Eggs and Things
The State Budget
2010-2011
Steve Norton
Director, NHCPPS
“…to raise new ideas and improve policy debates through quality
information and analysis on issues shaping New Hampshire’s future.”
1
Board of Directors
Donna Sytek, Chair
John B. Andrews
John D. Crosier
William H. Dunlap
Shelia T. Francoeur
Chuck Morse
Todd Selig
Stuart Smith
New Hampshire Center
for Public Policy Studies
All of our reports
are available on the web:
James Tibbetts
Brian Walsh
Kimon S. Zachos
www.nhpolicy.org
Martin Gross
Staff
“…to raise new ideas and improve policy debates through quality
information and analysis on issues shaping New Hampshire’s future.”
Steve Norton
Dennis Delay
Ryan Tappin
2
2009
3
The Good News?
4
What is the State Budget?
5
NH’s Budget
• Biennial Budget – 24 Months
• 2 fiscal years per budget
• Fiscal year runs from July 1 – June 30th
6
First, some history:
Balancing the NH General Fund, 1979-2007
$1,600
Non-tax Revenue:
Medicaid Enhancement
Tobacco Settlement (2002 & 03)
Flexible Federal Grant (2003)
$1,400
$1,000
General Fund
Expenditures
Lynch
$800
Benson
$600
Shaheen
Merrill
$400
Gregg
Sununu
$200
Regular General Fund Taxes
and Revenues
Gallen
State Fiscal Year
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
$0
1979
Millions of Dollars
$1,200
7
The General Fund in 2008 (est):
Court Fines & Fees
2%
Board and Care
Fees
1%
Securities Revenue
2%
Total:
$1,464.1
million
Tobacco Settlement
Beer Tax
1%
1%
Utility Tax
0%
Dog & Horse Racing
0%
Tobacco Tax
4%
Business Profits Tax
21%
Real Estate Transfer
Tax
5%
Other
5%
Communications
Tax
5%
Business Enterprise
Tax
5%
Meals & Rooms Tax
14%
Insurance Tax
7%
"Medicaid
Enhancement"
8%
Interest & Dividends
Tax
8%
Liquor Sales
9%
8
NHCPPS Model Showing a
$300m+ Revenue Shortfall
Projection of 2009 Combined General Fund
& Education Trust Fund Revenues
(in millions of $)
$100
$0
-$100
Will the state have to revise
revenue estimates down?
-$200
-$300
Month of Fiscal Year Completed
June
May
Apr
Mar
Feb
Jan
Dec
Nov
Oct
Sept
Aug
-$400
July
Above (Below) Budget
$200
9
The 2008-2009 Biennium
You are here
July 1st 2007
July 1st 2008
June 30th, 2009
January
With an unresolved GF
deficit
Of $125-$150 Million
10
What’s Next for 2009?
• Budget has been squeezed with relatively ‘limited’
impact to program areas.
• Next round of budget cuts will depend on April business
taxes and federal government decisions r.e. ‘bailing out’
states.
• Next round of budget changes unlikely to avoid
significant program impact.
• Rainy day funds are available, but it is likely to ‘rain’
harder in the next biennium.
• Significant constraints in 2009 mean that traditional
approaches to constraining expenditures at the margin
are not available for 2010-2011.
11
The State Budget Context
for 2010-2011
• Economic Dislocation
• Primary Budget Drivers
–
–
–
–
Medicaid
Retirement System
Corrections
State Participation in Local Education
• Uncertainty
– Very little information on business revenues to project
future.
– How low will we go?
12
When Will it End?
(Economy.com)
13
NH Initial Claims are on the rise again.
Initial Claims for Unemployment Compensation NH
14,000
12,000
10,000
8,000
6,000
4,000
2,000
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
0
14
Source: NH Dept of Employment Security
Maybe worse in NH?
15
Consumers aren’t (and maybe won’t)
spend disposable income
16
A 1990-1991 style recession,
without tax changes, equals
no State Revenue growth for five+
years
$700.000
$650.000
$600.000
$550.000
$500.000
$450.000
$400.000
1988
1989
1990
Total Real Taxes/Revenues
1991
1992
1993
1994
Total Revenue, w /o New , Changes
17
Economic Change and
Revenue? 2010-2011?
