Trains are Shiny But the Numbers Don’t Work

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Charlie Arlinghaus

January 14, 2014

As originally published in the New Hampshire Union Leader

Public policy is not about bright shiny objects. Too often politicians are so distracted by the shininess of an idea that they forget what their policy goal is. The classic example of this is the glassy eyed fascination so many people have with the romance surrounding trains. People think trains are really cool so let’s get one. It doesn’t really matter why. The excitement around the vehicle obscures the policy goal and the possible solutions.

Trains are and have always been very romantic. The mystique surrounding clouds of steam rolling across the platform of a train shed under Eiffel Tower like girders exerts a hold on our imagination that Greyhound was never able to capture. We all feel like Cary Grant in North by Northwest when he says to Eva Marie Saint, “Beats flying, doesn’t it?” Our attraction for the mode distracts us from the specific problem and economic considerations.

Regular passenger and commuter rail service to central New Hampshire ended in 1967. In an election year gift, the federal government paid for a year of commuter rail all the way to Concord in 1980. The election cut the money and the trains stopped.

According to the census bureau, about 85,000 New Hampshire residents commute to work somewhere in Massachusetts. A train along the I-93 or Everett Turnpike corridor would enable those who live in that corridor, live near a station, and work in Boston itself to commute to work.

Although some tout allowing Bostonians to commute to jobs in Manchester, very few people commute in reverse and the expense doesn’t justify the tiny number it would help. The real policy goal is to help people commute to Boston – or at least that area of Boston convenient to North Station – this doesn’t help much if you work in Woburn or Burlington or Framingham.

The major obstacle is price. Extending MBTA commuter rail to Manchester – the current preferred option – would require significant subsidies and an enormous capital investment which would never be recovered.

The capital cost of the program has been lowered to $250 million. To put that in perspective, the state borrows just less than $125 million every two years. So if we did no other borrowing whatsoever – for buildings, major projects, and other capital expenses that are generally funded at less than half of what agencies request – if we did none of that for four years, we could build a train.

At that point, we’re ready to start losing money hand over fist. One of the most successful train projects in the recent history of the United States has been the train from Portland to Boston known as the Downeaster.  Geographically and in its commuter focus it’s quite similar to the project advocates hope to build along I-93 instead of I-95.

The Downeaster carries 530,000 passengers in a year and needs $8.4 million from the State of Maine to cover its losses. And that’s the most successful passenger rail model in recent history.

If our goal is to move commuters to Boston efficiently, we already have a program. The Boston Express bus also moves more than a half million passengers a year (550,000 in the comparable time period) but does it at less than a tenth of the cost — $750,000 instead of $8.4 million.

If the policy goal is to operate a commuter service to Boston to satisfy the federal government mitigation requirements in a highway corridor, we already have one and it operates at a tiny fraction of the cost. But then Cary Grant rode the train and not the bus.

It is important to understand, however, that every policy choice displaces other choices. An additional $250 million in capital costs in a state that saw its debt explode by 40% from 2007-2011 is simply not available. The $8 million or more a year would have to come by cutting something else.

One plan is to use federal grants including the funds referred to as CMAQ. Some advocates don’t even count that as state money. Of course, that’s nonsense. Money being used today for needs identified in the state’s ten-year transportation plan would be displaced and their funds taken away.

 

The governor’s speech last week made a train the centerpiece of her economic development plan. Between now and her budget address next month we can only hope she might explain what will be cut to pay for this boondoggle.

 

 

 

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Politicians in Concord Could Learn a Lot From Saturn

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Charlie Arlinghaus

January 21, 2014

As originally published in the New Hampshire Union Leader

Politicians often seem like they are from another planet but today I think a few people in Concord could learn a lot from Saturn. Politicians on both sides of the political spectrum are easily tempted to come up with pretend solutions that aren’t focused on the real problem but serve their own political purposes. The more complex a problem is, the greater the political temptation can be.

It is no secret that the greatest challenge facing New Hampshire’s future is economic development. A once proud and thriving state now languishes in the doldrums of economic stagnation. Oddly, politicians familiar with the problem nonetheless can’t see how it might affect other issues they fret over.

Politicians wonder why young people don’t stay here yet have trouble figuring out that the lack of jobs might have anything to do with it. It shouldn’t be that hard to figure that the very mobile younger adults of today might be more likely to locate where they can find work.

