New Hampshire, Vermont, and Maine, like many states around the country, are walking a tightrope as they prepare for a tough upcoming budget season in the current recession while continuing to plug gaps in their fiscal 2009 budgets.

However, the three states have been somewhat shielded from the downturn by proactive spending cuts, healthy reserve funds, and having the impact of the subprime mortgage meltdown blunted.

"The three northern New England states, in economic terms, didn't experience the housing boom to the extent that Massachusetts and Connecticut did," said Karl Jacob, a senior director with Standard & Poor's. Still, he added, "none of the three are looking for recovery before well into next year."

In Maine, Gov. John E. Baldacci unveiled a $6.1 billion budget for fiscal 2010 and 2011, a plan that is $200 million smaller than the previous biennial budget. According to Maine officials, this proposed budget is the first since 1974 that is smaller than its predecessor.

The proposed budget is in balance but also includes a "placeholder" in the form of a federal stimulus package under President-elect Barack Obama, said David Farmer, Baldacci's deputy chief of staff.

"We were very conservative with it," Farmer said of the stimulus package estimate.

Maine is likely to sell bonds in the coming fiscal year to help fund transportation and infrastructure projects, but the offering has yet to be sized.

"There's plenty of need out there," Farmer said. "We have an infrastructure backlog, just like everyone else."

Meanwhile, Baldacci has grappled with a $140 million revenue decline in the current budget. In November, he cut $80 million in spending for the current fiscal year.

Maine has "been struggling for a number of years now" with job losses, said Nicole Johnson, a senior analyst at Moody's Investors Service. The state has also had to shoulder additional funding for K-12 education since voters approved a measure shifting the burden away from local communities.

"Despite their narrow balances, they have not had to issue notes for liquidity," Johnson said.

Maine has $169 million in its rainy-day fund, Farmer said. Its new fiscal year begins July 1. Meanwhile, the state can count on federal assistance for help cleaning up damage to seven counties from a severe mid-December ice storm.

New Hampshire - which benefits from close ties to Boston in the south along with a sizable technology industry - is facing a $100 million unfunded shortfall in fiscal 2009 as officials are preparing the fiscal 2010 and 2011 biennial budget, said Treasurer Catherine Provencher.

"We're still, obviously, wrestling with 2009, and the governor is speaking with all department heads on 2009, 2010, and 2011," Provencher said.

While she was unable to estimate a potential gap in the new biennial budget, Provencher pointed to recent testimony by the director of the New Hampshire Center for Public Policy Studies in Concord, who said the deficit could be as large as $500 million.

Gov. John Lynch is expected to outline his proposed budget in mid-February. The state's new fiscal year begins July 1.

A challenge for New Hampshire, which relies on migration from Massachusetts to fuel its housing industry, has been the recent drop in real estate transfer taxes, Jacob said.

The Granite State could sell an additional $40 million of debt in the new fiscal year under an authorization to issue bonds to fund its school building program. New Hampshire typically sells $75 million to $100 million of bonds each year, Provencher said.

Earlier this month, the federal government granted New Hampshire's request for public assistance in the wake of the December ice storm. In a letter posted on the governor's Web site, Lynch said that preliminary damage assessments to local communities and the state were in excess of $15 million.

Vermont Gov. Jim Douglas, who has applied for federal aid for damage from the ice storm, will present his proposed fiscal 2010 budget on Jan. 22.

The state is working to fill in a $35 million to $40 million budget gap in an overall $1.2 billion fiscal 2009 budget, and Treasurer Jeb Spaulding estimates that the shortfall in the new spending plan could be "in excess of $100 million." General fund revenues in December were essentially on target.

Despite the potential shortfall, Vermont plans to push ahead with capital projects.

"I don't think we'll be pulling back on capital spending," Spaulding said, citing the repairs needed on the state's roads and bridges, the availability of cheaper construction materials, and the importance of putting Vermonters back to work.

Vermont's new fiscal year begins July 1.

The state is well-positioned thanks to its $86 million reserve fund, which has been untouched in favor of spending cuts, according to Kimberly Lyons, an analyst at Moody's. She also credits state officials for being "very proactive in monitoring their revenues."

Lyons noted that it remains too early to determine how severely Vermont's tourism industry has been affected by the recession.

Overall, Moody's Johnson said she is looking to see which states get back into budget balance sooner, although she believes states will have a "muted performance at best" this year.

"We expect that states will draw on rainy-day funds, and that's what they're there for," she said.

Maine is rated Aa3 by Moody's and AA by Standard & Poor's and Fitch. New Hampshire is rated Aa2 by Moody's and AA by Standard & Poor's and Fitch. Vermont is rated Aaa by Moody's and AA-plus by Standard & Poor's and Fitch.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.