T HE J OSIAH Understanding The

BARTLETT
CENTER FOR
PUBLIC
New Hampshire
POLICY State Budget

April 2010

Measuring The Revenue Shortfall

Revenue on track to fall $84.8 million short in first half of budget
By
Charles M. Arlinghaus

Summary: Using a historical projection model, state revenues can be projected to fall
$84.8 million short of the amount budgeted to balance spending in the first year of
the two-year budget. Revenues in the second year of the budget are built off the first
year’s projection plus 2.2% growth over that base. At that rate of growth, revenues
would be an additional $86 million out of balance in the second of the two budget
years. The combined revenue shortfall of $171 million is the largest component of a
budget deficit greater than $250 million that legislators must resolve to balance the
state’s finances.

In New Hampshire’s two-year state budget, spending is balanced with an

estimate of how much each tax will raise. Historically, the state has estimated revenue
conservatively and generally exceeded budget estimates. That caution has allowed
budget writers some flexibility to make changes, add small amounts of spending or
build up a balance in the rainy day fund.

In recent years, partly because of the recession and partly because of optimistic
projections, revenue estimates have been high and have contributed to a deficit. An
estimate of the shortfall is an important part of figuring out what actions to take next.
Based on an historical projection model, revenues will be $84.8 million below the
budgeted amount in the first of the two fiscal years of the current budget. Revenue
shortfalls in each fiscal year are the largest component of the deficit in the current
budget.

The state Department of Administrative Services issues a monthly revenue

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report that lists receipts for each revenue source on a current month and year-to-date
basis. It also compares current receipts to the prior year and to the budget.1 Using their
numbers we can extrapolate a trend based on the historical collection pattern for each
tax. No tax is collected in twelve equal monthly segments. However, the patterns for
each tax are remarkably consistent each year.

For example, over the last ten years, the end of March total for the Meals and Rooms tax
is an average of 77.4% of the final total. That percentage has fluctuated within a range of
just 2.4 percentage points.

Fiscal Year 9 month total As a % of year-end total

FY09 164.4 0.783
FY08 166.8 0.778
FY07 161.3 0.775
FY06 155.6 0.775
FY05 149 0.770
FY04 143.1 0.772
FY03 136.3 0.777
FY02 131.6 0.771
FY01 127.5 0.777
FY00 118.5 0.759
10 year average 0.774
2010 177.3 Est: 229.13
difference 251.1 – 229.13 (21.97)

If the 2010 total at the end of March is divided by the historical average of 77.4%, we can
project Meals and Rooms revenues of $229.13 million or $21.97 million below the
amount used to balance the budget.

To establish a projected shortfall, I did a similar calculation for the six largest revenue
sources (Business taxes, Meals and Rooms, Tobacco Taxes, state liquor revenue, Interest
and Dividends Tax, and Real Estate Transfer Tax) and another calculation for “other
sources.” I’ve separated out the statewide property tax because it collects a set amount
that doesn’t vary. I’ve also done different estimates for Medicaid enhancement revenues
because they are not economically driven and for the insurance tax because the
collection process changed and it is now collected largely as one lump sum payment.

1
The State Department of Administrative Services maintains the monthly revenue reports for the last
eleven years as well as budget projections (referred to as the “monthly plan”) on their website. Data for the
previous month is generally posted one or two days after the month ends. Reports can be retrieved at
http://admin.state.nh.us/accounting/reports.asp.

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The following table lists each of the six largest tax sources and the other sources
category, the amount collected for each in the first nine months of the fiscal year and a
projected year-end total compared to budget. The Business Tax line is the total that
combines BET and BPT collections. Because the two are not separate taxes but linked to
each other, projections are more accurate when the two are combined. The list also
includes a similar projection for other categories of revenue not calculated separately.

