We have a $250 million hole.
That is, for the fiscal year that started July 1, 2009, and ends June 30, 2010, New Hampshire is expected to spend $250 million more than it brings in.
Compared to 2008, New Hampshire’s general fund revenue for 2009 was down 3.6 percent, with business taxes alone down more than 14 percent. According to the New Hampshire Center for Public Policy Studies, Fiscal Year 2009 appropriations were 88 percent of actual expenditures.
This may sound familiar. The state was projecting a $275 million shortfall in February 2009. To stay financially afloat, the state combined layoffs, program cuts, tax and fee increases, and an influx of federal stimulus dollars. And for the next biennial budget, the state will have to fill an even bigger hole. There is a projected $600 million hole for the budget that runs from July 1, 2011, to June 30, 2013, due to one-time revenue sources and budget cuts made for the current budget.
Across the country, other states are seeing these problems as well. The country is facing a 15-percent budget deficit and California tops the scales with a 36-percent deficit. New Hampshire is the fifth-lowest-spending state in the country per capita.
But still, we have those holes. Policy experts suggest there is no quick and easy “big fix” for the state budget. Cuts in spending or small raises in revenue can’t alone solve budget problems for the long term. Currently, the legislature is considering expanded gaming — a possible “big fix” that could also come with its own problems.
Other possible budget game-changers: An income or a sales tax might close the budget gap in the short term, but what might it mean for the long haul? Creating an independent commission to provide revenue projections not tainted by politics might keep things in check, but that wouldn’t create any more cash flow. What if the state eliminated something, like, say, the school building aid program? That program costs the state $44 million this year. But it’s not that simple.
Officials have the current deficit pegged at anywhere from $100 million to $250 million. Gov. John Lynch made his proposal to eliminate $85 million of the deficit last week. Lynch is saying the deficit is between $210 and $220 million and he is calling for layoffs, budget cuts and tax increases to close the gap this time around. The House tabled a $47 million package of cuts last month that had been reduced from $77 million. The state also lost out on $100 million from the Joint Underwriting Association when a state Supreme Court justice ruled the money couldn’t be raided to balance the budget. The state’s general fund for the current biennium is about $3.2 billion.
Stephen Norton, executive director of the New Hampshire Center for Public Policy Studies, said he expected legislators to make substantial cuts to the Department of Health and Human Services, which cost the general fund $720 million last fiscal year.
Lynch said revenues are down below 2006 levels and are 2 percent less than Fiscal Year 2009.
“During one of the toughest economic times in our nation’s history, we’ve made the difficult decisions necessary to cut state spending to ensure a balanced budget, to protect core services and to keep New Hampshire’s taxes among the lowest in the nation,” Lynch said in a release. “While we have already taken a number of steps to address challenges facing our state, New Hampshire, like more than 40 other states, continues to see a decline in revenue and increased costs. There have been signs of improvement in the economy, but it is imperative that we act aggressively to ensure a balanced budget.”
OK, but how? Here are a few crazy (or maybe not so crazy) ideas.
Idea 1: Expanded gaming
What that means: The current bill would allow slots at Rockingham Park in Salem and at tracks in Belmont and Seabrook. The bill would also allow slots at a proposed new casino in Hudson, along with two more new casinos in the state’s North Country. If they’re approved, the state could be looking at as many as 17,000 slot machines statewide.
Cash generation: Along with $200 million in annual revenue, initial licensing fees would garner $220 million for the state, the first $50 million of which would be directed to the Department of Health and Human Services.
The most imminent of solutions, expanded gaming has been on the table in one fashion or another for more than a decade. With the budget gap widening, and with hundreds of millions of dollars in one-time money used in the current budget, proponents are hoping the time is now.
Some are in a bit of a holding pattern to make further cuts as they await the fate of the current proposal for expanded gaming, which, as proposed, would greatly impact the Department of Health and Human Services, which would receive the first $50 million in licensing fees. Proponents say the measure would also provide 2,000 to 4,000 permanent jobs, along with thousands of construction jobs. The Senate approved the gaming proposal. Arlinghaus said it might solve budget problems in the short term, but its longer-term stability is still in question.
