Charlie Arlinghaus- $110 million budget hole is no cause for panic

By Grant Bosse on August 5, 2009
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By CHARLES M. ARLINGHAUS

The state of New Hampshire is not about to go out of business. We have a serious budget crisis, but nothing we can’t handle. A few prompt actions, a little vigilance to make sure nothing else goes wrong, and we’ll be fine at least until the next budget crisis.

No doubt you’ve read about the ongoing budget crisis (see Arlinghaus, Collected Works of). There’s no question we have a problem and that some action must be taken. However, in perspective, the problem is surmountable, and being forced to fix it has some long-term benefits.
As predicted, the state was prevented from seizing medical malpractice money that doesn’t belong to it. The result is that $110 million of revenue used to balance the budget that just ended and the one going forward is no longer available. The state is appealing, but no one in Concord realistically thinks the state has any hope in this case.

That’s the bad news. The good news is that as bad as revenues were, they were better than we hoped. According to the state’s final unaudited numbers just released, the tax sources used to fund the state’s operating budget, while well below the amount budgeted, were actually $15 million higher than we counted on a few weeks ago.

So assuming that we didn’t spend more than we thought a month ago, the problem is about $95 million. That sounds incredibly high, but it may not be as high as you think. Consider that 25 years ago, the state faced a huge crisis at the end of Gov. Hugh Gallen’s last budget. In the end, the deficit couldn’t be closed. Even after taking some actions, the state closed the books with a deficit of $60 million on an annual operating budget of $300 million. That would be the rough equivalent of a $500 million deficit today.

We have to balance a problem of about $95 million over the course of two years in which the operating budget paid for with state taxes (general and education funds) is projected to spend about $4.96 billion. In other words, we must cut 1.9 percent from current spending to avoid raising taxes.

The Legislature will almost certainly reconvene for a special session of some kind, but the governor needn’t wait for that. Under the state’s budget law, the governor may order spending reductions if he determines that “projected state revenues will be insufficient to maintain a balanced budget.” That time is now.

The responsibility for balancing the budget falls to him anyway. A 2 percent cut to state spending doesn’t sound like much, but it won’t be reached by legislators using the hunt-and-peck method to find something they may have missed before. Instead, it will require what we might call directed management.

The governor will have to sit down with each department head and ask him or her to find a few percentage points worth of reductions. He does this at the beginning of the process each budget cycle. This year, we were told he asked each for a 97 percent budget, although the final budget came in at 106 percent. He doesn’t even need to roll back to 97 percent, only to about 104 percent. In other words, he and his department heads need to select only a fraction of the cuts they’ve already considered.

By the way, this management technique is already part of the current budget. The budget as passed included unspecified management reductions by nine different agencies or departments. The commissioner or the branch of government in question were directed to figure out reductions that equal a specific amount. In addition, the largest reduction in the budget was a command to roll back state employee wages by $25 million, the details of which were left up to the governor.

One additional piece of good news is that our neighbors are doing their best to help us meet our revenue goals. My colleague Grant Bosse refers to Maine and Massachusetts as the “New Hampshire Economic Recovery Coalition.” Both states passed tax increases that will drive their citizens to New Hampshire to help our economy and tax collections.

There’s no question that the state faces a serious budget problem. But fixing it is well within reach. Cutting 2 percent of spending over the course of two years won’t require draconian changes to government or massive tax increases, and the governor has the authority to start right away.

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

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