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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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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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The State’s Job Problem Can’t Be Fixed By Changing Just One Thing

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Charlie Arlinghaus

September 17, 2014

As originally published in the New Hampshire Union Leader

The biggest problem with the anemic job growth New Hampshire has been saddled with for the last decade is not the lack of jobs but the forlorn hope of policymakers that there is one silver bullet that will fix everything.

It used to be true (and is no longer) that New Hampshire grew faster than most states when the economy was strong and came back from recessions before other states and more aggressively than other states. The explosive growth of jobs in the 1970s, the 1980s, and at least to some extent the 1990s was something we took for granted and defined what we perceived as the dynamic economic character of the state.

In the 1980s, New Hampshire’s economy went through an explosive boom cycle. At our job creation peak there were more jobs than available workers – we were the North Dakota of our time. For example, from 1983 to 1989 the number of jobs in New Hampshire increased by 28% in just six years.

That kind of an explosive jobs boom will create opportunities for entry level workers, improve the chances for good workers to move to better jobs faster and more regularly, and makes for a generally comfortable society.

Even booms didn’t make us immune from recessions and we went through a slow time. Our growth in the 1990s after the early decade recessions was 14% over six years – about half of the boom 1980s but still quite strong.

The policy challenge of recent times has been that even that more mature growth has not returned. We had the same number of jobs at the end of 2013 as we had eight years earlier despite a growing population. Two recessions over the last fifteen years have hurt but we no longer experience strong growth coming out of the recession. No one writes anymore that “New Hampshire led New England out of the recession.”

That frightening job situation leads policymakers to routinely ask “what’s the one thing you would do, the one change you would make, to promote job growth?” The right answer is to tell them it’s the wrong question. The one thing I would do is to try and convince lawmakers that there isn’t one thing.

Anyone who says cut this tax, pave this road, fund this program and all will be well is naïve. New Hampshire has become less and less competitive but not by making one big change that can be reversed. Nor do businesses locate on the basis of one factor alone. A business looking to compete with other businesses looks at dozens of factors and their cumulative fiscal and psychological effect. Our state government needs to be the same.

It is true without question that business taxes have gotten to a troublesome place. The Tax Foundation finds New Hampshire among the worst states in the country in the business tax component of their competitiveness index. That means that businesses making tax burden a significant consideration will frown on us. The bad news is that economic development professionals will almost uniformly tell you that the first question any potential business they are recruiting asks is about taxes.

But it isn’t just business taxes. Our unemployment taxes are quite high. The workers compensation rates that businesses are required to pay are among the highest in the country here. The cumulative effect of seeing each of those things on a spreadsheet is that New Hampshire begins to lose a bit of the “low-tax New Hampshire” reputation that defined our brand in the 1980s and 1990s. The psychological effect of that reputation goes well beyond the totals and averages of any particular spreadsheet.

But any business will tell you that there are other factors like the cost of doing business. New Hampshire ranks 49th in the cost of health insurance. Only Massachusetts is higher. Family coverage here is about 20% higher than in average states – states we compete with for jobs.

More troublesome are our electric rates. A lot of the high tech and manufacturing jobs we want to attract use a lot of electricity. It’s not clear why any concern which uses a lot of electricity would even consider New Hampshire. Our rates for industrial users are more than double what the 10 or 15 most competitive states charge and higher than all but a handful of neighbors.

No one thing will change our competitiveness nor are the handful of things I’ve mentioned the only ones that matter. But if we want jobs for our kids we need to pay attention to many details or just tell them to move to Texas.

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Why is the Government Hiding Its Problem From Us?

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Charlie Arlinghaus

August 13, 2014

As originally published in the New Hampshire Union Leader

The state budget is in shambles but that information is not being shared publicly. To guess at the nature of the overspending and budget shortfall, we can only estimate using some incomplete public documents. This problem can be resolved by the quick release of information the executive branch has but is not sharing. Longer term spending should be made transparent in a timely fashion in exactly the same way revenues are currently transparent.

For months now Concord has been awash in rumors of a significant budget shortfall.  The governor has already said she expects the state spend more money than the budget allows. Yet despite what would ordinarily be seen a crisis, no further or complete information has come out. Senators including Senate President Chuck Morse and Finance Chair Jeannie Forrester have repeatedly asked for a spending update from the executive branch.

But such is political life in this day and age that – probably because the two senators are from the opposing party to the governor – that information is not being released. Suspicion and gamesmanship accompany every information request and guide too many decisions.

