The Fiscal Collapse of a Once Proud State

By Charlie Arlinghaus

June 16, 2010

As originally published in the New Hampshire Union Leader

New Hampshire’s financial crisis is worse than at anytime in its history not because of outside forces but because of an internal refusal to admit it has a problem and to change its behavior as a result. The only two courses open to our future are to take responsibility for our own situation or hope desperately that a bankrupt federal government will bailout the big states and leave us a few scraps to finance our deficit spending.

The failure of New Hampshire to manage its own finances isn’t difficult to chart. Just two budgets ago, we raised what we spent and had a balanced budget with a modest surplus. In fiscal years 2006 and 2007, we raised $4.47 billion and spent $4.42 billion. We ended that fiscal year with reserves of $150 million and were in great shape financially.

Then the recession hit and New Hampshire didn’t manage well. Revenues over the four years of the next two budgets declined from $4.57 billion to the current official projection of $4.37 billion, a decline of $100 million. This decline is not dramatically different from most states.

According to the National Association of State Budget Officers (NASBO), tax collections were down in states across the country. What was different in New Hampshire was our reaction to the crisis.

In the fifty states as a whole, expenditures declined as revenues declined. Dramatic reductions mean that projected spending in the fiscal year starting July 1 (FY 2011) will be 3.1% less than four years earlier. This average reduction would have suited New Hampshire well. Revenues in the current budget will be just 2.3% less than in 2006-2007, the last balanced budget.

Yet we didn’t respond that way. Spending in the current budget will be approximately $470 million higher than four years ago. In addition, another $91 million is still being spent but is paid for not with revenue but by borrowing the money. As I said above, in the same period revenues will decline $100 million.

You can’t balance a budget by spending $561 million more and collecting $100 million less. That would be common sense to the average fourth grader but seems to be beyond the understanding of our state government.

There are some who would object and claim that reducing spending is impossible for a government. They simply ignore the experience of other states around the country. There aren’t just one or two states around the country that managed to magically reduce spending. Thirty-seven states managed to reduce spending. We weren’t one of them. Taken together, all fifty states reduced spending by a combined 6.8% in FY2010. We didn’t.

Nor did every state spend down its reserves. In New Hampshire our reserves declined from $150 million to $3 million in just three years. Across the rest of the country, 36 states have maintained reserves of at least 1% of their operating budget. We aren’t one of them.

Just ten years ago, the Federal Reserve Bank of Boston declared New Hampshire’s fiscal order to be the envy of its neighbors. That was then and this is now.

In a few short years, we’ve gone from envy to basket case. Old fashioned yankee frugality meant that whatever else we might debate, common sense would prevail on fiscal matters. You don’t spend more than you have. If revenues decline, spending must follow. The rest of the country figured this out but New Hampshire has the common sense of a teenager with a credit card. Our neighbors don’t envy us any longer, they giggle about us.

Once a fiscal beacon, we are now at the head of the bailout line. Recent spending is financed by borrowing and a bailout from the federal government but it’s still not enough. The recent budget “fix” included $65 million more in borrowing but even that wasn’t enough.

Despite hundreds of millions in federal bailout money, the state decided to budget another $48 million bailout with a catch. This extra money hasn’t been budgeted by Washington but we hope it might be. The president asked for it but the House rejected it. Sen. Reid wants it in the Senate bill but says he doesn’t have the votes for it.  So our budget writers have decided to count as revenue a bailout that they hope federal lawmakers might change their mind about.

Not too long ago we believed in balanced budgets. But that’s all changed. Other states made the tough decisions. We did not. Today the State of New Hampshire is just another failed enterprise hoping the federal government will cut them a check before the debt capsizes that ship.

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Starting From a Lower Base FY2011 Revenues on track to be $54.6M short of budget

Starting from a Lower Base

FY2011 Revenues on track to be $54.6M short of budget

With ten of the twelve months of revenue collected for Fiscal Year 2011, revenues are on track to be $54.6 million short of the budgeted amount. The shortfall will not only require action to balance the last budget but also reduces the base used to project revenue growth for the 2012-13 budget currently under consideration.