“Taxes are essentially a price on economic activity and in a recessionary environment, nobody wants to raise the price of any economic activity,” said Charles Arlinghaus, president of the Josiah Bartlet Center for Public Policy in Concord. “That’s why gambling has caught fire lately.”
Gambling is voluntary and yet it could net quite a bit of money for the state.
“It’s just a tax on people who can’t do math,” Arlinghaus said.
Arlinghaus said gambling could allow lawmakers to postpone making difficult decisions on cuts.
Sen. Lou D’Allesandro, D-Manchester, has spent the last decade or so advocating for expanded gaming. He’s at it again this time around. His proposal calls for expanded gaming at six venues, including three racetracks, a proposed conference center and two locations in the North Country. The first $50 million raised would go to provide for much-needed human services, a sum that would be almost doubled by matching federal funds.
“If there is a better way, I suggest you bring it forward,” D’Allesandro said to House members recently. “Fifty-two thousand people are waiting to hear a better way — that’s the number of people who are unemployed here in New Hampshire.”
Gambling opponents worry about problems expanded gambling would create in the state and in government. According to the New Hampshire Coalition Against Expanded Gambling (www.noslots.com), more gambling could impact public safety, would increase issues related to gambling addiction and could become the dominating political force in the state.
Lynch had said the initial proposal went too far in expanding gaming. He said he was concerned about regulations.
Those opposed worry not only about a degradation of the state’s quality of life, but also about public corruption, increased crime rates and a detrimental impact on the state’s small business economy. That last bit could be key, as a bad year for business in New Hampshire is a bad year for the state budget, which drew 21 percent of its general fund revenue from the business and profits tax during the last biennium.
Idea 2: Eliminating school building aid
What this means: The school building aid program provides a percentage reimbursement to school districts for school building projects. The state could cut its reimbursement.
Cash savings: The program will cost the state $44 million this year.
Legislation is working through the legislature that would suspend school building aid for one year while a committee studies the program and how it could be restructured. The state will spend $44 million on school building projects this year. School building aid nearly tripled in the last 12 years. When it was instituted in 1956, it cost $350,000. That grew to $15 million in 1997 and to $44 million today. The state is currently paying on more than 400 projects built during the last 20 years. There is no cap, so if a project is eligible, it will receive aid.
The program provides reimbursement for a share of the cost of construction of new buildings or additions to existing buildings. The state provides 30 to 50 percent of the cost of construction, which includes the purchase of land, planning, design costs and the actual construction. The state pays a percentage of the annual principal payment and the payments go to communities over the term of the financing or five years, whichever is longer. When a district can pay for construction in a lump sum, the state will send its reimbursement over five years. The program was created as an incentive “to cause communities to come together and pool their resources and build cooperative schools,” said Ed Murdough, of the state Department of Education.
Communities would still need to build new schools or renovate existing facilities, so eliminating the program might tidy up the state budget, but it might not have any positive impact on taxpayers.
Norton said that program could be re-worked substantially in a number of ways to limithe state’s expense, including targeting low-income schools or limiting aid to certain types of projects.
The recent boom in building made the line item increase that much faster.
“It is important that we as lawmakers slow down the current rapid, accelerated growth in school building aid in order to have the necessary time to consider how we structure a school building aid program that is sensible, equitable and sustainable,” said Sen. Molly Kelly, D-Keene, earlier this year. “The committee also heard testimony that schools that need school building aid the most may not be the schools that are actually receiving the aid.”
The legislature shifted school building aid into the state’s capital budget last year, which means the state is borrowing money to pay its share. It helped balance the budget last year, but officials say it’s not a long-term solution.
“One question is where does it belong?” Murdough said.
If the state were to continue in this fashion, in 10 to 15 years the state would pay more on the debt service from the money it borrows to make the annual payment than it would on the actual annual payment. Officials say the current borrowing setup is clearly not sustainable, said Dennis Delay, an economist with the New Hampshire Center for Public Policy Studies.