Similarly, the statewide angst over declining in-migration ought to be less of a mystery. There is no chicken-or-the-egg riddle here. People don’t move here and then figure out how to create jobs, quite the reverse. When we had one of the fastest growing economies in the country a lot of people moved here. When we declined into employment mediocrity people stopped moving here. Correlation is not the same thing as causation but this isn’t a mystery of human nature.

At this point, virtually everyone agrees that jobs are our first priority. The disagreement is about how to get there.

We can learn a lot from Saturn – not the planet with the icy rings but the General Motors project started in the 1980s and closed by the federal government in the bankruptcy/bailout recently.

GM went on a nationwide search in the mid-1980s for a location for a new plant for the just created Saturn division. It ruled out Detroit from the start although finalists included some old line auto hotbeds like Kalamazoo. New York offered huge subsidies to lure them but ultimately wasn’t close.

Ultimately a location near Nashville beat out Kalamazoo and Lexington. Prof. Timothy Bartik did a number of academic studies on the subject. His findings are interesting and worth more detail than I can get into here. But they support the conclusion that economic competition is not ruled by any one item.

To be sure, the three finalists had the three lowest tax costs of any location under consideration. But taxes as component of the cost per car were not the only consideration affecting the economic competitiveness of a particular location. The eventual winner had the lowest variable costs overall and the second lowest tax cost.

The costs of energy, housing, and general cost of living that determine wages made a big difference in Nashville’s favor. In addition the responsiveness and low key competence of Tennessee’s government made a big difference. The study also found that if New York – offering incentives greater than a billion dollars — had eliminated all taxes whatsoever they would still not have attracted Saturn.

The suggestion is, not surprisingly, that tax differentials matter but they aren’t the only thing that matter. States are and should be attracted to tax reductions to improve their economic climate because of their immediacy. Many measures, like location and access to railheads, can’t be changed. Other cost-of-living and cost of labor measures change slowly over time. Electric rates, for example, are quite uncompetitive but can’t be lowered in one fell swoop. Home and rental prices which drive cost of living and therefore labor costs can be changed but only slowly.

On the other hand non-competitive taxes can be changed right away. A tax cut, however, is not like a spigot turning on. Rather, it is a strong signal of business sensitivity and one immediate change to our climate. In that sense it affects both the competitiveness spreadsheet and also is a marketing message.

Similarly, the silliest thing we can do immediately is to raise taxes. One nonsensical proposal going nowhere this year would create a capital gains tax and send a signal to investors willing to risk capital that we would prefer they not do so here. Rather than seeking investment, we want to make it more difficult for you to invest in our state. I’m not sure that “please don’t invest in us” is an effective economic development slogan.

Over the next decade New Hampshire has to do short term and long term things to move us up the list in any economic development spreadsheet. It’s not one thing. It’s everything.

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Pension reforms upheld again by State Supreme Court

Josh Elliott-Traficante

January 16, 2015

Today the New Hampshire Supreme Court issued a ruling in the case of American Federation of Teachers –New Hampshire et al v State of New Hampshire, which upheld pension reforms made in 2007 and 2008.

Background

This suit, brought in 2009 by most of the state’s public sector unions, was against two particular changes made to the system. The first dealt with changing the definition of ‘earnable compensation’, by removing ‘other compensation’. In effect, it meant that special duty pay, for example, could not be used in calculating the pension payout. The second dealt with the method of funding cost of living adjustments (COLAs), specifically the move of $250 million from the Special Account into the rest of the trust fund and the elimination of annual COLAs. Both were efforts to shore up the financial stability of the New Hampshire Retirement System (NHRS).

The Unions’ Arguments

The unions argued that these moves impaired the rights of their members, which they were vested in upon full time employment. Changing the terms of how benefits were accrued and the effective halting of granting COLAs was a breach of contract. Likewise, these moves also constituted illegal taking by the government depriving members of the monetary gain these provisions would grant them.

The State’s Arguments:

The state argued that the statutes changed by the law did not constitute a contract. If they did not constitute a contract, then there could be nothing that could be illegally taken from union members. The employees were only vested in their retirement benefit once they retired. In addition, the plaintiffs did not show either the changes constituted a substantial impairment, or did they prove it was retroactive.  In regards to the COLA question, that by its very nature the COLA was based on a contingency, and not a contract. Even if it was a contract, the changes were reasonable and necessary (established as a key consideration by legal precedent for contract modification ) because without the change, the plan’s tax exempt status was jeopardized.

The Lower Court:

Like in the other pension reform cases, the lower court found that both the state and the unions were wrong in their arguments. Relying on the statutes governing the NHRS the court found that vesting both occurred at 10 years and that created a contract. As such, the changing the definition of earnable compensation did constituted breaking a contract, but only for vested employees. The changes to the COLA, though also breaking a contract, were necessary and reasonable to preserve tax exempt status with the IRS.

