would wind up subsidizing the degrees of the roughly one third of Americans who graduated from college.

In New Hampshire, 35.4% of men and 38.4% of women have a bachelor’s degree, according to a state report issued in 2019. 

For years, Republicans in Concord have been divided on the issue of student loan forgiveness.

Earlier in the session, legislators blocked a Sununu administration effort to create a larger-scale loan forgiveness program. The Joint Fiscal Committee tabled a proposal to use $17 million in federal American Rescue Plan funds to forgive the loans of students who agreed to work for at least four years in New Hampshire after graduating college. 

Gov. Sununu in 2019 proposed a $32 million student loan assistance program to be financed with revenue from the state’s 529 college savings program. Legislators rejected the idea in favor a smaller Graduate Retention Incentive Program. 

That program offers free job postings and marketing for companies that agree to give a $1,000 bonus or student debt payment to employees who agree to workin the state for four years.

New Hampshire has an established loan repayment program for medical professionals who agree to work in underserved areas of the state. It cost $766,783 in the current budget.

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Businesses are raining cash on the state budget

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With two months left in the fiscal year, state business tax collections are $217.2 million above budget. For context, business tax revenues came in $649.9 million over budget during the entire previous decade. 

So surplus business tax collections during the last 10 months have equaled 33% of the total surplus in business tax revenues collected from 2012-2021. 

To put it another way, business taxes have generated about three years’ worth of above-budget revenue in just 10 months. 

To get an idea of just how big that $217.2 million figure is, consider that business tax revenues for the first six months of FY 2012 totaled $231.7 million. 

The state’s collected almost as much in surplus business tax revenues during the 2022 fiscal year (so far) as it collected in total business tax revenues in the first half of 2012.

Total revenues from all state taxes for the current fiscal year are $382.2 million above budget. 

That’s a tremendous amount of surplus revenue for New Hampshire. Predictably, lawmakers have been busy allocating it to various priorities. (We’ll have more on this soon.) 

The good news is that they’ve been treating it as one-time revenue, and therefore not rolling it into permanent spending. The bad news is that they’re not dedicating any significant portion of it to state pensions, which would be the most fiscally responsible thing to do and would save the state money in the long run, as we outline here. 

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