By GARRY RAYNO, Distant Dome
There will be good news and bad news for the New Hampshire Legislature’s budget writers in the Spring.
Whoever wins the governor’s race and controls the House — the Senate is off limits for Democrats thanks to gerrymandering — will face a daunting task in a state government spoiled by the lure of easy federal money intended to blunt the worst fiscal impacts of the COVID pandemic.
That spigot is dripping and about to run dry but has been the state’s savior allowing Republican lawmakers to cut business and rooms and meals tax rates and eliminate the interest and dividend tax —the one state tax that actually taxes wealth — at the end of the calendar year.
Budget writers may regret those cuts to the state’s revenue stream when the state’s three-day Spring arrives in New Hampshire, but by then Gov. Chris Sununu, who gladly took credit and touted the tax reductions, will be gone and the new governor will have to face the music of declining revenues and enhanced needs.
State government used millions and millions of dollars of the federal money for capital projects that otherwise would have fallen to state revenue to support like a new youth detention center, a separate facility for behavioral services for troubled young people, a legislative parking garage, new building for the Department of Education and another for the Attorney General’s Office, as well as new gondolas for Cannon Mountain, etc.
Last week, the Federal Reserve sent a message to the financial institutions and the public that the fear of a great recession and runaway inflation was unfounded as the long embraced theory of a soft landing is reality.
That message came in a .5 percent cut in the prime interest rate, which in theory should make borrowing money less expensive for state, local and county governments, businesses and individuals including those holding credit cards.
This rate cut and others expected to come as the Federal Reserve seeks to lower the rate back toward what it was before inflation took off after the worst of the pandemic ended and as the world’s economies sputtered to reach cruising speed everywhere, although the United States fared better than almost all of the industrialized countries.
More infrastructure and capital projects, and more residential and commercial building are likely to result from the rate cuts, which in turn will increase economic activity both for goods and labor, eventually translating into greater revenues for government, particularly the state, and reducing the need for governmental services such as subsidized housing and other social needs.
And the rate cut is also expected to spur the stock market, which likes rate cuts almost as much as it likes an overstocked workforce which drives labor costs down instead of up as has happened since the recovery from the darkest days of the pandemic as fewer people returned to the labor market.
Most public retirement systems like New Hampshire’s are more and more dependent on equity growth to help pay for the benefits for current and future retirees.
The greater the return on investment the less the state and the cities and towns have to pay for their share of retirement system costs.
New Hampshire, like many other state retirement systems, has substantial unfunded liabilities or benefits to be paid to retirees in the defined benefit system.
The legislature took action more than a decade ago to address the unfunded liabilities, but it increased expenditures for state and local governments or more importantly for property taxpayers for municipalities and for general and education fund taxpayers for the state.
But that is where the good news ends and the bad news begins because of the interest rate cut in the prime lending rate.
The biggest problem for the state is it will lower the amount of interest the state has been collecting on its “surplus funds” from the last few years and more specifically on the federal money the state banked while waiting for it to be spent, which has been substantial.
Last fiscal year the interest earned on the funds was $95 million, which is $56.4 million more than anticipated and for the first two months of this fiscal year, the interest payments have kept state revenues above the water line and not under.
With lower interest rates and the depletion of the federal money, the state is not likely to have this windfall for much longer.
While an analysis by the Pew Charitable Trusts’ Fiscal 50 project last week indicates most states’ increased revenues and reduced demand for government services will offset what they lose on their earned interest, New Hampshire’s return may not be offset given the amount of interest the state has collected.
The $60 million to $80 million a year will be hard to replace and coupled with the ending of the interest and dividends tax, which produced $185 million last year, budget writers will have more than a $200 million annual hole to fill.
While revenue surpluses would have covered that easily in recent fiscal years, last fiscal year the total revenue surplus was $126 million far short of that figure.
The other problem last fiscal year was the revenues earmarked for the Education Trust Fund were in deficit by $42 million, although the fund has a hefty surplus, but that won’t last long with the cost of the Education Freedom Account growing by leaps and bounds.
As the revenues shrink, there are demands on the spending side that will aggravate the shortfall such as the promise to put $75 million a year into the Sununu Youth Development Center settlement fund to pay the more than 1,000 victims who claim they were abused at the hands of state employees while at the center in Manchester.
And if some of those folks decide not to take the settlement and proceed to court and they win decisions like the first victim, David Meehan, who was awarded $38 million, the problems could be much more severe for budget writers.
The state claims the jury award can be no more than $475,000 by state law, and that is currently under litigation.
Also on the horizon is a new agreement with the hospitals over the Medicaid Enhancement Tax, which is assessed at 5.5 percent against net patient services.
The $320 million is used to match federal Medicaid dollars and then about 91 percent is returned to the hospitals depending on how many Medicaid patients they treat and the uncompensated care they provide.
Sununu wants to change the formula to return only 80 percent to the hospitals and to use the rest to help community mental health centers and substance abuse disorder clinics, which do not pay the tax.
At issue is about $35 million, and the NH Hospital that loss will destabilize the entire health care system.
The use of the money and how much is returned to hospitals has been litigated before and could well be again.
This is what budget writers will face next spring even with the cost of borrowing being less and an expected bump in business tax revenues.
Revenues for the next biennium are not expected to be sufficient to continue what state government is spending this biennium which ends June 30, 2025.
And that is the bad news waiting for the next newly-elected governor and state legislators.
Garry Rayno may be reached at garry.rayno@yahoo.com.
