Bill Would Make NH Beer Tax Nearly Quadruple the MA Rate

 Beer Tax Hike on the Horizon?

Josh Elliott-Traficante

A proposed hike on the Beer Tax hike would push New Hampshire’s rate to nearly four times that of Massachusetts. The state Beer Tax is currently assessed on brewers at $0.30 per gallon sold, with the cost passed on to consumers. HB 168, introduced by Reps Charles Weed and Richard Eaton, would increase the beer tax by $0.10 per gallon, putting the tax at $0.40 per gallon. This would make New Hampshire’s Beer Tax the 13th highest in the country, (up from 19th) and the highest in the North East. Massachusetts, in comparison, has a rate of only $0.11 per gallon.

The Fiscal Note for the bill projects that the revenue raised would be in the range of $4.25 million, which is an extrapolation of current revenues at an increased taxation rate. However, as studies have shown, while demand for alcohol remains inelastic in response to tax increases, the alcohol tax revenue is elastic.

In other words, people do not drink less in response to tax hikes; they get their alcohol from elsewhere, either legally by crossing state lines, or illegally through smuggling and backyard stills. That is not to say that I expect moonshiners to set up shop in the back woods of the state, but more people will travel to Massachusetts in particular to buy their beer, rather than here in New Hampshire.

In fact, New Hampshire is already losing out to Massachusetts. The state does not charge sales tax on alcohol, which puts it on an even playing field with New Hampshire, but the higher Beer Tax rate in New Hampshire tips the balance in Massachusetts’ favor. Though there is a deposit across the border, it is by definition refundable. The result is that an increase in the Beer Tax would drive even more business across the border, at the cost of small businesses, not only through the loss of sales on beer, but on collateral sales as well.

There is also the question of from whom the tax is being raised. Like most sin taxes, the beer tax is regressive, by some accounts even more regressive than the cigarette tax. So while the state would raise in the neighborhood of 4 million more in revenue, it would come from those who could least afford it.

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The Constitutionality of School Choice in New Hampshire

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The Josiah Bartlett Center for Public Policy’s comprehensive analysis demonstrates that a choice program is consistent with court opinions and permissible under the New Hampshire State Constitution. In addition, a discussion of the Blaine Amendment describes its bigoted history.

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The Trillion Dollar Coin and the Debt Limit

Would it be possible and is it legal?

Josh Elliott-Traficante

With the US Treasury rapidly closing in on another debt limit ceiling, the idea of minting trillion dollar platinum coins to get around Congressional approval of a debt limit hike has gained some steam in the pundit world and with the public at large. It has even spawned the twitter hashtag #mintthecoin and a White House petition in support of the proposal.

The idea was first posited by analyst Chris Krueger at Guggenheim Securities’ Washington Research Group as part of a piece looking at methods for raising the debt limit. James Pethokoukis, of AEI, a Washington DC based think tank, picked up on the idea in early December, bringing it to a larger audience. While there are enormous concerns regarding both the inflationary risk and the expansion of Presidential powers, would it even be possible to do?

The argument is based on a quirk in current law [31 USC §5112 (k)]  that allows the Secretary of the Treasury to mint platinum bullion coins of any denomination. Therefore, the argument goes, Tim Geitner, or more likely his successor as Treasury Secretary, could order the Mint to create two Trillion dollar platinum coins. The coins would then be deposited in the Fed and then sent to the Treasury. Though the coins themselves would not contain $1 Trillion worth of platinum, through seigniorage they would be worth their face value. Once in the Treasury, there would be no difference between the two coins and money taken in by taxes, so payments could be drawn against their value. Thus, by creating $2 trillion in new money, the debt limit, while still existing, becomes a moot point as there would be money to pay for everything without issuing new debt.

