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Wednesday, December 17, 2008

The state budget deficit is unlikely to be closed this year


With only six months left in the state's fiscal year, the current budget deficit is so large that it probably cannot be fixed. Instead, it will be rolled over until next year, making a difficult budget task even worse.

Even as all public eyes are focused on finishing out the current budget year with as small as a deficit as possible, both the governor and the Legislature are trying to figure out what to do about the budget nightmare approaching after the new year.

A brief status report is in order. New Hampshire is three-quarters of the way through its two-year budget. The first of the two years was bad, but not that bad. The state treasurer provides a concise summary for investors every time the state goes into the bond market to borrow money. According to that report, "The combined general and education fund activity for fiscal year 2008 resulted in an aggregate operating deficit of $37.7 million (including a $15.3 million deficit in the Education Trust Fund). After a $6.8 million budgeted transfer from the general fund to the highway fund, a $17.2 million surplus remained because of the $61.7 million surplus carry forward from fiscal year 2007."

So we spent about $40 million more than we raised in 2008, but we had a cushion built up because of $30 million of the old Craig Benson surplus we had kept out of the rainy day fund and another $30 million of surplus from the first Lynch budget. By law, that $60 million should have gone into the rainy day fund. But by suspending the law, legislators avoided its restrictions.

Whether that was good policy or not (and it wasn't), there won't be any left after this year.

Even after revenue changes the governor made, his administrative services commissioner projects a $250 million revenue shortfall for fiscal year 2009. To address that, the governor has already ordered $40.2 million of cuts and spending freezes. He also has $40 million in bonding authority (to pay for school construction aid). That left a $170 million shortfall.

Last month, the governor proposed another $56.6 million in cuts and an additional $20 million of one-time revenue the Legislature must approve when it reconvenes.

The additional $20 million includes transfers from the highway fund (repaying the end of 2008 transfer) and other surplus money to be transferred from dedicated accounts outside the state's operating account. The $20 million and the $56.6 million should reduce the deficit to about $93 million. If you add to that the $17 million carried forward from last year, the current shortfall is nominally about $75 million. Because some of the reductions will include money that would otherwise "lapse" in budget terms, the real shortfall is probably a little more than $80 million.

To end the year in balance, the governor needs to identify another $80 million in a budget that has only six months remaining. At this point, it seems likely that the governor will roll over the deficit into the next two-year budget when he presents his 2010-2011 budget in February. Without any additional cuts, next year's problem will be Herculean. Because budgets are about making choices about spending and revenue, the so-called starting deficit depends on your assumptions about those choices and how the economy will further affect revenues.

But to show how difficult things are likely to be, assume as a starting point a budget that increases spending by the 20-year average of 5 percent each year. If revenues don't decline any further and stabilize for two years, the gap between spending and available revenues would be almost $700 million over two years plus the $80 million deficit we carry forward.

If spending were held to a zero increase for two straight years, something accomplished only once since World War II, the gap would still be more than $400 million. Maybe the economy will recover a lot faster than anyone thinks. But we probably shouldn't make that assumption in the budget. Budget writers will need to identify hundreds of millions of dollars of spending cuts or increased revenue to close the gap.

Borrowed money will have to be repaid and replaced. One-time revenue sources, such as transfers from the Pease Development Authority or other funds, can't be used to support spending year after year. A federal bailout would only be a stopgap to manage a transition to a real balanced budget. Getting back to fiscal sanity will take time. But we can't keep running deficits.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

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