Note: This is part of the Josiah Bartlett Center’s week-long investigative series on the New Hampshire Treasury.

Part II: Living in Cash-Flow World

If New Hampshire revenues came in at the same rate as state spending went out, the Treasurer wouldn’t have more to do than the “nitty-gritty” work of reconciling bank statements and approving cash receipts.  But neither revenues nor expenditures are smooth.  Business tax payments, the core of New Hampshire’s state budget, come in quarterly, with barely a trickle of payments in the other eight months a year.

And while most of the state’s expenses are relatively stable month to month, such as state payroll and benefits, Medicaid payments, utility bills, several “Spending Shocks” hit the system throughout the Fiscal Year.  Four times a year, the State sends between $116 million to $173 million in Adequacy Grants to local school districts.  Twice a year, state employees receive three paydays in the same month instead of two.  And at the end of the calendar year, the state sends back payments under its Catastrophic Aid and Meals and Rooms Programs.

This year, all of the state’s large payments line up in December, making the holidays the most expensive month on Provencher’s calendar.  In total, she has to find $298 million for December payments in addition to the stable regular expenses that occur every month.  The following chart demonstrates how drastic the December spending shock will be this year.

Fluctuating Program Spending, Fiscal 2010

Source: New Hampshire Treasurer’s Office

Provencher says by knowing when the biggest expenses will arrive, she can plan for the long-term, and be prepared for short-term emergencies.

“We work with the state agencies.  We try to do a high level cash flow on a monthly basis out through the Fiscal Year.  If Medicaid or TANF claims were running significantly off what they were supposed to, we’d see them on what’s going out each day.”

Provencher says since her office sees every dollar that goes out, she’ll know if caseloads are running higher than anticipated.

“And if we see something that is spiking up, we’ll get on the phone, call HHS and say ‘This looks a little odd.  This is outside of your norm.’  There are times during the year that the Liquor Commission has to make very big payments to its vendors.  We know when those times are going to come, and we’ll get on the phone. ‘Okay, Liquor, are you anticipating your vendor payments to spike at certain times during the year?’”

But this year, revenues aren’t coming in as quickly as planned, and that’s causing a more severe cash crunch at Treasury.  Even though November tax receipts were $6.6 million over the state’s revenue plan, overall receipts are still $31 million short for the first five months of the Fiscal Year.  And even that short-term spike might be due more to delayed refund payments from the Department of Revenue Administration than faster than anticipated tax collections.  But Provencher says the most expensive month of the year could also be the make or break month for state revenues.

“The other unknown is December, which is going to be a very significant month,” Provencher explained.  “The $31 million shortfall to date in revenue just makes cash flow that much more important to watch.”

Helping to ease the crunch was enormous lump sum payments from the Federal government.  “We received the stimulus education funds for the entire year in October, so we had plenty from that federal draw in October, so that helped in the first part of the Fiscal Year on a cash flow basis.”

That’s the difference between cash flow and accounting.  The Legislature, which writes the state’s two-year budget, lives in an accounting world.  They divide the state budget into separate pots of money, with discrete amounts going to each state program.  In the accounting world, the money that funds education is completely independent of the money paying for road crews at the Department of Transportation, or contractors at Health and Human Services, or even for bond payments for construction projects.  But in a cash flow world, where Provencher lives and works, every dollar is fungible.  State revenues accrue in one big pile.  The money is split among several bank accounts, but not according to its ultimate destination.

In a cash flow world, today’s revenues pay for tomorrow’s expenses, even if those revenues are dedicated on paper to another program.  If the federal government pays for a year’s worth of education aid up front, Provencher will use those funds to pay other bills, rather than let a cash balance accumulate in one account while another runs dry.

The JUA Case

There’s a $110 million problem not included in the Treasury plan.  The state budget transferred that much money from the Joint Underwriting Association, a mutual insurance pool providing medical malpractice coverage for New Hampshire doctors and hospitals.  The participants took the State to court, arguing that while state officials administered the program, the premiums and the surplus that built up over the years were private property.  In a blistering Superior Court decision, Judge Kathleen McGuire ruled that the state could not confiscate the money, blowing a $110 hole in the budget, and in Provencher’s cash flow plan.  The State has appealed the case to the Supreme Court, which is expected to issue its verdict any day now.

“The Budget mandated that $65 million be transferred to the State by July 31^st.  And we know that didn’t happen.  So we’re doing a short-term bond anticipation note.  This was on the horizon at the end of the budget session.  The Treasurer’s job is to look out over the horizon to see what the cash needs are and then how are we going to fill those needs.”

As a Constitutional Officer, Provencher is independent of the Governor’s Office, but she’s being told that the State is confident in its case.

“If we are not successful, the Governor and the Legislature will have to do something to come up with the $110 million.  You only have three choices.  You have to cut, you have to raise revenue, or you’re going to borrow.”

Provencher says if the $110 million isn’t available, New Hampshire’s options are limited.

“Never mind the state.  It’s the same thing in our homes.  You have to cut.  You have to get more revenue, get more income in.  Or you have to borrow,” she repeats.  “And I don’t think borrowing is going to be a viable option.  I’m pretty confident that borrowing is not going to be a viable option.”

Part 1: New Hampshire Looking to Borrow $125 Million Next Week

Part 3: Checking New Hampshire’s Credit Rating

Part 4: Building Aid Moratorium Won’t Solve Building Aid Problem

Part 5: New Hampshire’s Investment Strategy