NH Total Revenues, incl Medicaid Enhancement Rev
Revenues from the General Fund and Education Trust Fund
$3,000
$2,500
$500 Million Biennium Shortfall
$1,500
$1,000
$500
Actual &Est Update
Repeat of 2001-03
Recovery and Trend
Repeat of Early 1990'S
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
$0
19
Millions $
$2,000
18
Drivers Unlikely to Slow
Change in Per Capita,
Inflation Adjusted Expenditures by Major Budget Line Items
1999-2009
$70
$60
Medicaid Provider
Payments
$50
$40
$30
Retirement System
Retirement Health
Corrections
$20
HHS: Developmental
Catastrophic Aid
$10
School Building Aid
$0
-$10
-$20
Municipal Revenue Sharing
HHS State Hosp
Debt Service
19
The 2010-2011 Budget
Process
• November – Agency Budget Hearings scheduled for
November 20, 21 and 24
• December – Senate & House organized on December
3rd; legislative leadership makes committee
assignments; Governor begins to craft budget
• Late January – Governor’s budget is being finalized
• February – Governor presents budget to the Legislature
on February 15th; later in the month, House Finance
Committee begins deliberating
• March – House Finance Committee takes action
• Negotiations until June 30th …. ?
20
The 2010-2011 Budget
Process and Biennium
You are here
2010-2011 Biennium
Jan 2008
July 1st 2009
June 30th, 2011
June 30th, 2010
Decisions for 2010 and 2011 will be made in the next 6 months
and policy changes will have to be implemented now, not later to
meet budget obligations.
21
Agency Maintenance
Requests (Have Come In)
• Maintenance Requests ask: “What do you
have to spend to maintain existing
services?”
Agencies Answered: 12.5% increase from
2009 to 2010.
22
Undesignated Fund Balance in 2011 Under Alternative Assumptions About State
$0
Existing Agency
Maintenance Requests
Deficits
Level Fund 2010, 3%
Growth in 2011
($200,000,000)
97% of '09, 3% Growth in
2011 and No Increase in Ed
funding
($231,440,280)
($400,000,000)
($403,069,534)
($600,000,000)
($800,000,000)
($1,000,000,000)
($1,109,737,038)
($1,200,000,000)
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Spending
24
State Appropriated $5.2
Billion in 2007 (all funds)
Distribution of 2007 General Fund Appropriations
by Major Components of the Government
Education,
$217,555,760 ,
16%
General
Government,
$292,825,224 ,
21%
Admin of Justice
and Public Prtn,
$217,790,891 ,
16%
Health and
Human Services,
$626,817,876 ,
44%
4
Resource
Protection and
Development,
$43,904,834 , 3%
Transportation,
$2,958,949 , 0%
25
Distribution of Appropriations (Total Funds) by Type of Expenditure (2009)
Admin Expenses
5%
Other
0%
Debt Service
4%
Consultants
0%
Total Personnel
14%
Benefits
4%
Program Expense
73%
26
Levels of budget
compulsion and discretion
Most
•
•
•
•
•
•
•
•
•
•
Least
Federal constitution
– (e.g., elections for federal offices)
State constitution
– (e.g., indigent defense, Secretary of State, adequate education)
Federal law or regulation – mandate on all
– (e.g., special education)
Federal law or regulation - quid pro quo
– (e.g., Medicaid, child care, vocational rehabilitation)
Court order against the State
– (e.g., state prison system, community developmental services, juvenile services)
State law mandating the activity
– (e.g., vital records, parole board hearings, dam inspections)
Revenue-producing and deficit-neutral activities
– (e.g., DRA auditors, child support enforcement, liquor stores)
State or federal law authorizing activity
– (e.g., school building aid, hunter education program)
Agency regulation authorizing activity
– (e.g., complaint investigations at the Veteran’s Home)
Historic practice without specific authority in law or regulation
– (e.g., National Governor’s Association & NCSL dues and meetings)
27
Changing Spending:
Process (e.g. Methods)
• Many different methods for changing spending that
legislators can choose from:
– Shift Financial Burden to property tax by eliminating programs
supporting local government finances, offsetting shift with a
state-funded property tax circuit breaker for low income.
– Reduce administrative costs;
– Eliminate Government Activities no longer reasonable in this
climate;
• State Library
• Nursery
–
–
–
–
Last In, First Out;
10% Across the Board Reduction;
Eliminate whole programs that could be later reinstated;
Large scale reform of programs (longer-term)
28
To control spending: have
to focus on ….
• Medicaid (~$450 million in general funds)
• Corrections (~$350 million in general funds)
• Local Aid (~700 million)
–
–
–
–
–
State Education Contribution ($500m?)
Local Retirement Costs
Catastrophic Aid to towns for special aid
School Building Aid
Meals and Rooms sharing
• Education Finance Reform
– Adequacy defined, but will cost an additional $100 million in
spending under current law.
• Layoffs will happen: Employees as major driver of corrections,
state hospital (and salaries and benefits?)
• Public system transformational changes may take too much
time to impact 2010-2011.
29
Transformational Policy
Opportunities
• Medicaid Care Management – Significantly
Broaden management of care (utilization)
• Retirement
– Tiered system (new vs. old employees)
– Contribution amounts
• Corrections
–
–
–
–
–
Mental Health Management
Re-entry
Home-confinement
County vs. State management of the system
Reimplementation of good time
30
What are the Revenue Options
Now?