“Clearly there’s got to be something done,” Delay said. “We’ll have to see what that is.”
The state could theoretically eliminate the program. That’s not likely, but if the state were to go that route, it would probably have to continue paying on its existing commitments. Still, Delay said there are a lot of things the state is committed to do by law, but that when times are tough, it just changes the law.
egislators did that with the state’s revenue sharing program this last budget session. The state changed the way it allocated the meals and rooms tax. The state continually seems to change the education funding formulas, Delay said.
“Pretty much everything’s on the table,” Delay said.
The school building aid program is attractive because of the education funding problem right now. A big chunk of the state education aid, the adequacy program, is controlled and supervised by the court system.
“People are afraid to change that,” Arlinghaus said, adding building aid would be easier to cut than, say, special education aid.
Restructuring or eliminating the school building aid program would provide substantial long-term savings, but likely not that much in the short term since the state is paying annually on 20-year bonds.
Idea 3: Income tax or a sales tax
What that means: Residents would hand over money to the state government in each paycheck they receive or in each purchase they make. (Ask people in Massachusetts.)
Cash generation: States that have both these taxes often draw more than half of their revenue from them. It wouldn’t be this simple, since the state could set either tax up in a variety of ways and because the state has a diversified tax base already, but half of New Hampshire’s general fund in Fiscal Year 2009 was $825 million. (Colorado appears to have the lowest statewide sales tax in the country at 2.9 percent. Illinois has the lowest statewide personal income tax at 3 percent.)
Supporting an income or sales tax in New Hampshire is the equivalent of not just touching the third rail but tying yourself to it and letting the train run over you. Lynch has said he would not support any broad-based tax. Officials say a sales or income tax is not on the table. Neither party is willing to even discuss them.
“Both parties consider them political suicide,” Arlinghaus said. He added there are supporters but the consensus in both parties is that just discussing them would be politically nightmarish. “At the end of the day, those are off the table.”
Delay agreed that neither a sales tax nor an income tax is on the table in any real sense. He said bills are filed every year to try to do one or the other or both. Recent proposed legislation would have combined an income tax with a property tax.
“They never really seem to be adopted by the leadership on either side of the aisle, let alone by the governor,” Delay said.
Still, New Hampshire is the only state without one or the other on a broad-based basis. Delay said the state does have income and sales taxes, they just aren’t called that. The business enterprise tax is an income tax leveled on businesses and the wages they pay out as opposed to residents. The interest and dividends tax is an income tax. (Lawmakers are looking at how to restructure the interest and dividends tax.)
A much smaller issue that offers an example of what an income tax fight might look like: Earlier this year, lawmakers drew plenty of criticism from business owners when they extended the interest and dividends tax to limited liability companies. Business owners weren’t pleased the measure was approved without public hearings during last year’s budget negotiations. Lynch called for the repeal of the extension of the tax this year. The Senate approved a repeal measure but the House balked and instead opted for more study.
The state also has taxes that cover certain sales. The rooms and meals tax is a sales tax on the sale of meals and on hotel fares. The gasoline tax is another sales tax limited to the purchase of gasoline, Delay said.
“We do have a sales tax and an income tax, it’s just not a broad-based version of either of those,” Delay said. “They’re perfectly viable ways to raise money but both tend to be volatile ways of raising revenue.”
Part of Lynch’s proposal last week involved raising the tobacco tax by 20 cents. It’s just a sales tax on a specific population. Lynch said raising the tax will net the state an additional $12 million.
When the economy nosedives, tax revenues from both sources decline unless governments raise rates.
Delay said there have been too many elections in the state where a broad-based tax of one kind or another is part of the discussion. The candidate running on a pro-broad-based tax platform most often loses.
“I think the message has been given pretty loud and clear over the last two or three decades,” Delay said. “It’s just not politically viable.”
The success of an income tax can rely on how it’s structured. A number of states have flat rate income taxes where all earnings are taxed at a fixed rate. Other states have graduated income taxes, where the rate depends on how much an individual earns.
