Page 17 - Delaware Lawyer - Fall 2021

designed to ensure that the state is solvent year-to-year. Balanced budget provisions typically require only that current expen- ditures be limited to current revenues. Delaware’s balanced budget provision is different; it limits annual appropriations to a maximum 98% of revenues. Subsec- tion (b) states, in part:
No appropriation, supplemental appropriation, or budget act shall cause the aggregate State General Fund appropriations enacted for any given fiscal year to exceed 98 percent of the estimated State Gen- eral Fund revenue for such fiscal year from all sources.... 2
This restriction is commonly referred to as the “98% rule” or the “98% ap- propriation limit.” The remaining 2% of
estimated revenues must be set aside for appropriation in the following year unless the state encounters a hardship covered by Section 6(c).3
Subsection (d) of Section 6 (“Subsec- tion (d)”) establishes a budget reserve account within the General Fund (the “Reserve Account”), colloquially referred to as the “rainy day fund.” States com- monly use budget reserve accounts to store funds for future expenditure; when the state faces a sudden and unexpected shortfall in revenue, it can draw on re- serves rather than raise taxes, cut expenses or borrow. Subsection (d) requires the state maintain 5% of gross General Fund revenue in the Reserve Account.4 It also sets forth the conditions upon which the state may draw on the Reserve Account:
The General Assembly, by a three- fifths vote of the members elected to each House, may appropriate from the Budget Reserve Account such additional sums as may be necessary to fund any unanticipat- ed deficit in any given fiscal year or to provide funds required as a result of any revenue reduction enacted by the General Assembly.5
The Reserve Account has never been used.6 It has merely functioned as a small savings account, benefiting the state as a source of credit enhancement.7
expenditures may be appropriated in a supplemental appropriations bill.8
DEFAC, the Delaware Economic and Financial Advisory Council,9 calculates the 98% appropriation limit by adding the previous year’s unencumbered cash bal- ance to its revenue estimate for the bud- get year, which provides the 100% appro- priation limit.10 Two percent of that sum is set aside for appropriation in the follow- ing year. Thus, for example, if the unen- cumbered cash balance for the prior year were $100 million, and the revenue esti- mate for the budget year were $4.0 bil- lion, the 100% appropriation limit would be $4.1 billion, and the 98% appropria- tion limit would be $4.018 billion. The $82 million difference would be set aside for appropriation the following year.
IV. The Path to Budget Smoothing
In the years following the Great Re- cession, public officials faced steady pres- sure to increase spending in the face of constrained revenue growth, jeopardiz- ing the long-term health of Delaware’s budget.11 In 2017, the General Assembly established the DEFAC Advisory Panel on Potential Fiscal Controls and Budget Smoothing Mechanisms (the “Panel”).12 The Panel was formed to study, among other things, the benefits of adopting a budget stabilization fund and ways to restrain annual budget growth, including by improving the state’s appropriation of periodic budget surpluses.13
After months of study, the Panel rec- ommended that Delaware’s Reserve Ac- count be “repurposed” into a budget stabilization fund holding reserves of no more than 10% of estimated General Fund revenues. The funds in the Reserve Account would provide the initial fund- ing for the budget stabilization fund, and additional contributions to the fund would be made over time. The budget stabilization fund would collect and dis- burse funds over periods of fluctuating revenue and across economic cycles. The state would contribute to the fund when
III.
The Budget Process
Delaware’s fiscal year runs from July 1 to June 30. Each January, the Governor submits to the legislature a recommend- ed budget for the ensuing fiscal year, or budget year. Budget negotiations occur between February and June, and the Gen- eral Assembly enacts the final budget on or before June 30. At least three pieces of budget legislation are passed each year: (1) the Budget Appropriation Bill (also known as the budget bill or the operating bud- get), (2) the Bond and Capital Improve- ment Act (also known as the bond bill or the capital budget) and (3) the Grant-in- Aid Act. Additional funds for one-time
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