The two-year state budget up for debate in the New Hampshire House today relies on $30 million from a settlement with tobacco companies that hasn’t been finalized. The Legislature rushed through SB199 in March in order to give the Attorney General’s Office authority to sign the deal. Once complete, the nation’s largest cigarette makers will distribute billions to 19 states entering into the agreement, if objections from other states don’t scuttle the deal.

While New Hampshire would use the windfall to help balance the Fiscal Year 2014-2015 budget, the state would end up paying back nearly all of money to tobacco companies over the next five years.

In 1998, 46 states settled lawsuits with the four largest tobacco companies over claims that cigarette smoking led to higher health care expenses. The Master Tobacco Settlement Agreement required the those companies, and dozens of smaller cigarette makers who later joined the agreement, to make annual payments to the states based on annual tobacco sales. Several smaller companies declined to join the settlement. The settling companies required state officials to seek escrow payments from these Non Participating Manufacturers (NPMs) to in order to prevent the NPMs from gaining a competitive advantage. Should an independent auditor find that the NPMs had gained market share as a result of the state’s failure to collect escrow payments, the states would have to refund part of their settlement checks.

The big tobacco companies have claimed that they have been owed refunds since 2003, and began withholding part of their annual allocation to states since 2006. New Hampshire Associate Attorney General Richard Head says $8 billion in contested payments is at issue. If the latest settlement goes through, the tobacco companies would distribute a portion of that $8 billion to the 19 states signing the new deal, and agree not to withhold any of their scheduled payments for the next two years. Head says this agreement would settle all claims from 2003 to 2012, and he believes could head off litigation in the future.

But most states aren’t joining the settlement, and Head says several are drafting objections. In exchange for a share of the disuted funds up front, states would start paying the NPM Adjustment back. While state treasuries would get a quick cash infusion from the settlement, they would have to pay back half of the amount almost immediately, and most of the rest of the settlement over the next four years. Head says while the amount paid in NPM Adjustments can’t go higher than the lump sum, he expects the state to receive a “very small net positive” from the deal.

The new settlement would effectivey be a no-interest loan funding the current budget, but foregoing higher tobacco settlement payments over the next five years. The Master Tobacco Settlement Agreement has paid New Hampshire about $40 million a year for the past 15 years, as part of $6 billion distributed to states annually. Head says the tobacco companies have been withholding $1.2billion a year over the NPM issue, which meant $5 million less for New Hampshire. He argues that the Granite State won’t notice the drop. Instead of withholding payments, the tobacco companies will simply owe less each year. Meanwhile, Head says that New Hampshire will get the use of the $30 million right now. He couldn’t specify exact amounts, since an independent auditor needs to determine precisely how much market state the Non Participating Manufacturers have gained.

This settlement is a key cog in the budget bill on the House floor today. While the $30 million payment could come in as soon as April, House budget writers are booking $21.6 million in FY14 and $2.5 million in FY15. Moving that revenue out of the current Fiscal Year means that it can’t be counted against a potential FY13 deficit. Governor Maggie Hassan wants to sweep surpluses from unidentified dedicated funds throughout state government, but the budget only gives her that authority if it’s to cover a deficit. Booking the tobacco settlement money in FY13 would create a surplus, sending money into the state’s Rainy Day Fund. Booking the money after June 30th would make it available to support General Fund spending.

The current year deficit might not be as large as feared when Hassan submitted her budget proposal to the Legislature. March business tax revenues released yesterday helped cut the current budget shortfall from $41 million at the end of February to $14.5 million with three months to go in the Fiscal Year.

Head says there may be good reason not to count on the tobacco settlement revenue this year, since Colorado and Maryland are already preparing legal objections to the deal.

“We’re going to contest the objecting states’ claims, but litigation is difficult to predict,” Head explains. He says the check might not arrive for two years.

That uncertainty calls into question whether budget writers should count on the tobacco settlement to balance the FY14 budget. If delayed, haf of the money would need to be paid back to cigarette makers almost as soon as it arrived, leaving much less to spend on the General Fund.

The New Hampshire House takes up the state budget, HB1 and HB2 today at 10am.

Better than expected business tax collections boosted state revenues in March, cutting the state’s projected budget deficit by more than half with just three months to in the current Fiscal Year. Overall, New Hampshire collected $637 million in March, $26.5 million more than the budget plan. The extra revenues will cut a shortfall of $41 million down to $14.5 million.

Governor Maggie Hassan has asked the Legislature for broad authority to raid dedicated funds across state government in order to fill any deficit left on June 30th. The House budget up for a vote tomorrow gives her that authority, and also requires the Administration to report on where it took the money. Should state revenues run significantly ahead of forecasts for the next three months, there would be no need to drain funds paid for by dedicated fees such as Fish and Game licenses and conservation plates.

March business taxes filled state coffers. Business Profits Tax revenues ran $7.5 million ahead of projections while the Business Enterprise Tax generated $9.3 million more than the plan. Insurance Taxes came in $5 million over budget, while Interest and Dividends alone were 77% higher than anticipated, $4.6 million versus $2.6 million. The Department of Revenue Administration says this surplus may stem from taxpayers filing their federal taxes earlier this year because tax forms were available earlier.

Tobacco tax revenues exceeded projections by $700,000, bringing Year To Date proceeds within $8.8 million of the forecast.

Overall, total state revenues are now running just $14.5 million behind schedule, compared to a $41 million deficit at the end of last month. While Hassan and Democratic budget writers have blamed a 10-cent per pack cut in cigarette taxes for the shortfall, to other sets of taxes are having a much bigger impact of state finances. Communications taxes are off $13.3 million from the budget adopted two years ago. And Medicaid Enhancement Tax revenues are $34 million short.

In fact, the state would be running a significant surplus, even with tobacco and communications taxes failing to meet expectations, if hospitals weren’t in a protracted fight with the state over much how they owe under the MET. Several hospitals dispute what the Department of Revenue Administration says they owe under the tax, which until this past budget was immediately refunded to hospitals under the Disproportionate Share Hospital Program. They are withholding part of MET payments and suing the state for previous cuts to Medicaid reimbursement rates.

The MET dispute is not only creating a potential deficit in the current year’s budget, but could blow a whole in the FY14-15 Budget up for a vote in the House tomorrow. The New Hampshire Hospital Association is warning lawmakers not to count on MET revenues increasing by 19% in 2014 and another 8% in 2015. The budget endorsed last week by the House Finance Committee estimates that in the next two years, the MET will bring in $93.5 million over FY13 revenues.


Update: The original version of this story did not include that the sweep of dedicated funds must get approval from the Fiscal Committee. Thanks to Ben Leubsdorf of the Concord Monitor for the addition.