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.

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.