Grant Bosse

New Hampshire’s decision to borrow money for three years to pay for the state’s Building Aid Program is adding a $27.6 million crunch to the current budget debate. Despite suspending new school construction projects from applying for state assistance several years ago, state taxpayers still owe more than $495 million over the next thirty years, and an additional $168 million just to pay off the bonds for the three years lawmakers took out loans to fund the program.

NH School Building Aid TailSince the late 1950′s, the state budget has subsidized local school construction projects. Brising construction costs and a flood ofnew construction projects around the state made Building Aid one of the fasting growing programs in the General Fund. The New Hampshire Center for Public Policy Studies 2011 report Under Construction found that local requests for Building Aid doubled from $25 million in 2003 to over $50 million a year.

Facing falling state revenues, Governor John Lynch proposed shifting the Building Aid Program from the General Fund to the state’s Capital Budget. Instead of paying for the state’s annual assistance checks to local school districts from that year’s tax revenues, the state would increase the amount it borrowed by issuing General Obligation Bonds. From Fiscal Year 2009 to 2011, the Legislature borrowed $131 million to cover three years of Building Aid payments, incurring $188 million in debt that will be paid in full by FY30. $168 million from those bonds remaining outstanding.

State obligations to schools already entered into the Building Aid program total $495.6 million. Debt service payments for the three years of Building Aid borrowing increase the state’s future obligations by 34%.

The decision to rely on increased debt in 2009 makes it harder for the current Legislature to balance the budget, which passed the House last week and will soon be reshaped by the Senate. Scheduled Building Aid payments of $45.2 in FY14 and $42.7 million in FY15 to local school districts must be made, though the state is not likely to accept any new schools into the program. The state also needs to repay bond holders $14 million in FY14 and $13.6 million in FY15.

Total state spending on the suspended Building Aid Program will total $115 million over the next biennium. The last Legislature put a $50 million annual cap on the program should the state resume accepting new projects, but the tail from previous commitments falls sharply as older school bonds are paid off. By the time the 20-year notes taken out to fund Building Aid from 2009 to 2011 are paid off, the state’s annual obligation will have dropped to just $5 million, and taxpayers will have paid of more than 96% of their pledge to local school construction.

The state’s debt service payments on Building Aid are also front-loaded, dropping to $11.5 million annually in FY20, and just $3.8 million by FY30. But the past obligation crowds out current spending priorities in the budget that begins July 1, 2013. The decision to borrow to pay for Building Aid means there is $27.6 million less to spend on other programs over the next two years alone.

Josh Elliott-Traficante

With Illinois preparing to go to market with $500 million in general obligation bonds, the big three bond rating agencies, Moody’s, Fitch, and S&P have all issued their ratings of the new debt. Moody’s ranked the bonds as A2, Fitch at A and S&P at A- with all three agencies rating the outlook on the state as negative. This downgrade put Illinois’ bond rating as the lowest in the country. In comparison, the ratings on New Hampshire’s last bond issue were Aa1, AA+ and AA respectively, each 5 notches higher than their Illinois counterpart.

While seemingly archaic financial scores, bond ratings have a large impact on how much the state has to spend in interest payments over the life of the loan. Illinois State Treasurer Dan Rutherford has estimated that Illinois’ poor rating on the latest tranche of bonds will cost the state nearly $95 million.

Much has been made in the past few years over the dysfunction of Illinois’ finances and the legislature’s inability to get the state’s fiscal house in order; however, rating agencies are taking a closer look at another factor that weighs heavily on state finances: pensions.

All three of the rating reports of Illinois latest bond issue underscore the desperate need for pension reform.

From Fitch:

The rating watch negative reflects the ongoing inability of the state to address its large and growing unfunded pension   liability…Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable. This large unfunded pension liability is despite the issuance of pension obligation bonds and passage of bipartisan comprehensive pension reform affecting new employees.

Moody’s also highlights the issue in their rating:

Illinois’ rating and negative outlook are consistent with our view that the state’s pension funding pressures are likely to persist and perhaps worsen in the near term. Lawmakers’ repeated inability to reach consensus on retiree benefit measures last year underscored the task’s extreme difficulty…Illinois is heading towards an unsustainable combination of higher pension contribution needs and reduced tax revenues.

