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Charles Arlinghaus: NH's fiscal crisis cannot be ignored

April 29. 2014 6:09PM

THE $400 MILLION hole in the state's budget that I described two weeks ago has caused the state to be placed on a negative fiscal watch. Some would ignore or minimize the crisis, but the problem is large, structural and will require more than a small tweak to fix.

This past week, the national bond rating agency Standard and Poor's lowered the state's outlook from "stable" to "negative." Very quickly, the other major national group, Moody's, followed and advised investors and anyone watching the state's finances that New Hampshire's outlook was negative. The bond rating was not lowered, but both major fiscal watchdogs are advising the world that New Hampshire's outlook is negative. I think it's fair to say that this is not putting our best foot forward as we look to attract jobs and investment to the state.

When the state courts ruled (as many of us predicted they would) that the state's Medicaid enhancement tax is unconstitutional, the ruling took off the table almost $400 million used to balance the state's budget (about $370 million in direct payments plus some federal matching money which could still exist if the state uses other funds to match it).

Half of that money has already been collected for the fiscal year ending June 30. But, being unconstitutional, it would have to be refunded. The other half simply won't be collected. The state can delay the refund of the first half by appealing, but no one really thinks the state has much hope of winning an appeal.

Since the decision came out, we've known there's a big problem. The governor can (and should immediately) start cutting back on the state's budget. A $400 million problem that has to be made up in one year isn't easy when the state's general and education fund budget (our "operating budget") totals only $2.32 billion in fiscal year 2015.

It is important to note that not all lawmakers have their heads in the sand. Some of them sound like they've been listening. Senate President Chuck Morse, who long served as chairman of the Senate Finance Committee, decided to focus on substance. He described the Standard and Poor's report as a "clear road map." He's right. The S&P description of what's wrong reads like a primer on the state's fiscal problems. They are describing New Hampshire as negative based not simply on the MET problem, but on the state's pathetic reserves and our having one of the worst-funded pensions in America.

Sen. Morse responded to each factor. His statement on the problem provides a clear outline of a three-part approach. First, take the remaining $15 million of surplus we haven't already spent and put it away in the rainy day fund. Pre-crisis, the governor and House were reluctant to do so. One imagines they will now see the light.

Second, Morse doesn't want to undermine the modest pension reforms written by Sen. Jeb Bradley and passed in 2011. I would go further and move to a more stable, defined system. Three years ago, Josh Elliott-Traficante outlined the options to fix the system in "Defined Contribution Models in Other States" for the Josiah Bartlett Center. New Hampshire needs a well-funded system not "worst-in-the-nation.

Third, Morse correctly points out that there is no short-term or easy fix. Grant Bosse's "Meet the MET" warned about this mess in 2013 when people were pretending a crisis wasn't looming on the horizon. Morse describes the task correctly as needing to find "long term solution to how we fund our state's health care safety net." That debate will be a political minefield.

There is very broad agreement that there ought to be some sort of safety net, but tremendous disagreement about what that net ought to include or look like. The state has always been content to fly by night and create short-term solutions to nurse us through the next few years. Sometimes a crisis can focus the mind.

One real danger here is that the scope of the problem will encourage some lawmakers to do nothing right away. That's their natural reaction, and it's wrong. S&P showed the need for a less pathetic rainy day fund. Put away the $15 million before you spend it. We know the big problem will approach $400 million. Start cutting spending now as the first fiscal year winds down and before managers are inclined to "spend it so they don't lose it."

A crisis isn't coming, it's already here. The time for acting isn't soon, it's now.

Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.

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