NH has quietly built a mountain of debt

By CHARLES M. ARLINGHAUS

New Hampshire's budget deficit may be the worst in the modern history of the state, but it may not be the worst financial crisis we currently face. As the current budget eats away our financial reserves and puts enormous pressure on our budget structure, the state's long-term debt and obligations are rising to dangerous levels that make the budget deficit pale in comparison.

Like almost every government entity in the country, New Hampshire finances many of its capital projects with long-term debt or bonds. Twenty years ago, our general obligation debt was $349 million. Over 20 years, that number has risen to $738 million (as of June 2008) and is growing every year.

By federal standards, of course, $738 million is nothing. It's only $556 per capita. However, the trend is disturbing, as is the willingness to turn to debt whenever there's a problem. The most recent budget includes $40 million worth of items that had always been considered operating expenses before but which are now paid with debt. On top of that, we borrowed an additional $60 million to pay for highway fund expenses that used to be paid for with taxes.

The real problem isn't any one year of debt. The cumulative burden has been building for 20 years, slowly and inexorably. Stopping that growth is a long-term project.

Regular state debt is getting worrisome, but the hidden obligations of state government are the real problem. While nominal state debt is a little more than $700 million, the state's unfunded pension and similar obligations are almost 10 times that amount and growing rapidly.

Government accounting rules require a periodic statement of the state's pension liabilities and funding ratio. As recently as 1989, the state's unfunded liability was zero. We had enough assets in the system to cover our expected liabilities at projected growth rates.

Then the state's unfunded liability began to creep upward. By 1999, we were only 90 percent funded with a liability of $340 million. As of June 2008, the unfunded liability had exploded to $2.5 billion, and it's getting worse. The state reported that through October, the system lost almost $1.5 billion, making the unfunded liability $3.95 billion and growing. But that's only the beginning.

Recent accounting changes have forced the state to report the value of other benefit obligations. As of the last valuation two years ago, the state had no assets set aside for its "other post-employment benefits" (OPEB) obligation and had liabilities of $2.56 million.

In addition to the OPEB obligation, the state reports a separate health benefit liability of $495 million. Finally, the much-smaller judicial retirement system has dropped to 92 percent funding and has a liability of $4.3 million.

These four obligations combined have an unfunded liability of more than $7 billion, dwarfing the general state debt of $738 million. What's worse is that each of these obligations gets larger every year.

Our unfunded pension and benefits liabilities increase with serious declines in the stock market. During market retreats, they will look much worse than they are in the long term just as market booms will exaggerate their health.

But regardless of market distortions, we have among the worst-funded pensions in the country. We've gone from being more or less fully funded and keeping up with our growing obligation each year to having billions of dollars in debt.

For decades, debt and the long-term pension obligations were an insignificant part of policy debate. They were out of sight and out of mind. Finally, the growing shortfall had an impact on the state's annual contribution and therefore affected the state's operating budget.

There was a strong effort by the House to pass significant reforms to secure the long-term future of the retirement system. In the end, some changes were made, but there's much more work to do. The changes are not just about the solvency of the pension system. They're about the solvency of the state.

The debt problem is part of the whole budget-deficit problem, and the time to act is now. The new President of the debt-ridden federal government, Barack Obama, put it succinctly: "What we have done is kicked this can down the road. We are now at the end of the road and not in a position to kick it any further."

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