The next state budget fight will be over revenue estimates

Charlie Arlinghaus

January 23, 2013

As originally published in the New Hampshire Union Leader

New Hampshire’s budget battles are always about revenue, and this year is no exception. Revenue estimates drive spending and make some decisions possible, others impossible. This year’s estimates will determine the path the budget takes.

During boom times, revenues flow freely into the state treasury and make the state budget about who gets more money. But an economic downturn or poor revenue estimate creates budget crises and constant pressure to cut.

This year, revenue estimates are likely to be cautious because of both the general economic outlook and the recent history of revenue estimating.

In general, New Hampshire’s revenues recover strongly from a recession. But while the recession is technically over according to economic data, the economy is relatively stagnant and the future is uncertain. Some observers worry that we are going to enter a second recession, others fear long-term stagnation on the Japanese model.

Whoever is right, budget writers being forced to project revenue for a period that doesn’t end until July 2015 are forced to budget cautiously, especially given the state’s recent history.

Recall that in the state’s budget, total spending is balanced by an estimate of how much each tax or fee will raise over the next two years. Estimating revenue more than two years in advance is necessarily imprecise. The best situation is to estimate cautiously. Having some money left allows lawmakers to pay for additional legislation passed after the budget, take care of some priorities or emergencies that they didn’t foresee, or save some money for a rainy day.

A small surplus is a benefit; a shortfall is a crisis. If revenues fall short, supplemental budgets and executive orders must remove spending from the budget long after many monies have been spent. Rather than programs competing against each other on a priority list, decisions tend to be distorted by what’s easier to cut. Generally it is easier to cut larger programs regardless of priority.

The budget passed in 2007 created disasters that are still being sorted out. Some of us warned that revenues were overestimated by several hundred million dollars. We were ridiculed for our pessimism. In fact, at the end of the two-year budget, revenues were $384 million short of the budgeted amount. The state finances were in crisis and odd decisions were made.

A shortfall of that size was unprecedented, and the governor looked to unique financial arrangements to borrow money to pay for operating expenses. The problem was not resolved, it was delayed. The next budget wasn’t much better. Operating expenses artificially propped up by money we didn’t have were again propped up with borrowing and a one-time federal bailout. Revenue estimates were again exaggerated to make the budget easier. The shortfall was smaller – a mere $87 million this time – but lawmakers were without a recession to blame for the error.

The next budget, in 2011, was characterized by cuts that had merely been delayed by artificial borrowing. The budget also saw a battle over revenue estimates.

Revenues are the basis of spending. Estimates are produced so finance committees know the limits on spending. The governor’s estimates were characterized by his opponents as “unrealistic.” The House estimates were much lower, and their opponents attacked the figure as artificially low. At the time, I described the legislative estimates as “pessimistic but not overly so.”

The final estimates were raised just a bit by the Senate and turned out to be remarkably accurate. In the aggregate, they were almost exactly correct for the first year. In the second year, regular taxes will come in about $25 million ahead of budget, but a $36 million shortfall in the Medicaid Enhancement Tax (MET) will leave revenues short by about $10 million.

Estimating cautiously allowed us to survive a significant MET shortfall without crisis. Not using any one-time windfalls ensured that no fiscal time bombs were delayed for the next Legislature. This year’s estimates must follow suit.

Any estimate that assumes significant economic recovery in the face of uncertain forecasts should be dismissed. If no one describes your estimate as pessimistic, it’s probably wrong. No regular state spending should be balanced with windfalls, borrowing, or wishful revenue estimates.