Delaware Passes Balanced Budget

Photo by Delaware State House of Representatives – Republican Caucus

By Terry Rogers

On Sunday, July 2, Governor John Carney signed a $4.1 billion budget for Fiscal Year 2018 after lawmakers were called in for an emergency session to address a $400 million budget shortfall that was preventing passage of a balanced budget that is required under Delaware law. The budget includes the funding of several key priorities in the state, including pay raises for Correctional Officers, new teachers to address enrollment growth and to address growth in the Medicaid program. The budget also included cuts to the Educational Sustainment fund, the elimination of vacant positions and an increase in healthcare costs for state employees. Despite recommendations from Governor Carney to raise personal income tax, legislators did not add an increase in that area but did increase the corporate franchise tax. Other increased revenues will come from alcohol and tobacco as well as a one percent increase in the realty transfer tax.

Local legislators say that although they were pleased with the across-the-board compromises that achieved a balanced budget, much more work needs to be done to address revenue and spending in the state. “Going forward, I see an awakening in the legislature to enact fiscal controls that will prevent us from repeating the same mistakes of the past, i.e., spending too much in the good years and then having to rely on tax increases to get us through the bad years,” Senator Gary Simpson said. “We have also mandated an informed look at possible school consolidation and other ways to make school funding more equitable. Additionally, we have taken serious steps to begin a serious study relating to Medicaid spending and healthcare cost reductions.”

Senator Simpson said that one of his initial thoughts when the Governor first proposed shifting the $22 million cost in Education Sustainment Funds to local school districts was that it should be based on an equalization formula whereby poorer districts were not hit as hard as richer districts. His second thought, and one he heard the most from his constituents, was not to agree to a proposal to allow the state to shift the funding lost to the taxpayers without a referendum. The budget does cut the Education Sustainment Fund by $11 million, but there was no stipulation that districts can add what is known as a “match tax” to cover the loss of funding without the need for referendum.

“Going into the last night of the extraordinary session, I also asked that the $22 million be cut back to $11 million,” Senator Simpson said. “My thinking was that this was a much more reasonable cost for the districts to absorb, and many would be able to use reserve funds to make up for the loss without having to go back to the taxpayers.”

Representative Harvey Kenton said that education reductions will be divided proportionally between all 19 school districts and charter schools and that the reduction is less than two percent of all education expenditures. Representative Charles Postles said that he felt the reduction in public education funds was disproportionately low considering that public education is the largest expense in state government.

“Facing a budget deficit hole this year of $364 million, state lawmakers bridged that gap with $192 million in spending cuts,” Representative Postles said. “Public education accounts for more than one of every three dollars spent, 34.5 percent and accounts for $1,418 billion in the new budget.” In addition to funding reductions to districts, legislators are planning to look into consolidating school districts as this had been suggested by constituents as a way to reduce education costs. Representative Postles said that there were some districts in Milford where merging would seem feasible but it is not something he believes should be taken lightly or quickly. He said that a group of officials would be empaneled to gather information on whether consolidating districts throughout the state would significantly reduce education costs to the state.

There have been concerns that the increase in the corporate property tax could impact the ability to attract new businesses to the state. Senator Simpson as well as both Representatives Postles and Kenton do not believe that the slight increase will have any impact on corporations coming to Delaware.

Photo by Delaware State Senate – Republican Caucus

“That tax increase will only fall on the largest companies in the nation that are incorporated in Delaware,” Representative Kenton said. Representative Postles said that Delaware has a considerable incorporation business and it should not have an impact on businesses that are already here or those who wish to locate here. Senator Simpson said that he specifically asked the Secretary of State if he thought the increase would have an impact and was told that it would have little, if any, effect. Senator Simpson said that Delaware continues to attract businesses that want to incorporate here based on the efficient and predictably reliable Chancery Court system that has been rated the best in the country.

Representative Kenton said that he did vote against the realty transfer tax increase. He said that he felt it may have a minor impact on sales, although, in the long term, he did not feel it would diminish the low property tax environment that attracts people to downstate Delaware. Representative Postles also voted against the measure, but he was not sure whether it would have an impact on the local real estate market. He did feel that this area will remain an attractive place for people to raise a family or retire.

“I don’t think the one percent, half percent to each buyer and seller, increase in the realty property tax will have any appreciable effect on real estate sales,” Senator Simpson said. “There is some talk about revisiting the issue in January to look into the possibility of giving a break to first time home buyers though.”

Other than correctional officers, state employees did not receive pay increases for 2018 and there were changes made to their health insurance costs. Representative Postles said that the health insurance change did not increase the cost to employees significantly but that many Delawareans faced an increase in health insurance costs in recent years.

“I don’t think anyone needs to be told that healthcare costs continue to rise dramatically,” Senator Simpson said. “In fact, they are one of the fastest growing portions of Delaware’s overall budget. I acknowledge state employees have not had a decent pay raise in years, but when you look at what the state has spent on health insurance costs for its employees during those years, it is easy to see why. Any raise they would have gotten has been eaten up by the amount spent on insurance costs. Yes, state employees will pay a bit larger portion, less than three percent, for their health insurance, but I’m sure that private sector employees and retirees would be happy if they had the same opportunity.”

In the initial budget proposal, the Grant-in-Aid fund, which provided funding to many non-profits throughout the state, had been eliminated entirely. In the final budget, more than $36 million in assistance had been reinstated, approximately 20 percent less than in 2017. Representative Kenton said that fire companies and other community non-profits told him they were not thrilled to get less money than last year, but they were glad that funds were restored.

“All Delawareans should be thankful for the excellent work being carried on by the non-profits of our state,” Senator Simpson said. “What would we ever do without the various non-profits right here in the Milford region that are doing so many good things like People’s Place, Milford Senior Center, Milford Housing Development Corporation, Kent/Sussex Industries, Carlisle, Slaughter Beach, Ellendale and Houston Fire Companies, Slaughter Neck Community Center and so many others too numerous to mention. Each of those entities, plus hundreds of others throughout the state received a cut in their funds this year to make up for a portion of the budget deficit. That’s unfortunate, and some will undoubtedly have to struggle to make it during the next few months. It is my hope that full funding can be restored next year, although I also wish that we had a reliable way to sift the good from the bad, such that the non-profits doing a good job are rewarded while those that fall short should be allowed to fold.”

Representative Postles said that people operating non-profits that he spoke to after the passage of the budget understood that the state was facing a significant shortfall and were thankful that some funding had been restored in the Grant-and-Aid Fund.

The three Milford-area legislators say that all members of the General Assembly are looking at ways to prevent large budget shortfalls in the future. Senator Simpson said that he was pleased that there was no increase in personal income tax and that citizens will still be able to deduct mortgage interest, charitable contributions and other items on their state taxes. He hopes that this trend can continue as legislators look at other ways to increase revenue and reduce costs.

“It’s too early to say what conditions we will face next year at this time,” Representative Kenton said. “Still, we have set some wheels in motion, including a review of the Medicaid program, which has been a major driver of state spending for more than a decade. We will be looking at some innovative ideas employed by other states to reduce fraud, reduce the cost growth curve and improve service. In the last budget, Medicaid cost state tax payers about $775 million, so even a small improvement would help dramatically.”

Representative Postles was pleased with discussions about a Budget Sustainability Fund that could help when the state suffered economic downturns. “In good years, we would automatically add money to it and in bad years we would make withdrawals to fill the gaps and sustain state operations,” Representative Postles said. “It holds the promise of reducing volatility in the budget process. A group is going to be studying the idea in the months to come and I think it makes a lot of sense. It will require a constitutional amendment to put it in place.”

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