Retirement System Posts 0.9% Return for 2012

The New Hampshire Retirement System announced Friday that the pension fund posted a 0.9% gain for Fiscal Year 2012.

Preliminary estimates had projected a 0.7% gain, but upon the final calculation for the fund’s real estate and alternative assets, the rate of return was revised upward.

In the quarterly investment highlights, the system also published the performance of each of the asset classes’ benchmarks. In benchmarks are used as a standard to see how well the fund has performed. Sometimes they are broad; such using an entire index, or they can be more specialized. In the case of the NHRS, the benchmarks are a mix of both, using indices as well as taking into account historical investment strategy decisions.

Below is a chart showing how well the NHRS matched the benchmarks for each asset class.[i]

 

Given the market volatility over the past year, the fact that the NHRS has lagged behind its benchmarks is no surprise. Generally speaking, volatility favors passive management over active management.

Market volatility however, is not the cause of the spread between the realized return and the benchmark for alternative assets. By definition, these types of holdings do not trade on the open market and are made up of stakes in privately held companies, non-publicly traded debt and distressed assets. These types of holdings are on the higher end of the risk spectrum, meaning big losses when things go poorly, or big gains should they do well.

The level of risk in Alternative Assets has split the public pension fund community, with some embracing it and others shunning it entirely. The NHRS currently has roughly 2.5% of assets in this type of holding, with plans to expand up to 10%.

[i] http://www.nhrs.org/Investments/QuarterReports.aspx

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Politicians need discipline forced on them by budgets

Charlie Arlinghaus

September 26, 2012

As originally published in the New Hampshire Union Leader

Budgets are a discipline we force upon politicians who have trouble controlling themselves. Left to themselves, politicians will promise you the moon without telling you about the new moon tax they have to impose to pay for it. On Earth, the discipline of a budget means spending causes taxes or cuts to other programs. Gravity doesn’t apply to federal politicians but the rest of us must follow the rules.

During political season, we are often treated to politicians trying to pretend the normal laws of budgets don’t apply. They can “restore funding” or “invest resources” without any admission that there are costs to their platitudes.

Budgets are quite simple in principle. The government collects a finite amount of money. Rather than authorizing the spending of that money on an ad hoc basis and suddenly running out when they get to something important, budget writers prepare a comprehensive list of programs and make sure they spend only what they have. In a balanced budget, as in your household budget, spending is limited by the resources available.

If the programs a politician wants to implement exceed the money available, he must choose among competing priorities or decide that the total spending package is so important that the government should take more money from us. In general, the citizenry at large is hostile to adding or increasing taxes so politicians must make do with the money available.

In that light, every program competes against every other program for dollars. If we chose to spend another $100 million here, we must cut it somewhere else. Advocates for a particular program will try to get us to discuss it in a vacuum – isn’t this a good idea? Wouldn’t you support something like this if we had the money for it?

But if we made a list of everything that sounds nice, we’d have spending requests that were three or four times greater than the money we have. At that point, adult decisions have to made (unless you’re in Washington of course).

As an example, I’ve written numerous times about not funding commuter rail in New Hampshire. I like trains and would love to ride a train to Boston but I know that the millions of dollars required for that project would come at the expense of other budget priorities. Pollsters ask people if they support a train in a vacuum (they ask in a vacuum, no one is suggesting we run trains inside of vacuums). The correct question is “if additional funding is available, would you rather it be spent to fund the developmental disabilities waiting list or spent on a commuter train to Boston?” You can predict the result which is why they don’t ask it that way.

During an election season politicians are unlikely to discuss tradeoffs. They just say “we can find the money for this worthy project.” More recently, some say “we should restore the cuts the Republican legislature made.” Yet, those cuts were made precisely because the money wasn’t there. The previous legislature had temporarily propped up spending despite declining tax revenues by using a one-time federal bailout and borrowing money to pay operating expenses.

The alternative to spending reductions was to raise taxes. During a recession. Think of taxes as a price on economic activity. A higher price would lead to less activity in that area.