The Supreme Court:

When ruling in this case, the Supreme Court relied on the Unmistakability Doctrine’, just as it did in its pension ruling last December. Under the ‘unmistakability doctrine’, the court, in determining if a law constitutes a contract or not, must find evidence that the legislature meant to create a contract. “(A)bsent some clear indication that the legislature intends to bind itself contractually, the presumption is that a law is not intended to create private contractual or vested rights.”

Unlike the ruling on contribution rates, the Court had to deal with the issue of the word ‘vesting’. Rather than using the 10 year mark as the lower courts had done, the Supreme Court on the relied on the precedent set by the First Appellate Court, which had found that “when used in the context of a pension plan, the terms ‘vesting’ and ‘contractual’ are not synonymous and references to ‘vesting’ do not necessarily create a contract.” Looking the language that concerns vesting, the Court found “no unmistakable language that the legislature intended that once a member ‘vests’ that a contractual commitment has been established.” ‘Vesting’ in the sense that it is used by the NHRS does not create a contract.

With the vesting question dispatched, the Court then looked at the statutory language for the definition earnable compensation, and found, again, no unmistakable intent by the legislature to bind itself contractually. In looking at the statues concerning COLAs, the Court came to the same conclusion.

Going Forward:

There is still one pension case left outstanding; it had been stayed pending the outcome of these two cases. With this ruling firmly establishing that the use of the term ‘vesting’ does not in and of itself create a contract, and the application of the ‘unmistakability doctrine’ in both this case and in December’s ruling, all of the recent pension reforms are here to stay.

http://www.courts.state.nh.us/supreme/opinions/2015/2015006americanfederationofteachers.pdf

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A Look at the New Hampshire Supreme Court’s Pension Reform Ruling

Josh Elliott-Traficante

 December 11, 2014

Yesterday the New Hampshire Supreme Court handed down a ruling in the case of Professional Firefighters of New Hampshire, et al v State of New Hampshire; representing the culmination of nearly three and a half years of legal proceedings that sought to answer the question: how far can the state go in reforming pensions? The answer: pretty far. The Supreme Court unanimously ruled that increases can be made in employee contribution rates for all employees, regardless of how long they have been working. The increase in employee contribution rates were a key component of the package of pension reform measures that passed in 2011.

Background:

The pension reforms measures passed in 2011 took a number of steps to shore up what was, and still is, among the worst funded state pension systems in the country. Reforms included changing the way pension payouts were tabulated, such as extending the number of years used to calculate the final average salary from the last three to last five, how much overtime could be counted, and increasing employee contribution rates.

Additional suits had been filed (and are still pending) regarding other facets of reform measures, but this ruling on this case, commonly referred to as ‘Firefighters I’ only dealt with the changes made to the contribution rates for employees. Those changes increased rates for employees and teachers from 5% to 7% of salary, firefighters from 9.3% to 11.55% and police from 9.3% to 11.8%. However, the key point in each of these suits is the determination of when ‘vesting’ occurs. Once a person is vested, it means they have property rights that cannot be violated.

The Unions’ Arguments:

In June 2011, shortly after the increase in contribution rates took effect, a group of unions filed a petition in Merrimack County Court, arguing that these changes were unconstitutional. They argued that ‘members become vested in their NHRS benefits upon commencement of permanent employee status” In short, as soon as an employee makes it through their probationary period, how his or her pension benefits are accrued or contributed to on that day can never be changed.

This claim rested heavily on the precedent set in State Employees’ Association v Belknap County. In that case, a number of county employees were not enrolled in the New Hampshire Retirement system, despite several long standing orders from the State Treasury to do so. In that ruling, the court stated that “(retirement)benefits constitute a substantial part of an employee’s compensation and become vested upon the commencement of permanent employee status.” The use of the word ‘compensation’ was critical to the union’s case, as there is substantial judicial precedent in regarding compensation as contractual. With the Belknap ruling using the word ‘compensation’ in describing retirement benefits, the unions argued that retirement benefits were in fact a contract, and therefore changes made by the legislature were in violation of the Contract Clauses both in the U.S. and New Hampshire Constitutions.

The State’s Arguments:

The state argued that the legislation was not a binding contract, and that the only contract formed is the one once the employee retires and begins collecting his or her pension. If that is the case, then changes could be made to the pension system, such as increasing the amount of money an employee must contribute toward it, right up until the moment an employee retires.

