NH Public Policy
New Hampshire Center for Public Policy Studies

Busines NH Magazine: Slow Economy Sets Terms of Budget Debate

Slow Economy Sets Budget Debate

Business NH Magazine

February 1, 2013

by STEVE NORTON & DANIEL BARRICK

With a new governor and Legislature being sworn in this month, all attention in the State House is quickly turning to the budget. Lawmakers will make countless decisions about spending during the next six months, but one factor will truly dictate the budget debate: The direction the national economy takes over the next two years.

Using the NH economic forecast developed by the New England Economic Partnership as a baseline, the NH Center for Public Policy Studies forecasts state tax receipts will grow by slightly more than 1.5 percent annually, or about 3.4 percent during the coming biennium. This is roughly half the historic growth rate in tax receipts, and it is significantly lower than the spending increase state agencies say is necessary to continue doing business as usual.

Slight Revenue Growth

Our forecasted growth in revenue will add roughly $148 million more to General Fund coffers in Fiscal Years 2014-2015 than in 2012-2013. (In reality, less than half of the revenues in the state budget come from the General Fund. The rest are federal funds or other designated state sources, such as the Highway Fund. But the General Fund projections give the best benchmark of what money will be available to budget writers.)

Our forecast assumes a modest rebound in the national economy during the next two years, with slight increases in employment and an improving real estate market. But predicting the economy’s direction so far in advance is an imprecise business. A deeper downturn—or the return to a full-blown recession—could result in decreases in state revenues through 2014-2015, as much as $360 million below our projections. A stronger recovery, on the other hand, would likely increase revenues, though probably only about $40 million over the biennium.

These forecasts also presume that lawmakers adopt no new revenue sources or increase existing taxes or fees (except an automatic increase in the cigarette tax, which is all but certain to take effect in 2013.) The Legislature could entertain expanding gambling or introducing a new tax. But given the fragile economic recovery, and the newly divided Legislature (Democrats control the House, Republicans the Senate by one), it’s hard to predict what will happen.

Spending Options Narrow

With those fiscal facts in mind, what options do budget writers have over the next six months? The coming debate will take the existing budget for FY 2012-2013 as the baseline. But that budget already represented a significant shift in resources. Among them are deep cuts to public higher education, a decrease in payments for uncompensated care at acute care hospitals, and cuts in traditional sources of aid to local cities and towns, including the public retirement system.

While many members of the incoming Legislature and Gov-elect Maggie Hassan campaigned on restoring some cuts, achieving those promises will require many trade-offs. And policymakers will face pressures on the state budget growing even without new spending because of increased costs.

For instance, according to budget requests submitted by agency directors in November, the states’ existing utility costs for heat, electricity and water for state buildings will rise more than 10 percent in FY 2014-2015. That’s $5.8 million. Similarly, debt service payments will increase by $13 million, and the cost of providing health insurance and other benefits to state employees is expected to increase nearly 22 percent over the biennium at a cost of $121.7 million. Barring any changes in policy in how these items are provided, these kind of “natural” increases will complicate efforts to restore some of the cuts made last session.

And the requests for new spending are significant. The University System of NH has asked lawmakers to nearly double its appropriation from $106 million in 2012-2013 to $200 million in 2014-2015 to return state support for the public universities to pre-2012 levels. State health officials are seeking to restore payments to some hospitals, at a cost of $215 million over the biennium. And state education officials have requested an additional $22 million to help school districts pay for new construction.

These are just a few examples of the kinds of tensions that will animate the coming budget discussion, and illustrate how the sluggish economy continues to dictate the terms of NH’s policy debates.

Steve Norton is executive director and Daniel Barrick is deputy director of the NH Center for Public Policy Studies, an independent, nonprofit, non-partisan organization based in Concord that pursues data-driven research on public policy. For more information, visit www.nhpolicy.org.