During this election season some politicians will talk about restored funding. Will they offset that funding with cuts to other areas or do they intend to raise taxes? In almost every case, they intend to raise taxes – actually this month they intend to start a dialogue, have a discussion, consider our options, not rule anything in or out. Those euphemisms are easier to push past the voters. The actual tax hike comes post-election.

There is an exception to all this. At the state level you must be disciplined or raise taxes. Those are the only options. At the federal level a third option is open to you – borrowing. In Washington, taxes only pay for two-thirds of federal spending. The rest they borrow which saves them having to make decisions. Politicians in Washington aren’t adults and don’t have to be. They get to borrow the money and saddle our grandchildren with debt. Maybe we should change that.

Back here in the real world spending means taxes. Every program competes for the same dollars. Ask your candidate to treat you like an adult.

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Did NHRS Pension Fund Investments Really Do That Badly in 2012?

Recently the New Hampshire Retirement System (NHRS) released its preliminary investment return figures for Fiscal Year 2012. Over the fiscal year, the NHRS saw .7% return on pension fund, falling well short of the assumed rate of return of 7.75%. While this shortfall will lead to a decline in the funding ratio, it is important to remember that pension funds do not function on a year to year basis. One really good year, or one really bad year does not mean that a system is healthy or sickly respectively.  Nor does the NHRS operate in a bubble, independent of global economic conditions.

The chart below shows a comparison of how the returns of the NHRS stand in relation to a handful of other state retirement systems that have reported preliminary figures so far. More or less, the NHRS’s returns were average when stacked against similar systems.

The research firm Wilshire Associates calculated the median gain to state and local pension funds for fiscal year 2012 at 1.15%, so though New Hampshire’s return was lower than the median, it was only by 0.4%.

So did the NHRS do badly this past year? While the system did poorly in terms of meeting the assumed rate of return for the year, comparatively speaking, the NHRS was firmly in the middle of the pack.

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Good Revenue Estimates Avoid Crisis Planning

Charlie Arlinghaus

July 11, 2012

As originally published in the New Hampshire Union Leader

Last year, the state’s revenue estimates were a controversial part of the budget process. With the first of the budget’s two fiscal years under our belt, it’s hard to see what all the fuss was about. The state seems to have returned to cautious budgeting and avoiding the major planning failure that decimated the state budget over the previous four years and created a huge deficit.

When the legislature and the governor began debating the current budget more than a year ago, the centerpiece of their dispute was a disagreement over estimating revenues. Recall that the state balances its two-year budget with an estimate of revenues over the two years ahead. If those estimates are cautious, the budget is balanced but if they are optimistic, spending goes forward without the revenue to balance it and problems ensue.

New Hampshire’s history is of cautiously estimating revenue. This is important when, for example, the governor’s February budget proposal is expected to anticipate the revenue levels we might expect two and half years later.

For the ten years ending in FY2007, revenues came in higher than estimated in nine of the ten years. Then our fiscal crisis began. My own warning about the 2008-2009 budget was ridiculed as ridiculous pessimism. Charlie, I was told, we have an excellent track record. Your warnings are ridiculous. One budget writer even told me I should be embarrassed for my detailed analysis that suggested revenue estimates were overly optimistic and would create a budget hole.

In fact, for four straight years optimistic revenue estimates weren’t met, falling a total of $471 million below the amount budget to be spent. The result was an extraordinary fiscal collapse, special sessions, budget adjustments, last minute cuts, borrowing problems all leading to a nightmarish budget process in 2011.

Despite all those problems, optimism was still rampant in some quarters. In 2011, the governor was very critical of the House for adopting pessimistic revenue estimates. He and his legislative allies hoped to spend more and therefore estimated optimistically. Yet, by most measures even then, the economic outlook was uncertain.

