1

The State Budget2010-2011

Presentation to the NH Senate 1/7/2009

“…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

Steve NortonDirector, NHCPPS

2

All of our reportsare available on the

web:

www.nhpolicy.orgwww.nhpolicy.org

New Hampshire Center New Hampshire Center for Public Policy Studiesfor 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.”

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

Distribution of $5.2 Billion in State Appropriations by Source of Funds (2009)

Federal Funds29%

Sweepstakes Funds0.2%

Turnpikes2%

Fish and Game Funds0.2%

Highway Funds5%

Other Funds33%

General Fund31%

Focus is Generally on the General and Education Trust Funds

Includes fundsfor education trust

8

First, some history:Balancing the NH General Fund, 1979-2007

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,60019

79

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

State Fiscal Year

Mill

ion

s o

f D

olla

rs

Non-tax Revenue:Medicaid EnhancementTobacco Settlement (2002 & 03)Flexible Federal Grant (2003)

General Fund Expenditures

Merrill

Gregg

Sununu

Gallen

Shaheen

Lynch

Benson

Regular General Fund Taxes and Revenues

9

The General Fund in 2008 (est):

Business Enterprise Tax5%

Meals & Rooms Tax14%

Liquor Sales9%

Insurance Tax7%

Tobacco Settlement1%Beer Tax

1%

Communications Tax5%

Securities Revenue2%

Court Fines & Fees2%

Board and Care Fees1%

Dog & Horse Racing0%

Utility Tax0%

Business Profits Tax21%

Tobacco Tax4%

Real Estate Transfer Tax5%

Other5%

"Medicaid Enhancement"

8%

Interest & Dividends Tax8%

Total:$1,464.1 million

10

NHCPPS Model Showing a $300m+ Revenue Shortfall

Projection of 2009 Combined General Fund & Education Trust Fund Revenues

(in millions of $)

-$400

-$300

-$200

-$100

$0

$100

$200

July

Au

g

Se

pt

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

e

Month of Fiscal Year Completed

Ab

ov

e (

Be

low

) B

ud

ge

t

Will the state have to reviserevenue estimates down?

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The 2008-2009 Biennium

July 1st 2007

June 30th, 2009

July 1st 2008

You are here

With an unresolved GF deficit

Of $125-$150 Million

January

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?

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When Will it End?(Economy.com)

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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

$400.000

$450.000

$500.000

$550.000

$600.000

$650.000

$700.000

1988 1989 1990 1991 1992 1993 1994

Total Real Taxes/Revenues Total Revenue, w /o New , Changes

17

Economic Change and Revenue? 2010-2011?

NH Total Revenues, incl Medicaid Enhancement Rev

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Mill

ion

s $

Actual &Est Update Recovery and TrendRepeat of 2001-03 Repeat of Early 1990'S

Revenues from the General Fund and Education Trust Fund

$500 Million Biennium Shortfall

18

Drivers Unlikely to SlowChange in Per Capita,

Inflation Adjusted Expenditures by Major Budget Line Items1999-2009

-$20

-$10

$0

$10

$20

$30

$40

$50

$60

$70

Medicaid Provider Payments

Retirement System

Retirement Health

HHS: Developmental

Catastrophic Aid

School Building Aid

Debt Service

HHS State HospMunicipal Revenue Sharing

Corrections

19

NH Initial Claims are on the rise again.

Source: NH Dept of Employment Security

Initial Claims for Unemployment Compensation NH

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000Ja

n-90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

20

More inmates means more prison capacity

Source: NH Dept of Corrections and Census Bureau

NH State Prison System

0

500

1,000

1,500

2,000

2,500

3,000

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Population Capacity

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NH Retirement System Hit Hard by Stock Market Losses

Source: NHRS CAFR

NH Retirement System Annualized Investment Returns

1.4%

20.0%17.5%

18.6%17.5%

14.4%13.2%

-6.7%-6.4%

2.5%

14.9%

10.2%10.0%

16.0%

-4.6%

-15.7%-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

ActualTarget

12 Mos 9/30/08

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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 …. ?

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The 2010-2011 Budget Process and Biennium

Jan 2008

June 30th, 2010

July 1st 2009

You are here

June 30th, 2011

2010-2011 Biennium

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.

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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.

