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