The legality of such a maneuver is questionable; even two former Mint Directors have differing opinions on the issue. Philip Diehl, who was director when the statue in question was signed into law, argues that it is indeed a legal course of action. Former Director Edmund Moy, however, has some serious doubts on whether the coin would be worth a $1 Trillion a piece. Since the coin could not contain $1 trillion in platinum, therefore it has to be worth face value for the plan to work. ($1 trillion represents more than 1100 times the amount of platinum ever mined.) However, to be worth face value, he continues, the coin has to be in circulation, i.e. in use by the general public. Coins for circulation come under Congressional purview, so the body would have to pass legislation to produce them, putting the coin on the same path that it was explicitly created to circumvent.

The issue gets even more interesting when looking to the original purpose of the law, authored by former Congressman Mike Castle of Delaware. The language of Public Law 104-208 actually deals with commemorative coins and was in response to collectors’ complaints that the platinum coins being minted were out of reach of most people, due to the high value. The legislation was designed to allow the Treasury to fix this very specific problem and nothing more. Castle told the Washington Post that this potential loophole “…was never the intent of anything that I drafted or that anyone who worked with me drafted. It seems to me that whatever is being proposed here is a stretch beyond anything we were trying to do.” While arguing legislative intent before a court can be a tall order, given the very short time frame between passage and question, the fact that the concept of using the law to create fiscal policy with the platinum coin statute when under deliberation was not considered, combined with such an unequivocal statement by the law’s author, were the Obama administration to go on this path, any Federal judge who was worthy of the bench would rule against the government.

It should be noted that both Krueger and Pethokoukis thought and still think that the chances of this method being used as solution debt crisis are very small. Krueger noted that the “effects on the currency market and inflation are unclear, to say the least.” The creation of trillion dollar coins as a work around for the debt crisis has been lambasted by financial institutions such as Bank of America, which called it a “trillion dollar tooth-fairy.” Given the reaction of one of the nation’s largest banks, bond rating agencies probably would not look too kindly on the idea either.

Returning to the original question: would it be possible to do?  Given the way the law is written it would seem so, however, the fact that it could not possible be made with $1 trillion worth of platinum, calls its value into question. Since no one could possibly use it as currency, thus eliminating the gain from seigniorage, would it really be worth $1 trillion? In addition, it remains unclear if the statute in question, since it deals with commemorative coins, would even apply.

 

Homer Simpson and Mr. Burns admiring a Trillion Dollar Bill, which was later lost to Fidel Castro

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How Maggie Hassan will Make the Same Choices Bill O’Brien Did

Charlie Arlinghaus

December 12, 2012

As originally published in the New Hampshire Union Leader

Budgets always involve choices. This year’s choices are very different from the political rhetoric that has been thrown around for the last year. Far from restoring any previously made cuts, the new legislature and governor can’t afford the current budget and will have to find additional cuts not additional spending. Every policy wish competes against every other policy wish and there is money for none.

Going into the budget season, lawmakers of all stripes engaged in a hopeful discussion of what spending cuts they would like to “restore.” The two most common mentions on the campaign trail were restoring the university system to its previous levels and increasing hospital uncompensated care payments which had been cut.

This is wishful rhetoric that is sadly divorced from reality. In recent speeches, I’ve been saying that we have enough money next year to merely do what we’re doing today. Nothing more. In fact, this too is a wishful exaggeration. Reality is less optimistic than I am.

The government’s preliminary estimate is that in the next two-year budget cycle, taxes and fees will raise about $100 million more than they will in the two years that end in June. However, the estimated maintenance budgets are $372 million higher before adding in new things departments would like to suggest doing.

Because the cost of so many things (salaries, health care, debt service) go up, we’re a few hundred million short of being able to do what we did last year.

This helps explain why the new governor asked her department heads to prepare a budget at 97% of the current year’s authorization (or roughly equal to the first year of the current budget). If every department head responds to her request, the two year total will equal last budget’s two year total.

Every program in the budget competes against every other program of the budget for scarce dollars. Keep that in mind when someone suggests something that sounds like a good idea.

