The governor's proposed budget is still in the red

By CHARLES M. ARLINGHAUS

The governor's first draft of a budget made some important suggestions for lawmakers to consider. But it leaves much work to be done and a huge problem of around a half billion dollars.

The problem Gov. John Lynch faced going into the budget process was enormous. If no changes were made, we would face a current-year shortfall of $122 million and a hole in the coming budget of an additional $677 million over two years. In other words, as the governor prepared his budget, he knew that he had to make changes to reduce spending or increase revenues by $799 million just to balance the state's operating spending.

On the spending side, freezing general fund spending at current levels for two years would reduce the hole in the coming two-year budget to around $450 million.

In his speech, the governor suggested he had reduced general fund spending by $43 million, or 1 percent. The problem is that his so-called reduction is based not on actual cuts but on hiding money previously counted as general fund spending.

For example, the liquor commission spending increased 28 percent from $71 million in the last budget to $91 million in this budget. Yet the liquor commission is moved offline into its own fund, so the increase is counted as $71 million spending cut.

Another $83 million in pseudo-spending cuts comes from borrowing $83 million to pay for school aid. We're still spending the money, but because we're borrowing it, we score it as a spending cut. Real general fund spending isn't being cut but is being increased by hundreds of millions of dollars.

The governor should be commended for proposing some real changes to spending that will generate a lot of controversy but are important to consider when money is so tight. He's proposed changing how we deliver many services to reduce administration costs, whether combining district court offices, closing a prison or consolidating state agencies. He's also cutting almost 800 positions, the majority through attrition, but some through layoffs.

That the budget increases despite all of those changes just shows how difficult reducing spending can be and how much more work needs to be done. That's part of the reason the governor took the unusual step of saying at the beginning and end of his speech that this first draft is just one road map and that he would continue to work with the Legislature over the next four months.

The end point for all parties and all factions is, as the governor said, a balanced budget. But the current budget fails to achieve this. Annual revenues and annual expenditures are not balanced. The budget requires the use of close to a half billion dollars of one-time revenue sources, including the borrowing mentioned earlier, draining a medical malpractice insurance fund and using federal stimulus money to replace state spending for one budget. It also spends the rest of the previous surplus funds and reduces the rainy day fund substantially. Reserves that had been as high as $151 million two years ago will be reduced by two-thirds.

Because the budget crisis is as bad as any in the modern history of the state, most policy makers understand that this budget will end up serving as a transition to get us back to fiscal respectability. The size of the hole we dug for ourselves will require that we use some one-time money to get us back to normal.

The problem with the current proposal is that it uses more and more one-time funds rather than gradually weaning the state off. Closing the current deficit of $120 million with revenue sources that don't recur is acceptable, but then we should slowly move toward real balance until regular ongoing revenue sources support or nearly support operating expenditures.

Even if we allow for a transition period, fiscal year 2011, the second year of the budget being debated, should come close to having revenues and spending match. It doesn't. Revenues in 2011, including a temporary increase in federal Medicaid dollars, are $2.3 billion. Net spending in the same year is projected to $2.4 billion, creating a gap of $131 million.

As the House and Senate consider additional spending changes, it will be important to consider ideas, not politics. The problem is so big and we are so far from solving it that everyone will have to pitch in. The governor's proposal was step one, but we have quite a few big steps left.

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