ISSUES AND ANSWERS ON STATE SPENDING: Cutting the fat begins with prevailing wage reform

How much should the state be spending?

The short answer is: As little as possible to meet the essential needs of all Delawareans while safeguarding the welfare of our state.

On a more thoughtful note, we need to take a fresh look at our budgetary assumptions, which have been unchanged for decades. Our state government is limited by law to spend no more than 98 percent of projected revenues. While this is a seemingly rational method for ensuring our government does not spend more than it receives, it results in budgets that race to hit the spending threshold.

We need to fundamentally change the way we think about budgeting and spending: prioritizing expenditures so the most critical needs of our citizens are addressed first; evaluating past spending to ensure funds are achieving intended goals and being used efficiently; and reforming spending so that one-time revenues are used on one-time expenditures.

What can realistically be done to cut spending?

With regard to the capital budget, prevailing wage reform would be a good start. This state-mandated system for any public works projects utilizing state funds requires that workers be paid specific minimum wages that vary by county, occupation, and project type.

The problem is that the state Department of Labor (DOL) spends about $1 million annually to set these wages and, because of the unsound protocols it uses, the wages far exceed those actually paid in the marketplace. For instance, under this system, unskilled laborers currently must be paid $44.70 per hour ($92,976 annually for a standard 40-hour work week).

We continue to recommend reforming this system. Instead of using the DOL’s flawed methods, we suggest using wage data already gathered (at no cost to Delaware taxpayers) by the U.S. Department of Labor’s Bureau of Labor Statistics. This state-specific information would ensure workers are paid fairly, but would save Delaware taxpayers tens-of-millions of dollars annually on projects ranging from building new schools to road construction.

With respect to the operations budget, the Delaware General Assembly should change its budgeting procedures to strongly factor performance into financing decisions. Our present process does not hold state agencies accountable for the efficacy of past spending, but rather takes the last expenditure as the baseline for the next year’s funding. Performance budgeting would require linking spending to proven results.

How can we lower Medicaid costs?

We can more aggressively pursue fraud. While we do not believe fraud is rampant in the system, the state is spending more than $760 million in the current budget on Medicaid expenditures. Even if only a small percentage of this outlay is due to fraud, curtailing it could save significant money.

Also, Medicaid has been one of the leading factors for driving state spending growth for more than a decade. Other states have taken innovative approaches to deliver Medicaid services and have launched wellness programs to help drive down costs.

We need to be more aggressive about pursuing and implementing such initiatives if this program is to remain viable for the long-term.

Should Delaware create a “budget-smoothing” fund?

Yes. House Republicans endorsed this idea last year and made it a key part of budget negotiations as we worked to find a consensus solution to close a $364 million budget shortfall.

A little background is needed. In 1980, Delaware established a “Budget Reserve Account” which has since become known as the Rainy Day Fund (although that moniker does not appear in the Code).

The law creating this account —which is capped at 5 percent of state revenue (presently about $225 million) – states that legislators can appropriate the reserve funds “as may be necessary 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.”

So the Rainy Day Fund was originally intended to be a “budget-smoothing” fund. However, over time it came to be viewed as a catastrophic reserve account – to be tapped only in the most extreme of emergencies. Partly, this was done to preserve Delaware high bond rating. But while well-intentioned, not using the fund for its envisioned purpose has left us without a mechanism to deal with annual fluctuations in the economy and Delaware’s revenue streams.

We support re-thinking the Rainy Day Fund and creating a new budget-smoothing fund. Combined with the other reforms we are suggesting for state spending and budgeting, we believe these measures will greatly reduce, or eliminate, the budget cycles we too frequently experience in Delaware that swing wildly between surplus and shortfall.

These measures would provide a greater level of predictability and reliability and allow the legislature to focus needed attention on the state’s other pressing issues.

Should the state make efforts to increase revenue? If so, how?

It is more an issue of making Delaware’s revenue streams more predictable. At present, the state’s sources of revenue are out of balance with changes in economic activity and the growth of factors driving spending higher.

Another challenge the state faces are multi-billion dollar, long-term retirement and health care obligations that must be financed.

In addition to the aforementioned spending and budgeting reforms, restructuring our revenue sources to be more reliable, year-to-year, is a needed step to putting the state’s financial house in order.

Are Delawareans getting the best value out of their tax dollars?

Generally, yes. However, in a $4.1 billion state operating budget, there would seem to be ample opportunities to achieve better productivity and find savings. In fact, as indicated earlier, we think the budget process should require state agencies to justify expenditures, validate results, and constantly seek better ways to perform their missions and serve Delawareans.

What would you do differently if you ran the state?

We need to get our state’s economy moving. Delaware’s economic recovery continues to lag behind many states. Our economic growth has been half the U.S. average since the end of the recession. Delaware’s unemployment rate is consistently above the national average.

Making Delaware a Right-to-Work state — where union membership could not be a mandated condition of employment — would help. Although this proposal is often mischaracterized as a “union busting” or anti-union measure, there are 28 right-to-work states that collectively contain millions of unionized workers. Unions in right-to-work states are incentivized to be better organizations. By empowering workers with the ability to choose, unions must work to promote the benefits of membership and provide superior service. In fact, some right-to-work states have seen surges in union membership immediately following the enactment of the law.

There are no right-to-work states in the Northeast U.S. and none bordering Delaware. It is a reality that some businesses, when looking for a new home, place the existence of a right-to-work law high on their checklists. Enacting such a statute here would not be a magic bullet, but it would give us a competitive advantage that states in the immediate area lack.

We also need to streamline, and in some cases eliminate, regulatory interference from state agencies. During a recent series of business forums, dozens of businessmen and women from all over Delaware bitterly complained about huge added costs and lengthy delays caused by our state’s transportation and environmental regulators. Rather than fight with an inflexible bureaucracy, many entrepreneurs have abandoned job-creating projects. Others took their business ideas, and capital, to other states.

We believe most business owners want to be good partners with the communities they serve. We also believe that regulations have a necessary place in protecting public welfare. It is in the best interest of our citizens, the business community, and our state government to change our regulatory mindset from one of confrontation and punitive action to that of helpful, collaborative compliance. Our state should be facilitating responsible business growth, not obstructing it.

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