31
How did the State respond to the
1990 recession?
• Early 1990’s recession was much worse in
New Hampshire than in the US.
• Changes to state taxes were significant:
–
–
–
–
–
–
BET created in 1994
M&R increased from 7% to 8% in 1990
RETT 30% 'temporary surcharge' in 1990
Communications Tax revamped in 1991
Utility Tax revamped in 1992
Tobacco Tax increased in 1990 and again in 1991 (17 cents to 21
cents to 25 cents)
– Medicaid Enhancement Revenue from $50m in 1991 to $250m in
1994
32
New Hampshire State Revenue
Options for the Legislature:
•
•
•
•
Increase Ad Valorem Tax Rates
Index per Unit Taxes to Inflation
Increase the Tobacco Tax
Federal ‘Bail-Out’ including Medicaid
Enhancement Revenue or FMAP increase
• New State Revenue Sources
–
–
–
–
–
Estate & Legacy
Amusement Tax
Luxury Tax
Gambling
Capital Gains
33
5% Increase in Ad Valorem Taxes
(2008 Revenues)
All data in Millions of 2008 Dollars
Business Profits Tax
Business Enterprise Tax
$19.1
$11.5
Meals and Rooms Tax
$10.7
Interest and Dividends Tax
$6.7
Real Estate Transfer Tax
$5.8
Communication Service Tax
$4.0
$57.8 Million
34
Extra 2008 Revenue If Per Unit
Taxes Had Been Indexed to
Inflation for Five Years
All data in Millions of 2008 Dollars
Court Fines and Fees
$4.6
Board and Care
$3.0
Beer Tax
$1.9
Electric Consumption Tax
$1.0
Dog & Horse Racing
$0.5
Gas Road Toll Tax
$20.9
MV Registrations
$11.4
35
NH Cigarette Tax Increase of 25
cents.
Increase in the Tobacco Tax on
Cigarettes at Current Annual Sales
Cents per Pack Increase
$0.25 =$38m
36
New (and Renewed) Revenue
All data in Millions of 2008 Dollars
Estate & Legacy tax at 8%
$24.0
Amusement Tax at 5%
$32.0
Luxury Tax (Example 10% on Luxury Homes, $500K)
$60.0
Gambling (Video Slot Machines) in New Hampshire
Capital Gains Tax at 5%
$100-200
$0?
37
There is no crystal ball.
But ….
• If revenues are flat (no declines!) and the Governor’s
request for a 97% (of ’09) and 100% (of ’09)  An
estimated $231 million problem remains.
– When will federal FMAP arise?
– Condundrum  need to cut services in order to meet 97%
budget, does that make it impossible to draw down new federal
dollars given maintenance of effort requirements?
– If no new federal revenues  an additional reduction of
spending of over 15%.
• Demand for services will increase (given economic
conditions).
• Using the budget process to implement policy change
will delay savings significantly, potentially out beyond
2010. Policy change needs to occur sooner rather than
later.
38
Options: History would suggest
… a little of everything?
• ‘Balanced Budget’ law and rosy glasses  RSA 9:8-B
• Rainy Day Fund – When will it really start to rain?
• Further accounting changes
– Further bonding
• Sale of Assets
• Spending reductions of somewhere between 10-20%
compared to historic growth, depending on federal
response, and other legislative actions.
• Education
• Revenue
– Increase of existing revenue streams (e.g. the last three
recessions)
– New (or renew) streams
39
Longer Term Problems
•
•
•
•
Corrections
Retirement System
Retirement System – Health
Inexorable growth in
Medicaid associated with
aging.
40
Both Spending Reductions and Revenue
Changes affect Businesses
• Spending changes impact NH businesses
– LRGH impacted by Medicaid reductions
– $350 million reduction in local aid results in a 12.5%
increase in commercial property tax.
• Revenue increases can impact NH businesses
– Meals and Rooms  Tourism
– Business Tax  Location decisions, Jobs
• Tough choices that will have to be weighed
carefully by the legislature.
41
Board of Directors
Donna Sytek, Chair
John B. Andrews
John D. Crosier
New Hampshire Center
for Public Policy Studies
William H. Dunlap
Shelia T. Francoeur
Chuck Morse
Todd Selig
Stuart Smith
All of our reports
are available on the web:
James Tibbetts
Brian Walsh
Kimon S. Zachos
Martin Gross
Staff
www.nhpolicy.org
“…to raise new ideas and improve policy debates through quality
information and analysis on issues shaping New Hampshire’s future.”
Steve Norton
Dennis Delay
Ryan Tappin
42