Charlie Arlinghaus: Gov. Lynch should veto the Senate's experiment with deficit spending

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Charlie Arlinghaus: Gov. Lynch should veto the Senate's experiment with deficit spending
By CHARLES M. ARLINGHAUS



EVERY BUDGET requires a conference committee to sort out the differences between the House and Senate versions. The differences are usually subtle. This year, however, the details reveal startling differences that suggest the Senate version should be either fixed or vetoed.

The House passed a professional and responsible budget. I have been critical of the House revenue estimates for being too high and its spending increase for being huge by recent historical standards, but those criticisms amount to policy differences and different views of the economy.

Both the Senate and House budgets raise spending too much. A 16 percent increase is much too high, vastly outpaces inflation, and cannot possibly be maintained over time without significant tax hikes or "reform." However, by three important measurements the House budget is responsible and the Senate budget is an enormous mistake.

The most important distinction is balance. Just four years ago, the state's bond rating was lowered after four consecutive years of general fund deficits. The bond rating is important because it affects the rate at which we borrow money. A lower rating is like being forced to pay higher mortgage interest rates.

More important, a bond rating is a more objective assessment of the state's fiscal stewardship than the political process usually allows. Each party will criticize the other, emphasize the positive aspects of its own ideas and denigrate the other party. A bond rating is one of the few objective assessments delivered by national rating agencies on Wall Street.

The House budget combines the interdependent general and education funds into one budget (a suggestion Doug Hall and I made two years ago) for clarity. It balances that budget each biennium and puts any surplus into the state's rainy day fund as required by the state's budget law.

The Senate budget can only be described as hand crafted to get us into trouble with the bond rating agencies. While I was happy to see senators adopt more conservative revenue estimates in a few areas, the rest of the budget is out of balance and relies on gimmicks.

The Senate split the budget back into a general and an education fund. Each of its two budget years and the end of the most recent is in deficit. Despite revenue $60 million ahead of budgeted expenses, the fiscal year ending next week shows an $8 million general fund deficit (spending $1.394 billion and estimating revenue at $1.385 billion).

Because the education fund came in strong, there will be a surplus of $48 million. State law and the House budget call for it to be deposited into the rainy day fund. Surpluses in good economic times are saved for recessions. The Senate, in contrast, suspends state law to keep most of the money so the state can run large general fund deficits in both of the next two fiscal years.

In FY 2008, the Senate runs a $49.5 million deficit. In FY 2009, it swells to $60.7 million. On top of a small 2007 operating deficit, that will make three years in a row of deficits during years of significant revenue growth. You can almost hear the eyebrows on Wall Street rising.

The Senate budget spends $110 million more than it raises. The state is saved from deficit only by transferring $87 million from the education fund and borrowing $48 million left in the rainy day fund two years earlier.

The Senate's experiment with deficit spending is the result of a similar escapade two years ago. The Legislature then suspended the rainy day fund law to borrow $30 million from the surplus Craig Benson left. Benson's $30 million forms the bulk of the 2007 surplus that the Senate is borrowing.

It is an action that makes a mockery of the rainy day fund. However, at a minimum, senators should put the $30 million back in the rainy day fund or send Craig Benson a thank you note for the surplus that allows the their profligacy.

The governor should insist the final budget come closer to the House's version. Any surplus that our windfall levels of revenue create must be deposited in its entirety in the rainy day fund, not borrowed to perpetuate problems. Also, the general and education funds should be recombined to reduce the operating shortfall to $23 million. The remaining deficit should be eliminated with spending cuts.

If the final version doesn't do each of those three things, the governor's only responsible choice is to veto it.

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