Revenue collections for the current fiscal year have been falling further behind the estimates used in the last budget. After the April numbers were reported, some analyses have compared revenues to the month-by-month plan. A better assessment uses historical averages to avoid having to make a judgment about the accuracy of the month-by-month projection.

Historical Averaging Methodology

The chart below compares the major categories of state revenue with the historical collection amount. For example, Meals & Rooms Tax revenues were $199.4 million through the first ten months of the year. Historically, the ten-month total for that tax is 81.9% of the final collection. If this total is 81.9% of the final, we are on track to collect $235.4 million which is $9.6 million below the budgeted amount.

[For the full report click here:

NewHampshireRevenueShortfall2011

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FY2011 Revenues on track to be $54.6M short of budget

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By Charlie Arlinghaus

May 2011

With ten of the twelve months of revenue collected for Fiscal Year 2011, revenues are on track to be $54.6 million short of the budgeted amount. The shortfall will not only require action to balance the last budget but also reduces the base used to project revenue growth for the 2012-13 budget currently under consideration.

Revenue collections for the current fiscal year have been falling further behind the estimates used in the last budget. After the April numbers were reported, some analyses have compared revenues to the month-by-month plan. A better assessment uses historical averages to avoid having to make a judgment about the accuracy of the month-by-month projection.

Historical Averaging Methodology

The chart below compares the major categories of state revenue with the historical collection amount. For example, Meals & Rooms Tax revenues were $199.4 million through the first ten months of the year. Historically, the ten-month total for that tax is 81.9% of the final collection. If this total is 81.9% of the final, we are on track to collect $235.4 million which is $9.6 million below the budgeted amount.

The table combines BET and BPT collections into “business taxes.” Because the two are not separate taxes but linked to each other, projections are more accurate when the two are combined. The list also includes a similar projection for the combines other categories of revenue which are not calculated separately. The insurance and statewide property taxes and Medicaid enhancement revenue are discussed following the table.

Tax Source April 2011 Historical Average Projected Total Budgeted amount Difference
Business Taxes 392.7 .819[1] 479.5 503.0 (23.5)
Meals & Rooms Tax 199.4 .847 235.4 245.0 (  9.6)
Tobacco Tax 192.3 .822 233.9 220.6 +13.3
Liquor Revenue 102.2 .831 123.0 127.9 (  4.9)
Interest & Dividends Tax   65.9 .846   77.9   90.1 (12.2)
Real Estate Transfer Tax   67.2 .832   80.8   89.2 (  8.4)
Other Sources[2] 314.9 .808[3] 389.7 386.5 +  3.4

These seven categories add up to a projected budget shortfall for the first of the two budget years of $41.9 million. To this total we need to add estimates for the Insurance Tax, Medicaid enhancement revenue, and the Statewide Property Tax. There is seeming broad agreement that the two Medicaid enhancement sources will end the fiscal year short by a combined $14.2 million.

Insurance receipts are more or less complete and will likely end the year $1.5 million ahead of budget. The Statewide Property Tax will be right at the budgeted amount. The SPT is set at a fixed amount not a rate so it isn’t an estimate that varies.

Revenue Shortfall for Fiscal Year 2011Combining the seven-source estimate with the other three sources, the state is currently on track to be $54.6 million short of its budgeted revenue in FY2011. That total would reflect a drop of 1.6% below the levels of FY2010

How this Estimate Will be Wrong

Using historical averages gives us an estimate of each tax but the actual performance will vary a point or two from the average. What is most likely is that some taxes will end just higher and some just lower than average so the variations will be smoothed out. Nonetheless, this projection is not meant to predict an exact number. What is most likely is that revenues will finish the year close to $54.6 million behind barring any unusual event (like last year’s surprise windfall of $32.1 million which caused the June revenues to be revised dramatically in the accrual statement).