After hopeful estimating had led to the $650 million deficit legislators were being forced to close, I suggested treading carefully. In April, two months before final passage of the budget, I wrote “there is no question that the House estimates are cautious and pessimistic but it this uncertain economy it would be difficult to argue they are overly cautious.” 

Those cautious estimates were eventually adopted with only slight changes. Before they were agreed to, the author’s of the previous four years of bad estimates proposed adopting “a responsible revenue estimate” and adding back in $38 million of spending based on higher estimates. The House instead lowered their cautious estimates by another $18 million. At the end of the process, a compromise with the Senate didn’t adopt the lower number and added in $5 million, not exactly splitting the difference.

A year later, we know how they did and the answer is pretty good.

The fiscal year ended June 30 and the tax total is 0.2% above budget, about $5 million. This is ideal; a very small cushion allows for slight modifications and engenders no crises.

There is still a dispute over “Medicaid enhancement” revenues between hospitals and the state. Both sides claim they will win in the end but the result is unclear. At the end of the day, that’s a legal dispute not an estimating problem.

Revenues tracked well not because any estimator is omniscient. Estimators were closer on some taxes than other, higher and lower on others. But they were optimistic on some and pessimistic on others and it balanced out.

The biggest problem was tobacco taxes. The tobacco tax rate was cut by ten cents per pack partially as a response to four increases in four years that more than tripled the price of a product used disproportionately by people at low income levels. The net cost to the state budget was $12 million (sales decline each year for cigarettes regardless of price).

I have been an advocate for reducing taxes to help the economy but I would have started with a tax with a direct economic effect. Cutting the Business Profits Tax rate, among the highest in the country, by a half a percent would send a stronger signal to businesses that we are trying to attract as the recession ends and would have cost $18 million instead of $12 million.

Caution and well founded pessimism, however, have created a good situation. For the first time in five years, we aren’t panicked about a budget spiraling out of control and in need of special sessions or emergency spending cuts. That’s a nice change.

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Pension Reform Study Commission Falls in Committee of Conference

A study commission that would have looked at instituting a defined contribution retirement plan (ie a 401(k) style plan) for state employees failed to make it pass a committee of conference.

Both the Senate and the House, while agreeing in principle to study the idea of implementing a defined contribution plan, had passed differing versions of a study commission, with the House passing a more aggressive timeline for reporting as well as a provision that would have enacted a DC plan should the legislature had failed to act on the commission report.

Though most of the disagreements were worked out over the course of three meetings, including the controversial “Sword of Damocles” provision. The major sticking point revolved around the Request for Proposals process. The House position was that the commission needed to be able to issue RFPs themselves rather than through DAS (Department of Administrative Services) to get concrete details about what a plan would look like while the Senate, uneasy with the unprecedented nature of giving a commission such authority, wanted DAS or the Retirement System to issue them and provide technical assistance which was complicated in of itself due to the nature of the NHRS as well as existing priorities of DAS.

The Senate and House could not agree on this point and in the words of Rep. Ken Hawkins had to “agree to disagree.”

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Let’s Follow the Path Canada Laid Out For Us

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 Charlie Arlinghaus

May 30, 2012

As originally published in the New Hampshire Union Leader

In the general debt and spending crisis that envelops Europe and is spilling across the Atlantic, we can find inspiration in unlikely places – this time, Canada. The recent Canadian experience shows what’s wrong with the rhetoric of both parties, the benefit of sequestration, and the parallel to the recent New Hampshire experience.

Although some of us have been caterwauling about debt for the last thirty years, the potential collapse of Europe has finally pushed debt to the front pages. At this point, everyone agrees we can’t keep borrowing money from our great-grandchildren to pay our bills.

With total debt significantly larger than the size of their entire economy, Greece has become the poster nation for debt disaster debt but a handful of countries wait in the wings to follow along. The Unites States used to be well away from the basket case countries but we’ve been accumulating more debt since 2002 and have seen an explosion in the last few years.

But a neighbor has already trail blazed a path to solution. I have written before about emulating the Canadian example to get our fiscal house in order. Chris Edwards of the Cato Institute has done much to publicize Canada’s sensible reforms recently.

