Municipal officials yesterday cheered news from Gov. John Lynch that he's recommended rejiggering his budget proposal to preserve nearly $60 million a year in cash that the state traditionally sends to cities and towns.

Lynch yesterday reversed course to recommend that the state continue sending a slice of the rooms and meals tax to municipalities across the state, money that cities and towns have long relied on.

To make that possible, Lynch's office announced he would tap federal stimulus money to help pay for the bigger tab for education funding called for under a new law passed last year. That plan, which lawmakers called the first ever to meet the state's court-ordered education funding obligations, costs $123 million more than current spending over the two-year budget.

The New Hampshire Municipal Association, which had led the charge against Lynch's proposed rooms-and-meals-tax suspension, sent an e-mail to members calling the governors' announcement "great news for New Hampshire's cities and towns, as it would return close to $120 million over the (two-year) biennium to municipalities - revenue which is critical to providing essential local services."

"It's very significant," said Maura Carroll, the municipal association's general counsel. "And it certainly is a good-faith effort on the part of the governor."

But that doesn't mean that the struggle between state and municipal officials is over: Carroll noted that the governor still recommends suspending revenue sharing, a program that sends $25 million a year to cities and towns across the state, as well as cutting from 35 to 30 percent the share that the state pays into many local employees' pension funds, a change that will cost municipalities millions.

Meanwhile, the budget is now up to House and Senate lawmakers, who will ultimately settle how much local aid to retain or cut. Yesterday, House Finance Committee Chairwoman Marjorie Smith sounded supportive of Lynch's plan.

"Understanding both the serious fiscal challenges facing the state and the equally serious challenges facing cities and towns, the House Finance Committee is committed to helping cities and towns meet their obligations," she said in a statement. "The governor's proposal to use stabilization money to help fund adequacy frees up general fund dollars to help municipalities during these difficult times."

Lynch spokeswoman Pam Walsh said that because Lynch delivered his Feb. 12 budget address before the stimulus package had passed the Senate, it wasn't clear exactly what stimulus money could be used for.

"As you know, when the governor presented his budget the stimulus package was not finalized," Walsh said.

In the address, Lynch recommended sending the state's share of stimulus money out to cities and towns while suspending the local portion of rooms-and-meals, revenue sharing and paring back the state's retirement commitment.

That prompted hand-wringing among local officials because, while the old state sources of funds were familiar, steady and reliable, no one knew how much stimulus money to expect or what strings would be attached.

Then, word got out that most of the so-called "fiscal stabilization" money in the stimulus was earmarked for education, prompting the prospect of the state sending whopping education checks and meager other aid to municipalities. But Lynch argued that the ultimate goal was to make the taxpayer whole, and that what happens line-by-line on a given tax bill isn't the important part.

In Concord, city officials were already predicting a $3.3 million gap in the municipal budget for fiscal 2010 when the governor gave his budget address and proposed suspending or paring the three programs. Those changes would make the problem $3.2 million bigger, City Manager Tom Aspell said. (next page »)