Debt service is going up by $17 million and we have to pay it (after a historic jump in borrowing from 2007-2011). “Restoring” the university system to the level it enjoyed prior to the last budget would cost $100 million over two years. Restoring some portion of hospital funding could cost another $100 million.

Additions to the state’s building aid program have been suspended. The revenue sharing associated with the room and meals tax is scheduled to go up by $15 million under current law. Special education aid – which for some ridiculous reason the budget calls catastrophic aid – is supposed to $22 million higher in the next budget. Land conservation (LCHIP) is scheduled to come back at $4.5 million.

Some of the items in the preceding two paragraphs are included in the “maintenance budget” and some aren’t. If we funded all of them and the projected increases to pay, benefits, and everything else we’d need an additional $450 million and we will only have an additional $100 million.

Every legislature sets priorities. The last legislature brought spending and revenues into line. Every part of government was cut but not equally. Because the budget passed in 2009 included a host of unusual measures, comparisons are nearly impossible so I’ll compare to 2008 to suggest the priorities the last legislature set.

They passed a budget that was 11.4% lower in 2012 than in 2008. But the budget can be divided roughly in two halves. The Health and Human Services part of the budget – the part that includes programs for the most vulnerable – declined by just 3.8% while the rest of the budget (all the other departments of state government) declined by 17.5%. Even within HHS, there was a difference. The division serving people with mental illnesses (”behavioral Health”) and the one for developmental disabilities actually increased from 2008-2012 while the rest of the department declined.

With so many hoping for so much more funding but very little available it will be important to remember that every addition to the budget will require a cut somewhere else. Hospitals and the University System have generated a lot of sympathy in the last year but what about special education? And will we freeze aid to cities and towns again?

With so many competing priorities, the governor and legislature will have to make choices. I suspect they will resemble the choices made two years ago. But don’t tell Bill O’Brien or Maggie Hassan that.

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Mythological Phase of State Budget Has Begun

Charlie Arlinghaus

November 28, 2012

As originally published in the New Hampshire Union Leader

There are many phases to the state budget process but the first one can be described as mythological. As part of the design of our state budget, the semi-independent heads of each state department get to lobby state budget writers for spending based not on the priorities of the legislature or the governor-to-be but on their hopes and wishes. In exchange, lawmakers can look tough. It may make everyone feel better but it is little more than political theater.

In New Hampshire, preparations for the state budget are well under way long before the election determines who the governor is. Each agency and department of state government submits a budget by October 1, five weeks before the election, called a maintenance budget in law but more accurately termed “agency requests” in and around the State House.

A governor who is returning or expects to return can tell the agency heads to draft these requests a certain way. For example, two years ago, Governor Lynch directed the agency heads to submit budgets at 95% of previous spending levels to deal with an expected $800 million shortfall. But when the governor is retiring, the agency budget requests are unfettered and add up to a ridiculous, pie-in-the-sky fantasy.

The agency requests are a large document that few people manage to get through. My colleague Grant Bosse said “if you’re only going to read one 5,000-page document about New Hampshire’s budget, this is the one.” Fortunately, Grant read it so we don’t have to. If every agency budget were adopted as submitted, state spending would increase by almost $2 billion in total funds, a 19% increase.

Even this number is misleading. Some departments submitted a reasonable maintenance budget with a 3 or 4% increase in costs. Others didn’t maintain, they wished and hoped. So the 19% is an amalgam of some departments maintaining current programs and others asking for the kitchen sink.

Some politicians enjoy the agency budgets. Agencies have always asked for the moon. The total requests then add up to an impossible number. The governor and the legislature in their initial budget documents can talk about how they cut agency requests by $1.4 billion and thereby portray an increase of a half a billion as a cut. Nifty, isn’t it?

