Pew analysis commends governor’s fiscal efforts

DOVER — In its year-end analysis of states who strengthened their fiscal policies, The Pew Charitable Trusts — a public policy think tank — noted Gov. John Carney’s executive order 21 among the positive developments in 2018.

Gov. Carney signed the order in late June that focused on limiting budget growth.

Based off recommendations issued earlier in the year by Delaware Economic and Financial Advisory Council, the order instructs the council that sets the state’s revenue forecast to develop a benchmark aimed at slowing the growth of the budget by setting aside revenue that, if expended, would cause the spending plan to pass a certain point.

Steve Bailey, associate manager of The Pew Charitable Trusts, says the measure appears to have been a “sensible” attempt to rethink the way the state funds and uses its budget stabilization account.

“This is a way of thinking about when the state should be saving more actively and when it should be withdrawing from the rainy day fund,” he said. “With a lot of states, they’re slowly building up their funds to higher levels during growth periods then allowing the state to use that money as a buffer when revenues fall below normal and that just really hasn’t been a concept that existed in Delaware formally with their rainy day fund. I think executive order 21 is the governor’s way of managing that volatility a little more.”

Back in June, the decree came after a constitutional amendment that would have accomplished much of the same thing failed to advance through the General Assembly, primarily due to opposition from Democratic lawmakers, members of the governor’s own party.

Gov. Carney’s administration hopes to use it to end the cycle of boom and bust that has plagued decision-makers over much of the past decade. However, it’s ultimately nonbinding and advisory, meaning the General Assembly can choose to ignore the limit and expend beyond what the benchmark calls for.

Under the executive order, DEFAC will be tasked with developing an “index” based on the three-year average of the state’s personal income and population growth, as well as inflation on government goods and services. From there, the council will create a spending limit the governor’s proposed budget, often used by lawmakers as the basis for the eventual final spending plan, will adhere to.

Similar policies have started catching on in other states since the thaw of the Great Recession, said Mr. Bailey.

“Saving based off of revenue volatility is a relatively new concept, prior to the Great Recession, only 10 states saved in this way and I think that’s because intuitively states assumed it made more sense to save only when they had budget surpluses,” he added. “That means instead of looking at revenue performance, you’re looking at how much money is left at the end of the year. While that’s straightforward, what happens often if you wait till the end of the year with a surplus is that it gets spent on other priorities before going into savings. The recession gave states a pretty good opportunity to look at how they were saving and rethink it. The number of states doing this has grown from 10 to 20 since then. It seems like they’re having success tying savings a little more directly to volatility in revenue performance instead of basing it on surpluses.”

Mr. Bailey also points out that Delaware is already an “interesting” state in terms of how it manages its budget reserve account — mostly in that it routinely funds it, but never touches it.

“For Pew, Delaware has always been an interesting case for us,” said Mr. Bailey. “By all accounts, it’s a relatively well-managed state. They are Triple-A rated by all three major credit agencies. It’s not that Delaware had been doing anything wrong, but it’s one of the very few states that’s had their rainy day fund, or budget reserve account, since the ’70s that they haven’t withdrawn from once. For most states, a rainy day fund is one of those first buffers to offset volatility. They are putting money into it during good times, and withdrawing during bad times. Delaware didn’t even use its reserve account during the Great Recession and that was interesting to see.”

The state currently has over $200 million in its budget reserve account.

Mr. Bailey also feels that the executive order — depending on whether or not the General Assembly decides to adhere to it — would make for a good set of training wheels ahead of another attempt at writing adopting the policy as a constitutional amendment.

“The legislature looked at House Bill 460 which would have put this into statute, but they declined to take it up — I think this is a great trial run to see how the governor’s budget is and work out any kinks before the legislature maybe takes it on again,” said Mr. Bailey.

Asked back in June if the idea behind the order was to put political pressure on legislators, Gov. Carney, who has made budget stabilization perhaps his main priority, did not deny it.

“Well, the intent is to lead, to say to the public that this is the way we ought to do it, this is a better way,” he said at the time. “It protects our priorities in down cycles better than our current system. Our current system in some ways creates an incentive to appropriate into a bubble because it allows us to do so.”

The governor’s budget plan is expected to be complete by the end of January and will adhere to the executive order. Whether the Joint Finance Committee ends up following that “lead” remains to be seen.

Staff writer Ian Gronau can be reached at 741-8272 or igronau@newszap.com

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