Will legislators add new unfunded liabilities to State Retirement System?

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On public policy, New Hampshire should always beat Vermont, as a matter of principle. That goes double for the handling of money. The state that sends a self-proclaimed “socialist” to the U.S. Senate should never get to say it’s more responsible with a dollar.

New Hampshire has bragging rights here. The Granite State is 12th in the Mercatus Center’s ranking of states by fiscal condition. Maine is 34th, Vermont 39th, Massachusetts 47th. 

And yet there’s one area where New Hampshire and Vermont are uncomfortably close: the Pew Center’s national ranking of the best-funded state retirement systems. Both states are down in the 30s, with less than 70 percent of their pension liabilities funded. 

So Vermont officials might have watched approvingly on Wednesday when the House advanced a bill that would worsen the financial position of the New Hampshire Retirement System. 

Instead of edging the State Employee Retirement System closer to the point at which it might some day have enough money to pay what the state owes its retirees, House Bill 1205 would edge us slightly in the opposite direction.

The state’s retirement system ended the 2019 fiscal year 64.8% funded. The system hasn’t been above 70% funded since 2004. Vermont has two state retirement systems, one for state employees, which is just over 70% funded, and a separate system for teachers, which is funded at about 54%. Pew’s latest ranking (using 2017 data), puts Vermont at 64.3% funded.

By contrast, Maine is a Northern New England lighthouse beacon of frugality, with 82% of its obligations funded. 

HB 1205 would nudge New Hampshire downward by eliminating an existing 10% reduction in retiree benefits that kicks in for Group 1 employees (general government employees and teachers) at age 65. The bill would cost the retirement system $37 million, according to its fiscal note. It would cause a slight (less than half a percentage point) increase in government contributions to the system (that is, taxpayer contributions).

When the mandatory cut was passed into law in 1988, 65 was the Social Security retirement age. The age has since inched up to between 66 and 67 years for retirees born in 1938 or later, but state law has kept the pension reduction pegged to age 65.

As a technical update, one can see the logic behind HB 1205. But that logic doesn’t generate its own money. The bill includes no funding to pay for its increased cost.

It’s a $37 million “giveaway,” Rep. Carol McGuire said when speaking against the bill. 

McGuire wasn’t able to convince her colleagues to vote against the bill. But she did succeed in tabling a bigger one, HB 1341. That bill contains a lot of changes, the largest being that it would raise the contribution rate for a large chunk of Group II employees by changing the formula for calculating their pensions. Municipalities would be hit with a large, mandatory increase in their retirement contributions. 

The bill as originally drafted would have added $142 million in unfunded liabilities to the State Retirement System. An amended version on the House floor on Wednesday had no fiscal note, but legislators say it would cost less than the original. 

Supporters tried and failed to remove the bill from the table on Wednesday, so it remains in limbo for now.

Though New Hampshire’s general frugality has kept the state from issuing the sorts of lavish unfunded promises to state employees that have made jokes of the retirement systems in Connecticut, Illinois and New Jersey, most state pension funds are more fully funded than ours. 

Recent returns indicate that loading the system with more unfunded promises would be particularly risky this year. The retirement system’s rate of return on investment was only 5.7% last year, below the assumed 7.25% and well below the previous year’s 8.9%. That translates into a $229 million (32%) drop in investment income from 2018 to 2019.

The retirement system has a plan to move toward full funding over the next two decades, but it relies on hitting investment revenue targets. Consistently lower market returns, like last year’s, and adding large unfunded liabilities would throw off the plan.

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State education spending sees significant increase in compromise budget

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Through a combination of one-time expenditures and increases in baseline formulas, the new state budget produces significant increases in education funding over the next two years. It is no wonder that state officials hailed the compromise as a windfall for public schools.

The budget was built upon an education funding compromise that dramatically reduced the budget’s structural deficit by shifting more than $60 million in recurring education spending to one-time spending.

But the other part of that compromise built into the budget several increases in baseline education spending that will require additional revenues in the future.

As part of the deal, increases in fiscal capacity disparity aid and free-and-reduced-price meal aid expire at the end of the 2021 fiscal year rather than continue indefinitely. Those bumps in aid are financed with $62.5 million in one-time money from the state’s budget surplus.

