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Wednesday, October 28, 2009

Time has run out on the budget


Last week it was a tax summit, this week a spending summit. With all the talk about taxes and spending, you might think New Hampshire had another budget problem. And you know what? You'd be right.

New Hampshire often has a budget problem. In this year's version, we have both an immediate problem and a longer term problem. We have to find another $200 million to save in the next few months and then face another $600 million deficit going into the next budget.

With those sorts of extraordinary numbers on the table, no one party, branch of government or side of the bargaining table is going to be able to provide a solution. The economy isn't going to grow its way out of the problem; the federal government won't bail us out; and there isn't one silver bullet to fix everything.

The current budget includes fixing the shortfall at the end of Fiscal Year 2009 and balancing the current two-year budget. There are a lot of smaller issues that could add to the size of the problem, but there are three big issues that make up about $200 million.

First and foremost is the medical malpractice raid. The state is counting on taking $110 million from the malpractice fund known as the Joint Underwriting Agreement (JUA). Some of the money is for last year and some for the current budget, but all of it would have to be replaced. The Superior Court has ruled that the money is private property and can't be seized by the state simply because the state wants it. The governor and legislators are banking on the Supreme Court overturning the ruling.

If the ruling stands, as is more likely than not, the state is $110 million short of its budget. In addition, to balance the 2009 figures the state moved $18.4 million in stimulus funding forward from 2010, leaving the current budget another $18 million short. On top of that money, state revenues are coming in below the estimates used to balance the budget.

Based on the first quarter of returns, we will likely end the first year of the two-year budget $40 million short. Because the 2011 revenue growth was built off the 2010 base, that same shortfall would occur again in the second budget year unless the economy recovers more rapidly than expected.

The revenue shortfall, stimulus and JUA issues combine to create a $200 million gap between currently expected revenue and projected spending.

The problem is all the more important because of a fiscal time bomb waiting for us in the next budget. The current budget was balanced with hundreds of millions of one-time stimulus dollars from the federal government. Regular revenues and regular spending are $188 million apart in Fiscal Year 2011.

In addition, the budget includes a number of one-time spending reductions that are delays rather than cuts. For example, borrowing money to pay for construction aid isn't a spending cut, and municipal aid was suspended only for the current biennium. All told, the temporary reductions are $251 million over the biennium. That money is restored in the next budget.

The operating imbalance ($376 million for two years) and the temporary spending reductions mean the next budget starts out with a $625 million deficit -- if we manage to first cut $200 million out of the current budget and don't add to the problem.

The governor has suggested that a return to normal revenue growth in a robust economy will solve the problem. However, 4 percent revenue growth would mean just $92 million in 2012. Worse, because of the imbalance, typical growth in taxes and also in spending would make the deficit worse, not better. Three percent growth in spending and in taxes actually adds $18 million to the deficit. Economic growth only helps if spending is also restrained.

The good news is that the immediate problem we face will actually help us deal with the $600 million problem on the horizon. Spending cuts made to the current budget will have a triple effect. They reduce spending in the current budget and then in each year of the next two-year budget. So $100 million in cuts has a $300 million effect.

The size of the state's budget problem is as large as we've faced in our history. Last year, we faced the same problem but were able to delay it for two years because of the extraordinary federal bailout. That bailout or stimulus plan didn't fix anything. It merely bought us time. And now time is up.

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

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