The Lower Court Ruling:

Judge McNamara, of Merrimack Superior Court ruled that vesting occurred at ten years; not as some sort of Solomonic decision, but by looking at the letter of the laws governing the New Hampshire Retirement System itself. The RSA in question, 100-A, states that vesting occurs after 10 years, but crucially does not make mention of retirement benefits being considered as part of compensation.

In his ruling McNamara disagreed with the unions’ arguments on the basis of the Belknap County case. McNamara noted the Belknap decision found that RSA100-A only “(E)ntitles government employees to receive benefits in addition to salary, and that both wages and benefits are a substantial part of the employees’ compensation.” He went on to state that the issue at the heart of the case, the ability of the state to alter those benefits, was not presented in any of the case law cited by the unions.

The Supreme Court Ruling:

Both the State and the Unions appealed the decision to the Supreme Court. Leaving the issue of when vesting occurs aside, the Justices went to the heart of the matter: does language of the law concerning pensions constitute a contract?

Relying on previous case law, the Justices relied on the “Unmistakability Doctrine”, which requires the court to determination whether a challenged law has evidence of “the clear intent of the state to be bound to particular contractual obligations.” After review of the language of the statute that establishes the contribution rates, the court found that “the legislature did not unmistakably intend to establish NHRS contributions rates as a contractual right that cannot be modified.” As such, the Court ruled unanimously in favor of the state. With no contractual rights established in the law, the state can change the contribution rates for all employees.

What Does this Mean?

In short, the reforms of the past few years will remain in place. Though the Court only ruled on one narrow piece of the reform package, the impact of the ruling extends to the two other unsettled legal challenges. It its conclusion, the Court found “(T)here is no indication that … the legislature unmistakably intended to bind itself from prospectively changing the rate of NHRS member contributions to the retirement system.” Taking that as a guidepost, a reading of the legal language of the other contested reform measures, turns up nothing that would ‘unmistakably’ establish a contract.

In addition, the bulk of the other reforms made in 2011 were made to those who had not yet hit that critical 10 year mark. Those changes are currently being litigated in the ‘Firefighters II’ lawsuit. Firefighters II is currently stayed, pending the outcome of this weeks ruling and a third suit made against the reforms made to the system in 2008. That third suit, the HB1645 case, which deals with many of the same questions that Firefighters I and II does, was heard before the Supreme Court last month, with no timeline for when a ruling will be handed down.

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Stagnation Needn’t Be Our Destiny

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Charlie Arlinghaus

December 4, 2014

As originally published in the New Hampshire Union Leader

One of the problems for all of us is that we are living in the past. We think reality is the same as it was 15 years ago but in actuality we’ve been left behind and are in danger of becoming a museum piece. New Hampshire has been left behind and most politicians are reduced to talking about a previous reality that no longer exists except in their mind. Prosperity has been replaced by stagnation, dynamic growth by brackish backwater. This mediocrity is the problem of our time but too many don’t notice the problem or admit to the new rules we operate under.

The 1970s, 1980s, and 1990s were heady times of rapid job growth in New Hampshire. Each decade featured a dynamic economy, an extraordinary competitive advantage over our neighbors that made New Hampshire a haven of in-migration and led to New Hampshire being called an island of prosperity surrounded by a sea of socialism.

New Hampshire seemed to be a haven for entrepreneurs and high tech companies, a dynamic new economy remaking itself time and again in the midst of candlelit old economies wedded to the old stagnation we associated with yesterday’s socialism.

At the end of those thirty years, the Federal Reserve Bank of Boston, not a traditional cheerleader for New Hampshire, referred to our state as the envy of its neighbors. But that was then, this is now.

At the height of the envy-causing boom, New Hampshire had 28% job growth in five years (1983-1989). The last eight years saw complete job stagnation – the same number of jobs in 2013 as 2005. No single economic statistic is more important to public policy than this.

We are no longer an island of economic dynamism. We are merely one more pebble in a stagnant economic gravel pit.

Yet too many politicians continue to refer to what was once called the New Hampshire Advantage – the competitive economic advantage we once enjoyed over our neighbors that no longer exists.

Our tax picture is broadly better than most. The Tax Foundation ranks us seventh largely because we have no income tax. But subcategories are troubling. Our business taxes are among the worst in the country and business recruiters report that the first thing they are asked about is tax rates.

Unemployment taxes, workers comp rates, the cost of health insurance (labor costs) are all among the highest in the country. Most troubling, and the biggest roadblock we currently face, are our highest in the nation energy costs.