But other education aid increases are built into the baseline budget.

The budget changes the formula for kindergarten aid to count all kindergarteners as full-day rather than half-day students. That change will cost about $9.5 million a year above what Keno revenues had previously covered, according to the Office of Legislative Budget Assistant.

The budget also eliminates the formula by which stabilization grants were being gradually reduced. Stabilization grants are supplemental funds school districts receive as compensation for student enrollment declines. That is, schools get state funds to “stabilize” their budgets as they lose students (and the state adequacy aid that comes with those students).

The stabilization grants had been scheduled to decline by four percent of the 2012 grant level each fiscal year. The compromise budget restores them to 100 percent, permanently.

That change in state law increases 2020-2021 education spending by $56 million and adds about $6.2 million a year to the state budget going forward, according to the Office of Legislative Budget Assistant.

Finally, the budget increases the base per-pupil adequacy grant from $3,363 to $3,708. This increase was already scheduled under previous law, so it is not a new change. But it does drive state education spending higher.

Figures from the Office of Legislative Budget Assistant show that, including one-time and recurring expenditures, the budget spends $196 million more on education from FY19 through FY21, a 19.9% increase in appropriations over the 2019 budget.

Of that, $41 million is added for FY 2019, and $155 million for fiscal years 2020-21.

The line-item increase in total budgeted state education spending from FY19 to FY21 weighs in at 9.6%.

Adequate education aid accounts for the largest portion of the added spending. It rises by $111.9 million over the FY 2019 numbers approved in the previous budget.

Those are substantial spending increases, celebrated by both the Republican governor and Democratic Legislature. Yet we can’t help but suspect that political attack ads next year will frame things somewhat differently.

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Stabilizing business tax rates at last (for two years, anyway)

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Throughout 2019’s prolonged budget debate, two competing claims dominated the dispute over business tax rates. This week’s budget deal confirms conclusively which side was correct.

For months, Democratic leaders in the Legislature claimed that their budget — the one Gov. Chris Sununu vetoed — “stabilized” business tax rates. The budget did not raise taxes, they said repeatedly, but maintained existing tax rates and only eliminated tax cuts that were scheduled to take place in the future.

Republican Gov. Chris Sununu countered by accusing legislators of raising both the 2019 business tax rates and the 2021 rates.

The budget compromise Gov. Sununu signed this week reveals the truth. Unlike the vetoed state budget, this one actually keeps business tax rates the same for 2019 and 2020. It confirms that legislative leaders were incorrect when they claimed that their previous budget did not raise taxes.

On Jan. 1, 2019, the Business Profits Tax rate dropped from 7.9 percent to 7.7 percent and the Business Enterprise Tax rate dropped from 0.675 percent to 0.6 percent.

The budget that Gov. Sununu vetoed raised those rates back to their 2018 levels of 7.9 percent and 0.75 percent. It did so immediately, not in the future. It further eliminated the reductions (to 7.5 percent and 0.5 percent) scheduled to take place in 2021.

The governor insisted that the 2019 tax rates remain intact. Legislators insisted that rates return to their 2018 levels. There seemed to be no middle ground. Until this week.

How did this budget bring the two sides to agreement?

It did so by keeping this year’s tax rates intact and using revenue targets to trigger future changes.

The compromise budget keeps this year’s rates at 7.7 percent and 0.6 percent. Legislative leaders do not call this a tax cut. That is an admission that their previous budget did, in fact, raise business tax rates in 2019, not just in the future.

Under the compromise, if total general and education fund revenue for the current state fiscal year neither rises nor falls by 6 percent or more, those tax rates remain in place through the next fiscal year.

That is, the rates remain stable if revenue remains stable. At last, the budget “stabilizes” business tax revenue.

However, if total revenue rises by 6 percent or more, business tax rates will fall to the rates they were already scheduled to hit in 2021: 7.5 percent and 0.5 percent.

If total revenue falls by 6 percent or more, business tax rates will automatically snap back to their 2018 levels of 7.9 percent and 0.675 percent. This is another admission that the vetoed budget raised, rather than stabilized, business tax rates.

In essence, each side is betting that the economy will turn in their political favor in the next year.

In this deal, Democrats seem to be taking the bigger risk. To get what they have spent the better part of this year advocating, they need the economy to tank.