On the revenue side of the equation, politics is not involved. We know precisely how much money the state has collected from us. Each month, the state publishes and posts on the internet a list of how much the various taxes raised, how it compares to last year, and how it compares to the budget itself. Budget watchers follow those numbers intensely.

But revenue tells us nothing if we don’t know what’s going on with its dance partner, spending. If we raise a little less but also spend a little less, everything is fine. If we raise a little less but spend a little more that’s a problem.

What we know about state revenue is that the estimates were remarkably accurate. The state estimates as part of the budget how it much expects each tax to collect and then uses that estimate to budget spending. Overestimates are a nightmare. But this year the state collected one-tenth of 1% more than its estimate – the statistical equivalent of a bullseye.

That should be good news but rumors of overspending worry any believer in fiscal responsibility. If there were monthly estimates of spending we would know now and would have known for months where things stand. State law requires those estimates to exist but not to be made public.

State statute titled “Execution of the Budget” (RSA 9:11) requires Accounting Services to report to each state agency “once each month” the total amount spent that month and year-to-date. If there is a problem, the executive branch knows. That’s why the governor can predict overspending even though no public documents exist and nothing has been shared with the legislature.

The law should be changed to require spending updates placed online just as revenues are. In the meantime, we have a right to know if our budget is in crisis. Why is this information not being shared?

What we do know about the budget comes from the largest and most complicated department in state government. Because Health and Human Services accounts for about half the state budget unique pressures are placed on them. One of their responses is to present regular updates even when the news is bad. Their monthly “dashboard” is presented to the legislature, full of statistical information, and includes budget updates.

Commissioner Nick Toumpas should be applauded for his effort at transparency but his dashboard is depressing budget news.

Every year that department struggles to comply with service mandates but also significant pressure to spend less money while reducing no service. Governors and legislatures routinely push decisions of what to cut over to the department: “I don’t want to cut anything but you guys find an extra $40 million in cuts somewhere.”

The most recent dashboard predicts the department will end the final accounting having spent $30.9 million more than the budget in the fiscal year just ended and will be another $71.2 million over budget for the current fiscal year. If these numbers – the only ones we have to go by – are correct then half of the budget will be overspent by $102.1 million despite revenues being right on target.

If the hole is that big – and that’s a big hole – why have no steps been taken to curtail spending and eliminate the deficit? Why are we not being told anything yet? Problems don’t go away just because you hide them from the public.

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Does Concord Have a Big Spending Problem?

Charlie Arlinghaus

July 9, 2014

As originally published in the New Hampshire Union Leader

In the last year, the state didn’t have a tax problem but it had a large spending problem. The government collected taxes from us in almost exactly the amount predicted but it appears to have spent significantly more than the budget allowed it to do. The result is a budget hole the precise size of which is still unknown in Concord. The problem is not a shift in the economy or any circumstance beyond our control. Rather, it was an inexplicable failure to manage according to the financial rules laid down a year ago.

New Hampshire passes a two year budget plan which has to balance not each individual year but the total two-year cycle. Spending rules are set down in the budget law and are balanced by an estimate of how much each tax will raise over the course of the next two year. Typically budget inaccuracies stem from the difficulties estimating economic conditions and tax collections.

This budget year that hasn’t been a problem. The revenue estimates for the fiscal year which ended June 30 were remarkably precise. In fact, we raised $5.8 million more than estimated – a variance of just one-quarter of 1%. Any year in which we are right on target on the estimated portion of the budget is typically a good year. This year, however, is an exception.

Spending is supposed to be a precise amount. Departments and agencies are given an amount they may not exceed. That amount is specified in three ways. First, most individual line items have an amount that may not be overspent (this agency may spend only $400,000 on in-state travel, for example). Second, in most budgets many departments are given additional targets to reduce according to managerial discretion (notwithstanding the line item amounts, agency spending must be reduced an additional $400,000 in the ways that make the most operational sense to the manager). Finally, we know that every department and agency will spend a little less here and there than the maximum and therefore “lapse” a small amount back (in other words, not spend it). The example would be spending $392,000 on in-state travel – 2% less than the agency’s allotted $400,000. The exact amount of lapses is specified so keeping track of and managing the amounts is a managerial responsibility.

Once a budget passes the legislature, the management or execution of that budget is an executive branch responsibility. As of this writing, only the executive branch has an idea how close they are to their target. While most budgets can be counted on to underspend by a few dollars, the worst kept secret in Concord is that this budget was overspent. The exact amount is yet to be announced and is unclear even to the legislature.

One reason to worry is that the current budget gets worse and worse as each year goes by. The two-year budget was only able to be balanced by carrying forward a $56.9 million surplus from the prior two-year budget. In the first year (the one that ended June 30), the budget had planned to spend more than it would raise by reducing that surplus down to $26.7 million. The second year would spend down the rest meaning each budget year planned on spending almost $30 million more than it raised.