It’s similar for a sales tax. Most states exempt things like food and other necessities.
States that have income or sales taxes use them to make up 50 to 60 percent of total state revenue. New Hampshire has a much more diverse base of taxes. Other states also have taxes like the meals and rooms tax, gas tax or taxes on liquor sales, but the bulk of the revenue comes from income and sales taxes, Delay said.
New Hampshire’s retail economy is based upon not having a sales tax. New Hampshire businesses make millions of dollars from out-of-state shoppers driving into the Granite State to make purchases. Would businesses lose that if a sales tax were instituted, even if it were a substantially smaller tax than other area states?
“If instituted, it would hit one segment drastically and I don’t think people are prepared to do that,” Arlinghaus said. “There’s a reason there’s a mall on each of the major highways coming into the state. People don’t want to mess with that.”
Arlinghaus said politically, a sales tax is probably more attractive than an income tax because there’s a feeling a low sales tax might not make a huge difference to consumers. But, he said, the tax advantage in New Hampshire is not that the sales tax is lower, it’s that there isn’t one.
“That’s enormous psychologically,” he said.
An income tax is similar in some respects. Some businesses don’t care all that much if there is or isn’t one. But many find it very attractive and it’s a main reason they opt for New Hampshire, Arlinghaus said.
But would either one solve budget problems?
“We would have more money to spend,” Arlinghaus said. “Although historically, giant new tax infusions end up spending more than they raise. Everybody stops being cautious. That’s one of the great strengths of the system we’re in. We are cautious.”
“They certainly would raise revenue if they were enacted in New Hampshire,” Delay said. “But the simple fact of the matter is that it’s not going to happen.”
Idea 4: Privatize corrections
What that means: Contract out corrections to a private entity
Cash savings: The savings would be long-term but the presumption is that the state could fund the system for a percentage of its current $100 million-plus budget since the private entity would not employ state workers who would have been entitled to state benefits.
The prison system is overburdened and growing. The Department of Corrections cost the general fund $108.5 million last year.
Officials have also worked to make corrections more efficient and to reduce recidivism. The state’s inmate population has grown considerably, further taxing the budget. The prison system has worked to implement more community-based programs to keep those leaving jail from returning, officials said.
Privatizing services happens fairly regularly. Several years ago, Manchester got rid of its city janitors and hired a private firm to handle maintenance at schools.
Delay said there aren’t many privatization efforts like that at the state level. Legislators and state officials are studying ways to reform corrections rather than privatize it.
Privatizing corrections is something the governor has talked about doing. He’s suggested a system where New Hampshire would work jointly with other states or by contracting the services out to a private company. The notion came up in Lynch’s last budget address, Arlinghaus said.
Last year the state explored converting the prison in Berlin into a 2,000- to 3,000-bed regional facility to operate with Maine and Vermont. According to an article in the Berlin Daily Sun, the facility would have been privately run and would have paid property taxes to Berlin. The state closed the Laconia prison during last year’s budget crunch. The hope with this proposal was that New Hampshire could close its Concord prison as a way to reduce state operating costs.
While privatizing corrections could potentially be a viable option, the savings there aren’t short-term, they’re long-term, Arlinghaus said. And privatizing corrections wouldn’t eliminate the state’s costs in the matter, but it would presumably reduce them, especially if the state were sharing the cost with other states.
“The problem with any idea is short-term versus long-term,” Arlinghaus said. “How do you affect the budget today? We have a $250 million problem in the budget we’re in the middle of. Forward-seeking solutions don’t help that. We need to figure out how to fix the present.”
“That’s the sort of tension that [legislators] are under,” Arlinghaus said.
Idea 5: Sell something
What that means: Like a state-run yard sale, pick something — parks, state buildings, state land, the highway system — and sell it.
Cash generation/savings: Millions in one-time money with the potential for long-term savings — for example, in the case of roads and maintenance.
