By: DJ Bettencourt – December, 2014
This month, the newly elected members of the New Hampshire Legislature officially took office. Despite most of the attention focusing on legislative leadership battles and a shocking upset in the Speaker of the House race, the most important battle of the 2015-2016 legislative session is likely to be far less glamorous: revenue estimates.
As such, I have updated a column from a few years ago on the same topic. Simply defined, revenue estimates are the formal estimate of how much will be earned from a specific revenue source within a period of time. These estimates should take into account current economic trends or specific events that might affect revenues.
The importance of revenue estimates in the formation of a state budget is analogous to the story of the two home builders in Jesus’ Sermon on the Mount. The first man chose to build on sandy soil that was easier and faster to build but left him with a weak foundation. As a result, when the first storm struck, the house was immediately destroyed. Conversely, the other man built his house on rock which, while much harder, provided a solid foundation and remained strong no matter how fierce the storm. This story is insightful to revenue estimates.
Like all states, New Hampshire’s biennial budget is built on revenue estimates. Our recent history resembles those homebuilders. State budgets that are built on responsible revenue estimates, such as the 2012-13 budgets will endure for two years without deficits even during economic storms. Conversely, budgets built on manipulated revenue estimates based on wishful thinking, such as the 2007-2011 state budgets, will result in immediate monthly deficits. A brief history and comparison of these budgets is appropriate to serve as a warning of what we might expect from House Democrats as they project revenue for the 2015-16 budgets.
Governor Lynch’s 2008-2009 budgets relied on overinflated revenues of $4.9 billion at a time when agency estimates anticipated revenues of $4.6 billion, a difference of $276 million. Legislative Democrats accepted those unsustainable estimates in support of the state’s first $10 billion budget despite being much higher than economic forecasts supported.
After only three months of the budget cycle, the deficit reached $21.5 million. Then the 2008 recession struck. Suddenly, a deficit projected at $50 million exploded to $138 million. By artificially increasing revenue projections to accommodate spending increases, Democrats began creating the largest financial crisis in state history. In 2009, revenues were off by a whopping 11.92% and overestimated by more than $300 million.
Ignoring the mistakes of the past, House Democrats, once again, chose to base their 2010-11 budget on revenues that were totally unrealistic given the state of the economy. The end result was another $57.7 million tacked on to the deficit. The deficit continued to balloon to $360 million in 2010 and earned New Hampshire the distinction of being the worst state at projecting revenue estimates by the Pew-Rockefeller Study of State Revenue Forecast Accuracy.
Regaining the legislature in 2011, Republicans took a different approach to revenue estimates for the 2012-2013 budgets. We decided to go the difficult route and ascertain the most accurate estimates before crafting the budget to know, in advance, how much we had to spend.
We were brutally honest with economic realities and when agency heads testified before the legislature we asked a simple question: “what are the most accurate revenues as though your job depended on it?” When then kept spending married to those accurate estimates.
Democrats accused us of intentionally lowering estimates to justify draconian spending cuts, yet our process produced estimates that were underestimated by a mere 0.3%.
Then there is the current (2014-2015) budget. Thanks to Republican Senate President Chuck Morse, revenue estimates have been extraordinarily accurate despite efforts by big spenders to manipulate them upward. Yet, this month, Governor Hassan was instructing her department heads to close a $75 million deficit. How did this happen? Because Hassan allowed her office and state agencies to spend beyond estimated revenues. This presents an even more basic economic principle, once you accurately know how much you have to spend, you can’t spend more than you have.
For Hassan and her Democrats, the temptation again exists to manipulate revenue estimates or spend beyond those estimates.
It is always easier to spend than cut spending. It will be up to the Republican controlled legislature to ensure fiscal integrity and accurate revenue estimates that do produce massive deficits. The past must not be prologue.
D.J. Bettencourt served as a State Representative in the New Hampshire House of Representatives from 2005 to 2012 and was the House Majority Leader for the 2011-2012 legislative term. He currently works as the Director of Development and Community Relations at the Salem Animal Rescue League and serves on the Economic Development Action Committee in Salem, NH.