If spending mistakes this year further erode our fiscal position, next year may well be untenable and require significant spending cuts before the year is too far underway.

Another worrisome thing is the politics surrounding “extra money.” Although the budget as passed spends $56.9 million from prior years, final audits showed an additional $15 million in surplus that is not yet spoken for. The Senate wanted to save it in the rainy day fund as the law would ordinarily require. The governor and the House wished instead to spend it this year. They couldn’t agree so the money remained unspent but not locked away.

There is a concern that clever politicians will have run an end around the legislative process by merely letting some departments overspend by the same $15 million (and perhaps the extra $5.8 in revenue) and thereby achieve the spending increase they were unable to pass legislatively.

That concern may be overly cynical but at this point all we know is that the tax side of the budget was fine, nearly perfect in fact. The spending side is a mystery. The mystery should be revealed as soon as possible if only to put the cynics out of their misery.

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Budget Problem About Teamwork and Turkey

Charlie Arlinghaus

June 11, 2014

As originally published in the New Hampshire Union Leader

DRED Commissioner Jeff Rose made a strong plea last week for his economic development bailiwick.  His rationale, however sensible, minimizes a very real problem and is an accidental example of the problem state government faces. The state faces a real problem, one they know about even when denying it, and can’t fix it without a team pulling on each and every oar, not with selective paddling.

The state may or may not face a budget crisis depending on who you believe. In the face of what she thinks is a crisis, the governor imposed the mildest of spending restrictions on every part of state government. Until we know the problem better, she decided to impose the time honored first step: a freeze on new hiring and out-of-state travel. It doesn’t save much money in the short term but it’s symbolic.

Very quickly, some criticized the governor because while out-of-state travel is banned, she herself will still go on a long planned trade mission to Turkey. While there is clearly a political element to the brouhaha, there are lessons to be learned whether the travel goes forward or not.

DRED Commissioner Jeff Rose, the state’s leading economic development official (and, I should add, all around decent guy and a friend of mine) took to the state’s newspapers to defend the Turkey Trip as appropriate, good for economic development, and mention that the state budget situation really isn’t very bad.

Commissioner Rose makes a good case for the value of trade to the state’s economy and the utility of missions such as this in developing business. He sounds like a good commissioner who has thought through the strategic value of a trip and can successfully engage in its defense. But, on some level, Rose’s skill is part of the problem.

Every commissioner and director has – usually – good cause for their individual program. Whether they communicate as effectively as Rose does or whether their trip holds the obvious appeal of a trade mission, most state managers have a good reason for their travel or new hire. The appeal of the trip or the persuasive power of the guy making the argument for what goes on in his bailiwick ought not influence our opinion.

The simple fact is that, despite the Commissioner’s attempt to minimize the fiscal turmoil of the state, we face a real problem.

Revenues, which we track on a monthly basis are in fact more or less right on budget. They are $0.8 million ahead of budget so therefore some would claim there is no issue. But two short months ago (nine months into the first fiscal year of the two-year budget) revenues were $25.5 million ahead of schedule. The rapid deterioration of revenues is not “mildly troublesome” but rather “quite alarming” to any serious budget watcher.

And yet revenues are the most optimistic half of the story. State spending is more than a little scary. Remember that to balance the budget, the executive branch must manage spending in such a way that they do not spend or “lapse” $50 million. The governor herself told the legislature’s fiscal committee that we are very unlikely to come close to meeting our budget target.

Add together deteriorating revenue numbers and spending well above budget and you get a budget problem. And I haven’t even added in the costs that will get carried forward to next year to pay for the MET lawsuit settlement.

Budget crises come and go in New Hampshire but there is only one way to solve them: together. I told legislative leaders in 2011 that real spending cuts were necessary but possible only if everyone on the team shared in the effort. Everyone must cut or everyone will battle to be the exception. That same dynamic should apply to the current situation.

Many spending ideas sound quite sensible on paper especially when advocated with Commissioner Rose’s eloquence. But if constraints like travel freezes and spending freezes are to be imposed they must apply to everyone. The more important and glamorous trips should not be an exception but a leadership example of everyone being in the boat together.

Perhaps we were too far down the road to Turkey to cancel – plans already made, etc. But that’s a different argument than “this project is really important compared to the other boring stuff the state does.” Going forward, all parts of the government, however exciting or well argued, should be part of fixing a very big problem by sharing in the travails.

