November 7, 2012
As originally published in the New Hampshire Union Leader
You have me at a disadvantage today. As you read this, you know the results of the elections held yesterday (well, probably). As I write this, I don’t. But the tasks at hand aren’t altered by who wins or loses. The contestants may have different approaches to solving problems, but the problems themselves are the same. So let me say to the incoming governor and Legislature: “Congratulations. I always knew you would win. You’re already behind in preparing your next budget, and I’ve got a list of other problems that need tackling too.”
The first task of the next governor is to prepare the state budget. The new chief executive has to deal with a transition and then have a complete budget prepared and address the Legislature about six weeks after the inaugural. Let me suggest you start today or it’ll never be done.
In New Hampshire every budget is a crisis to at least a small degree. This one is perhaps less so than others in recent years, but an uncertain economy means you’ll have to proceed cautiously. Last year’s Legislature effectively brought spending back into line with revenues. They started with an $800 million hole to fill. After cutting about 10 percent of the budget, spending is now in line with revenues. Cautious revenue estimating after four years of holes and supplemental budgets means we had no special sessions or emergency budget fixes this year.
That’s all good, but revenues still present a few problems. First, tobacco taxes are unreliable. They are the third-largest revenue source at about 10 percent of the operating budget. After four increases in five years, the rate was cut and collections fell. But they will continue to fall as fewer people smoke. Total sales by unit are down 5 percent this year and 25 percent over the last four years.
To make sure we don’t rely too heavily on an unreliable source of revenue, we should set a base amount, perhaps 80 percent of current revenue, as what we use for the operating budget and dedicate any collections over that amount toward paying down debt or some other non-operating expense so fluctuations don’t cause budget crises.
The more important problem is business taxes. Our business taxes – a combination of the business profits and business enterprise taxes – are among the highest in the country. As the country begins to grow again – we hope – New Hampshire needs to be attractive to business development. The single most effective tax to cut is our uncompetitive business profits tax (I confess that two years ago I suggested to cut this tax first, not tobacco taxes, but budget writers chose a different path).
Each half-point cut will have a budget cost of about $19 million per year. But that would send a stronger signal than anything else that New Hampshire is the right place to put a new facility or expand a facility and create more jobs. Cutting the BPT has to be at the very top of any economic development agenda.
There are two Washington-style debt problems that must be addressed as well. I’ve written before about how a bipartisan consensus on debt had been broken. After about 14 years of stable debt (average increases of less than 1 percent), debt went up by 43 percent over four years. This budget area remains to be addressed. The new governor’s budget should borrow no more than 90 percent of what we pay off each year, probably for the next six or eight years. Setting an actual cap is a discipline that will force decisions that might not otherwise be made.
As bad as debt has become, the unfunded pension liability is worse. Our unfunded liabilities are more than $4 billion (by contrast, our burgeoning state debt is about $1 billion). Some modest reforms were made to the retirement system, but each year the state’s liabilities grow faster than the assets we set aside to pay for them. Each year we get further and further behind on an obligation that isn’t discretionary.
There are dozens of different ways a new plan can be structured. But whatever we do should make the state obligation more defined, make the entire obligation paid every year, and make sure that whatever pension assets an employee receives he owns and can take with him from one job to the next.
These are just a few starting points for governors and legislators to think about in the first weeks after the election. We haven’t touched the state’s infrastructure, education funding and dozens of other issues. Oh, congratulations on your election.