Officials eye plan to limit budget growth

NEW CASTLE — Delaware has a structural budget problem, officials say.

About 40 percent of the state’s $4 billion in General Fund revenue comes from sources like the fran-chise tax, unclaimed property and the lottery, which don’t reliably grow as the economy blooms.

Coupled with rapidly increasing costs in areas such as education and health care, and policymakers have run into trouble balancing the budget since the so-called “Great Recession” began seriously impacting Delaware in late 2008.

Legislation signed into law in August created a task force “to study potential fiscal controls and budget smoothing mechanisms.”

That panel held its third meeting Tuesday, with members discussing the feasibility of developing a fund that would limit budget growth and provide some certainty in tough times.

Delaware has had a reserve account commonly known as the Rainy Day Fund since the late 1970s, but that fund has never been tapped.

The First State is one of 14 states with the highest credit rating of AAA from Standard and Poor’s, and officials say the $231.6 million sitting in the Rainy Day Fund is a big reason why.

“The perception is the Delaware Rainy Day Fund is a fundamental credit enhancement device that if we do anything with it, it will be catastrophic, or it may not be catastrophic but could erode our rating,” Mike Houghton, chairman of the Delaware Economic and Financial Advisory Council, said.

The fund is especially important for Delaware because it receives lower marks in other areas, such as the diversity of its economy, due largely to its small size, according to Secretary of Finance Rick Geisenberger.

Stephen Bailey, an associate manager with the not-for-profit Pew Charitable Trusts, said most, if not all, of the other AAA-rated states used their reserve accounts in recent years.

Based on models used by Minnesota, Delaware would need to set aside about 3.9 percent of General Fund revenue to cover a moderate recession and 9.6 percent for a very severe one. For the fiscal year ended June 30, that’s $156.5 million and $385.2 million, respectively.

But the issue, Secretary of State Jeff Bullock noted, is not so much that Delaware may struggle if the economy plummets but that balancing a budget even in strong economic times has been a challenge. Lawmakers failed to pass a budget before the end of the most recent fiscal year and had to return in July for the first time since 1977.

One option that would provide more stability is to limit the increases in the budget, putting all revenue beyond a chosen amount or percentage into a new reserve account. Lawmakers could, for instance, tie budget growth to economic growth.

“What we’re really trying to unpack is a new way to budget,” Delaware Treasurer Ken Simpler said.

Office of Management and Budget Director Mike Jackson noted lawmakers would have to decide if they want to set a strict limit for budget growth.

Sen. Harris McDowell, a Wilmington Democrat who co-chairs the Joint Finance Committee, said he is unsure about creating such a limit because it could tie the hands of lawmakers and budget officials in the future.

Adding money to a reserve account, or budget-smoothing fund, in boom years can lessen the impact of lean years. However, any money placed in such an account doesn’t exist in a vacuum — it means less funding for programs and services included in state budgets.

“This doesn’t take the difficult decisions away, it just puts them in a different place,” Mr. Jackson said.

Additionally, once reserve funds are spent, the account must be replenished.

According to Gov. John Carney’s administration, passing a bill that would have raised income taxes on state residents this legislative session would have alleviated some of the concerns. The measure would have generated $211 million more for state government in the first full fiscal year, but Democrats were unable to gain Republican support. The proposal failed at the end of the 2017 legislative session.

However, legislators did increase taxes on alcohol, tobacco and major corporations.

A spokesman for Gov. Carney said in an email “it may make sense to modernize the Rainy Day Fund to require the state to store excess funds during good times so the state’s budget can more easily navigate through bad times.”

The income tax bill was briefly discussed Tuesday when Rep. Mike Ramone, a Pike Creek Valley Republican, said members of the GOP might be more willing to discuss tax increases — if lawmakers are faced with a shortfall in the spring and Democrats are committed to spending reform.

Mr. Bullock, however, expressed skepticism, calling the 2017 session the “perfect storm” that nonethe-less still was not able to get the bill over the hump.

“I am hard-pressed to think of a better scenario,” he said.

Sen. Anthony Delcollo, a Republican from Marshallton, said a reserve account that limits budget growth is a necessary part of spending reform — what Mr. Simpler has termed a “grand bargain.”

The issue should not be one that divides Delawareans based on political party, Mr. Houghton said, in-terjecting some levity at the end of the two-hour meeting by joking that “spending things the wrong way is a long bipartisan tradition.”

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