S&P pointedly states that:

(t)he downgrade reflects what we view as the state’s weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions

So while this does not bode well for Illinois, what impact does this have on New Hampshire? No question, Illinois is in much worse financial shape than New Hampshire when it comes to both state finances and pension funding ratio. In New Hampshire’s last bond issue however, while all three agencies affirmed top ratings for the debt, they also highlighted the size of the pension unfunded liability as a concern going forward. (Fitch & Moody’s)

However, state pension systems that have higher funding ratios than New Hampshire, such as Pennsylvania, have seen debt downgraded in part due to pension liabilities. In Pennsylvania’s case, a combination of high debt and modest unfunded pension liabilities contributed to its downgrade. New Hampshire’s relatively light debt load so far has allowed the state to avoid costly downgrades despite a large unfunded pension liability.

To prevent New Hampshire from going down the path of Illinois or Pennsylvania, the state policy makers must keep bonding in check and not only hold the line on past pension reforms, but reform the system further by taking steps to spread the risk more equitably between the public employees and the taxpayers of the state.

[UPDATE: Illinois has postponed the bond issue mentioned below, citing “unfavorable market conditions”]

Charlie Arlinghaus

October 31, 2012

As originally published in the New Hampshire Union Leader

The biggest state political issue no one is talking about is debt. Everyone knows of the federal debt problem. Most people (except, perhaps, for my most faithful readers) do not know about the debt explosion at the state level that is only starting to be corrected.

During its experiment with fiscal games from 2007-11, New Hampshire started to slide into Washington-style debt habits that will take more than one budget cycle to correct. I have been very critical of the unusual budgeting tactics employed in the two budgets prior to the current one.

The short version is that by using borrowed money (and a one-time federal bailout) for operating expenses, budget writers exploded state debt and created a delayed deficit for the next Legislature to fix. It is well known that the balanced-by-borrowing budget created a deficit-to-be-fixed that was around $800 million (other estimates are higher).

Less discussed is the debt problem. New Hampshire’s policy toward debt was stable and cautious under governors of both parties for more than a decade. But in 2007 everything changed. From 2007 through 2011, the state’s general obligation debt exploded from $654 million to $939 million. This 43 percent increase was striking by any measure. Consider that the $285 million total increase in just four years was more than state debt had increased in the previous 20 years (the increase from 1987-2007 had been $275 million).

As a percentage, the rate of increase was more than 10 times the rate of the previous decade. For more than 10 years, state debt had grown at an average rate of less than 1 percent each year. For the four-year explosion, the annual increase was 9.5 percent. The explosive growth of debt was not just unusual, it was a radical departure from New Hampshire’s tradition of responsible borrowing.

The tradition this new behavior most resembles is that of Washington. Federal debt rose by an average of 9.8 percent each year from 2001-2011 (a period that includes Presidents of both parties) and shows no signs of slowing down. But New Hampshire isn’t supposed to be like Washington. Washington hasn’t seen its debt decline since 1969. In New Hampshire, we had small reductions in our debt in six of the 10 years from 1994-2003, and the years of increases were at or near the rate of inflation.

The explosion of debt was not an accident. The governor and Legislature at the time borrowed money to balance the budget not because it was the right thing to do – they agreed it was unusual and not a good idea – but because borrowing allowed them to pass hard decisions on for a future Legislature to make. Like many people faced with a tough decision, they hoped delaying it would make it better. Instead, it made things worse.

The Legislature elected in 2010 inherited a mess. The borrowed money had been used to pay for ongoing operating expenses. Without the borrowed money and the one-time federal bailout, legislators would be forced to raise taxes or cut spending. Realistically, increasing taxes in a recession or weak recovery wasn’t an option. So they were forced to make the decisions that hadn’t been made for four years: bring revenues and expenses back into balance.

During this election, the legislators who were forced to make difficult decisions are being attacked for those decisions by many of the same people who chose to avoid decisions and spend borrowed money as if they’d been elected to Congress. Yet no one talks about the debt. No politician is being forced to defend his or her decision to increase debt in four years by more than it had been increased the previous 20 years.

A rational state government will carry some debt simply because some capital expenses should be paid over 10 or 20 years rather than at once. But our debt increased too fast, showing that we need to guard against the politicians’ weakness. Left to their own devices, weak politicians will spend future money by borrowing so they can avoid a difficult decision today.

The current Legislature stopped the borrowing cycle. But there’s more work to be done. The next Legislature should pledge to limit new borrowing to 90 percent of what is paid off. They can only borrow money by paying down other borrowed money.

 Charlie Arlinghaus

May 30, 2012

As originally published in the New Hampshire Union Leader

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

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

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

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

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

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

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

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

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

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

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

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

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

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