Report calls for change in state budgeting with spending limit


DOVER — A panel examining state budgeting is recommending lawmakers create a cap on annual budget growth, reorganize the Budget Reserve Account to make it easier to tap into in times of need and broaden the tax base by ending some tax breaks and lowering income tax rates.

As Delaware has battled with balancing its budget year after year, Republicans and Democrats alike have expressed a desire to reform budgeting, and Gov. John Carney has identified that as one of his key priorities.

Over the summer, officials created a task force to study ways to stabilize budget growth, with an eye toward creating a special account to be filled in boom years and tapped in bust years. This “smoothing account” has bipartisan support, but the exact nature has yet to be determined, although the advisory group’s preliminary report offers a look at how it may end up. The items would mark the perhaps the biggest change to Delaware budgeting in decades.

Released Tuesday, two weeks after the planned due date, the findings offer a brief look at why officials say it’s needed and what they think should be done.

“Delaware’s yearly budgetary debates and periodic deficits have become a source of both growing concern and intensified political discord,” the report says, noting the state’s revenues have not kept pace with the economy, meaning spending has at times outpaced income.

Few years offer a better illustration of that disarray than 2017, when the General Assembly missed its budget deadline. Legislators had to deal with a shortfall of nearly $400 million last year, and they did so with a mix of tax increases and spending cuts, although only after having to return early in July after the normal close of session for the first time in 40 years.

Tuesday’s findings call for the development of an artificial limit on budget growth. That limit could be based off one of a number of things, such as the Consumer Price Index, although the panel suggests using a weighted index of the three-year average of Delaware personal income growth, population growth and inflation.

Revenue that exceeds the benchmark would be split, with half going into the smoothing fund and half being used as one-time money to fund new services, programs, construction or other needs. Meanwhile, the current reserve account, often known as the Rainy Day Fund, would be altered. The fund has never been used in the approximately 40 years of its existence, but simply having extra money that can be utilized in the event of an emergency is part of the reason for Delaware’s sterling AAA credit rating, officials say.

The fund, which by law cannot exceed 5 percent of estimated revenues, currently has about $232 million. It can only be accessed “to fund any unanticipated deficit in any given fiscal year or to provide funds required as a result of any revenue reduction enacted by the General Assembly” and requires a three-fifths supermajority vote to do so.

The panel wants to allow it to hold up to 10 percent of revenue and be used when a deficit exceeds 2 percent of available revenue or when growth fails to meet the benchmark. Withdrawals, the panel says, should be restricted to half the shortfall or half the money in the account — whichever is less.

The recommendations also call for setting a minimum amount that must remain in the account unless lawmakers, by the same supermajority currently required to tap the Rainy Day Fund, vote to ignore that provision. The new account would be renamed the Budget Stabilization Fund.

“At this level of funding, the BSF would provide Delaware with sufficient liquidity to weather most historical downturns with minimal or no expenditure cuts and/or revenue enhancements,” the report says. “Even in the most extreme cases, expenditure cuts and/or revenue enhancements would be more moderate than required under current budget rules. As a consequence, the BSF not only serves to alleviate the toughest of budget decisions, but also provides counter-cyclical fiscal policy that should mitigate the severity and/or length of economic contractions.”

The final section of the recommendations deals with broadening the tax base and repeats some of the same items in a May 2015 report from a similar panel. The advisory body urges legislators to eliminate or means-test some tax breaks for senior citizens and lower income tax rates, particularly for those in the top bracket of more than $60,000. Doing so, according to the summary, would provide for greater certainty in income tax collections.

“Taken together, the panel believes that these recommendations will alleviate the managerial, cyclical, and structural volatility currently exhibited by Delaware’s budget framework,” the report says. “The recommendations, however, will not fully resolve these issues, nor will they relieve policymakers from their ongoing obligations to make determinations regarding scarce budget resources. The panel strongly encourages the governor and legislators to consider implementation of these recommendations as a ‘package’ for reasons of both political viability and overall efficacy.

“While each reform can be attempted alone, the panel considers the politics of such an approach more challenging than their adoption in totality. The panel also believes that the reforms taken as a whole are greater than the sum of their parts, with each proposal reinforcing and working in harmony with the others.”

Gov. Carney in a statement applauded the release and said officials “should finally commit to addressing our budget problems so we can get back to making investments that matter — in our schools, our communities, and our economy.”

The last regularly scheduled day of the legislative session is June 30, meaning lawmakers may not have time to pass smoothing fund legislation this year.

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