Report: State heading toward large budget shortfall

 

DOVER — Delaware has a stagnant economy and “unsustainable” spending, a report from the Delaware Business Roundtable claims.

The roundtable commissioned an independent study on Delaware’s budget and released the results Wednesday afternoon. The findings are generally not surprising, coming as the government has been studying revenues and has plans to analyze state spending. Lawmakers and budget officials are focused heavily on the budget for the upcoming fiscal year, projected to be a tight one.

The scale of the conclusions may be startling, however, and projections that the deficit could top $600 million in less than a decade are surely unwelcome to chief budget officials.

Some budget cuts were made this year this year, but the Joint Finance Committee opted to balance the budget largely by using one-time banking settlement money. Absent new tax increases, Democrats claim, the state will face serious challenges as officials begin crafting the budget in the winter and spring. Republicans counter spending is simply too high, and government can become more efficient.

A committee formed last year by Gov. Jack Markell, a Democrat, released recommendations in the spring that called for “base broadening” to reduce volatility by lowering income tax rates, eliminating itemized deductions and ending the estate tax.

The roundtable, which describes itself as an independent association of CEOs, shared the results with the governor and the General Assembly.

From a fiscal perspective, Delaware is an unusual state in several respects.

Its current issues stem largely from revenue sources that have not grown as the economy has rebounded from the Great Recession. Inelastic areas like abandoned property, the lottery and the franchise tax are inconsistent and can stagnate even as the overall economy moves forward.

The roundtable report notes this and praises officials for past management while warning of future challenges.

“Delaware has long been considered one of the best managed and most fiscally prudent states in the country, a reputation that has served the state well over many years and has continued with the Markell administration,” it says. “Now, as a result of a number of economic factors often beyond the state’s control, Delaware is finding it increasingly difficult to maintain a balance between revenues and expenditures in its annual budgets.”

Should no changes be made, the operating deficit could hit $610 million in fiscal year 2025, according to the report. The deficit for the next fiscal year is at least $100 million.

The findings caution that, as Delaware has an above-average tax rate already, tax increases could place the government in a “precarious position.” Instead, the report suggests Delaware should focus on broadening the base, a strategy advocated for by the state’s exploratory revenue committee.

Recommendations

Delaware is the seventh-highest spender in terms of money going toward state and local government services, according to the report — a fact noted last month by Treasurer Ken Simpler in a quarterly newsletter.

Mr. Simpler is trying to frame the issue not as spending more versus spending less, but as spending smarter.

“If I say it’s a value problem there’s a good chance I can get everyone in the room, because everyone wants good value,” he said in an August interview.

One of the causes of that high level of spending comes from a decades-long trend that would be difficult to reverse.

Due to its small size, Delaware takes on many services that generally would be assumed by counties. Unlike most states, Delaware, not its counties, spends heavily on education and corrections, a detail singled out by the roundtable report.

From 2008 to 2014, the average state spent 4 percent less on education on a per-student basis, but Delaware spent 12 percent more.

The report also advises efficiencies in Medicaid could be found. The Department of Health and Social Services has commissioned the company Health Integrity to look for fraud, waste and abuse. A preliminary study released in May found $4.1 million in potential inefficiencies, less than what lawmakers had expected. Full results are due next month.

The roundtable’s findings conclude officials did not take enough drastic steps during the recession and immediately after it.

“Specifically, Delaware relied heavily on temporary solutions to maintain balanced budgets during the period,” it reads. “Our review of budget-balancing actions taken by the 50 states for fiscal years 2009 through 2012 suggests that, while Delaware did reduce spending on state employees and operations, it made fewer ongoing reductions than other states in core programs such as education, health, social services and corrections.”

It also recommends reducing the number of government employees. Since Gov. Markell took office in January 2009, the state has eliminated about 1,100 positions through not filling them once they become vacant.

A spokeswoman for the governor largely agreed with the conclusions put forth by the business group.

“The Business Roundtable’s report confirms that Delaware’s economy continues to grow but that there are concerns about how the state can best manage future budget challenges because of the unique ways we generate revenues and pay for government services,” Kelly Bachman said.

“The governor looks forward to working with the Business Roundtable to build on the actions he has already taken, including reducing head count in the executive branch by 4.5 percent, reforming pension and health care spending and managing the budget so that inflation-adjusted government spending per resident is less than it was when he took office. There is always more to be done, and the governor will be creating a group to look for further savings opportunities this fall.”

Despite the positive attitude taken by the governor’s office in regard to the economy, the report says job growth has stagnated, something seconded by other sources. The Economist noted in April the First State is the only one to see hourly and weekly earnings fall from 2009 to 2014.

“Though sharing in the national economy’s ups and downs, Delaware’s output and job creation trailed the nation over the full 2002 to 2014 period,” the roundtable report says.

Despite an unemployment rate better than the national average, some fields have seen large drops in employment rates. One of those is manufacturing. The General Motors Wilmington assembly, Newark Chrysler plant and Delaware City Valero refinery all closed in 2008 and 2009, resulting in the loss of thousands of jobs during one of the worst economic periods since the Great Depression well over half a century before.

However, the number of health care jobs has grown, a result of the state’s aging population as more and more retirees flock to the area.

Looking ahead

Robert Perkins, executive director of the Delaware Business Roundtable, described himself as confident the government can respond to the challenges it faces, challenges that came about in a not-insignificant way as a result of circumstances beyond the state’s control.

The roundtable believes officials should concentrate on boosting the state’s revenue portfolio, spending carefully and promoting economic development.

“Focus on ways to make Delaware as competitive as possible with other states,” Mr. Perkins said. “There are very competitive efforts between states, and Delaware is small, so we often don’t have the resources that other states might have to try to attract large businesses, or any size businesses, quite frankly, with things like grants and tax refunds and things of that nature, so it’s more challenging for Delaware.”

The state’s advantages include its location near major metropolises and close relationship between the government and businesses, he said, and the report notes the Court of Chancery is another factor benefiting companies.

The roundtable report concludes by urging budget-writers to avoid heavy tax increases and focus instead on spending efficiently.

“Continued emphasis on strategic economic development is a key to Delaware’s future success. Given its relatively small size, talented workforce and strong higher education system, the state is uniquely positioned to identify and act on opportunities to, for example, build strategic alliances with the private sector, and remove regulatory and workforce barriers to potential growth,” it says.

“The state may also wish to consider whether its high corporate income tax rate and continued use of a three-factor apportionment formula for multi-state companies are impediments to new investment. In short, because sluggish economic growth is an important factor contributing to Delaware’s budget problems, we believe that a high priority should be given to policies that will boost, rather than hinder economic growth in the state.”

Reach staff writer Matt Bittle at mbittle@newszap.com

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