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Discipline Today Saves Trouble Tomorrow

Charlie Arlinghaus

March 12, 2014

As originally published in the New Hampshire Union Leader

Every legislative session there are 3 or 4 issues which dominate the media’s attention but some of the most important long term decisions pass by with little notice. You’d be forgiven for thinking the gas tax, gambling, and Medicaid expansion are the only three issues before the legislature. These are important but you’ll forgive me if I take a moment to talk about the state budget.

Too often legislatures focus o the budget one year and completely ignore it the next year. The budget passed last year was balanced in its own way but had a few problems that the legislature wants to correct. The most important correction is a simple but controversial partial correction to the state’s rainy day fund.

Recall that our budget is balanced on the basis of a two-year estimate of revenues. Estimating 24 months of revenues in an uncertain economy is necessarily imprecise. Lawmakers, typically but perhaps not always, try to estimate cautiously which tends to leave a small remainder at the end of the two year cycle. By a state law honored more in the breach than in the observance, that residual is supposed to be set aside for a rainy day.

No one wants to create a slush fund with the remainders so the fund has a cap on its total amount (larger amounts should obviously be returned to the payer) and relatively strict rules about when withdrawals can be made.

The last two year budget ended with $72.2 million that should, by law, have been transferred to the rainy day fund. Instead, lawmakers spent it. That is, they spent most of it. At the time spending decisions were made, rather than balancing projected revenue and spending, they took about $50 million extra to enhance their spending thoughts instead and “temporarily” suspended the law that requires it be put in the rainy day fund.

In the final accounting, it turned out that there was more money than they thought. What to do with the extra $15.3 million? Predictably, one group has spending eyes. A second group, the Republican leadership of both houses, wants to deposit it into the rainy day fund. It’s about time.

Suspended state law would have required a $72 million deposit. Republicans want to deposit just the $15.3 million the compromise state budget hasn’t already spent. Oddly, that’s too much for the governor. Rather than be satisfied that she’s managed to tap into $57 million she’s not supposed to have, she wants to spend most of the extra as well. Ridiculous.

The $15.3 million should merely be an opening good faith deposit. The first of two fiscal years of this budget will see about $25 million in revenue above the budget – depending on business tax receipts the next two months.  That money should also be set aside, by law, to get us to half of what should have been deposited.

This is not merely a side issue unrelated to important things. Rather, it is a test of whether or not the legislature can discipline itself. We have state laws that create structures to impose modicums of discipline. Those laws turn from discipline to cynical mockeries of the taxpayer if they are merely suspended every budget season.

Some lawmakers are under the mistaken impression that we are still laboring under the supposedly dramatic cuts of the 2011 passed budget. The state’s operating budget (general and education funds plus a handful of relabeled funds) that year was a merely a reversal of the prior increase. That prior increase was not supported by tax dollars but by a one-time windfall (borrowing and a bailout).  The pre-bailout amount of $2.336 billion became $2.327 in the dramatic cut year.

That cut itself was almost entirely erased in the current budget. The pre-cut operating budget was $2.465 billion. After a brief decline, operating spending came back up to $2.457 in year two of the current budget. This time, however, the spending is supported largely by tax revenues  not by hundreds of millions of dollars of one-time windfalls. The money that should have been put in the rainy day fund amounts to 1.2% of the two-year budget (compared to 9.8% one-time cash in the borrowing and bailout budget).

Future budgets are dictated by current discipline. We can save ourselves a lot of trouble tomorrow by exercising discipline today. Until the proposed Rainy Day Fund deposit is $72 million, all calls to spend it instead should be resisted. Proposing $15.3 million is a pittance and ought not be controversial.

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Discipline Today Saves Trouble Tomorrow

Charlie Arlinghaus

March 12, 2014

As originally published in the New Hampshire Union Leader

Every legislative session there are 3 or 4 issues which dominate the media’s attention but some of the most important long term decisions pass by with little notice. You’d be forgiven for thinking the gas tax, gambling, and Medicaid expansion are the only three issues before the legislature. These are important but you’ll forgive me if I take a moment to talk about the state budget.

Too often legislatures focus o the budget one year and completely ignore it the next year. The budget passed last year was balanced in its own way but had a few problems that the legislature wants to correct. The most important correction is a simple but controversial partial correction to the state’s rainy day fund.

Recall that our budget is balanced on the basis of a two-year estimate of revenues. Estimating 24 months of revenues in an uncertain economy is necessarily imprecise. Lawmakers, typically but perhaps not always, try to estimate cautiously which tends to leave a small remainder at the end of the two year cycle. By a state law honored more in the breach than in the observance, that residual is supposed to be set aside for a rainy day.

No one wants to create a slush fund with the remainders so the fund has a cap on its total amount (larger amounts should obviously be returned to the payer) and relatively strict rules about when withdrawals can be made.

The last two year budget ended with $72.2 million that should, by law, have been transferred to the rainy day fund. Instead, lawmakers spent it. That is, they spent most of it. At the time spending decisions were made, rather than balancing projected revenue and spending, they took about $50 million extra to enhance their spending thoughts instead and “temporarily” suspended the law that requires it be put in the rainy day fund.

In the final accounting, it turned out that there was more money than they thought. What to do with the extra $15.3 million? Predictably, one group has spending eyes. A second group, the Republican leadership of both houses, wants to deposit it into the rainy day fund. It’s about time.

Suspended state law would have required a $72 million deposit. Republicans want to deposit just the $15.3 million the compromise state budget hasn’t already spent. Oddly, that’s too much for the governor. Rather than be satisfied that she’s managed to tap into $57 million she’s not supposed to have, she wants to spend most of the extra as well. Ridiculous.

The $15.3 million should merely be an opening good faith deposit. The first of two fiscal years of this budget will see about $25 million in revenue above the budget – depending on business tax receipts the next two months.  That money should also be set aside, by law, to get us to half of what should have been deposited.

This is not merely a side issue unrelated to important things. Rather, it is a test of whether or not the legislature can discipline itself. We have state laws that create structures to impose modicums of discipline. Those laws turn from discipline to cynical mockeries of the taxpayer if they are merely suspended every budget season.

Some lawmakers are under the mistaken impression that we are still laboring under the supposedly dramatic cuts of the 2011 passed budget. The state’s operating budget (general and education funds plus a handful of relabeled funds) that year was a merely a reversal of the prior increase. That prior increase was not supported by tax dollars but by a one-time windfall (borrowing and a bailout).  The pre-bailout amount of $2.336 billion became $2.327 in the dramatic cut year.

That cut itself was almost entirely erased in the current budget. The pre-cut operating budget was $2.465 billion. After a brief decline, operating spending came back up to $2.457 in year two of the current budget. This time, however, the spending is supported largely by tax revenues  not by hundreds of millions of dollars of one-time windfalls. The money that should have been put in the rainy day fund amounts to 1.2% of the two-year budget (compared to 9.8% one-time cash in the borrowing and bailout budget).

Future budgets are dictated by current discipline. We can save ourselves a lot of trouble tomorrow by exercising discipline today. Until the proposed Rainy Day Fund deposit is $72 million, all calls to spend it instead should be resisted. Proposing $15.3 million is a pittance and ought not be controversial.

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State’s Poor Fiscal Health Demands Caution

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.

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