Technically, departments are also supposed to submit by November 15 a 10% reduction budget. But the wording of the law – as opposed the intent of the law — seems to allow them to just submit a one page document which is simply a math worksheet: we spent $90 million last year so a 10% reduction would leave us with a budget of $81 million. It’s very useful for any legislator who has trouble with simple multiplication and doesn’t own a calculator but useless otherwise.

That leaves this week’s hearing as much ado about nothing. Agency heads come in and talk about their part of the mammoth 5,000 page document. The governor-elect tells us that these budgets are a non-starter. She’ll pick a better number for each department – soon, I hope – and base her budget on that. In addition, department heads are, for the most part, unwilling to discuss what might be cut from each of their budgets.

So, we already have 5,000 page wish lists. Both the governor and the legislature are going to use a yet-to-be-determined number as a starting place and ignore the wish list. The discussion of cuts has been forestalled by imprecise language in the current state law. It’s clear what exactly these hearings are intended to accomplish. I suppose that it’s fun theater and gives the local papers some copy during a slow season.

Instead of this charade, the hearings should be held with the agency heads being given more direction or providing different information. The legislative finance chiefs or the governor should set an actual useful parameter for the agency heads and ask them to present about the tradeoffs needed to reach that number. After all, what good does it do the governor-elect to listen to commissioners wax poetic about a spending level that isn’t actually being considered?

Next the spending cut law should be changed. The language should make clear that commissioners must present details not merely one line math problems. The current submissions are mocking not helpful. Change the percentage to 95% or level funding if you must but with such limited time no one helped by having a nonsensical theatrical phase to the budget process.

 

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Current Budget is All We Can Afford

Charlie Arlinghaus

November 21, 2012

As originally published in the New Hampshire Union Leader

Winning an election for governor is a sort of mixed blessing in New Hampshire. On the one hand you have the euphoria of having won the election. On the other hand, your gift is to immediately start preparing a budget that’s due just a few weeks after you get sworn in. New Hampshire’s budget is always in a bit of crisis and this year is no exception.

Every two years, we see headlines about difficult budget decisions. The last few cycles have been worse than most. After four years of recessionary revenue contraction, emergency budget fixes, and unusual financial measures (gimmicks if you didn’t like them, unusual measures if you did), the legislature had a huge problem. So the 2011-passed budget cut spending to bring revenue and spending back into line with each other.

The current governor-elect and many newly elected legislators spent a lot of time on the campaign trail promising to reverse those changes or at least ameliorate them. Now comes the hard part.

Budgets, like politics, are all about choices. There are five or ten things everyone would like to add in but only if the money is available. Therein lies the rub. A budget is about picking and choosing among competing priorities but spending no more than the money that is available.

After the last budget, spending and taxes are roughly in line but there are pressures that will make it difficult to keep them in line. Everything else being equal, the natural growth in revenues (most taxes will increase a little bit as the economy grows without any change in rates) will pay for the things we are currently doing plus the natural increase in costs associated with those programs – health insurance costs more, retirement costs continue to rise, staff salaries have automatic increases, most supplies cost more.

In other words, to add new programs or “restore funding” to this system or that, some other area of the budget must be cut. It seems unlikely that other areas will be cut. After all, the last legislature was the most eager to cut spending in the modern era. Cuts they left on the table are probably too controversial to pass muster with current lawmakers.

The other way to increase spending is to increase taxes. The problem is that most taxes are essentially a price on economic activity. Raise the price and you get less activity. In the current precarious economic climate there are few activities we would like less of.

In times of budget pressure, there is a temptation, to which both parties are susceptible, to let some degree of wishful thinking trump caution in the budget process. Temptation rarely takes the form of obvious gimmickry. Things like using borrowed money for operating expenses are now ridiculed enough to be politically impossible.

But the first cautious battle will be over revenue estimates. Traditionally, the House Ways & Means Committee and the governor will develop revenue estimates concurrently. Two years ago, a huge disagreement over those estimates was the central budget battle. The governor’s estimates were of the same wildly optimistic variety that had gotten us into trouble the previous two budget. If you guess high, you can spend the money, hope for the best, and patch the holes later.