Tax Source March Historical Projected Budgeted Difference

2010 Average Total amount
Business Taxes 311.1 .656 474.24 502.8 (28.56)
Meals & Rooms Tax 177.3 .774 229.13 251.1 (21.97)
Tobacco Tax 181.3 .749 241.98 217.2 +24.78
Liquor Revenue 89.5 .763 117.33 117.3 +0.03
Interest & Dividends Tax 42.5 .448 94.96 117 (22.04)
Real Estate Transfer Tax 63.8 .767 83.14 84.7 (1.56)
Other Sources2 213.3 .5763 370.26 398.6 (28.34)

These seven categories add up to a projected budget shortfall for the first of the two
budget years of $77.66 million. To this total we need to add estimates for the Insurance
Tax, Medicaid enhancement revenue, and the Statewide Property Tax.

The Statewide Property Tax is required by law to be set at a rate that will raise $363
million. Each year it raised a few hundred thousand dollars extra. This year it has raised
$363.2 million reducing our revenue shortfall by $200,000.

The Insurance Tax was changed to collect about 85% of the revenue in one lump sum.
The last three months of the year are budgeted to raise only an additional $100,000 net.
To date we have collected $83.0 million leaving us with a projected shortfall of $2.6
million at the end of the fiscal year.

Medicaid enhancement revenues4 are $110.2 million behind the budget. The final three
2
For comparison with the state’s monthly revenue reports, “other sources” as defined here includes the
communications tax, court fines & fees, securities revenue, utility consumption tax, board & care revenue,
beer tax, racing & games of chance, gambling winnings tax, transfers from lottery commission, transfers
from racing & charitable gaming, tobacco settlement, utility property tax, and “other.”
3
For the category of other taxes, the historical average is for the years 2006-2009. The trend has been
consistent over the last four years but not for before that. Using a ten-year average would significantly
exaggerate the projected amount of shortfall.
4
Medicaid enhancement revenues include the two categories from the monthly revenue reports called “Net
Medicaid Enhancement Revenues” and “Recoveries.”

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months are projected to raise an additional $6.6 million, 5% of the final total for that
source. Even assuming we don’t fall any further behind, Medicaid enhancement will fall
$4.8 million short of the budgeted amount.

Revenue Shortfall for Fiscal Year 2010

Combining the seven-source estimate with the other three sources, the state is currently
on track to be $84.8 million short of its budgeted revenue in FY2010.

A Preliminary Estimate for Fiscal Year 2011

The budgeted revenue for FY2011 includes no additional taxes or rate changes. It
assumes a 2.2% growth in total revenues over the prior year. If we assume the same
2.2% increase off the new FY2010 base, revenues would be $86.6 million below the
amount budgeted to balance spending in the budget5.

To reach the budgeted level, revenues would have to grow at 6.2% -- well above
historical averages and unusual when coming out of a recession, especially a severe
one. Growth of 2.2% is a more reasonable assumption for the fiscal year that begins in
just two-and-a-half months.

There is a case to be made that 2.2% growth should be revised downward. The 2.2%
assumption was made as part of the estimate that has turned out to be very optimistic
for the current fiscal year. If the forecast was that off for the current year, it might likely
be optimistic for the second year as well.

For the purposes of this current paper however, it seems reasonable to take a middle
ground and assume neither higher nor lower growth and stick with 2.2%. The January
15 estimate from the state Department of Administrative Services adopted this
approach estimating a 2.3% increase.

Revenue Shortfall as part of the Budget Deficit

The two-year revenue shortfall this paper estimates to be $170 million is only one
component of the overall budget deficit the state faces. The deficit also includes
replacing $18 million of stimulus funding that was budgeted but moved to 2009. The
budget also used $45 million of Joint Underwriting money that is now off limits. In
addition, there is a shortfall at Health and Human Services of between $20 and $80
million. A more detailed estimate of the deficit is the subject of a forthcoming paper but
it can safely be said to hover between $250 and $300 million.

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If FY2010 revenues fall 84.8 million to $2,174.3M, a 2.2% increase would yield $2,222.13M or $86.67
million less than the budgeted amount of $2,308.8M.