In the middle of the 1990s, Canada’s debt had risen to levels seen as ridiculous and burdensome. Canadian debt was 68% of GDP (the size of the economy). For comparison purposes, our public debt is now 73% of GDP. The difference is that Canada decided to do something about it.

Canada was governed by the Liberal party, not some sort of right wing cabal, but to reduce debt they reduced spending. Not just a small program here or there. To make a difference, everyone had to be on the team. Every area of government was cut without exception. Some were cut more and some were cut less but every area was cut. This way, no minister felt like his ox was being gored to pass the saving along to some other minister who escaped helping out.

The results were impressive. The budget was balanced and Canada’s debt was reduced from 68% of GDP down to 34% of GDP. As a result, the economy boomed and Canada was able to cut corporate taxes from 29% to 15% and create more jobs.

Budget cuts can be difficult because everyone has a favorite program or area that they believe ought to be spared. When New Hampshire faced the enormous potential deficit in 2011, I told any policymaker I could find that the only way to accomplish such a Herculean task would be to make everyone pull on an oar. If any department was exempt, every department would fight to be exempt. We’re either all in this together or we fight.

Our federal task looks just as Herculean but is no more impossible than New Hampshire’s or Canada’s were. The difference is that there are few voices arguing that we’re all in this together.

Instead, each area of the federal government warns that while the budget ought to be balanced and cuts are necessary, my area should be exempt. For more liberal analysts, every transfer program is a burden on states and recipients. There are more than 1,000 different programs that transfer money from the federal government to the states but eliminating even one or perhaps combining a few is attacked as impossible.

Conservatives are no better. Conservatives talk a lot about cutting the budget but are just as likely to count a slowed increase as a cut as if reducing the rate of increase from 4% to 3% is somehow devastating. More important, some conservatives have their own exempt categories – notable defense. Some conservatives want to cut the budget but not the 19% of the budget spent by the defense department.

Is this because of previous massive cuts? No. Over the last ten years, defense has gone from 17.3% of the budget to 18.9% — a significantly greater percentage of a budget that itself increased from $2 trillion to $3.8 trillion.

The federal budget sequester has focused Congress’s collective mind. If they can’t reach a deal, the sequester is an automatic reduction in every bit of discretionary spending. If it didn’t exist, disagreement would lead to more spending by default. It changes that so that disagreement now leads to less spending by default.

Balance needn’t be draconian. Spending will increase by 4.4% each year if we do nothing. The budget can be balanced in ten years if we grow spending at 3.8% instead. If every department grows but just a little less we can be more like Canada and that’s a good thing.

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Funding Amendment Won’t Affect Local Autonomy

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 Charlie Arlinghaus

May 9, 2012

As originally publish in the New Hampshire Union Leader

An amendment on education funding in New Hampshire is long overdue and is only common sense. The only thing stopping the legislature from putting one on the ballot are the misconceptions of one group of people and the tax fantasies of another. Both groups should be overlooked and an amendment adopted.

The source of the conflict is a series of state Supreme Court ruling called the Claremont decisions which basically said, in 1999, that the way we had funded education – largely through local property taxes with a small amount of state aid – was unconstitutional.

They interpreted  the phrase “cherish the interest of literature and the sciences, and all seminaries and public schools,” to mean that the state can’t delegate its authority and has to use a state not a local tax to pay for a basic portion of the funding. The inherent ambiguity of the phrase is what led many people to think of the decision as a bit of an overreach.

Some of the more liberal leaning legislators hoped the decision would force an income tax or at least a transfer of education to the state – one big school district of you will. But that was always a fantasy and there has never been much support for a state school district (nor should there be).

Current state education spending is about $2.7 billion or $15,000 per pupil. The state transfers about one billion dollars, a little more than a third of spending. In any system where state aid is a minority of revenue, people in both parties agree those limited dollars ought to be targeted on the basis of need (just as most government programs are). But the court specifically prohibits that.