The House estimates were about $200 million lower. At the time I said they were pessimistic but not overly so. The House lowered them again but the Senate wisely went along with the original House estimates. Twelve months later, there was no budget emergency but revenues had come in within one-tenth of 1% of the estimate. The second year of the budget is actually doing a little better but it’s still early.

Lawmakers need to estimate revenues cautiously. Underestimating a little creates a small cushion for contingencies. Overestimating creates a crisis. On top of that, so-called medicaid enhancement provides about 5% of our revenues and is subject to a lawsuit which looks like it could go either way.

Add this adds up and it seems unlikely that any new programs are going to be added to state law without a significant tax increase (which seems unlikely).

Agency heads submitted budgets asking for about a 19% increase in spending. Based on current revenue levels, that seems about 19% too high. In all likelihood, those wanting the restoration or expansion of their program will have to live with the status quo.

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What our newly elected state government needs to address first

Charlie Arlinghaus

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.

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Yes, New Hampshire has a debt problem

Charlie Arlinghaus

October 31, 2012

As originally published in the New Hampshire Union Leader

The biggest state political issue no one is talking about is debt. Everyone knows of the federal debt problem. Most people (except, perhaps, for my most faithful readers) do not know about the debt explosion at the state level that is only starting to be corrected.

During its experiment with fiscal games from 2007-11, New Hampshire started to slide into Washington-style debt habits that will take more than one budget cycle to correct. I have been very critical of the unusual budgeting tactics employed in the two budgets prior to the current one.

The short version is that by using borrowed money (and a one-time federal bailout) for operating expenses, budget writers exploded state debt and created a delayed deficit for the next Legislature to fix. It is well known that the balanced-by-borrowing budget created a deficit-to-be-fixed that was around $800 million (other estimates are higher).

Less discussed is the debt problem. New Hampshire’s policy toward debt was stable and cautious under governors of both parties for more than a decade. But in 2007 everything changed. From 2007 through 2011, the state’s general obligation debt exploded from $654 million to $939 million. This 43 percent increase was striking by any measure. Consider that the $285 million total increase in just four years was more than state debt had increased in the previous 20 years (the increase from 1987-2007 had been $275 million).

As a percentage, the rate of increase was more than 10 times the rate of the previous decade. For more than 10 years, state debt had grown at an average rate of less than 1 percent each year. For the four-year explosion, the annual increase was 9.5 percent. The explosive growth of debt was not just unusual, it was a radical departure from New Hampshire’s tradition of responsible borrowing.

The tradition this new behavior most resembles is that of Washington. Federal debt rose by an average of 9.8 percent each year from 2001-2011 (a period that includes Presidents of both parties) and shows no signs of slowing down. But New Hampshire isn’t supposed to be like Washington. Washington hasn’t seen its debt decline since 1969. In New Hampshire, we had small reductions in our debt in six of the 10 years from 1994-2003, and the years of increases were at or near the rate of inflation.

The explosion of debt was not an accident. The governor and Legislature at the time borrowed money to balance the budget not because it was the right thing to do – they agreed it was unusual and not a good idea – but because borrowing allowed them to pass hard decisions on for a future Legislature to make. Like many people faced with a tough decision, they hoped delaying it would make it better. Instead, it made things worse.

The Legislature elected in 2010 inherited a mess. The borrowed money had been used to pay for ongoing operating expenses. Without the borrowed money and the one-time federal bailout, legislators would be forced to raise taxes or cut spending. Realistically, increasing taxes in a recession or weak recovery wasn’t an option. So they were forced to make the decisions that hadn’t been made for four years: bring revenues and expenses back into balance.

During this election, the legislators who were forced to make difficult decisions are being attacked for those decisions by many of the same people who chose to avoid decisions and spend borrowed money as if they’d been elected to Congress. Yet no one talks about the debt. No politician is being forced to defend his or her decision to increase debt in four years by more than it had been increased the previous 20 years.