The Division of Parks and Recreation made headlines last year when it released a draft of a 10-year management plan that seemed to suggest the possibility of selling off some of the state’s parks. Officials quickly said that was never the intention, though a new approach to management was in need. But with 75 parks, there would likely be some cash available if the government were to sell off properties. Parks are funded through user fees — New Hampshire has the only self-funded parks system in the country, which means the system doesn’t draw directly from the general fund, though the system is consistently under-funded.
States sell off property for a variety of reasons. Sometimes they do it to simply balance the budget in a given year. The big sell has already begun in some places. The state is going to lease state rest areas to private companies for $30 million in up-front payments. The problem with selling off state property is that it is a one-time infusion of cash. In Chicago, lawmakers routinely sell off property and then blow the return in one year, Arlinghaus said.
While the notion of selling off some state parks was met with criticism, Arlinghaus said the parks probably wouldn’t raise that much money in a sale anyway. Behind the scenes, discussions are more likely to center on selling off parts of Interstate 95. It’s a toll road so it has a built-in revenue stream for a buyer, Arlinghaus said.
“I don’t think, at the end of the day, lawmakers are going to bite,” Arlinghaus said.
In Arizona last year, lawmakers were considering selling off a slew of state-owned buildings, including its House and Senate buildings, 10 prisons, a state mental health facility and an executive office tower — with the potential of generating $737 million, according to an article at www.stateline.org. The same article said two companies paid the state of Indiana $3.85 billion four years ago to lease a state toll road for 75 years. The number was $12.8 billion for Pennsylvania, which had considered leasing a state highway to pay for repair costs.
Delay said the state could, say, sell the F.E. Everett Turnpike to a private company to maintain the roads and collect the tolls. While the initial sale would provide an influx of cash, there would presumably be long-term savings as well, since the state would save on maintenance costs.
Idea 6: Independent revenue-estimating commission
What that means: Get someone else (ideally, a group of non-politically motivated assessors) to keep us living within our means.
Cash savings: The idea is that what comes in is all that is spent so at the end of the fiscal year, the state is $0 in the hole.
This wouldn’t necessarily make the government any smaller or particular programs any more efficient, but it could (theoretically) eliminate politics from the revenue-estimating process.
Arlinghaus said he thought the Department of Revenue Administration presented some optimistic numbers to legislators right before they passed the current budget. He thought revenue estimates were cautious throughout much of the budget process last year. But on the last day of the committee of conference, the Department of Revenue Administration came in with larger estimates, which seemed to tie up the budget neatly and a little too conveniently. That’s part of the reason the state is in the predicament it’s in right now, he said.
Some states do have independent commissions set up to estimate revenues and to set up the state budget. Some are advisory groups that have no authority. Others have authority to essentially set revenue targets, Delay said.
“We have a pretty good idea on a monthly basis of what the revenue for the state looks like,” Delay said. “The state does a good job of publishing that on its Web site. … It doesn’t have the same for expenditures. The governor has said he wants to get more transparency into the expenditure side of the budget. We should be able to know fairly quickly if we’re spending more than expected or less than expected.”
Creating an independent consensus revenue-estimating panel is something that has been studied in the past and that has been killed.
“But we have not been doing a good job estimating revenues,” Arlinghaus said. “Politics play a big role in that. There’s an attraction to assigning those estimates to economists as opposed to legislators. It would take politics out of the process. But at the end of the day, it doesn’t fix anything.”
The state has implemented efficiency commissions every 10 years or so. Arlinghaus expected to see one take shape in the next year and a half or so.
“Legislators will be eager for ideas and they’ll look to any source they can find for new ideas,” Arlinghaus said.
Delay also suggested shifting to zero-based budgeting, where department heads would need to create each year’s budget from the ground up, rather than comparing it to the previous year — essentially starting at zero each year.
“What would it cost to run the state next year with this year’s services?” Delay asked. “It isn’t as simple as multiplying last year’s numbers times inflation. There are new mandates that come along. We want to have a pretty clear idea of all those things.”
Idea 7: Opt out of Medicaid
What that means: Remove the Medicaid program from the books entirely.
