Gov. Hassan is right about the projected state surplus

Charlie Arlinghaus

May 10, 2013

As originally published in the New Hampshire Union Leader

The state is on track to generate a modest surplus when the two-year budget passed in 2011 ends this June 30. However, regular revenues are not surging and legislators writing the current budget should estimate cautiously and follow Gov. Hassan’s advice to place this surplus into the long-neglected rainy day fund.

For months, most budget writers have feared a significant budget shortfall. Revenues through the first eight months of the fiscal year, the last report before the budget was adopted by the House, were $41.1 million below budget. Taking that into account, the House budget presumed an end-of-year shortfall of $38 million.

But the last two months have been extraordinary. For just the last two months, revenues have exceeded budget estimates by $74.5 million. Most of that can be attributed to two things: Business taxes exceeded the budget by $34.5 million, and the general fund portion of the proceeds from two legal settlements were $27.2 million.

At this point, if spending levels come in as predicted, the state could end the budget cycle (the result of the budget passed two years ago) with a $43 million balance – the undesignated surpluses of the last four years.

Our state budget law normally requires a surplus balance at the end of two years to be deposited in the rainy day fund. But it has become distressingly commonplace for legislators of both political parties to suspend that portion of the budget law without debate.

The budgets in 2005 and 2007, each one managed by a different party, suspended the rainy day fund law. Only later in the process did each Legislature decide to put a portion of the balance in the rainy day fund. That keeps the money available for current spending rather than safeguarded as a reserve.

The 2011 budget followed suit. The prior budget resulted in a $17.7 million balance, which would ordinarily have been deposited in the rainy day fund. Instead, section 207 of the state budget suspended that law. That was a mistake.

Suspending the rainy day fund law encourages the Legislature to pass a budget that is not balanced in itself but spends a one-time windfall as if it were operating revenue. The potential surplus we are looking at (if the last two months go as expected) includes $17.7 million carried forward and an operating surplus for the biennium that is roughly equal to the $27 million of lawsuit windfall revenues (another tobacco lawsuit and the MTBE lawsuit).

The governor’s reaction to this was exactly correct. We should take whatever surplus ends up generated and put it in the rainy day fund. Sadly, over the last decade lawmakers have regarded the decision to follow the state budget as an extraordinary act rather than business as usual.

Ordinarily I would advocate not using the proceeds of lawsuits as general-fund spending. Booking them as 2013 revenue rather than using them as a prop for the next two-year budget is a good step. Lawmakers of both parties should now commit simply to following the state’s rainy day fund law. Follow the law and the surplus gets put where it ought to go. This shouldn’t be a subject for debate – or remotely controversial.

Next, we ought not assume that revenues are flowing freely and that revenue estimates should suddenly be shot skyward. Our windfall is not the result of economic growth. It is the result of $27.2 million of not-to-be-repeated lawsuit windfall.

Revenues are not doing unusually well. Excluding the lawsuit, year-to-date revenue is less than one-half of 1 percent ahead of budget. Regular revenues are about 3.5 percent ahead of last year. House budget writers estimated cautious increases of just under 2 percent per year (absent tax increases). Those estimates are quite realistic if you don’t assume that the above-average business tax growth of 2013 will be repeated.

Remember that the state has very difficult times when revenues don’t materialize and sudden, out-of-budget spending cuts have to be found. Cautious revenue estimating leads to modest surpluses which allow for contingencies that come up during the two years a budget is in effect.

State government should follow the governor’s advice: don’t suspend the rainy day fund law. Save the surplus. Then use the House revenue estimates (without the tax increases). After the ups and downs of the last decade, a little caution is in order.