Impact on the Budget Debate

The revenue numbers for Fiscal Year 2011 are more important than just as a look back at the prior year. The current budget being debated must balance any shortfall from the prior year. In addition, the FY11 numbers are used as base for the estimates of growth in 2012 and 2013. As such, any change in the 2011 number has a threefold impact as it affects each of 2011, 2012, and 2013.

The governor’s original estimates in his February 15, 2011 budget address and the numbers used by the House of Representatives in the version of the budget it passed in March are $307 million apart[4]. Half the difference is explained by a difference in the 2011 number and therefore a lower base for 2012 and 2013. If the FY2011 shortfall is $54 million not zero, then the economic projections for the following years are built off a lower base. The shortfall plus the lower base would make a total difference of $162 million. The rest of the difference is a result of the governor using optimistic economic predictions for 2012 and 2013 and the House using pessimistic ones.

Muted recovery

The lower revenue for FY 2011 would leave the revenues used to finance the general and education funds 1.6% below the FY2010 level. While declines in total revenue are rare, a 1.6% decline is a slight improvement over the 3.5% drop the prior year and the 10.5% decline in 2009. Although we are still well below the ten-year average growth for FY2001-FY2010 of 1.45%. The weak performance for FY2011 suggests that the economic recovery is somewhat muted in terms of its impact on state revenues. As such, growth estimates going forward should remain cautious.


[1] The business tax average is for the years 2001-2009. FY 2010 included what an unusual $32.1 in extension payments which caused a dramatic revision of the June number. Regular collections absent the unusual event were in line with the 2001-09 historical average.

[2] For comparison with the state’s monthly revenue reports, “other sources” as defined here includes the communications tax, court fines & fees, securities revenue, utility consumption tax, board & care revenue, beer tax, racing & games of chance, gambling winnings tax, transfers from lottery commission, transfers from racing & charitable gaming, tobacco settlement, utility property tax, and “other.”

[3] For the category of other taxes, the historical average is for the years 2006-2010. The trend has been consistent over the last five years but not for before that. Using a ten-year average would significantly exaggerate the projected amount of shortfall.

[4] The estimates used by the House and Governor treat a Meals and Rooms Tax change differently. The last budget dedicated a portion of that revenue to a specific debt service payment. Both budgets acknowledge the law change in expenditures but the governor’s budget includes that revenue in his general fund revenue estimates while the House doesn’t. The change amounts to $5m in FY2011, $14.6m in FY2012, and $14.4m in FY2013. To make the revenue numbers comparable to each other and to the state monthly revenue updates, this analysis includes the dedicated revenue in the general fund totals.

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House Budget Draft Lets Us Evaluate and Change Priorities

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By Charlie Arlinghaus

April 13, 2011

As originally published in the New Hampshire Union Leader

The budget that passed the House and was sent to the Senate at the end of March wasn’t perfect nor is it supposed to be. What the budget did do is to use realistic budget numbers and make the very difficult decisions required to balance a budget and close the largest budget gap in modern history. Each of us will set different priorities for spending but the House draft of the budget clarifies the choices we have to make if we want to change some of those decisions or create different priorities.

The House draft is probably the most difficult part of the process. They have only six weeks and program supporters still talk about each program independent of the budget as a whole. The major accomplishment of the House draft is to take the level of money the House and Senate agree on and craft an actual budget based on that amount. It becomes what a final budget might look like.

They have to make broad decisions and weigh each program against every other program. But now we have a draft that balances and we can look at it and decide where to reprioritize.

The most debated parts of the budget are the cuts made to human service programs. As I’ve mentioned before, every part of the budget was reduced. Programs in Health and Human Services saw a smaller reduction but a reduction nonetheless.

The hardest part of this year’s budget is to account for stimulus programs in making comparisons. So, for example, the amount of general fund (state tax dollar) money spent on HHS isn’t actually changing much. However, in the last budget we spent $167 million of federal stimulus money as if it were state tax dollars. So while the budget impact is flat, a fair comparison of changes the program itself has to make requires we add back in the stimulus money and suggests a cut of about 12.5%. This is still less than the 29% cut to the rest of state government but somewhat higher than the 4% cut to local aid programs.