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Undesignated Fund Balance in 2011 Under Alternative Assumptions About State

($1,109,737,038)

($403,069,534)

($231,440,280)

($1,200,000,000)

($1,000,000,000)

($800,000,000)

($600,000,000)

($400,000,000)

($200,000,000)

$0

Existing AgencyMaintenance Requests

Level Fund 2010, 3%Growth in 2011

97% of '09, 3% Growth in2011 and No Increase in Ed

fundingDeficits

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Spending

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Distribution of 2007 General Fund Appropriations by Major Components of the Government

Education, $217,555,760 ,

16%

Health and Human Services, $626,817,876 ,

44%

General Government,

$292,825,224 , 21%

Admin of Justice and Public Prtn, $217,790,891 ,

16%

Transportation, $2,958,949 , 0%

Resource Protection and Development,

$43,904,834 , 3%

4

State Appropriated $5.2 Billion in 2007 (all funds)

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Distribution of Appropriations (Total Funds) by Type of Expenditure (2009)

Program Expense73%

Consultants0%

Other0%

Debt Service4%Admin Expenses

5%

Total Personnel14%

Benefits4%

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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

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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)

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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.

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2009 GF Appropriation

Estimate of a 10% Reduction in

Appropriations01 DEPT OF HEALTH AND HUMAN SVCS $713,040,337 $35,652,017

Provider Payments $223,117,006 $11,155,850Developmental Services $96,836,583 $4,841,829Behavioral Health Services $50,399,450 $2,519,973State Hospital $48,021,974 $4,802,197Glencliff Home $12,770,514 $1,277,051Substance Abuse Services $7,384,489 $738,449

10 NH RETIREMENT SYSTEM $103,940,607 $10,394,061Health Subsidy $48,385,686 $4,838,569Retirement System $55,554,921 $5,555,492

16 DEPARTMENT OF CORRECTIONS $104,588,817 $10,458,882

03 DEPARTMENT OF EDUCATION $106,185,085 $10,618,509School Building Aid $44,068,069 $4,406,807Catastrophic Aid $34,287,167 $3,428,717Other $27,829,849 $2,782,985

08 TREASURY DEPARTMENT $178,526,155 $17,852,616Debt Service $91,338,688 $9,133,869Revenue Sharing (Municipal) $86,119,110 $8,611,911

06 UNIVERSITY SYSTEM $100,000,000 $10,000,000UNH Durham $53,576,000 $5,357,600Keene State $13,268,000 $1,326,800Plymouth State College $13,268,000 $1,326,800UNH Manchester $1,976,000 $197,600Other $17,912,000 $1,791,200

01 JUDICIAL BRANCH $66,699,989 $6,669,999

04 NH COMMUNITY TECH COLLEGE SYS $34,625,817 $3,462,582

13 LIQUOR COMMISSION $36,113,304 $3,611,330

18 JUDICIAL COUNCIL $24,834,811 $2,483,481Public Defender Program $17,929,754 $1,792,975Other $6,905,057 $690,506

Total $111,203,475

Estimating the GF Savings Associated with a 10% Reduction for Selected Line Items

A 10%

Reduction in

Major expenditure

areas raises

$111 million in

GF

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Examples:

Line Item GF

Reductions

GF Reduction

10% Workforce Reductions 17,435,052.73 10% Reduction in Overtime/Holiday Pay 2,212,848.60

10% Reduction in Consultants 2,182,188

10% Reduction in Admin CostsCurrent Expenses 3,570,418 Indirect Costs 511,414 Audit Set Aside 76,863 Rents and Leases 1,439,671 Heat, Electricity and Water 1,801,258 Maintenance 926,055 Equipment (own, bonded, leased) 2,294,235 In-State Travel 622,889 Out-of-State Travel 1,337,645

3% Agency Management Reductions in Class 90 Program Expenditures $37,239,354

Specific Program Expenditure ReductionsElimination of State Parks and Recreation $0Elimination of Governor's Commission on Substance Abuse $5,600,000Elimination of LCHIP $6,000,000Reduce Contributions to Retiree's Health Insurance 10% $4,662,410Reduce Contribution to Retirement 10% $8,165,669Implement Good-Time Rules in Prison $20,000,00010% Reduction in Medicaid Provider Payments (SFY 2008 Actuals) $9,667,86610% Reduction in Medicaid Outpatient Hospital Payments $3,933,905Elimination of Healthy Kids Silver Program $4,735,640Eliminate Adult Medicaid Optional Sources $272,000Elimination of Catastrophic Aid to Hospitals $1,444,81110% Reduction in Medicaid Community Mental Health Centers $4,264,58010% Reduction in Developmental Services Providers $8,075,774Municipal Revenue Sharing (appropriation 2009) $8,611,911.0UNH - Durham (2009 Appropriation) $5,357,600.0UNH - Kenne (2009 Appropriation) $1,326,800.0UNH - Plymouth (2009 Appropriation) $1,326,800.010% Reduction in Catestrophic Aid to Schools $3,428,716.70Elimination of School Building Aid $40,000,000Elimination of Additional Adequacy Expenditures $50,000,000.0