One course would be for the legislature to dispute the court’s ruling and assert its own interpretation of constitutionality. But in the most libertarian leaning there ever was and probably ever will be, there are precious few votes for such an approach.

A reasonable amendment that would allow targeting aid and change little else would restore the ability of the legislature to make its own decisions instead of wondering first what the court will allow.

The latest version, a recently tweaked draft being considered by a committee of conference, is supported by the leading scholarly critic of Claremont jurisprudence Gene Van Loan and former justice Chuck Douglas. Needless to say, it isn’t wishy washy.

Nonetheless, there is a group that opposes it as some sort of assault on local control and claims that New Hampshire is some sort of home rule state. They are wrong on most counts.

New Hampshire does not now nor has it ever had complete local control. Skeptics point to a provision in the constitution granting towns the right of electing their own teacher. While towns have that right, from the beginning the state regulated them and what they taught.

The first law under the new republic specified the credentials required of a teacher, the subjects that must be taught, and the different subjects that must be taught in a shire town. The curriculum rules were altered again in 1807. Then in 1808, additional curriculum requirements were placed on towns and the  regulations on teachers were again changed with more state minimums placed upon them before they were allowed to be hired by the town.

In the first forty years of the republic, laws were changed seven times creating more regulations regarding curriculum, required local regulatory officials, required taxes, and minimum state standards for teachers.

In fact, when the first direct state aid program was passed in 1828 (it was about 10% of total revenue), it was used a carrot to better enforce compliance with state regulation and the state superintendent of public instruction.

Don’t get me wrong, we should fight against local interference in curriculum decisions. I don’t think the state should insist of teaching this or not teaching that even if I happen to agree. Parents locally should decisions about textbooks, subjects and curriculum. But the structure of New Hampshire’s government has always permitted interference and the language of the current amendment will affect that reality not one jot or tittle.

It remains upon us and will remain upon us to limit over regulation by both conservatives and liberals to preserve local decision making.

The proposed amendment is both sensible and reasonable. Legislators should offer it to the people for their consideration this fall.

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NHRS System Returns Show Strong 3rd Quarter, Still Behind for the Year

The recently released investment return figures from the third quarter show that while the New Hampshire Retirement System investment fund saw a 8.4% return in the corpus’s investments, beating the benchmark, the fund has only seen returns of just under 3% so far for the year, falling short of the 7.75% assumed rate of return.

The domestic equity portfolio, saw a 12.2% return, though falling short of the benchmark of 12.9%. Non-US equity saw 13.2%, which beat its benchmark by 2 points. Fixed income assets also did well, seeing a 2.5% return versus a .9% benchmark.

Due to the complex nature of the valuation of assets of Alternatives and Real Estate, the figures and benchmarks a lagged by one quarter, but the data is still valid. Real Estate saw 1.3% return, though the benchmark was 3.1%.

Lagging behind all other investment vehicles was Alternatives. Alternatives are private equities, essentially stakes in a company that does not have shares that are publicly traded. For example, Burger King and Toys R Us, fall into this category. Bain Capital, which was in the news as of late, as well as Berkshire Hathaway are both involved in these financial sector.

Alternatives saw a -.2% loss for the quarter, while the benchmark was 9.2%. So far this fiscal year and year to date, the NHRS has lost money on these investments. Annualized returns have also the System lagging far behind. Granted, the system had left the Alternatives portfolio go dormant, (i.e. new investments were not made, but money was not pulled either) until its revival in fiscal year 2011. For FY11, Alternatives saw a 13.9% return.

All that being said, it is hard to gauge the success or shortcomings of an investment class over the time frame of less than two years and even more so for just a single quarter that this investment snapshot looked at.

In the world of pension funds, Alternatives are a mixed bag. Some systems embrace them, seeing them as a way to close unfunded liabilities without resorting to pension reform. Others shun them, viewing them as far too risky an investment. While the gains could be substantial, so could the losses they reason.