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HHS Spending, Uncompensated Care, and the Rainy Day Fund

May 2014

Joshua Elliott-Traficante

Summary: The current FY14-15 budget spends $30.5 million more on Health and Human Services than the House Budget proposed, when Uncompensated Care is removed. Revenue projections for the Medicaid Enhancement Tax (MET), which funds Uncompensated Care, were revised downwards in the Enacted Budget on the advice of HHS. Taking into account all back of the budget reductions, the Enacted Budget spends nearly $23.5 million more over the biennium than the House Budget in General Funds.

 

The last budget created a surplus of $72 million dollars. $57 million was spent in the current budget and legislators are now debating what to do with the remaining $15.3 million. The Senate position is to place the entire sum into the Rainy Day Fund, which currently stands at $9.3 million. The House has passed measures that would spend $7 million to restore reductions made in the Health and Human Services Budget, while placing the remaining balance in the rainy day fund.

A previous piece went into greater detail last May[1] about these cuts, but given recent events, it is worth discussing again. The Enacted FY14-15 budget actually spends roughly $30.5 million more on HHS than the House proposed budget. The only really difference was how much the Medicaid Enhancement Tax was expected to raise and therefore spent on Uncompensated Care.

Uncompensated Care

The House and Enacted Budgets had similar spending levels for HHS. Developmental Services and Behavioral Health, the two agencies tasked with helping the disabled and mental health respectively, spending was virtually identical.

The only part of the HHS budget that had a major difference is Uncompensated Care.

Within Uncompensated Care, the funding levels between the House and Enacted Budgets differ by more than $165 million over the biennium, in contrast to the bottom line difference of $135 million across the entire HHS budget.

This funding difference is not a result of a policy choice but of revenues. Uncompensated Care is paid for by Medicaid Enhancement Tax (MET) revenues, matched with Federal Funds.[2] The House was optimistic on MET revenue, while the Senate, and ultimately the Enacted Budget, on the advice of HHS, lowered the estimates the tax would raise.[3]  Spending for Uncompensated Care was then reduced to match the lower estimates.

With Uncompensated Care removed from both budgets, the Enacted Budget spends more than the House Budget by just over $30.5 million in total funds over the biennium.

Back of the Budget Cuts:

The $7 million increase sought by the House is meant to eliminate a specific back of the budget cut. The Enacted Budget requires $7 million in General Fund spending to be cut by the Commissioner, who has full discretion as to how and where to make these cuts.

Another point of contention during the budget debate last summer was the requirement to cut $20 million statewide in General Fund personal spending, of which HHS’s share is roughly between $5.6 and $9.4 million.[4]

When all of the back of the budget cuts are included, the Enacted Budget spends $23.46 million more in General Fund money than the House Budget.

Taking in a step further, if you were to subtract the $20 million in General Fund money added by the Senate to bolster Uncompensated Care, the Enacted Budget spends roughly $3.5 million more than the House.

The Courts and Bond Rating Agencies:

In mid-April, a New Hampshire Superior Court Judge ruled in a lawsuit brought by 6 of the state’s hospitals that the Medicaid Enhancement Tax was unconstitutional, creating a potential $300 million dollar hole in the current budget. Two of the big three bond rating agencies (S&P and Moody’s) took note and revised their outlook on New Hampshire’s debt from ‘stable’ to ‘negative’, indicating the potential for a credit rating downgrade in the future.

In their respective opinions, the rating agencies cited three specific causes for the downward revision: the previously mentioned court ruling, the funding level of the state pension system, and the low balance in the Rainy Day Fund.

Conclusion:

The difference in MET revenue estimates and Uncompensated Care spending between the House and Senate are the main driver in the bottom line difference that shows the Enacted Budget ‘cut’ more nearly $135 million in HHS spending from the House Budget.

Uncompensated Care aside, the Enacted Budget passed last June spends $30.5 million more than the House Budget in all funds.  Accounting for all of the back of the budget cuts to Health and Human Services, General Fund spending is roughly $23.5 million higher in the Enacted Budget than what the House Budget proposed.

Considering the potential $300 million shortfall in the current budget, the last thing the Legislature should be doing is increasing spending. In addition, given the concern over the balance of the Rainy Day Fund highlighted by the bond rating agencies, the entirety of the remaining surplus should be deposited into the Rainy Day Fund.