Long Term Transformational ChangesImplementation of Comprehensive Medicaid Managed Care Not AvailableScale Back Medicaid Eligibilty to 1990 levels Not AvailableSale of Pease Not AvailablePrivatization of Lottery Not AvailablePrivatization of Turnpikes Not AvailableCommunity Based Re-Entry Programs for Corrections Not AvailableConstitutional Amendment Regarding State's Role in Education Finance Not AvailableDefined Benefit Package for Retirement System Not Available

Total Yearly General Fund Reductions 258,524,372.90

Estimated Spending Reductions for General Funds

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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

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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

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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 YearsAll 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

Spending and Revenue Changes (Existing Revenue Sources Only)

($209,338,141) $101,015,603

($250,000,000) ($200,000,000) ($150,000,000) ($100,000,000) ($50,000,000) $0 $50,000,000 $100,000,000 $150,000,000

Elimination of Additional Adequacy Expenditures

Elimination (or Bonding) of School Building Aid

Implement Good-Time Rules in Prison

10% Workforce Reductions (1000 Layoffs)

10% Reduction in Medicaid Provider Payments

10% Reduction Municipal Revenue Sharing (appropriation 2009)

10% Reduction in Developmental Services Providers

Elimination of LCHIP

Elimination of Governor's Commission on Substance Abuse

10% Reduction in State Contribution to Retirees

10% Reduction in UNH - Durham (2009 Appropriation)

10% Reduction in state Contribution to Retiree Health

Elimination of Healthy Kids Silver Program

10% Reduction in Medicaid Community Mental Health Centers

10% Reduction in Medicaid Outpatient Hospital Payments

10% Reduction in Catastrophic Aid to Local Schools

10% Reduction in Overtime

10% Reduction in State Travel

10% Reduction in Heating, Electricity

Elimination of Catastrophic Aid to Hospitals

10% Reduction in UNH - Kenne (2009 Appropriation)

10% Reduction in UNH - Plymouth (2009 Appropriation)

Eliminate Adult Medicaid Optional Sources

Gas Road Toll tax Indexed

5% Increase in Business and Profits Tax Rate5% Increase in Business Enterprise Tax IncreaseMV Registrations

5% increase in Meals and Rooms Tax5% Increase in Interest and Dividends Tax

5% Increase in Real Estate Transfer TaxCourt Fines and Fees Indexed to Inflation5% Increase in Communication Service Tax

Board and Care Index to Inflation

Beer Tax Indexed to InflationElectric Consumption Tax Indexed to InflationDog and Horse Racing Index

Total of Revenue OptionsTotal of Spending Reduction Options

43

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

Annual Spending Reduction and Revenue Enhancement Options

Elimination of Additional Adequacy Expenditures

Elimination (or Bonding) of School Building Aid

Implement Good-Time Rules in Prison

10% Workforce Reductions (1000 Layoffs)

10% Reduction in Medicaid Provider Payments

10% Reduction Municipal Revenue Sharing (appropriation 2009)

10% Reduction in Developmental Services Providers

Elimination of LCHIP

Elimination of Governor's Commission on Substance Abuse

10% Reduction in State Contribution to Retirees

10% Reduction in UNH - Durham (2009 Appropriation)

10% Reduction in state Contribution to Retiree Health

Elimination of Healthy Kids Silver Program

10% Reduction in Medicaid Community Mental Health Centers

10% Reduction in Medicaid Outpatient Hospital Payments

10% Reduction in Catastrophic Aid to Local Schools

10% Reduction in Overtime

10% Reduction in State Travel

10% Reduction in Heating, Electricity

Elimination of Catastrophic Aid to Hospitals

10% Reduction in UNH - Kenne (2009 Appropriation)

10% Reduction in UNH - Plymouth (2009 Appropriation)

Eliminate Adult Medicaid Optional Sources

($60,000,000) ($40,000,000) ($20,000,000) $0 $20,000,000 $40,000,000 $60,000,000 $80,000,000 $100,000,000 $120,000,000

Dog and Horse Racing Index

Electric Consumption Tax Indexed to Inflation

Beer Tax Indexed to Inflation

Board and Care Index to Inflation

Implementation of Gambling

5 Percentage Point Increase in FMAP

25 Cent Increase in Tobacco Tax

Implement an 8% Estate and Legacy Tax

Increase in Gas Tax

5% Increase in Business and Profits Tax Rate

5% Increase in Business Enterprise Tax Increase

MV Registrations

5% increase in Meals and Rooms Tax

5% Increase in Interest and Dividends Tax

5% Increase in Real Estate Transfer Tax

Court Fines and Fees Indexed to Inflation

5% Increase in Communication Service Tax

Revenue increases are estimates based on historical trends and may not reflect existing circumstances.

New Revenue streams are in bold

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.orgwww.nhpolicy.org

New Hampshire Center New Hampshire Center for Public Policy Studiesfor 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.”