The next week is a pivotal time for the state budget debate in New Hampshire, as the House of Representatives puts the final touches on its version of the next two-year spending plan and sends the result to the Senate.
Much of the conversation over the past few days has centered on the cuts that the Republican-led House Finance Committee has proposed to Gov. Hassan’s original budget plan. Among the sharpest cuts are in the Department of Transportation (where the House may end up cutting $88 million from the Governor’s budget) and the Department of Health and Human Services (where spending reductions currently hover around $170 million in General Fund spending over the 2016-17 biennium, compared to the Governor’s budget.)
Measuring those spending changes is critical to understanding the budget and its potential impact on the state and its residents. But as a preliminary step, it helps to look at the revenue assumptions supporting those spending plans. In large part, the gap in revenue estimates between the Governor and the House explain the differing spending plans put forward by each party.
Let’s start with the Governor’s revenue estimates (in both cases, we’ll consider just General Funds and Education Trust Funds, which together account for slightly less than half of all state spending.) The Governor began by adopting the recommendations of the Consensus Revenue Estimating Panel, a bipartisan, independent group tasked with forecasting revenues for the next two years (Center Economist Dennis Delay serves as a member of that panel, along with other economists, analysts, state officials, and budget experts.) That panel expects state revenues from existing tax sources to increase 2.7 percent in FY2016 and an additional 1.9 percent in FY2017. (See table below.)
The Governor than built onto those estimates by including additional revenues sources, beyond the existing tax and fee structure. We’ve discussed some of these in a past post, and they include an increase to the tobacco tax, a change in the reasonable compensation threshold for certain business taxes, and the legalization Keno as a form of state-sponsored gambling.
With these new sources included, the Governor’s revenues rise about $125 million above the panel’s forecasts. And it’s these additional revenue sources that allow her to increase biennial spending in her 2016-17 budget by 12.1 percent in General Funds (or 7.1 percent, if Education Trust Fund revenue is included.)
The House Ways and Means Committee, which is responsible for setting revenue estimates for the House, differs significantly in several ways from the Governor’s estimates.
First, the House expects slower growth in existing revenue sources over the next two years, with growth rates about half that predicted by the Consensus Panel and adopted by the Governor. That alone means House budget writers are looking at $103 million in revenue lower than what the Governor began with.
Second, the House rejected the new revenue sources (tobacco tax increase, etc.) that the Governor built into her budget. When that loss is added to the lower growth forecasts, it means the House is starting with roughly $225 million less in General Fund revenue to pay for its spending plan. And it’s this gap – more than anything else – that is driving the House’s spending cuts now under discussion.
Nothing is final yet. The full House will vote on the budget next week. And before that, the House Ways and Means Committee is expected to release revised revenue estimates later this week. With an addition two months of perspective on the state economy, including relatively steady tax receipts for the current fiscal year, committee members may decide to amend their original forecasts. This could, potentially, narrow the gap between the Governor’s spending plan and the House’s. And, of course, there is still another stage in the circuitous budget process: The Senate will take the steering wheel in April, including the drafting of its own revenue forecasts that will likely shape the resulting budget proposal.
All of this presents an important question: What is the price of over- or under-forecasting state revenues?
If state revenue projections prove too conservative (i.e. too low), that would mean the state has more money at the end of biennium than budget writers had expected. This surplus revenue could be used to increase the size of the Rainy Day Fund, a kind of state savings account. But even though state law directs the Legislature to replenish the Rainy Day Fund with surplus revenue, lawmakers in recent years have used revenue surpluses to support spending. That means that, as of earlier this year, the Rainy Day Fund stood at just $9 million – not much of a cash cushion for an annual budget that reaches more than $5 billion. As recently as 2008, the fund stood at close to $90 million, before being steadily tapped to buffer the impact of the Great Recession.
If the state revenue forecast is too optimistic, on the other hand, it would mean the state found itself with less money to meet spending obligations. In such cases in the past, there have been renewed efforts to cut expenditures in the middle of the budget. Most times, these mid-stream expenditure reductions are made in a crisis atmosphere, with little time for long-term planning.