So much of business relocation is psychological, and the psychology of measure after measure after measure being so high and out of range is that places like Texas and North Carolina look more and more attractive.

In the midst of splashing around in this brackish backwater we are treated to politicians talking about preserving some non-existent advantage.

It’s time to face reality. We are not competitive. College graduates of today do not remember a time when New Hampshire was a great place to look for a job. Their whole life has existed while New Hampshire was a place to be escaped to find a brighter future.

I have seen this film before and I don’t like how it ends. Growing up in Detroit, newsstands stocked the Dallas Morning News so people could read the Sunday want ads. It was more useful to them in finding their next job than the local papers could be. I would hate to see people trade in their Union Leader subscription for the Chattanooga Times.

But our die has not been cast. We have not crossed a Rubicon. Instead we have sat still and stillness can be cured by action. We should not resign ourselves to business as usual and the fate of being the third pea in a Northern New England pod of stagnation.

The dynamism of the past may be gone but we can work to tear down walls to competitiveness. Admit that our advantage is gone and we can fight to get it back. We are still a small state and somewhat more nimble than many would be competitors. We have not gambled millions on giveaways and irreversible programs.

Every action taken in the next legislature should be judged by whether it raises or lowers the price of doing business in New Hampshire, whether it makes us more or less competitive. Stagnation needn’t be our destiny.

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Budget Gimmicks That Will Raid Your Wallet

Charlie Arlinghaus

November 26, 2014

As originally published in the New Hampshire Union Leader

Tis the season for budget games. The groundwork is already being laid for tax increases and budget gimmicks all in the name of a balanced and equitable approach to government. We can only hope that the newly elected are less susceptible to these siren calls than the lot that came before them.

We’ve talked in the past quite often about the mess the state’s budget is in. A month before the election, the governor announced that a shortfall had developed and that she needed department heads to find $30 million in budget cuts just to balance the current two-year budget that expires in seven months. In addition to the $30 million, the department of Health and Human Services had a hole of another $45 million.

This week, with the election long in the rearview mirror, the governor came to the Legislative Fiscal Committee with a list of suggested cuts. But it isn’t anywhere near long enough to close the gap. The budget gap as described by the governor – and she has access to information the rest of us don’t and the legislature doesn’t yet – is $45 million at HHS and $30 million in the rest of government. To offset that $75 million hole, she proposed cuts of $18 million this week.

You don’t have to be a genius at the round hole and square peg game to figure out that $18 million can’t plug a $75 million hole.

So did the hole disappear suddenly or is there something else in the offing? We have a hint as to what’s coming in the governor’s speech. She talked about the problems we all know exist: the current shortfall, lawsuit settlements driving HHS spending, and a big increase in Medicaid caseloads from sources other than expansion. But she also talked – as she has repeatedly for months now – about a supposed business tax problem.

She has regularly suggested that minor changes to business taxes have given the state a big revenue problem. The implication is that the budget hole is a revenue problem. Fortunately, publicly transparent revenue numbers tell a very different story.

We often have budget problems when legislators do a poor job estimating revenues. In the current budget, the estimates were the result of the final examination in the Senate led by since retired Sen. Bob Odell – a man with a reputation among friend and foe for caution.

Odell’s estimates were adopted in the budget and have proved remarkably accurate. In year one, the budget guesstimated $2,169 million. The actual raised was $2,171 million. In the first four months of the second year, we budgeted $529 million but raised $530 million. The total variation through the first 16 months of the budget is just one-tenth of 1% — a ridiculously accurate estimate by traditional standards.

Some taxes are up more and some are down more but the hallmark of a good estimate is that the different variations among the basket of taxes will average out to make the sum more accurate. In short, there is absolutely no short term revenue problem. The budget has raised almost precisely what it was projected to and just a tiny bit more.

There are two real possibilities for the “we have a tax problem” rhetoric. The first is that the next budget will try to find tax changes here and there to “enhance revenues.” Changing thresholds, reasonable deductions, and definitions of what’s taxed are clever ways raise taxes while pretending you aren’t. Classic examples include extending the Meals and Rooms tax to rental cars which aren’t traditional meals unless you’re really hungry. The same tax was briefly extended to campsites before lawmakers recovered their sanity and repealed it. Look for deduction and filing threshold changes to be proposed in the winter.

Second, so-called revenue problem chatter is always one of the precursors to dedicated fund raids – a classic New Hampshire gimmick. Taking other people’s money from the JUA fund was the most egregious (and stopped by the courts) but “converting” fee revenue legally dedicated to a purpose and instead spending it on operations is an all too common tactic and one that lawmakers should resist.