A rational state government will carry some debt simply because some capital expenses should be paid over 10 or 20 years rather than at once. But our debt increased too fast, showing that we need to guard against the politicians’ weakness. Left to their own devices, weak politicians will spend future money by borrowing so they can avoid a difficult decision today.

The current Legislature stopped the borrowing cycle. But there’s more work to be done. The next Legislature should pledge to limit new borrowing to 90 percent of what is paid off. They can only borrow money by paying down other borrowed money.

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How a ‘balanced’ state budget created an $800 million deficit

Charlie Arlinghaus

October 24, 2012

As originally published in the New Hampshire Union Leader

Starting in 2008, the governor and Legislature adopted a series of unusual practices that obscured spending decisions. As a result, the two gubernatorial candidates this year fight over what the facts really are.

Republican Ovide Lamontagne claims that Democrat Maggie Hassan raised spending when she was Senate majority leader and left the state with an $800 million deficit. She claims she balanced the budget and spending went down. A careful look behind the curtain shows that significant spending increases without the money to pay for them caused a huge deficit that forced the most recent Legislature to pass a significant correction.

The source of the problem is a series of very unusual measures that hid some spending, relabeled other spending and made apples-to-apples comparisons difficult. During the recession and its aftermath, the state didn’t have the revenues to support the amount of money it wanted to spend. Rather than reducing spending, the state borrowed money to support regular spending.

The state used to pay for school building aid (not the building itself, but state support of local annual debt service payments) out of its general operating fund. But from 2008 through 2010, we paid with borrowed money. In addition, we borrowed money to pay for a year’s worth of regular debt service payments. Under the state’s accounting system, because these expenditures ($170 million over three years) were paid for with borrowed money instead of taxes, they don’t show up as general-fund spending. That is not a spending cut, but if you did not know how our budget works you might be misled into thinking it was.

Similarly, the budget for 2010 and 2011 included large payments from the federal government for state fiscal stabilization. These were essentially one-time windfalls to bail out state spending. Because the money used for some general operating expenses came from Washington, it was not counted as state general or education-fund spending. If you didn’t understand how our budget works, you might be misled into thinking it was a $167 million spending cut.

Thirdly, the 2010-11 budget renamed spending on the liquor commission as liquor-fund spending, moving it out of the general fund. Again, if you didn’t understand how our budget works, you might be misled into thinking that $90 million was cut. It was not; it was relabeled.

An apples-to-apples comparison is easy if you add the comparable lines back in. Doing so, we find that the 2010-11 budget was 14.2 percent higher than two budgets prior — definitely not a cut.

The unusual shifting around also explains why critics like to say that the budget from all funds (including highways, turnpikes, dedicated funds and all federal money) increased 24 percent since 2008. That 24 percent is based on budgeted rather than actual amounts because of some different rules, but the actual spending is at least 21 percent higher, with some spending authority not lapsing.

The fiscal gimmicks and the need for more borrowed money also explain why state general obligation debt increased by 43 percent over those same four years after having increased by only 8 percent in the prior four years and 4 percent in the four years prior to that. As a state, we borrowed a lot of money officially and used federal borrowed money to prop up spending that we formerly paid for with state taxes.

That created a deficit. Budget observers right and left all agreed that because of the unusual measures — whether you supported them or not — the Legislature’s budget in 2011 faced a structural deficit of $800 million.

In New Hampshire terms, that means that the state would have to decrease spending or increase revenues by $800 million to balance the budget. The previous years had been balanced by the legislative tricks, but the borrowing and the bailouts would disappear from the next budget, creating an $800 million hole the next Legislature would have to close.

Regardless of whether you supported those unusual budgetary measures, it is unquestionably true that we used unprecedented borrowing and bailouts to delay some decisions and create an $800 million problem that had to be fixed (and was fixed by the current Legislature through spending cuts).

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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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