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.

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.