Click here to download a pdf version of the report

[1] http://www.jbartlett.org/governor-house-and-senate-budgets-largely-the-same-in-health-and-human-services-spending

[2] For an in-depth discussion of the issue, read “Meet the MET” http://www.jbartlett.org/meet-the-met

[3] Katie Dunn, the State Medicaid Director testified to the House Finance Committee that “SFY 2014/2015 projected MET revenue needs adjustment downward, consistent with actual collections in SFY 2013, which will impact amounts available for distribution.” While the House pared back projections slightly, the Senate Finance Committee heeded Dunn’s advice and used MET revenues collected in FY13 as a base line with 2% growth each year. This resulted in lower levels of funding for Uncompensated Care.

 

Source: SFY 2014/2015 Budget Worksession, House Finance Division III, NH Department of Health and Human Services, Office of Medicaid Business and Policy http://www.dhhs.nh.gov/ocom/documents/diviii-03042013.pdf

[4] The Back of the Budget Reductions call for $50 million in personnel reductions to be made, $20 million of which must be General Funds. The HHS portion of $20 million reduction could be anywhere from $5.6 based on number of positions to $9.4 million based on share of General Fund money spent. $9 million was used as an estimate for the purposes of this chart.

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The State’s Fiscal Crisis Can’t Be Ignored

Charlie Arlinghaus

April 30, 2014

As originally published in the New Hampshire Union Leader

The $400 million hole in the state’s budget I described two weeks ago has caused the state to be placed on a negative fiscal watch. Some would ignore or minimize the crisis but the problem is large, structural, and will require more than a small tweak to fix.

This past week, the national bond rating agency Standard and Poor’s lowered the state’s outlook from ‘stable’ to ‘negative.’ Very quickly, the other major national group, Moody’s, followed suit and advised investors and anyone watching the state’s finances that New Hampshire’s outlook was negative. The bond rating was not lowered but both major fiscal watchdogs are advising the world that New Hampshire’s outlook is negative. I think it’s fair to say that this is not putting our best foot forward as we look to attract jobs and investment to the state.

When the state courts ruled (as many of us predicted they would) that the state’s Medicaid Enhancement Tax is unconstitutional, the ruling took off the table almost $400 million used to balance the state’s budget (about $370 million in direct payments plus some federal matching money which could still exist if the state uses other funds to match it). Half that money has already been collected for the fiscal year ending June 30 but, being unconstitutional, it would have to be refunded. The other half simply won’t be collected. The state can delay the refund of the first half by appealing but no one really thinks the state has much hope of winning an appeal.

Since the decision came out, we’ve known there’s a problem and a big problem. The governor can under state law (and should immediately) start cutting back on the state’s budget. A $400 million problem that has to be made up in one year isn’t easy when the state’s general and education fund budget (our “operating budget”) totals only $2.32 billion in FY15.

It is important to note that not all lawmakers have their heads in the sand. Some of them sound like they’ve been listening. Senate President Chuck Morse, who long served as chairman of the Senate Finance Committee, decided to focus on substance. He described the Standard and Poor’s report as a “clear road map.” He’s right. The S&P description of what’s wrong reads like a primer on the state’s fiscal problems. They are describing New Hampshire as negative based not simply on the MET problem but on the state’s pathetic reserves and our having one of the worst-funded pensions in America.

Sen. Morse responded to each factor. His statement on the problem provides a clear outline of a three part approach. First, take the remaining $15 million of surplus we haven’t already spent and put it away in the rainy day fund. Pre-crisis, the governor and House were reluctant to do so. One imagines they will now see the light.

Second, Morse doesn’t want to undermine the modest pension reforms authored by Sen. Bradley and passed in 2011. I would go further and move to a more stable, defined system.  Three years ago, Josh Elliott-Traficante outlined the options to fix the system in “Defined Contribution Models in Other States” for the Josiah Bartlett Center. New Hampshire needs a well-funded system not “worst-in-the-nation.”

Third, Morse correctly points out that the fix to this problem is not short term or easy. Grant Bosse’s “Meet the MET” warned about this mess in 2013 when people were pretending a crisis wasn’t looming on the horizon. Morse describes the task correctly as needing to find “long term solution to how we fund our state’s health care safety net.” That debate will be a political minefield.

There is very broad agreement that there ought to be some sort of safety net but tremendous disagreement about what that net ought to include or look like. The state has always been content to fly by night and create short term solutions to nurse us through the next few years. Sometimes a crisis can focus the mind.

One real danger here is that the scope of the problem will encourage some lawmakers to do nothing right away. That’s their natural reaction and it’s wrong. S&P showed the need for a less pathetic rainy day fund. Put away the $15 million before you spend it. We know the big problem will approach $400 million. Start cutting spending now as the first fiscal year winds down and before managers are inclined to “spend it so they don’t lose it.”

A crisis isn’t coming, it’s already here. The time for acting isn’t soon it’s now.

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