The New Hampshire Retirement System currently allocates roughly 2.1% of the fund for these kinds of investments, roughly $132 million. Their new target 10%, all things being equal would mean an investment of more than $650 million. While that in of itself is not a bad thing, investments in this area must be carefully placed and closely monitored. Big risks can mean big rewards, but we shouldn’t forget it can mean big losses as well.

Though the fund is currently falling short of the 7.75% goal, the books do not close until June 30th, so there is time to make up the difference. Only time will tell if we hit or miss the mark this year.

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Is Paul Ryan An Adult Surrounded by Children?

Charlie Arlinghaus

April 11, 2012

As originally publish in the New Hampshire Union Leader

Washington is an odd place with a desperate need for adult supervision. The general lack of maturity is on display in the attitude of both political parties toward budget committee chairman Paul Ryan and his willingness to discuss the federal budget problem.

At this point, even the most casual observer of the federal government understands that the federal budget is not just a mess but a disaster. The budget isn’t balanced or close to being balanced. In FY2012, the federal government will raise $2.4 trillion but spend about $3.6 trillion, an incredible 50% more than it raises.

This will be the fourth straight year with deficits in excess of a trillion dollars. The country’s total debt will exceed 100% of GDP, the total size of the economy, this year. Ten years ago, the last time the budget was nominally balanced, total debt was half that size. Public debt, the amount the government owes to other people and not to itself, has skyrocketed in the last decade from $3.3 trillion to $11.5 trillion. If these numbers seem ridiculous, it’s because they are.

Even more incredibly, the worst is yet to come. As long term obligations start to come due, debt would rise exponentially to 200 or 300% of the economy. Or at least it would if bankrupt countries could still borrow money and the economy didn’t go to pieces. For more information, see Greece, recent history thereof.

As chairman of the House budget committee, Rep. Paul Ryan has emerged as the congressional leader in the fight to propose serious solutions to the real problems everyone agrees we face. The difficulty is that he’s proposing a solution in a city of adolescents.

Ryan has come under attack from not just his foes but his friends. Republicans who call themselves, without a hint of irony, political professionals have spoken out against the notion of doing anything, their courage careful concealed by their anonymity. A typical pinhead worried “didn’t they learn their lesson? House Republicans are under the mistaken impression they have to lead.”

You see “political professionals” fret when someone on the budget committee thinks he should put together a budget. Better the country go to hell in a hand basket than someone venture forth and have an opinion. Such is the received wisdom of Washington.

Ryan’s opponents have been critical so our anonymous weathervane has hidden under his bed afraid to come out and speak.

The criticism is so divorced from reality, I wonder if anyone will be fooled. Defenders of the current trillion dollar deficits, would have us believe that Mr. Ryan intends to slash and burn villages and cut the federal government to a mere shell of its former self.

In fact, the Ryan plan is a modest step and doesn’t cut at all. Under Ryan, spending would increase over a decade from $3.6 trillion to $4.9 trillion, an increase of 35%. Without any change, the current budget would have increased to $5.5 trillion.

So, the current budget increases 4% each year, which is fine and noble according to status quo defenders. Because Ryan increases a mere 3% each year, he’s cold and heartless. Apparently, the difference between 4% and 3% is the difference between glorious and evil devastation. Who knew?

The obstacle to any serious financial discussion is Washington is this sort of foolishness. Ryan’s plan balances the budget gradually. It adds to the country’s debt but reduces it as a percentage of GDP. The budget wouldn’t actually be balanced for another 25 years but debt would decline as a share of the economy.

This very gradualist approach is mild and not as strong as I would prefer but it would work over time. Yet, in the strange world that is Washington, D.C. this is somehow attacked as extreme because politics gets in the way.

There are similar dynamics at the state level but somehow every state in the country balances its budget the the federal government can’t. Why? Because they have no choice. The law requires it.