Perhaps the most controversial cuts to HHS programs are the cuts to mental health programs and to services for people with developmental disabilities. To measure the impact of those cuts on the population served, I’m going to make comparisons using the total funds in the budget – all money spent in those divisions regardless of whether it’s from federal sources, state sources or grants – because it is total funds that determine how much or how little an agency can do.

The divisions of Behavioral Health and Developmental Services make up about 20% of the Health and Human Services budget. The House passed budget for FY2012, the first and lowest of the two fiscal years in the budget, is about $1.8 billion for HHS. Of that total, $353 million goes to Behavioral Health and Developmental Services.

The total budgeted HHS spending is about 6% less in total funds than two years before and actually 4% higher than four years before.

Many budget observers would say that while cuts to some programs are quite sensible in difficult economic times, programs that help people who can’t help themselves are in a different category and should bear a significantly lesser burden. The most often cited categories are services for mental health and developmental disabilities.

The Division of Developmental Services actually fares better than HHS as a whole in the House budget. The House budgeted amount is $255 million in 2012. That represents an increase of 7% over 2 years ago and 22% more than 4 years ago.

In contrast, the Division of Behavioral Health actually fares worse than HHS as a whole. Their total fund appropriation in FY2012 is $98 million which is about 18% less than 2 years ago and even 1% less than four years before.

The House budget was a huge step forward in the process. It set priorities and achieves a realistic balance. It also allows us to compare and think about priorities and making some alterations to those priorities.

The House prioritized cuts to state government that were significantly greater than cuts to the local aid half of the budget. HHS quite sensibly saw smaller cuts than the rest of state government did but Behavioral Health saw cuts larger than the department as a whole.

A sensible compromise might bring local aid cuts closer in line to the cuts to state government and a lesser cut to Behavioral Health.

 

 

 

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New Hampshire State Budget by The Numbers

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By Charlie Arlinghaus

April 6, 2011

As originally published in the New Hampshire Union Leader

The draft of the state budget that passed the House last week is a significant cut to state government but much of the political hype about it from both sides is slightly different from the reality of the numbers.

Faced with the worst budget shortfall in recent history, budget writers were forced to either make significant cuts to state spending or to raise taxes. In the midst of a precarious economic recovery, neither the governor nor the House was willing to raise taxes and hurt job growth even a little bit. That left spending cuts.

Everyone agreed going in that cuts would involve more than just eliminating elusive waste and inefficiency or making small cuts for everyone. The government would actually have to stop doing some things that we might think were a good idea in better economic times. The budget that passed the House is without question the biggest cut in modern state history. On apples to apples terms, the proposed budget would spend 11.3% less in general and education funds, the state operating budget, than we will spend in the current two-year budget. That amounts to an actual cut of $564 million.

The budget can be divided into three parts. Debt service is only 5% of the budget but comprises payments for money we already borrowed in previous years and therefore must pay for. It went up 9% and we had no choice. The remainder of the budget can be divided into two halves: local aid and the operations of state government.

The current budget cuts local aid but by only about 4% to $2.2 billion; most of which is for schools. The governor would have cut local aid a bit more but the House added back in $28 million for special education and $29 million for building aid. Otherwise, they were broadly in agreement, notably on eliminating the state subsidy of local government retirement costs.

The biggest disagreement comes over the state government portion of the budget which the House budget writers reduced by 19% or $481 million. In the current two-year budget ending in June, the state government portion can be divided into Health & Human Services (HHS) and the rest of government, each about half.

The House budget writers did not cut those two chunks equally. In fact, spending on HHS functions was essentially flat, dropping $19 million or 1.5% not counting stimulus money. The other half of government declines in this draft of the budget by 29%.

This isn’t meant to minimize the cuts to HHS. Certainly caseloads are still rising and health care inflation is much higher than price and wage inflation. A 1% cut without significant economic recovery to reduce the pressure is difficult. But in setting a smaller cut for HHS budget writers set clear priorities.