The budget situation isn’t complicated: we raised just what we budgeted but spent a great deal more. By definition, that isn’t how budgets are supposed to work.

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The Budget Debate Should Be About Ideas Not Personalities

Charlie Arlinghaus

November 12, 2014

As originally published in the New Hampshire Union Leader

Campaigns used to tell us what came next. This one offered few clues to the people about what those unfortunate enough to be elected will do to us now that they have the reins of government. What they must not do is simply look to the next election and use this as a two year dance to enhance the positioning of one politician or another for 2016. Some compromise may be called for but every politician should look to do the right thing before they abandon all initiative in the face of bipartisan milquetoast.

Voters did not send a clear message. Each party will spin the results to claim that its successes are clear mandates while its failures were merely anomalies. But the truth is always and everywhere radically different from the mush coming out of the mouths of anyone working for what is ironically called an organized political party. The truth is that voters sent a mixed message. They elected legislators and councilors of one party and a governor of another. Neither need cave into the other.

The last election was remarkably free of substance. It was an election characterized by nasty attacks from all sides on the character of political opponents rather than pushing something resembling an agenda or a program. In that environment, voters can only expect that those elected will work hard to do what they think is right.

What a legislator or governor thinks is right ought not be sacrificed to the talking heads of the other side who claim to have divined the real thoughts of the electorate. Just as important, it ought not be sacrificed to some mythological middle ground known as compromise or consensus.

I like to regularly remind legislators about Margaret Thatcher’s wise words regarding consensus. Thatcher said, “To me consensus seems to be the process of abandoning all beliefs, principles, values and policies in search of something in which no one believes, but to which no one objects—the process of avoiding the very issues that have to be solved, merely because you cannot get agreement on the way ahead.”

Lady Thatcher’s advice was always right and politicians of both parties should heed it. The state faces problems. We elected you to solve them. To spend two years trying to punt or trying to affix blame to the other side is not what you were elected for. If you aspire to another office, the way forward is to do something. Show some leadership and go forward trying to fix the problems we face.

At the end of the day, I expect to disagree with solutions most politicians propose. But you and I are much more likely to be forgiving and even supportive if we have the sense that a proposal is what he or she thought was right. We want to believe that an elected official is trying to succeed, not just trying to get by.

The state faces a series of problems which many politicians are reluctant to tackle or unsure how to tackle. First and foremost, a budget crisis continues but the details are not completely apparent. The silly elections intervened and politics kept some information from being shared. The election is now over and the problem is likely to be big – perhaps in the hundreds of millions if we add the current shortfall to the prospective one next year.

In all likelihood, Democrats will hate most Republican ideas and vice versa. But history has shown us that crises can be solved not by ignoring your political enemy but by each side co-opting some ideas of the other side. Even in the contentious legislature of 2011-12, Republican majorities were willing to adopt or modify some ideas originally presented by a Democratic governor. The final budget included much that he didn’t like but then-Gov. Lynch let it slip by his veto pen unscathed.

Republicans should expect Gov. Hassan to put forth to them and the public ideas she thinks are important. She should not be expected to abandon her beliefs any more than they should be expected to abandon theirs. A budget of their own making could include good ideas of hers and many of their own.

But please let us agree that the process should be a contest of ideas and not the insipid screeching about personalities that has so traumatically poisoned the process we call elections.

 

 

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Don’t do Something, Just Get Out of The Way

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October 22, 2014

As originally published in the New Hampshire Union Leader

To help create jobs, politicians regular have to decide whether to do something or get out of the way. New Hampshire can do more by doing less and try to stay out of the way of people who know what they’re doing. We can’t compete with big states in an expensive and unfair bidding war to lure jobs to the state. Our best strategy is to create a climate in which job creators can flourish and avoid the managers looking for handouts and subsidies.

Regularly we read about some large auto company or other concern who gets states to bid millions of dollars in handouts of money and soon-to-be “forgiven” loans – money those politicians take from other taxpayers in their state in the hope of landing some high profile press release factory.

New Hampshire’s history is to avoid such politically driven games. We don’t enter bidding wars with money taken from other taxpayers to transfer to a chosen few.

The state’s long standing philosophy was summed up quite well by one of the government’s most senior economic development professionals. Michael Bergeron of the state’s Division of Economic Development talked to Sarah Palermo of the Concord Monitor about jobs that moved from Concord to Connecticut.