Cost savings: Medicaid cost the general fund $416 million in Fiscal Year 2008 and that number rises each year.
The budget drivers ? Medicaid, retirement system costs, corrections costs and education ? are the toughest items to control in the state budget. There are few non-discretionary items within the budget. Medicaid is the big driver within the Department of Health and Human Services, which cost the general fund $720 million last fiscal year.
In tough economic times, the demand for things like welfare and Medicaid only rises. Since 1999, Medicaid expenditures have skyrocketed by more than $60 per person, retirement system and retirement health costs have together jumped more than $40 per person, corrections increased by about $20 per person and local education aid has risen by $20 per person.
Just simply cutting Medicaid from the books isn’t likely to happen nor is it even likely to be anywhere near the table. The cost to the state is huge but the loss of federal aid would be devastating. The state could look to cut or reduce some of the services and programs offered under Medicaid. That too, could risk losing out on federal funds, officials said.
The gaming proposal before the legislature currently would direct the first $50 million in revenue to Health and Human Services, largely because the money would direct another $50 million in matching federal funds to the department.
In Fiscal Year 2008, Medicaid accounted for 28 percent of all state expenditures ? $1.3 billion. The good news is that nearly 51 percent of that was covered by the federal government in the form of matching funds, according to the annual state Medicaid report. The state received more than $90 million in Medicaid enhancement funds from the federal government last year on top of the normal match. The general fund accounted for 32 percent of the cost of Medicaid in Fiscal Year 2008, while the remaining 17 percent was accounted for through other state and local revenue sources. The state spent on average $677 per month per Medicaid beneficiary. The program served 147,000 people in Fiscal Year 2008, with more than 86,000 of those recipients low-income children.
No magic bullet?
There is no magic solution in Lynch’s recent proposal.
Lynch’s plan is a three-part approach that includes additional reductions in state spending plus refinancing and restructuring the state’s debt and revenue, including increased federal funds and a 20-cent increase in the tobacco tax that is expected to net an additional $12 million. The governor recieved approval from the Joint Legislative Committee to make $25 million worth of spending reductions for Fiscal Year 2010, which includes replacing general funds with $10.7 million in additional federal revenue. The bulk of the proposal includes $80 million in specific reductions from across government, and will include up to 35 layoffs. The proposal also includes an additional $44 million in federal funding through Medicaid, debt refinancing and restructuring to provide $45 million in relief to the general fund, and $8.3 million savings in the next Fiscal Year from national health care reform.
Many things were considered last year in balancing the current biennial budget. Legislators considered extending the real estate transfer tax to refinancing. They considered eliminating the business enterprise tax credit. There was talk of an estate tax and a capital gains tax. Increasing the gas tax was on the table for a time. They also wrestled with gambling last year as well, Delay said.
The state raised $271 million over a two-year period in new taxes and fees when they put together the current budget. Legislators left about three-quarters of new revenue proposals on the table, Delay said.
“Our budget is a big mess and you can’t get out of a big mess easily. You have to do a lot of things,” Arlinghaus said.
“I don’t hold out a lot of hope,” Delay said, laughing, regarding a magic bullet solution. “It certainly hasn’t happened in any other state. Even states with sales and income taxes have had serious budget difficulties.”
Traditionally, revenues don’t grow as quickly as expenditures. Since the late 1970s, New Hampshire has regularly had structural deficits.
“We like to think we’re a low-tax state, and we are by comparison to some others, but we’ve also raised taxes, raised fees and implemented new ones in order to address our problems,” Delay said.
Delay said it is difficult because any program that is on the state’s books is wanted by somebody.
“It’s difficult to cut back,” Delay said, adding New Hampshire does a better job than other states in evaluating expenditures.
Arlinghaus said he thought the public was starting to realize there is no quick and easy fix. He also said people have gotten more used to there being a budget crisis — not that they’re happy about it, but they are used to it.
“Neither the problem nor the solution can be summed up in a single sentence. Both require a longer conversation,” Arlinghaus said.