They have insisted that “out-of-state corporations” are unfairly undertaxed and that the state desperately needs more revenue. To achieve both, they have advocated higher business tax rates. Yet they get those higher rates only if state revenue comes in more than $155.8 million below expectations.

(Revenues have fallen slightly so far this fiscal year, but not at a rate that would trigger the tax increase.)

Gov. Sununu, on the other hand, gets two additional years of stable, relatively low tax rates (2019 and 2020). In the third year, he gets either a continuation of those rates or an additional tax cut unless state revenues quickly crater.

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Five secrets of the Legislature’s 2020-21 state budget

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State budgets are like the Grinch’s Santa sack. They’re huge, unwieldy, and overstuffed with giveaways and surprises. Their contents are a mystery to anyone who doesn’t have hours to crawl inside and unwrap every little package, which is pretty much every normal person. 

We’re not normal (we like reading budgets), so we’ve done the unpacking for you.

Here are five interesting things we’ve found in the Legislature’s budget that have been overlooked or underreported in the news.

  1. The budget imposes immediate business tax increases. We’ve written about this before, but news reports continue to get it wrong. The budget does not merely repeal rate cuts scheduled to take place two years from now. It also raises this year’s Business Profits Tax and Business Enterprise Tax rates by 2.6% an 12.5% respectively. We have more on the budget’s tax increases here.
  1. Budget writers created a dangerous structural budget deficit. Legislators shifted much of the current budget surplus into the 2020-21 budget, then spent that one-time money on recurring line items. As a result, expenditures for fiscal years 20-21 exceed revenues by $134 million. That creates a hole in the ongoing budget that future legislators will have to fill. We have more on that here.
  1. From this fiscal year through the end of 2021, the budget spends almost $500 million more than Gov. Chris Sununu proposed spending. You can see our outline of the differences here.  
  1. The budget eliminates the existing prohibition on spending state taxpayer money on abortions. This repeal is located in House Bill 2 on Page 142, line 294, which states that the 2017 session law “prohibiting reproductive health facilities from using state funds to provide abortion services, is repealed.” 
  1. The budget moves occupational licensing revenue into the General Fund. When a barber, tattoo artist, nurse or other applicant for a state license pays the required fee, the money is kept in a segregated “office of professional licensure and certification fund.” That fund is to be used only to finance the state’s licensing regime. The budget changes the law to require that any licensing funds left in the account at the end of each fiscal year be moved to the General Fund. This would lend support to any licensed professional’s complaint that state fees are too high.

These are only a few of the newsworthy items we found that have received little or no media coverage. We’ve found more, which we will share in future posts.

If you want to do your own digging through the dark, cavernous goodie bag, knock yourself out. You can read HB 2, the budget “trailer bill” that contains the legal changes, here. 

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How the Legislature’s budget compares to the governor’s

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The Legislature’s final budget spends $497.3 million more than Gov. Chris Sununu’s budget in General and Education Trust Fund appropriations in the 2019 and 2020-21 fiscal years.

In this report, we examine the three major differences between these competing budget visions: total General and Education Trust Fund appropriations, business tax rates, and disposition of the current-year surplus.

Read the full report here: Budget Visions Legislature vs Governor Final.

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Dispelling myths about business taxes and the Legislature’s 2020-2021 budget

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Some supporters of the Legislature’s 2020-2021 budget are making inaccurate claims about its business tax provisions.

1. They claim that the budget’s tax increases apply only to rate reductions that are scheduled to take place in the future, and not to current-year tax rates.

2. They claim that the existing business tax rates and the lower rates scheduled to take effect in 2021 are tax cuts for “out-of-state corporations.” This brief shows how those claims are incorrect. 

Read our brief here: Bartlett Brief 20-21 Budget Biz Taxes.

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House, Senate budgets spend & tax significantly more than governor’s

The budgets passed by the New Hampshire House and Senate propose significant spending increases that are unsustainable without tax increases. Unsurprisingly, both contain large tax increases to cover the costs of their higher spending. By contrast, Gov. Chris Sununu’s budget keeps spending to levels that are sustainable without raising taxes.