Programs for those who most need help were almost level funded. The rest of government was cut by 29%. Most of us would probably lean toward that sort of priority setting if we had to find a way to reduce the budget.

Having said that, I don’t think the priority setting in the current draft of the budget was all well placed. Because House leadership has been focused on a misplaced downshifting argument, local aid has emerged somehow as a sacrosanct part of the state budget.

The argument is that while cuts to state government operations are fine, any reduction in local aid is a “downshift” and will result in higher property taxes. This argument wrongly presumes that state government has the ability to reduce its expenditures 29% in some areas but local governments can’t ever reduce anything even in budget crises.

It would seem more rational that if state government and local aid are each half of the state operating budget, the part funded by regular taxes, then each half could be reduced by a similar percentage without one side claiming the other is shifting its burdens. In contrast, the current House draft cuts local aid by 4% and the rest of state government by 19%.

I think an 11% cut to each half would be equitable. Without question it would require difficult choices to be made at the town and school level but no more difficult than the choices being made in Concord.

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The Pension System is Broken and Can’t Be Fixed By Tinkering

By Charlie Arlinghaus

March 2, 2011

As originally published in the New Hampshire Union Leader

Pension and retirement obligations are the biggest long term problem facing the state. New Hampshire’s four long-term pension and retiree health benefit obligations have current unfunded liabilities of more than $7 billion. Changing the state’s pension and health obligations is no longer optional.

Through the Retirement System, the state administers a pension plan for state and local employees and a retirement health benefit. Those two components have unfunded liabilities of $4.7 billion. In addition, outside of the system there is a much larger health benefit with an unfunded liability of $2.4 billion and a much smaller judicial retirement plan with rapidly eroding funding — $15 million in the hole after just five years.

Reform efforts right now are focused on the largest component, the pension plan of the Retirement System. For state and local employees, employees contribute a percentage of their income and the taxpayers contribute a percentage. Theoretically, the contributions plus the investment income earned on those contributions pay for the cost of an employee’s retirement benefit earned according a formula based on years of service and three highest years of salary.

The problem is theory hasn’t worked in practice. When the system began in 1967, it was expected that an employee would receive benefits for about ten years. The current life expectancy of a 65 year old is 20 years and most employees retire well before 65. For police and fire retirees who can retire as early as 45, they can earn benefits for twice that long.

Over the last 25 years, employees and employers (taxpayers) have each contributed about $2.1 billion into the system. Those contributions have earned a total of just over $5 billion. Despite that, the system is short $3.7 billion in the pension benefit alone.

Most of the theories behind the shortfall are wrong. Switching from one valuations schematic to another made a small difference but the two (open group aggregate and entry age normal) were relatively close to each other in the seven years before we switched from one to another.

Taxpayer contributions did not match employee contributions for many of the last 25 years but they have exceeded them in recent years and the aggregate contributions are roughly equal.

The problem with the system is that it assumes a very static employment history when almost no one’s is static. If an employee stays in the same job at the same level with no promotions other than cost of living adjustments, the system works for most state employees.

But if your salary increases more than 2.5% in a year because of step increases or perhaps getting a better job, the system doesn’t keep up. Your benefit will be based on your highest salaries not your average salaries. But your contributions were based on a much lower number.

In a world where almost no one can be expected to stay in the exact same job with no promotion and no increased responsibility for 20 or 30 years, our retirement system works only if they do. That means that for the vast majority of employees contributions and investment income don’t cover their costs and the system will get worse and worse.

In fact the history of the system bears this out. While the unfunded liability has been increasing every year, we took steps a few years ago to supposedly fix the system. The greater portion of the taxpayer contributions to the system are to pay off the accumulated liability. If the fix is working our accumulated liability will slowly decrease over 26 years to zero.

