Managing Shortfalls and the Next State Budget

As state legislators convene for a new session, the biggest challenge they will encounter in 2021 will likely be crafting the next two-year state budget. Policymakers will face a significant budget shortfall, as the pandemic reduced state revenues and increased the need for services.

Legislators will not be able to tap into significant surpluses as they did in the last three state budget cycles. State revenues were about $106 million short of planned amounts in FY 2020, the first half of the current state budget. However, public agencies used fewer state funds than expected, as federal assistance supported new pandemic-related costs and other agency operations changed or slowed. As a result of underspending state funds, the total shortfall from the first year of the budget was an estimated $67 million.

The effects of the pandemic will linger throughout FY 2021 and may lead to a larger shortfall in this second year of the current budget. However, these budget shortfalls are significantly smaller than originally projected in the spring, when the effects and duration of the pandemic were unknown. The dire predictions of shortfalls totaling more than $500 million appear less likely now, and some key revenue sources have been surprisingly resilient.

Managing the Shortfall
Although NH law requires policymakers enact a two-year balanced budget, the state budget does not have to balance each year. Additionally, the current state budget does not have to end at a positive or zero balance if revenues and expenditures do not go according to the enacted plan. As a result, unless the state encounters significant cash flow issues, policymakers can avoid reductions to services during this budget biennium as long as they resolve the deficit in the next state budget.

Deficits generated last year and this year can be offset by higher revenues and lower expenditures in fiscal years 2022 and 2023. This gives legislators flexibility to meet current and near-term service needs while still passing a balanced budget plan for the next two years, as required by law.

Spreading out budget adjustments over time has three main benefits. First, it prioritizes services for people who need them during this crisis. While quarantining and virus risk mitigation continues, older adults, people experiencing disabilities and others who require personal care at home will still need support. Also, people may be more socially isolated than before, increasing the need for mental health, behavioral health and substance misuse services.

With nearly half of NH households estimated to have lost employment income at some point since mid-March, people already in tenuous financial situations or with substantial health needs may rely on public services to get through this crisis.

Removing supports would likely make recovery from the recession more difficult. As public health concerns recede and the economic recovery continues, NH’s residents will hopefully need less support in 2022 and 2023.

Second, keeping resources flowing to people who need it most helps the economy recover. Research indicates that aid to the unemployed and those with low incomes can have substantial economic benefits, especially during a recession. Moody’s Analytics calculated that, during the last recession, federal benefit increases in the Supplemental Nutrition Assistance Program, also known as SNAP or food stamps, added $1.74 to the economy for every dollar invested. Estimates from Moody’s and from the U.S. Congressional Budget Office also indicate aid to the unemployed provides a significant economic boost, potentially at much more substantial levels than tax rate reductions. Avoiding layoffs at state and local governments also helps support the economy.

Third, a longer time horizon to balance the budget provides more opportunity to find new sources of revenue, including federal assistance. With the potential for additional federal aid to states, policymakers may receive temporary boosts in resources that will help Granite Staters and the entire economy through the most challenging periods of this crisis.

Even if the virus is under control and key aspects of life have returned to a pre-pandemic normal, the economic recession will likely have left many of the state’s residents with fewer resources, less financial security and more long-term physical and mental health impacts. State policy decisions between now and June will be key to building an inclusive, equitable and sustainable recovery for all Granite Staters.

Phil Sletten is a senior policy analyst at the NH Fiscal Policy Institute, an independent, nonprofit, nonpartisan public policy research organization based in Concord. Learn more at nhfpi.org.