A Josiah Bartlett Center comparison of the governor’s budget proposal to the budgets that passed the House and Senate shows that the House would spend $320 million more than the governor in Fiscal Year 2020-21 General and Education Fund appropriations, while the Senate would spend $296 million more than the governor.

The governor’s budget would increase General and Education Trust Fund spending by 3.5% in FY20-21, compared to 10.8% for the House budget and 8.7% for the Senate budget.

Before counting the paid Family and Medical Leave program, the House budget proposes $268.1 million in tax increases for FY20-21, while the Senate budget proposes $158.6 million in tax increases over the biennium.

All three budgets included additional revenue from sports betting and from expanding the tobacco tax to cover electronic cigarettes.

The House and Senate budgets then add $168.6 million in payroll taxes to cover the cost of a state-run paid family and medical leave program, which is not part of the governor’s budget.

The full budget brief is available in pdf form here: Budget Visions 2020-21 House, Senate, Gov

 

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Legislators vote to raise business taxes, not ‘repeal future tax cuts’

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The Senate this week joined the House passing tax increases on New Hampshire businesses. Some reports give the impression that the House and Senate budgets would not raise taxes, but would repeal future tax cuts. Here we explain why that is not correct and the budgets raise business taxes, including the rates that businesses will pay this year.

Under current law, the business profits tax rate is 7.7 percent and the business enterprise tax rate is 0.6 percent for “taxable periods” that end “on or after December 31, 2019.” 

Both the House and Senate budgets would repeal those rates and replace them with rates of 7.9 percent and 0.675 percent, respectively. 

The budgets also would repeal the existing state law that lowers those rates further, to 7.5 percent and 0.5 percent, for taxable periods that end on or after Dec. 31, 2021.

Understanding how businesses pay taxes

What does it mean when state law declares that a tax rate applies to a “taxable period ending on or after December 31, 2019?” 

It does not mean that the tax rate takes effect on January 1, 2020.

A “taxable period” is not a calendar year. State law (RSA 77-A:1, IV) defines “taxable period” as a business’ fiscal year for federal income tax purposes. 

So a taxable period “ending on or after December 31, 2019” is a business’ fiscal year that starts in 2019 and ends on or after Dec. 31, 2019. 

A business will start to pay those tax rates in 2020, then, right? 

No. 

Businesses’ fiscal years do not always correspond with the calendar year. They can begin or end on any day of the year. 

Plus, businesses are required to pay taxes quarterly, not annually. 

Under New Hampshire law, any business with an estimated tax liability of more than $200 is required to estimate what its next year’s tax bill will be, and then submit 25 percent of that payment each quarter. 

Here is how that works.

In 2019, employers begin paying quarterly taxes for fiscal years that end “on or after December 31, 2019.”

For example, a business with a fiscal year that ends April 30, 2019, will start a new fiscal year on May 1, 2019. That new fiscal year will end April. 30, 2020. 

So starting on May 1, 2019, that company will be taxed at the rate in effect for “taxable periods ending on or after December 31, 2019.” It will make payments at that rate every four months throughout its tax year.

Under current law, companies with fiscal years starting May 1, July 1, and Oct. 1, 2019, will be making business profits tax payments at the 7.7 percent rate and business enterprise tax payments at the 0.6 percent rate this year. 

That’s why the House and Senate budgets do not just affect future tax rates that employers are not yet paying. The budgets would raise those fiscal year 2019 tax rates to 7.9 percent and 0.675 percent. 

So the House and Senate budgets would not merely not repeal future tax cuts, as is being reported. They would raise taxes on businesses this year.   

A tax increase is a tax increase

Furthermore, it is worth noting that “repealing a future tax cut” also is a tax increase. Those tax cuts are set in existing law. They apply automatically. To replace them with a higher rate is to raise taxes.

 

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Concord’s expanding black hole

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Scientists on Wednesday revealed what they claimed was the first ever photograph taken of a black hole. But this can’t be true because people have been taking pictures of government since the dawn of photography. 

This early photo of the U.S. Capitol was taken in 1846, 70 years before black holes were characterized and 125 years before the first one was discovered.

Black holes famously consume everything within their reach. Government demonstrates a similar appetite.  

Humanity fears the unstoppable power of the black hole. Anything that encounters a black hole is pulled into a dark abyss from which not even light can escape. Slip within one’s reach and doom is certain.

