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Wednesday, July 29, 2009

Charlie Arlinghaus- Keeping an eye on the new budget


Less than a month after the state's two-year budget was signed and theoretically balanced, there is a growing concern in Concord that the budget seems to be unraveling.

About 43 percent of the state's two-year, $11.5 billion budget is the operating budget supported by the general tax and fee revenues of the state, as opposed to federal grants and dedicated funds. This spending is paid for with the state's regular revenue sources -- business taxes, tobacco taxes, liquor revenue, etc.

For the two years that began July 1, we're planning on spending $4.95 billion in the operating budget. However, regular state revenue falls about $400 million short of that, so we're replacing it with a series of one-time revenue sources. Most of the one-time sources are special programs the feds included in their so-called stimulus bill.

One source generating concern in Concord is $110 million the state wants to take from a medical malpractice fund called the Joint Underwriting Association. This is the subject of a lawsuit, and I've written about it frequently. We'll know this week, but a growing number of people inside government believe the state will lose this case. That will create a $110 million hole in the budget.

Regardless of the outcome, the case will be appealed and we won't have a definitive answer for a few months. The difficulty is that much of this money is actually used to fix the ending deficit from the last budget. If the state loses this week, that money won't be available and the state will have to find some other money or end the previous fiscal year with a hole in the budget.

The $110 million in question is a lot of money, but to put it in context it's about 2.5 percent of the money the budget estimates our current taxes and fees will raise in unrestricted revenue. Therein lies the second possible concern in the current operating budget.

Our loose balanced-budget law requires that budgeted spending be balanced by an estimate of the revenues expected. In areas such as caseloads for Medicaid, the spending is an estimate. But for the most part, it is a fairly accurate limit that administrators are not permitted to exceed. The revenue side is more nebulous.

We have a history of exceeding our revenue estimates. For a long time, we were particularly cautious in our estimates and always raised a bit more than budgeted. Having a cushion is good budget practice. It gives us a greater certainty that the money really will be there and allows a potential cushion against pressing needs that arise.

Two years ago, optimistic revenue estimates caused budget problems mid-year when revenues came in at lower levels. A deep recession compounded the error, and we ended up with almost $400 million less than we had planned for over two years.

Uncertainty about the economy had everyone thinking about making cautious estimates. However, during the last days of conference committee negotiations, legislators needed more money or less spending to balance the new budget. Coincidentally, but fortuitously, the governor's new revenue commissioner came forward with new estimates that were $75 million higher than the ones from a few weeks before. Problem solved.

It would be fair to describe the new estimates as reasonable, but on the optimistic side. A more cautious approach would have used the lower estimates of three weeks before. In addition to the new optimism, the budget created new tax revenues that have to be estimated without any history or good data. For example, we don't know how many people camp, so the new campground tax revenue is a guess. The new tax on limited liability corporations is still being written, so it's even harder to predict.

By the end of the week, we'll have one vague snapshot of revenues. July's revenues are only about half the level of an average month during the budget year. If they are a few percentage points higher or lower than estimates, it won't be definitive, but we'll know if the estimates are in the ballpark. At the end of September, we'll have a full quarter of data and a much better idea of where we stand.

Our law requires only that the budget as passed come to an estimated balance two years from now. Once passed, the requirement ends, no matter what happens. The problem is that the longer we wait to act, the more painful the fix would be. Cutting $110 million to $150 million of spending over 22 months is easier than doing it over 14 months. Administrators shouldn't count on the final budget number being final. There's no need to panic, but we should proceed with caution.

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

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