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

March 7, 2012

As originally publish in the New Hampshire Union Leader

Stupid laws beget stupid problems. The current debate over the rainy day fund and what to do with a surplus has been going on for eight years and is a direct result of bad legislation. What to do, as with most budget issues, requires common sense and a little discipline. The last budget had an odd technical surplus and we should prevent people from being too excited about the existence of money that may mislead them about the state’s very poor fiscal health.

The State of New Hampshire operates under a two-year budget. The audit for the second year of the budget ending June 30, 2011 shows that the state ended the two year budget cycle with a decent surplus – with a $17.7 million balance plus $9.3 million in the rainy day fund for reserves of $27 million. (we started the cycle on July 1, 2009 with a zero balance and $9.3 million in the rainy day fund). In the first year of the budget, we took in $65 more than we spent but in the second year we spent $48 million more than we took in despite significant lapses in spending that the governor quite justifiably brags about.

It would be unfair to describe FY2011 as having a $48 million deficit because we budget on a two-year cycle. It is no more important than an individual twelve months be balanced than that a week or month be balanced.

Don’t let talk of a $17 million surplus fool you into think everything is hunky-dory in Concord. Things aren’t horrible but the budget was only balanced in 2010-2011 by the unprecedented use of borrowed money and grants. The first of the two budget years had used nearly $300 million in one-time federal bailout funds and borrowing. The second year – the year being talked about publicly as having a “surplus” – used $200 million in borrowing and one-time grants and still was $48 million short for the year.

The Swiss cheese nature of the last budget is why the current budget was forced to make significant cuts. The current two-year budget is projected to spend 9.9% less over its two years than the last budget did in an apples to apples comparison. Those cuts were required to replace borrowed money and the federal bailout.

The governor frets that the current budget is $14.1 million short in the first year with $14.7 million extra in the second. In a two-year budget cycle that seems reasonable compared to the $65 million up, $48 million down roller coaster in the last budget.

The real fight right now is over the rainy day fund. Yet, the sad part is that if state law were followed, there would be no debate. Under the state’s rainy day fund law, any surplus at the end of the two-year budget shall be deposited into the rainy day fund once the audit is complete. There is no vote, no choice. It happens automatically.

But the current budget suspended that law as did the three budgets before it. Section 207 of the current budget requires “nothwithstanding RSA 9:13-e…any budget surplus shall NOT be deposited….” Faithful readers will recall my carping on this subject during Gov. Lynch’s first budget when he also enjoyed a Republican legislature. Republicans inserted the language, then Democrats followed suit, and now Republicans did it again. You’ll forgive me if I have no sympathy now that suspending the budget law has come back and bit them in the neck.

The point of a rainy day fund law is to automatically take surpluses generated in good years and save them so we don’t have to play odd borrowing games in off years. The rainy day fund requires approval of both the governor and the legislature for a withdrawal and stipulates conditions that must be met (deficit or revenue shortfall). It’s not meant to be a windfall to be used to fund whatever you wish to fund instead of raising the taxes to pay for your plans.

Because there are restrictions, some politicians prefer the flexibility of just leaving it as an undesignated balance to use however they wish. But in New Hampshire we have storm clouds on the horizon (hospital lawsuits, uncertain revenues, and an uncertain economy) and our track record of responsibility is poor.

The legislature did the wrong thing in suspending the rainy day fund law. The Governor is suggesting they double down on their mistake. They need to ignore his siren calls, admit their error, and put the money away in the rainy day fund before someone spends it.