Thankfully, government can only aspire to such inescapable domination. As a creation of man, government can be controlled. But that can be done only by suppressing its natural tendency to expand and consume. 

We do that first by dividing and balancing its power. In this way we turn its power against itself. But that is not enough. We must also control ourselves.

Government will constantly expand as long as we fail to guard against the natural human temptation to increase our own status and authority by enlarging the ravenous, massive force we have created to serve us.   

Resisting this temptation is difficult. Think of all the good a more powerful government might do if only it could be kept in “the right” hands. Giving in to that temptation causes government power to expand, which necessarily causes the power of the governed to shrink. 

It is as The Simpsons explained about black holes in Season 24. 

Sadly, too few people in power take seriously the wisdom passed down by the Founding Fathers — or The Simpsons. 

The day after the release of the black hole photo, the N.H. House of Representatives passed a budget that increases state baseline spending by $382 million and raises taxes and fees by $417 million, as we explained in a report just after news of the black hole photo broke. These are not small, incremental changes. The spending figure is a 14.8 percent increase over fiscal year 2018. 

The House budget aggressively expands the size and power of state government. It’s important to recognize that the House’s disagreement with Governor Chris Sununu is not primarily about services provided. It is about power. 

The best example of this dynamic is the House’s immediate rejection of the governor’s compromise on paid family and medical leave. In the governor’s proposal, that service — a priority of the House majority — could be provided by the private sector through voluntary transactions. There would be no coercion, no tax, no government expansion. The House instantly rejected this option in favor of a mandate, a tax, and an expansion of governmental power. 

The surplus offers another example. The governor had spent the state’s large budget surplus on items that do not fall within the baseline budget. This was to avoid creating obligations on future budgets — obligations that would drive up taxes and expand the size of government. The House instead rolled it into the regular budget, necessitating tax increases.

In sum, the House budget expands both the size and the reach of state government. It enlarges state power and authority in much the same way a black hole grows — by grabbing things that were not previously under its control and absorbing them. When this is the primary motivation of government, all that is just outside of government’s reach ought to be worried.  

 

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House budget proposes $382 million in new spending, $417 million in new taxes and fees

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A new briefing paper from the Josiah Bartlett Center for Public Policy shows that the House’s 2020-2021 budget proposal spends $382.4 million more in state funds than Gov. Chris Sununu’s proposed budget and includes $417.7 million in new taxes and fees. 

The paper shows that the divergence in governing philosophies between the Republican governor and the Democratic House majority could hardly be more stark. 

Sununu’s budget would increase fiscal year 2021 general fund spending by 5.4 percent over fiscal year 2018. The House budget increases spending over the same time period by 14.8 percent.

The tax increases show an equally sharp philosophical divergence. 

Gov. Sununu’s proposed budget contains one expanded tax (extending the tobacco tax to cover electronic cigarettes) and a new fee (a charge on newly allowed sports betting). The House budget also expands the tobacco tax and includes the sports betting fee but also includes hundreds of millions of dollars in new taxes to cover the budget’s spending increases.

The House budget includes a sales tax on marijuana transactions ($4 million), business tax increases ($94.1 million), a new capital gains tax ($150 million), and a new wage tax (payroll tax) to fund a compulsory paid family and medical leave program ($168.6 million). 

Without those new taxes, the House budget does not balance. In fact, it also doesn’t balance without the surplus built up over the last two years.

Both Gov. Sununu and the House spend the current state budget surplus. But the governor treats the surplus as one-time revenue attributable primarily to the immediate stimulatory effects of the federal Tax Cuts and Jobs Act of 2017. He therefore dedicates the money to one-time appropriations rather than recurring spending. 

By contrast, the House treats the money as ongoing revenue and uses it to increase baseline state appropriations. Spending it this way requires future tax increases to sustain the higher level of spending, something the governor sought to avoid. 

The House budget would turn state taxation and spending sharply upward and put it on a rising trajectory into the foreseeable future.  

(A previous post in this space failed to account for a relocation of lottery revenues in the governor’s budget. That failure inaccurately put the House spending figure $584 million above the governor’s.)

A copy of the full report in pdf form is here: Budget Visions 2020-21-4.

 

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