Connecticut had offered a million dollars of “loan forgiveness” (which sounds better than a cash handout which is what it really is) and New Hampshire had no similar program of cash handouts.

Bergeron said “a lot of companies will shop around to find the best deal. Some states will give away the bank. The law of physics says the money comes from somewhere, and it’s the taxpayers.”

This lesson is often forgotten when people think “the government should do more.” Any subsidies that we hand out to lure businesses to the state are paid for with dollars taken from other businesses – businesses already here and creating jobs, employment, revenue, and economic activity. In essence we would be taxing existing business to transfer their money to the relocating business. We would penalize a company for being here already and being a good corporate citizen.

Bergeron went on to summarize our less controlling philosophy: “instead of taking money away from you and giving some of it back some of the time, why don’t you keep it and use it as you see fit for your company.”

Without question, New Hampshire’s strategy makes us unable to compete for those companies that demand handouts before they ever expand. Yet, no one business development plan will attract 100% of all companies. We choose not to try and pursue those companies who demand greater and more expensive handouts. That allows us, however, to compete for those companies that have a philosophy more suited to our own.

Many companies are not interested in the gamesmanship of new programs. Instead they want a climate like the one Bergeron describes. They want a stable climate where government is not constantly picking winners and losers. They don’t want to compete to be this year’s favorite of the current crop of government planners. Instead they want to run a business in the way think makes most sense, the way that provides the greatest number of jobs and return on investment.

In Bergeron’s terms, they aren’t seeking to pay into a kitty and try and get the government to pick them as this week’s winner. They want to keep the money and use it as they see fit for their companies.

This is New Hampshire’s traditional philosophy. We compete on climate not unusual events.

Unfortunately, our climate needs some work. Our business taxes are the highest in the country. In an historical oddity that would have seemed impossible years ago, our Business Profits Tax is higher than even Massachusetts. That and a series of smaller taxes must become more competitive.

If we aren’t competing through government handouts – and we shouldn’t be – we have to do everything we can to create a very competitive environment not just kind of competitive.

Activist politicians often speak of “investing” in this program or that. But lowering our highest in the region tax rates is a better investment. We don’t rely on hoping that government planners have managed to see the right trends. We get out of the way and let entrepreneurs risk their own capital to fail and succeed.

Our government’s best action is to do less and get out of the way more.

 

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Two Billion Dollar Spending Increase is Fantasy Theater That Should End

Charlie Arlinghaus

October 15, 2014

As originally published in the New Hampshire Union Leader

The executive branch just proposed a $2 billion increase in state spending and no one wants to talk about it. The budget process starts in October and the executive branch proposed spending $12.5 billion. Everyone involved admits this is an unrealistic and ridiculous place to start but no one wants to disown it just yet. Everyone involved in state budgeting should publicly repudiate the requests as unrealistic fantasies and commit to repealing the law that supposedly requires this bit of theater.

The state adopts a two-year budget in June each odd-numbered year but the process begins eight months earlier in the October preceding each general election. The governor’s final proposal must be presented in February but four months earlier her department heads are required by law to present their initial budgets. That initial budget this year asks for $12.5 billion over two years compared to the $10.5 authorized for the current budget.

These initial budgets are sometimes called agency wish lists but in reality they are guided by a state law and referred to as maintenance budgets. In theory, they are meant as an expression of what state law would require next year absent any changes to law. The theory behind the law as initially written was to establish a baseline.

In practice, department heads approach the law differently and governors approach the law differently. Some department heads regard them as an opportunity to put many different items on the table. One theory holds that programs are likely to happen only if they are put into discussion at this phase. A similar one suggests the more one asks for now the more a department will have after the budget is pared down into reality.

Some governors are more aggressive and work closely with department heads to create a realistic and useful step in the process. Others let fantasies take over and turn this phase into ridiculous theater. In their formal budget presentation in February, governors are wont to say “I cut millions of dollars from the agency budget requests.” It makes them look disciplined and only insiders know that the cuts were made to an illusory document.

At this point, the agency budgets are fantasy – a waste of time and paper for all involved. It might make sense to delete them from the web, send them back to the departments, and thank them for the busy work that wasted all of their time.

The year that ended June 30 spent $5.034 billion with an additional $5.5 billion authorized in the current year, according to Budget Office of the Department of Administrative Services. The fantasy budgets produced by the departments ask for $6.2 billion in the first year and $6.3 billion in the second year – a total of $12.5 billion compared to the $10.5 spent and authorized. This projected profligacy comes just after five months of discussion about budget shortfalls and the governor’s directive to find additional cuts to avoid a worsening deficit.

