In the last year, the state didn’t have a tax problem; it had a large spending problem. The government collected taxes from us in almost exactly the amount predicted, but it appears to have spent significantly more than the budget allowed it to do. The result is a budget hole, the precise size of which is still unknown in Concord. The problem is not a shift in the economy or any circumstance beyond our control. Rather, it was an inexplicable failure to manage according to the financial rules laid down a year ago.
New Hampshire passes a two-year budget, which has to balance not each individual year but at the end of the two-year cycle. Spending rules are set down in the budget law and spending is balanced by an estimate of how much each tax will raise over the course of the next two years. Typically budget inaccuracies stem from the difficulties estimating economic conditions and tax collections.
This budget year that hasn’t been a problem. The revenue estimates for the fiscal year that ended June 30 were remarkably precise. In fact, we raised $5.8 million more than estimated — a variance of just one-quarter of 1 percent. Any year in which we are right on target on the estimated portion of the budget is typically a good year. This year, however, is an exception.
Spending is supposed to be a precise amount. Departments and agencies are given an amount they may not exceed. That amount is specified in three ways. First, most individual line items have an amount that may not be overspent (this agency may spend only $400,000 on in-state travel, for example). Second, in most budgets many departments are given additional targets to reduce according to managerial discretion (notwithstanding the line item amounts, agency spending must be reduced an additional $400,000 in the ways that make the most operational sense to the manager).
Finally, we know that every department and agency will spend a little less here and there than the maximum and therefore “lapse” a small amount back.
Once a budget passes the Legislature, the management or execution of that budget is an executive branch responsibility. As of this writing, only the executive branch has an idea how close spending is to the target. While most budgets can be counted on to underspend by a few dollars, the worst kept secret in Concord is that this budget was overspent.
One reason to worry is that the current budget gets worse and worse as each year goes by. The two-year budget was only able to be balanced by carrying forward a $56.9 million surplus from the prior two-year budget. In the first year (the one that ended June 30), the budget had planned to spend more than it would raise by reducing that surplus down to $26.7 million. The second year would spend down the rest, meaning each budget year planned on spending almost $30 million more than it raised.If spending mistakes this year further erode our fiscal position, next year may well be untenable and require significant spending cuts before the year is too far underway.
Another worrisome thing is the politics surrounding “extra money.” Although the budget as passed spends $56.9 million from prior years, final audits showed an additional $15 million in surplus that is not yet spoken for. The Senate wanted to save it in the rainy day fund as the law ordinarily would require. The governor and the House wished instead to spend it this year. They couldn’t agree, so the money remained unspent but not locked away.
There is a concern that clever politicians will have run around the legislative process by merely letting some departments overspend by the same $15 million (and perhaps the extra $5.8 in revenue) and thereby achieve the spending increase they were unable to pass legislatively.
That concern might be overly cynical, but at this point all we know is that the tax side of the budget was fine, nearly perfect in fact. The spending side is a mystery. The mystery should be revealed as soon as possible if only to put the cynics out of their misery.
Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.