Written by Peter Kennedy, Director, for The Delaware Business Times

The State announced recently that it is facing a $350 million shortfall for the upcoming fiscal year.  So what does that mean exactly?

First let’s get some perspective on this.  Just how big is $350 million anyway?  Here are several points of reference: it is roughly 6.8% of the State operating budget for FYE 6/30/2017 ($5.2 billion).  That doesn’t sound so bad until you consider that it is larger than the entire budget of the next largest municipality in the State (New Castle County operating budget of $269 million; you could throw in Kent County’s $77 million budget and still not be quite there).  The DelDOT operating budget was only slightly less at $342 million.  There are roughly 950,000 people in the State of Delaware.  $350 million is $368 for every man, woman and child.  If you stacked brand new $100 bills it would be as tall as the Empire State Building (Stack of new 1,000 bills = 4.3″= $100,000; 3,500 X 4.3″ = 15,050″ = 1,254 feet).

How did we get here?  From a balanced budget one year to a $350 million deficit the next?  By State Law, budgeted expenditures can only be 98% of budgeted revenues.  Any shortfall or overage gets factored into the following year’s budget.  So what can (and did) happen is when projected revenues don’t live up to expectations, we get a double whammy – the shortfall from the current year and the downturn in the projection for the budgeted year.

If we think we have it bad, there is a state that has had to cut its budgeted expenditures by 21.7% since 2015.  This resulted from a major decline in an outside revenue source that fell 32% in a single year.  But that was Alaska and a large part of the cut was to reduce its dividend payments to residents to $700 down from $1,300.

People say there is no painless way to solve a $350 million budget whole but that isn’t completely true:  it’s called creative accounting.  If you need an example, the Federal Government is subject to a “Pay As You Go” rule (“PAYGO”).  Every law passed must be “deficit-neutral.”  The financial gymnastics that take place to make some new laws balance from a fiscal perspective would make Mary Lou Retton proud;

The Moving Ahead for Progress into the 21st Century Act (“MAP 21”) was signed into law by President Obama in 2012.  It authorized a vast array of spending for highway projects – $105 Billion, but how to PAYGO???  In a crafty move, MAP 21 also contained provisions reducing the need for employers sponsoring underfunded pension plans to pay in.  How does that help raise $105 Billion?  Well, the money that would have been contributed into the plans to fund the sponsor’s benefit obligation would have been tax deductible to the sponsor, so they pay higher taxes.  But also, underfunded pension plans generate additional premiums for the Government backed Pension Benefit Guarantee Corp.  Those rates were increased as well as a provision of MAP 21.  Someone crunched the numbers and Voila – $105 billion!  So, for allowing sponsors to continue to maintain their pension plans in an underfunded state, the projected increase in revenue collected was used to (on paper anyway) offset the highway spending – see how that works?   Maybe that’s the reason we have a National Debt which stood (on 11/7/2016) at $14.3 TRILLION (with a T), this in spite of PAYGO.  With 325,000,000 people in the US, that equates to $44,000 for everyone; think of it as the mortgage we don’t get a statement for.  I wonder how many people would be lining up for citizenship if they were handed a $44,000 IOU with their papers?

While under normal circumstances, you wouldn’t want to put a check on a creative process, the wise architects of the Delaware budget regime recognized the potential for chaos here.  As a result, the Delaware budget process includes an independent panel of financial experts called the Delaware Economic and Financial Advisory Council or DEFAC which evaluates the expense and revenue forecasts and signs off on their validity.

But budget gimmicks are still possible.  In the months leading up to the 2010 budget, things were looking bleak.  But there appeared to be a small beacon of light in the form of sports betting.  Under laws passed in the 1970s, Delaware was limited to 3-game parlays.  Moving to accepting single game bets would draw the “action” from the surrounding area – projected at $17 million in tax revenue.  Predictably, alas, the move was struck down by the Federal court system, but not before being included in the 2010 budget and allowing Delaware to kick a $17 million can down the road for another year.

Delaware has no “Drill Baby Drill!” option.  In the past, in spite of a relative paucity of marketable natural resources, Delaware has found ways to generate revenue from outside sources.  But much like an old oil field, Delaware’s outside revenue sources are getting played out.  Escheat revenues were 13.4% of FY 2016 total State revenues.  The DEFAC projects it to 12.3% in FY 2018 and 10.8% in FY 2019.  The Corporate Franchise, Lottery / Casino and Cigarette sources totaled $1.03 billion in FY 2016; they will be essentially flat in FY 2018.  The Corporate Income Tax projection is down $20 million for FY 2018 from FY 2016 actual.

No one should envy the budget writers their task – there is no quick and painless fix to this.    Major structural changes impacting expenditures or revenues or both will need to take place in the next 5 months to get the 2018 budget to work.  2019 and 2020 don’t look much better.

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