Let’ start off the next year by eliminating the so-called maintenance budget. Whatever point this may have served in the past, it serves none anymore. It is merely a distracting waste of everyone’s time. Agencies should still be required to produce a budget document with explanations. But that document should reflect instead the specific directives of the chief executive. It is a waste of everyone’s time to force the construction of a fantasy document but, most important, it is a waste of time of the people who will ultimately be tasked with helping the legislature find ways to cut spending from real levels not pretend levels. Executive branch budget officials have enough to do without creating busy work.

Instead, right now – before the election – everyone who wants to help control the budget and our current spending problem should tell us their target for spending. Last fiscal year was $5 billion. Do you intend to increase that amount? Will the current tax rates support any increase or do you have plans for additional revenue? During an election, we ought to know what’s planned.

Those auditioning to lead the state should tell us what they want to do. The leaders of the executive branch have bid for a $2 billion increase. Repudiate it and tell us what you would do instead lest we think you agree.

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The State Budget is a Mess and Getting Worse

Charlie Arlinghaus

October 8, 2014

As originally published in the New Hampshire Union Leader

The state budget is a mess and it keeps getting worse. What’s worse is that this budget mess isn’t caused by a recession but by poor management and political gamesmanship. The first year of the budget significantly overspent. The second year, which we are in the middle of, is significantly out of balance. All of this will make the next budget a significant problem.

This budget was supposed to be a transition budget. The earlier 2011 budget was a crisis budget. An $800 million imbalance forced significant budget cuts to bring spending roughly in line with regular revenues.

The 2013 budget relied on a significant surplus generated by its predecessor to include budget growth that was almost but not quite supported by revenue. The budget counted on spending $29.5 million of the surplus in the first year and $26.7 million in the second.

With the release of an unaudited budget summary last week we discovered that the budget situation is in fact quite bad. We also know now that there is no revenue problem at all but a significant spending problem.

In the first year of the current budget, revenues were one tenth of 1% higher than estimates – about as perfect as any revenue estimate ever gets. The first three months of the second year have produced $420.8 million – less than 1% higher than $418.4 million projected. Finally, the surplus carried forward from the prior legislature was $72.2 million – an extra $15.3 million the budget hadn’t spent. So if we spend what we budgeted all should be well.

But spending is a real problem. The current budget is a disaster by almost every measure. Notably, the first year of the budget spent $52 million more than it raised. But because it was bequeathed the $72.2 million, the governor was able to claim last week “the year ended in surplus.” A more appropriate, if longer, press release headline might have been “we lost control of spending, spent money we weren’t supposed to, spent the $15.3 million extra the legislature specifically refused to let us spend, deficit spent $52 million, but had our bacon saved by the last legislature’s prudent surplus even though we hate them.” Very accurate but it may not be the message they want to send.

By the way, it gets worse. As horrible as FY14 looks – and a $52 million current year deficit isn’t pretty – the next year is even worse. First of all, the overspending carries forward as a baseline. Second, there isn’t enough of the surplus left to deficit spend at budgeted amounts much less the nightmare of last year. Third, we know there is a huge problem at Health and Human Services – half of state government.

Revenues are right where they were supposed to be but spending is not. To make matters worse, everyone in the cesspool of Concord has known for at least five months that there is a problem but politics prevented action. Though Sen. President Morse and Finance Chairman Sen. Forrester spent five months asking for department by department updates, the executive branch refused. You see the governor and the senate are of different political parties so talking is apparently bad.

Last week, admitting reality, the governor announced that every department other than HHS is asked to cut a total of $30 million from the last eight months of their budgets. HHS, the other half of government reported that as of July 31 they have a shortfall of $42.5 million. It is likely that some of the $30 million saved elsewhere will be diverted to HHS but they still need additional cuts.

It’s worth pointing out that politics delayed admitting cuts were needed and is forcing them to be made over eight months instead of the fifteen months remaining when this shortfall was first discussed.

As of last fiscal year, the imbalance between spending and revenues was $52 million per year. Additional changes that include mental health settlements, Medicaid caseload increases from federal law changes, and a restructuring of the MET and hospital payments will add significantly to that tab – some budget writers have estimated as much as a 10% problem (that would be more than $400 million over two years in the operating part of the budget)

Small problems compound themselves if not dealt with responsibly and immediately. The compounding of errors has made a mess. The next budget will be very difficult and has been made all the worse by refusing to share information and tackling problems when they occur.

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