How a Balanced Budget Created a Deficit

Charlie Arlinghaus

October 10, 2012

As originally published in the New Hampshire Union Leader

Elections are about making choices but often the information we use to make those choices is misleading or confusing. This is particularly true in the area of the New Hampshire budget where mythical information passes for fact all the time. The political debate over the last two budgets illustrates the point.

As part of their gubernatorial campaigns, Democrat Maggie Hassan and Republican Ovide Lamontagne have traded charges over their approaches to fiscal policy and over the recent history of the state budget. Hassan claims to have balanced the budget and cut spending as Democrat Majority Leader while Lamontagne claims she created a deficit, raised taxes, and increased spending.

The budget passed in June, 2009 for fiscal years 2010 and 2011 paradoxically was both balanced and created a deficit but it did not reduce spending even a little bit.

By state law, New Hampshire, like almost every state, must balance its budget. But it can do so creatively. In 2009, the budget situation was dire and it looked as if difficult decisions would have to be made. Revenues didn’t support the amount of spending desired by the legislature. But instead of cutting spending, the legislature found creative ways to delay that decision for someone else to make.

Although spending couldn’t be supported by revenues, it was paid for with borrowing and bailouts. A federal bailout of the states gave the state a one-time cash infusion to prop up spending previously supported by tax revenues. Two years later, the money would have to be found some other way but that would be some other legislature’s problem. The state used $167 million of that bailout money for the general fund (operating budget) but it wasn’t enough.

The state’s budget law wisely forbids using borrowed money to support operating expenditures but it doesn’t define the terms. So if the legislature that wants to borrow the money decides the expenditure isn’t an operating expenditure then it isn’t no matter if it used to be. The 2009 legislature borrowed $91 million for school building aid and then borrowed another $40 million to pay for debt service – that’s right, they borrowed money to pay the costs of borrowing other money.

So the budget was balanced but balanced with borrowing and bailouts. Under this definition, the federal budget is balanced too because we borrow the money to pay for the deficit.

The borrowing helps explain the mythical spending cut. Under our accounting system, if the spending is paid for with taxes and fees, it counts as regular spending. If it’s paid for with borrowed money, it doesn’t count as being spent in the general fund. So the $91 million and the $40 million of borrowing don’t appear as spending because we used a loan instead of taxes. Similarly, the federal bailout also appears as if that $167 million wasn’t being spent. Add to that, the accounting change of moving $90 million of liquor spending from the general fund to its own fund and you get a mythical reduction.

If you think relabeling spending as a different fund or borrowing $131 million is a spending cut then spending went down. On the other hand, if you live in the real world and can see through accounting gimmicks, then on an apples-to-apples basis spending in 2010-2011 went up by about $300 million.

Although the borrowing and bailouts delayed the day of decision, they created a huge hole for the legislature to follow hence the talk of a deficit. In 2011, there was universal and unusual agreement on the right and left that the incoming legislature faced a huge deficit. My own estimate of the potential deficit was $820 million minus a minor natural growth in revenue.

That estimate was widely enough accepted that Mark Fernald, a former Democratic Sen. whose fiscal philosophy may be thought of as the inverse of mine, warned that “New Hampshire faces a deficit in its next two-year budget as large as $900 million.”

Some (but not me) argued that the deficit should be eliminated by both spending cuts and tax increases. The current legislature instead rejected any tax increases and fixed the problem largely by reducing spending to 9% lower than the previous budget — about the same level as 2006-07.

So, to reconcile the competing political statements: The previous legislature increased spending by $300 million and balanced the budget only through borrowing and bailouts. That strategy left an $800 million deficit for the current legislature to fix. They brought the budget back to real balance by cutting spending by about 9%.

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