1. New Hampshire Budget History and Drivers Orientation Presentation to Finance/Ways and Means January 10, 2007 Steve Norton Executive Director, NHCPPS “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

2. www.nhpolicy.org All of our reports are available on the web: www.nhpolicy.org New Hampshire Center for Public Policy Studies Board of Directors Martin L. Gross, Chair John B. Andrews John D. Crosier Gary Matteson Todd Selig Donna Sytek Georgie A. Thomas Brian Walsh Kimon S. Zachos Staff Steve Norton Dennis Delay Ryan Tappin Doug Hall “…to raise new ideas and improve policy debates through quality information and analysis on issues shaping New Hampshire’s future.”

3. Topics for Presentation  General Fund Appropriations 1997- 2007  Revenue and the Structural Deficit 1

4. 2

5. 3

6. 4

7. Growth In General Fund Appropriations ** Unadjusted for DSH or Medicare Part D 5

8. Adjusting Aggregate Appropriations for ‘Purchasing Power’  Aggregate expenditures must be adjusted to account for various factors which affect how far a $ goes … Changes in the prices of goods Changes in the number of people being served  Many different factors could be used to adjust nominal to ‘real’ spending Gross state product Change in aggregate personal income Combination of Consumer Price Index and Population Growth 6

9. Comparison of Aggregate Growth (1997-2007) 7

10. 8

11. Adjusting for inflation and population growth (examples) 9

12. Change in Inflation Adjusted Per Capita Appropriation 1997-2007 10

13. Feast and Famine: 1997-2007 Change in General Fund Appropriations (in $2007 per capita) 11

14. Factors Affecting the Five Big Drivers of the State Budget 12

15. 13

16. Caseload Growth Leveling Off for Children 14

17. … and for Adults. 15

18. New Hampshire's Monthly Unemployment Rate, 1996-2006 16

19. 17

20. Number of Newly Funded Local School Construction Projects 18

21. Average Cost of New Projects by Fiscal Year 19

22. Total School Building Aid by Fiscal Year 20

23. 9.8% Annual Growth Rate 21

24. 22

25. 23

26. 24

27. 25

28. Summary: NH General Fund Spending 1997-2007 Budget up 55.4% in 10 years Slightly more than inflation and population growth … and less than economy. Programmatically: In real terms: “Feast AND Famine” 5 entitlement functions driving expenditure growth Aside from 5 growth areas, net reduction in real spending for remainder of budget. 26

29. Topics for Presentation  General Fund Spending 1997-2007  Revenue and the Structural Deficit 27

30. Revenue & the Structural Deficit  Revenue sources  How have they changed over time?  What is a “structural deficit”?  Do we have one?  Why does it matter? 28

31. General Fund Revenue by Source FY 2005 29

32. General Fund Revenue ($ million) 30

33. General Fund Revenue ($ million) Compound annual rate of increase: 7.8% 31

34. General Fund Revenue ($ million) New Versus Old Revenues 32

35. General Fund Revenue ($ million) New Versus Old Revenues Compound annual rate of increase: 3.4% 33

36. $881 34

37. 35

38. 36

39. A Structural Deficit? 37

40. What is a “Structural Deficit”? A “structural deficit” is a situation where, with no change in tax laws or public services, tax revenues do not increase as fast as expenditures. 38

41. 39

42. 40

43. 41

44. 42

45. 43

46. Does New Hampshire Have a Structural Deficit? “New Hampshire can be characterized as having a long-term structural deficit in the sense that for a given scope of programs and revenue system, expenditures grow automatically faster than revenues.” KPMG Peat Marwick February 13, 1992 44

47. So What?  Recognize need to scale back on state activities OR recognize the necessity to raise tax rates or add new taxes to maintain a constant level of services.  Results in more detailed review of all state programs every biennium because there is always a looming shortfall.  Reduces possibility of surpluses for investment in desirable one-time projects.  Makes long-term strategic planning more difficult. 45

48. Conclusions?  Absent significant policy changes, historic growth in primary drivers of state budget will continue.  Over the past 15 years, ‘natural’ revenue growth has been outpaced by appropriations  constant changes to tax structure including increased rates and new taxes.  Absent significant policy changes which slow growth in primary drivers, appropriations likely to outstrip revenue growth  revenue structure changes or ‘tinkering.’  Both revenue and expenditure side driven by economic changes …. 46

49. Upcoming Publications  Plumbing the Numbers #14 – An Education Finance Update (End of January)  Medicaid Trends 2004-2006 (End of February)  New Hampshire Revenue Update (End of February)

50. Questions?

51. Total Authorized Positions: 1.2% Growth Per Annum Includes temporary, part time, classified and unclassified

52. Shift from other agencies Includes temporary, part time, classified and unclassified

53. Annual Growth (1998-2007) In General Fund Salary and Wages

54. When Reductions May Not be Reductions  Federal Funds Substituting for General Funds  Programmatic Changes

55. Change in Inflation Adjusted Per Capita Appropriation 1997-2007

56. CMHC GF Expenditures Decline, but ….

57. … total funds (federal funds) increase. $68.80$69.97