DOVER — State officials haven’t started rummaging through the couch cushions at Legislative Hall for spare change, but they aren’t ruling that out.
The fiscal picture doesn’t look promising. On top of proposals to increase the gas tax, create a new fee to pay for water projects, and provide relief for casinos, legislators now have a hefty revenue shortfall to counter in the budget.
Earlier this month, the Delaware Economic and Financial Advisory Council estimated a $40 million shortfall over the next two years.
Although that council, DEFAC, will issue three more monthly reports, the financial outlook begs the question of where elected officials can find money in the state’s budget.
By 2015, the state could be down $100 million for transportation projects if Gov. Jack A. Markell’s 10-cent gas tax hike and $50 million borrowing plan fails and federal funding for water quality projects will be sliced if funding isn’t matched. The governor proposed a new homeowner fee to generate money for those projects, a part of his Clean Water Initiative.
On top of those issues, some legislators are pushing for potentially $20 a million a year in tax relief for the state’s three casinos, which would be cut from Delaware’s operating budget.
The situation may not be as dire as in 2009, but Delaware’s budget director Ann Visalli said it’s very similar to March of that year when the state experienced a significant drop in revenue. Revenues fell by $200 million, causing officials to rework the FY2009 budget and draft FY2010 in a similar process.
Programs were not necessarily cut, but money was reallocated to cover deficits. For example, in the 2010 budget, the office eliminated 1,085 state jobs, which saved $12.8 million for the General Fund; reduced state agency printing and advertising expenses, saving $1.4 million; and enacted state employee health and pension reform, saving $131 million over the course of five years.
And, state employees took a 2.5 percent pay cut.
“That’s the same process we are going through; we are looking at account balances, trying to ask agencies to really control their spending at the end of the year for things that are unnecessary, discretionary,” Ms. Visalli said. “I don’t think there’s any one thing that’s off the table, and I don’t think there isn’t one thing that is an obvious priority.”
Over the course of FY 2015 budget hearings from November to February, Ms. Visalli said there was about $100 million of additional requests not included in the governor’s recommended $3.82 billion operating budget request. And in times like these, extra money is difficult to come by.
“So it doesn’t bode well for some of those requests,” she said. Among the add-ons, DNREC asked for $45 million to pay for capital projects.
However, she and her deputy, Brian Maxwell, stressed that it would be premature to take any definitive action to cut spending before receiving the next three DEFAC reports.
Putting practices in place
Mandating those economic advisory reports, over 35 years ago, was one of the best fiscal practices for the state, said former controller general Russ Larson. In 1977, then-Gov. Pete Dupont created the Delaware Economic and Financial Advisory Council to advise the governor and finance department on trends in revenue.
Mr. Larson, who retired in 2012 after 16 years as controller general, was deeply involved with crafting those budgets. He recalls the $800 million deficit the state wrestled with in 2009 after the economy tanked and the special meetings it took to reach a proposal.
Colloquially called “the big head committee” in the media, those special closed-door meetings involved eight people who convened to do damage control, Mr. Larson said. Separate from the Joint Finance Committee, the group was actually created in the 1990s during the time there was an economic surplus. Members would hammer out details of the spending, from implementing tax breaks to facilitating capital improvement projects.
“Move ahead 15 years, you get into the opposite situation,” Mr. Larson said.
In 2009, the big head committee worked out about a three-way split in tax increases, cuts and reallocation. Included were tax hikes on state personal income, gross receipts, franchise and estate taxes, that were made permanent last year.
“It ended up solving the problem, and it was a very cooperative effort,” he said.
While this fiscal year does not provide a lot of leeway in terms of revenue, he doesn’t foresee state leaders taking the magnitude of action that occurred in 2009.
“I don’t think it’s going to happen,” Mr. Larson said.
Finding the spare change
Secretary Rita Landgraf, head of the Delaware Department of Health and Social Services — the state’s most expensive agency — is no stranger to enacting cutbacks, also recalling the 2009 crisis, when her agency cut staff positions through attrition.
This time around, Secretary Landgraf said the agency is looking to potentially eliminate out-of-state travel expenses, especially if conferences are not mandated, cutting tuition reimbursement for physicians, forgoing some capital renovations and renegotiating contracts.
“Some of the things, though, I do want to be cautious on. It’s almost like preventative medicine; you don’t want to ignore something and it’s going to cost you more later,” she said.
DHSS’s FY2015 budget is close to $1.1 billion and contains a slew of mandatory costs on the federal and state level. Due to a reallocation by the federal government, the state will need to pay $25 million for increased Medicaid costs.
Sen. Colin Bonini, R-Dover, would love to slice the state’s Medicaid budget because it demands a considerable amount of revenue. He said he would like to explore the Medicaid eligibility requirements. Currently there are 215,450 Delawareans enrolled in Medicaid, with more on the way with the Jan. 1 Medicaid expansion to 138 percent of the federal poverty level.
“The bottom line is our budget is too big,” Sen. Bonini said. “Delaware does not have a revenue problem, we have a spending problem. We have to have the ability to look at our budget and look for savings.”
But Secretary Landgraf said amending the Medicaid eligibility is easier said than done, because it is mostly a federal program.
“Even if we wanted to do that, that’s not a quick fix. If we talk about eligibility criteria, are we forcing people further into poverty,” she added.
Still, Sen. Bonini, a member of the Bond Bill Committee, said such efficiencies should be made, and taxes are not justified to make up for any shortfall.