The culture of Washington demands deficits because responsibility is not required. The only discipline possible for these people is discipline imposed on them. Sequestration – automatic cuts in absence of an agreement – work. They worked under Gramm-Rudman in the 1980s (that’s why they were repealed) and they worked in the debate over the debt ceiling. Politicians couldn’t agree so the cuts were automatic.

The children in Washington can’t be trusted. If the carrot won’t work, it’s time for the stick.

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State’s Poor Fiscal Health Demands Caution

Charlie Arlinghaus

March 7, 2012

As originally publish in the New Hampshire Union Leader

Stupid laws beget stupid problems. The current debate over the rainy day fund and what to do with a surplus has been going on for eight years and is a direct result of bad legislation. What to do, as with most budget issues, requires common sense and a little discipline. The last budget had an odd technical surplus and we should prevent people from being too excited about the existence of money that may mislead them about the state’s very poor fiscal health.

The State of New Hampshire operates under a two-year budget. The audit for the second year of the budget ending June 30, 2011 shows that the state ended the two year budget cycle with a decent surplus – with a $17.7 million balance plus $9.3 million in the rainy day fund for reserves of $27 million. (we started the cycle on July 1, 2009 with a zero balance and $9.3 million in the rainy day fund). In the first year of the budget, we took in $65 more than we spent but in the second year we spent $48 million more than we took in despite significant lapses in spending that the governor quite justifiably brags about.

It would be unfair to describe FY2011 as having a $48 million deficit because we budget on a two-year cycle. It is no more important than an individual twelve months be balanced than that a week or month be balanced.

Don’t let talk of a $17 million surplus fool you into think everything is hunky-dory in Concord. Things aren’t horrible but the budget was only balanced in 2010-2011 by the unprecedented use of borrowed money and grants. The first of the two budget years had used nearly $300 million in one-time federal bailout funds and borrowing. The second year – the year being talked about publicly as having a “surplus” – used $200 million in borrowing and one-time grants and still was $48 million short for the year.

The Swiss cheese nature of the last budget is why the current budget was forced to make significant cuts. The current two-year budget is projected to spend 9.9% less over its two years than the last budget did in an apples to apples comparison. Those cuts were required to replace borrowed money and the federal bailout.

The governor frets that the current budget is $14.1 million short in the first year with $14.7 million extra in the second. In a two-year budget cycle that seems reasonable compared to the $65 million up, $48 million down roller coaster in the last budget.

The real fight right now is over the rainy day fund. Yet, the sad part is that if state law were followed, there would be no debate. Under the state’s rainy day fund law, any surplus at the end of the two-year budget shall be deposited into the rainy day fund once the audit is complete. There is no vote, no choice. It happens automatically.

But the current budget suspended that law as did the three budgets before it. Section 207 of the current budget requires “nothwithstanding RSA 9:13-e…any budget surplus shall NOT be deposited….” Faithful readers will recall my carping on this subject during Gov. Lynch’s first budget when he also enjoyed a Republican legislature. Republicans inserted the language, then Democrats followed suit, and now Republicans did it again. You’ll forgive me if I have no sympathy now that suspending the budget law has come back and bit them in the neck.

The point of a rainy day fund law is to automatically take surpluses generated in good years and save them so we don’t have to play odd borrowing games in off years. The rainy day fund requires approval of both the governor and the legislature for a withdrawal and stipulates conditions that must be met (deficit or revenue shortfall). It’s not meant to be a windfall to be used to fund whatever you wish to fund instead of raising the taxes to pay for your plans.

Because there are restrictions, some politicians prefer the flexibility of just leaving it as an undesignated balance to use however they wish. But in New Hampshire we have storm clouds on the horizon (hospital lawsuits, uncertain revenues, and an uncertain economy) and our track record of responsibility is poor.

The legislature did the wrong thing in suspending the rainy day fund law. The Governor is suggesting they double down on their mistake. They need to ignore his siren calls, admit their error, and put the money away in the rainy day fund before someone spends it.

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