Yet last year, when the system had a significantly better than average investment return and taxpayers supposedly paid a large installment on the unfunded liability, liabilities still increased by more than a billion dollars

To make matters worse, this picture is probably overly optimistic. Our estimate of the unfunded liability is based on a number of assumptions. One of them is that the system’s return on investments is going to be 8.5% per year. This assumed rate of return is significantly higher than the historical experience of the pension fund. Assuming a higher rate of return makes the problem look better than it really is.

The pension system is broken and tinkering on the edges won’t fix it.

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NH Budget 101 Presentations

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January 2011

Charlie Arlinghaus on Understanding the State Budget and Current Shortfall.

Grant Bosse presented on Growing State Debt Shortfall.

Rep. David Campbell outlined State Transportation Spending .

and Rep. Ken Hawkins explained The State Retirement System.

 

Please note that each file is a large pdf file and may take a few moments to download

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Accounting Gimmicks Can’t Hide State’s Fiscal Disaster

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Charles M. Arlinghaus

 October 6, 2010

Originally published in the New Hampshire Union Leader

After months of discussion about the exact size of the historic deficit we face next year, the news is filled suddenly with reports of a surplus. Did something change or are we just in the middle of election season? The short answer is things haven’t changed but the easiest distraction from bad news is to ignore it completely. The deficit is still huge. It will dominate the state’s financial future. And, paradoxically, we have a mid-budget surplus for the same reason we face a huge deficit.

New Hampshire has a two-year budget but sensibly mid-budget progress reports are announced. After weeks of discussion of the state’s dismal outlook, the governor eagerly announced this week that the state ended FY2010 in June with a $70M surplus. The public can be forgiven for being confused about how it is possible to have a surplus and also to be facing a huge deficit.

The current legislative leadership and administration will tell you they made the tough decisions and balanced everything through sound financial planning. Let’s look at what happened and decide for ourselves if it was sound decision making or if those decisions were bad for the long term stability of the state.

Although the total budget increased over the last four years by $2 billion, the increase in general and education funds was about $700 million while state tax revenues declined slightly. That revenue decline put a lot of pressure on the state budget. Ordinarily, without the money to pay for it, spending would need to have remained flat as well.

To keep increasing spending as if they had the money, legislators and the governor were forced to turn to three temporary sources for $597 million of one-time revenue. The largest chunk of temporary scaffolding came from the federal stimulus. Some stimulus money is meant for dedicated projects like paving. However, the current budget for FY10 and FY11 includes $351 million in state bailout funds to be used for whatever we wish. It goes away next year.

The budget also includes $90 million in one-time state revenues like the sale of state assets. Obviously you can’t sell things twice so that revenue also goes away next year.

Finally, the most dangerous thing we did was to borrow $156 million to plug what would have been a deficit including borrowing more money to pay the interest on money we borrowed in the past. As an added bonus, under state accounting, if you pay for a program with borrowed money it doesn’t count as spending so you can claim it as a spending cut.

All of that $597 million has to be replaced or the spending it paid for has to be cut. In addition, the state undertook $300 million of one-time spending reductions that will come back. For example, we suspended municipal aid but promised towns it was temporary and will come back next year. That’s how we can claim balance this year and have a deficit of historic proportions next year. Back in the day, this was referred to as robbing Peter to pay Paul and generally frowned upon.

Even among all the excess money, further games were played. The feds gave us $80 million each of FY10 and FY11 to prop up education spending. As the first fiscal year drew to a close in June, politicians fretted that the mid-budget number might be embarrassing so they fast-forwarded and spent $160 million in the first year and none in the second.

Spending it all in one year doesn’t have any impact on the state’s two-year budget but the quick infusion of $80 million turns the mid-year shortfall into a mid-year surplus just like magic.

A good sign that the nominal surplus is illusory is that no one has proposed using it to restock the rainy day fund. That’s simply because the surplus is a shell game not real.

For the future of our state, the real question is where we stand going forward. While people disagree about the exact number, no budget observer would disagree that the starting budget problem for next year is somewhere between $600 and $900 million.

When a politician starts talking to you about the supposed surplus, simply nod your head and humor them. Then politely turn the conversation to the current state of affairs. How big do they think the hole is for the next budget?