Gov. Markell’s proposal for a 10-cent gas tax hike tied to the consumer price index, coupled with additional borrowing, would generate more than $500 million for road and bridge projects over the next five years. However, the increase would bring the state’s gas tax to 33 cents.
His proposed new service fee, which would be indexed to inflation and collected through county property taxes, will potentially generate more than $30 million annually. Gov. Markell said it will be used to leverage more than $120 million in federal grants and borrowing for water infrastructure projects.
The fee would be $45 for the average single-family household living on a half-acre of land, and would increase to between $65 to $85 a year depending on the acreage. Large residential households, multi-family, commercial and industrial properties would be proportional, capped at $25,000 a year.
Sen. Bonini said, “I’ve never voted for a tax increase in my life. Even if you believe in tax increases, there’s no guarantee that money is going to go where it wants to go. It could go to anything.”
But he added that “there are things that absolutely need funding” and the state parks are in that group.
Delaware’s park revenue has been floundering; there is a $500,000 operating fund deficit due to decreases in entrance fees and park passes.
An annual pass to Delaware’s state parks costs $27 for residents. That’s low compared to Maryland, where residents pay $75 and New Jersey, where they pay $150 a year.
“But I think park fees aren’t the complete answer,” he said. “The structural problem is our government is too big and too expensive.”
“Where the money comes from is a tremendous concern; 15 percent of budget is escheat, 10 percent of the budget is [lottery revenue], which is going away. Twenty-five percent of our budget is based on revenue that we don’t know is going to be around. My point is, if we are strategic and smart on spending, we can create a path in which we have a much more efficient and manageable budget.”
Fellow Kent County lawmaker, Sen. Brian Bushweller, D-Central Kent, also feels there may be a structural problem with Delaware’s fiscal policy when it comes to taxes and regulation. But he said it stems from larger economic trends.
“What we face right now is a very, very tight budget which is made tighter by a very sluggish growth of revenue to the state because of the sluggish recovery. Typically after a recession there is a healthy rebound, and that simply hasn’t happened this time,” Sen. Bushweller said.
The senator, a member of the General Assembly’s Bond Bill and Joint Finance committees, said he is eagerly awaiting the April, May and June DEFAC reports, to see if the revenue picks up.
“There are a number of very legitimate needs the state has that we are hoping we have enough money to take care of. In my opinion, one of those very legitimate needs are the need to mitigate the financial damage that we did to the casino industry over many years, but especially in 2009,” Sen. Bushweller said.
Over the years, the state has increased its take of casino revenue, raising taxes seven times.
Sen. Bushweller has been championing efforts to help casinos, who have explained their revenue struggle given the effective 62 percent tax rate on top of out-of-state competition from new casino markets.
With taxes on Dover Downs, Delaware Park and Harrington Raceway, lottery revenue generates the fifth largest source of money for the state.
“This is not just a question of fairness to some corporation. There are 1,395 people who earn their living at Dover Downs,” Sen. Bushweller said. “Dover Downs is in fact a key element in the economic vitality of Kent County.”
“To me it’s an imperative that we make sure we, the state, are not part of the reason they face their financial difficulties.”
The Lottery and Gaming Commission, formed to investigate casinos’ struggles, recently recommended a plan to share slot machine vendor costs, eliminate annual table game fees and reduce the state’s share of table game revenue. That would put a $20 million hit in the state budget by 2015.
House Majority Leader, Rep. Valerie Longhurst, D-Bear, is a member of the Gaming Commission, but she is not fully supportive of the plan.
“Our priority is the budget. As much as they think they’re the priority, they are not the priority for us,” she said. “It’s a waiting game; it will probably be decided in June.”
In the meantime, she said, given all the financial proposals, “everything’s on the table.”
Republicans offer plan
Republicans put an alternative on the table, but it hasn’t gained administration support. They suggest fixing the ailing transportation trust fund by moving $37.6 million from DelDOT’s operating budget to the General Fund every year for the next seven years, freeing up more than $1 billion for road projects.
State Rep. Ruth Briggs King, R-Georgetown, suggested looking at travel expenses to cut the operating budget. She said many meetings can be done electronically and with the travel budget allocated to legislators driving to and from Legislative Hall, reimbursements can be up to $2,000.
“If I’m going to ask other state agencies to do it, I don’t have an issue with that kind of belt tightening to do that,” Rep. Briggs King said.
She also suggested strengthening the grant-in-aid process, in which the Joint Finance Committee evaluates and allocates money to nonprofits groups.
“There’s no check for outcome accountability built into that,” she said.
While finding waste and stopping fraud is critical, Sen. Bushweller cautioned about the approach. “We have to make sure we understand the difference between waste, fraud and abuse and something you just happen to disagree with. One person’s waste is another person’s lifeblood,” he said.
Even though the state is tight economically, he said that doesn’t mean planning for the future should stop. The governor proposed $7.4 million in new initiatives in his budget, from starting a nurse-family partnership to furthering substance abuse programs.
“I think if you look at what the governor proposed in new initiatives, statistically speaking he’s proposed nothing new money-wise,” Sen. Bushweller said. “Sooner or later we are going to get out of these economic doldrums we are in, and we need to be looking at the future and how to make life better in Delaware.”
Staff writer Jen Rini can be reached at 741-8250 or email@example.com. Follow @DSNJen_Rini on Twitter.