The State Budget 2010-2011 Presentation to the NH Senate 1/7/2009

1. The State Budget2010-2011Presentation to the NH Senate 1/7/2009 Steve NortonDirector, NHCPPS “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

2. All of our reportsare available on the web:www.nhpolicy.org Board of Directors Donna Sytek, Chair John B. Andrews John D. Crosier William H. Dunlap Shelia T. Francoeur Chuck Morse Todd Selig Stuart Smith James Tibbetts Brian Walsh Kimon S. Zachos Martin Gross Staff Steve Norton Dennis Delay Ryan Tappin New Hampshire Center for Public Policy Studies “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

3. 2009

4. The Good News?

5. What is the State Budget?

6. NH’s Budget • Biennial Budget – 24 Months • 2 fiscal years per budget • Fiscal year runs from July 1 – June 30th

7. Focus is Generally on the General and Education Trust Funds Includes funds for education trust

8. First, some history:

9. The General Fund in 2008 (est):

10. NHCPPS Model Showing a $300m+ Revenue Shortfall Will the state have to revise revenue estimates down?

11. 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

12. 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.

13. 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?

14. When Will it End?(Economy.com)

15. Consumers aren’t (and maybe won’t) spend disposable income

16. A 1990-1991 style recession, without tax changes, equalsno State Revenue growth for five+ years

17. Economic Change and Revenue? 2010-2011? $500 Million Biennium Shortfall

18. Drivers Unlikely to Slow

19. NH Initial Claims are on the rise again. Source: NH Dept of Employment Security

20. More inmates means more prison capacity Source: NH Dept of Corrections and Census Bureau

21. NH Retirement System Hit Hard by Stock Market Losses Source: NHRS CAFR

22. 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 …. ?

23. 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.

24. 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.

25. Deficits

26. Spending

27. State Appropriated $5.2 Billion in 2007 (all funds) 4

29. Levels of budget compulsion and discretion • 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) Most Least

30. Changing Spending: Process (e.g. Methods) • Many different methods for changing spending • 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)

31. To control spending: have to focus on …. • Primary drivers • Medicaid • Corrections • Local Revenue ‘Sharing’ including Catastrophic Aid, Building Aid and Meals and Rooms sharing • Education Finance • Adequacy defined, but will cost an additional $100 million in spending under current law. • 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.

32. A 10% Reduction in Major expenditure areas raises $111 million in GF

33. Examples: Line Item GF Reductions

34. Transformational Policy Opportunities • Medicaid Care Management – Significantly Broaden management of care (utilization) • Retirement • Tiered system (new vs. old employees) • Contribution amounts • Corrections • Re-entry • Home-confinement • County vs. State management of the system • Reimplementation of good time

35. What are the Revenue Options Now?

36. 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

37. New Hampshire State Revenue Options: • 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

38. 5% Increase in Ad Valorem Taxes (2008 Revenues) All data in Millions of 2008 Dollars Business Profits Tax $19.1 Business Enterprise Tax $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

39. 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

40. 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

41. 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 $100-200 Capital Gains Tax at 5% $0?

42. Existing Revenue Enhancements and 10% Spending Cuts are Likely Not Enough

43. Existing Revenue, Spending Cuts, Federal Bailout and New Revenues Likely Required

44. There is no crystal ball. But …. • Maintenance requests submitted in November suggest a huge deficit (over $1 billion). • 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. • Demand for services will increase (given economic conditions). • As in previous recessions, additional revenue (federal and state) and spending constraints will be necessary. • 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.

45. All of our reportsare available on the web:www.nhpolicy.org New Hampshire Center for Public Policy Studies Board of Directors Donna Sytek, Chair John B. Andrews John D. Crosier William H. Dunlap Shelia T. Francoeur Chuck Morse Todd Selig Stuart Smith James Tibbetts Brian Walsh Kimon S. Zachos Martin Gross Staff Steve Norton Dennis Delay Ryan Tappin “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”