The current budget problems were covered up with borrowing and bailouts. Do they intend to borrow another $156 million for spending? Are they counting on another bailout from Washington or will they join the 37 other states that reduced their spending while New Hampshire increased its spending?

We have a huge problem in the future. Pretending it doesn’t exist won’t make it go away.

 

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Accounting Gimmicks Can’t Hide State’s Fiscal Disaster

Charles M. Arlinghaus

 October 6, 2010

Originally published in the New Hampshire Union Leader

After months of discussion about the exact size of the historic deficit we face next year, the news is filled suddenly with reports of a surplus. Did something change or are we just in the middle of election season? The short answer is things haven’t changed but the easiest distraction from bad news is to ignore it completely. The deficit is still huge. It will dominate the state’s financial future. And, paradoxically, we have a mid-budget surplus for the same reason we face a huge deficit.

New Hampshire has a two-year budget but sensibly mid-budget progress reports are announced. After weeks of discussion of the state’s dismal outlook, the governor eagerly announced this week that the state ended FY2010 in June with a $70M surplus. The public can be forgiven for being confused about how it is possible to have a surplus and also to be facing a huge deficit.

The current legislative leadership and administration will tell you they made the tough decisions and balanced everything through sound financial planning. Let’s look at what happened and decide for ourselves if it was sound decision making or if those decisions were bad for the long term stability of the state.

Although the total budget increased over the last four years by $2 billion, the increase in general and education funds was about $700 million while state tax revenues declined slightly. That revenue decline put a lot of pressure on the state budget. Ordinarily, without the money to pay for it, spending would need to have remained flat as well.

To keep increasing spending as if they had the money, legislators and the governor were forced to turn to three temporary sources for $597 million of one-time revenue. The largest chunk of temporary scaffolding came from the federal stimulus. Some stimulus money is meant for dedicated projects like paving. However, the current budget for FY10 and FY11 includes $351 million in state bailout funds to be used for whatever we wish. It goes away next year.

The budget also includes $90 million in one-time state revenues like the sale of state assets. Obviously you can’t sell things twice so that revenue also goes away next year.

Finally, the most dangerous thing we did was to borrow $156 million to plug what would have been a deficit including borrowing more money to pay the interest on money we borrowed in the past. As an added bonus, under state accounting, if you pay for a program with borrowed money it doesn’t count as spending so you can claim it as a spending cut.

All of that $597 million has to be replaced or the spending it paid for has to be cut. In addition, the state undertook $300 million of one-time spending reductions that will come back. For example, we suspended municipal aid but promised towns it was temporary and will come back next year. That’s how we can claim balance this year and have a deficit of historic proportions next year. Back in the day, this was referred to as robbing Peter to pay Paul and generally frowned upon.

Even among all the excess money, further games were played. The feds gave us $80 million each of FY10 and FY11 to prop up education spending. As the first fiscal year drew to a close in June, politicians fretted that the mid-budget number might be embarrassing so they fast-forwarded and spent $160 million in the first year and none in the second.

Spending it all in one year doesn’t have any impact on the state’s two-year budget but the quick infusion of $80 million turns the mid-year shortfall into a mid-year surplus just like magic.

A good sign that the nominal surplus is illusory is that no one has proposed using it to restock the rainy day fund. That’s simply because the surplus is a shell game not real.

For the future of our state, the real question is where we stand going forward. While people disagree about the exact number, no budget observer would disagree that the starting budget problem for next year is somewhere between $600 and $900 million.

When a politician starts talking to you about the supposed surplus, simply nod your head and humor them. Then politely turn the conversation to the current state of affairs. How big do they think the hole is for the next budget?

The current budget problems were covered up with borrowing and bailouts. Do they intend to borrow another $156 million for spending? Are they counting on another bailout from Washington or will they join the 37 other states that reduced their spending while New Hampshire increased its spending?

We have a huge problem in the future. Pretending it doesn’t exist won’t make it go away.

 

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