Page 18 - Delaware Lawyer - Fall 2021

FEATURE | BALANCING DELAWARE’S BUDGET TODAY
it had surplus revenues and draw on the fund when it faced a shortfall.14
The Panel also recommended two long-term spending controls: linking an- nual appropriations to a spending bench- mark and devoting surplus revenues to one-time expenditures or other purposes that do not demand sustained funding. Each year, DEFAC would calculate the budget benchmark by applying an index to the previous year’s operating budget, grants-in-aid and recurring expenses in the bond bill (the last not to exceed 1% of the operating budget).15 The recom- mended index called for weighting equal- ly the three-year averages of (1) growth in personal income and (2) Delaware popu- lation growth and inflation. The differ- ence between the 98% appropriation limit and the benchmark appropriation limit would indicate either a revenue shortfall, to be bridged by drawing on reserves, or extraordinary revenues, to be appropri- ated in accordance with terms designed to restrain structural growth. Thus, for example, if in the prior year the operating budget was $4.0 billion and grants-in-aid totaled $550 million, the sum — $4.55 billion — multiplied by the index would provide the Benchmark Appropriation for the budget year. If the index were 1.044, the Benchmark Appropriation for the budget year would be $4.698 million, plus 1% cash to the bond bill.
The Panel recommended that extraor- dinary revenues be allocated (1) 50% to one-time expenditures and (2) 50% to the budget stabilization fund. Any amounts remaining after fully funding the budget stabilization fund could be appropriated for any purpose.
V. Turning Recommendations Into Action
In 2018, a bipartisan group of legisla- tors introduced HB 460 to amend Sec- tion 6 based on the Panel’s recommen- dations, with some modifications. The bill did not make it out of committee,16 but the executive and legislative branch- es took additional steps to adopt the Panel’s budget smoothing practices. For
example, on the last day of the session, Gov. Carney issued Executive Order 21, adopting the Panel’s key budget smooth- ing practices for the executive branch, with some modifications.17 The General Assembly established a budget stabiliza- tion fund the following year.18
Executive Order 21 largely adopted the Panel’s budget smoothing recommenda- tions. Each May and December, DEFAC calculates: (1) an advisory Benchmark Index for overall state budget growth,19 (2) an advisory Benchmark Appropria- tion,20 and (3) the difference between the Benchmark Appropriation and the 98% appropriation limit required by Sec- tion 6(b) of the Delaware Constitution. A positive variance between the Benchmark Appropriation and the 98% appropriation limit indicates the amount of extraordinary revenues available for the budget year; a negative variance indicates a shortfall. The Governor has not recommended that ex- traordinary revenues be split equally be- tween the budget stabilization fund and one-time expenditures. Rather, he has rec- ommended that extraordinary revenues be appropriated to a combination of (1) the budget stabilization fund, (2) one-time ex- penditures, and (3) the reduction of long- term liabilities. The General Assembly has followed suit, retaining discretion over the size and mix of its appropriations of ex- traordinary revenues.
VI. Applying Budget Smoothing Principles
The state has employed budget smoothing principles in the last four budget cycles, FY19 through FY22. The budgets for FY19 and FY20 were enacted before the start of the COVID pandemic, and the budget smoothing process func- tioned as advocates had anticipated. In both years, the Benchmark Appropriation was smaller than the 98% appropriation limit and there were extraordinary rev- enues to appropriate. The General As- sembly directed a portion of the state’s extraordinary revenues to one-time ex- penditures and a portion to reserves. The state contributed a combined $126
million to the budget stabilization fund over the course of two years.
The General Assembly passed the bud- get for FY21 during the early months of the COVID pandemic, which took hold in Delaware in March 2020. In June of that year, DEFAC calculated a Bench- mark Appropriation of $4.6 billion, or 3.8% growth over FY20. Unlike the two preceding years, the difference between the two appropriation limits indicated a revenue shortfall. The General Assembly would need to close a gap of $118 million in order to meet the Benchmark Appropri- ation. Advocates had anticipated that the state would be able to draw on the budget stabilization fund to meet the Benchmark Appropriation during a revenue shortfall. Unfortunately, the shortfall occurred ear- lier than anticipated, and the state had not yet built sufficient reserves. The General Assembly followed the terms proposed in draft HB 460 and appropriated only one- half of the budget stabilization fund, or $63.1 million, to narrow the budget gap.21 The General Assembly also transferred funds from other sources and rejected cer- tain proposals in the Governor’s Recom- mended Budget.22 Nevertheless, the Gen- eral Assembly passed a budget below the Benchmark Appropriation. The final FY21 budget of $4.4 billion represented growth of 2.1% over FY20.
In 2021, public officials faced a new challenge: a significant influx of cash from the U.S. Government under the federal CARES Act. The variance between the 98% appropriation limit and the Bench- mark Appropriation for FY22 was a whop- ping $1.1 billion. The General Assembly approved an operating budget of $4.7 billion, representing growth of 5% over FY21. It also appropriated: (1) $63 mil- lion for grants-in-aid, (2) $223 million to fully fund the budget stabilization fund, and (3) $221 million for one-time expen- ditures. The General Assembly devoted the remaining extraordinary revenues to one-time expenditures in the bond bill. At $1.3 billion, the FY22 capital budget is the largest in the state’s history.23
16 DELAWARE LAWYER FALL 2021