Charles M. Arlinghaus

 October 6, 2010

Originally published in the New Hampshire Union Leader

After months of discussion about the exact size of the historic deficit we face next year, the news is filled suddenly with reports of a surplus. Did something change or are we just in the middle of election season? The short answer is things haven’t changed but the easiest distraction from bad news is to ignore it completely. The deficit is still huge. It will dominate the state’s financial future. And, paradoxically, we have a mid-budget surplus for the same reason we face a huge deficit.

New Hampshire has a two-year budget but sensibly mid-budget progress reports are announced. After weeks of discussion of the state’s dismal outlook, the governor eagerly announced this week that the state ended FY2010 in June with a $70M surplus. The public can be forgiven for being confused about how it is possible to have a surplus and also to be facing a huge deficit.

The current legislative leadership and administration will tell you they made the tough decisions and balanced everything through sound financial planning. Let’s look at what happened and decide for ourselves if it was sound decision making or if those decisions were bad for the long term stability of the state.

Although the total budget increased over the last four years by $2 billion, the increase in general and education funds was about $700 million while state tax revenues declined slightly. That revenue decline put a lot of pressure on the state budget. Ordinarily, without the money to pay for it, spending would need to have remained flat as well.

To keep increasing spending as if they had the money, legislators and the governor were forced to turn to three temporary sources for $597 million of one-time revenue. The largest chunk of temporary scaffolding came from the federal stimulus. Some stimulus money is meant for dedicated projects like paving. However, the current budget for FY10 and FY11 includes $351 million in state bailout funds to be used for whatever we wish. It goes away next year.

The budget also includes $90 million in one-time state revenues like the sale of state assets. Obviously you can’t sell things twice so that revenue also goes away next year.

Finally, the most dangerous thing we did was to borrow $156 million to plug what would have been a deficit including borrowing more money to pay the interest on money we borrowed in the past. As an added bonus, under state accounting, if you pay for a program with borrowed money it doesn’t count as spending so you can claim it as a spending cut.

All of that $597 million has to be replaced or the spending it paid for has to be cut. In addition, the state undertook $300 million of one-time spending reductions that will come back. For example, we suspended municipal aid but promised towns it was temporary and will come back next year. That’s how we can claim balance this year and have a deficit of historic proportions next year. Back in the day, this was referred to as robbing Peter to pay Paul and generally frowned upon.

Even among all the excess money, further games were played. The feds gave us $80 million each of FY10 and FY11 to prop up education spending. As the first fiscal year drew to a close in June, politicians fretted that the mid-budget number might be embarrassing so they fast-forwarded and spent $160 million in the first year and none in the second.

Spending it all in one year doesn’t have any impact on the state’s two-year budget but the quick infusion of $80 million turns the mid-year shortfall into a mid-year surplus just like magic.

A good sign that the nominal surplus is illusory is that no one has proposed using it to restock the rainy day fund. That’s simply because the surplus is a shell game not real.

For the future of our state, the real question is where we stand going forward. While people disagree about the exact number, no budget observer would disagree that the starting budget problem for next year is somewhere between $600 and $900 million.

When a politician starts talking to you about the supposed surplus, simply nod your head and humor them. Then politely turn the conversation to the current state of affairs. How big do they think the hole is for the next budget?

The current budget problems were covered up with borrowing and bailouts. Do they intend to borrow another $156 million for spending? Are they counting on another bailout from Washington or will they join the 37 other states that reduced their spending while New Hampshire increased its spending?

We have a huge problem in the future. Pretending it doesn’t exist won’t make it go away.