Page 20 - Delaware Lawyer - Fall 2021

FEATURE | BALANCING DELAWARE’S BUDGET TODAY
goals. Especially now that the budget sta- bilization fund has reached its limit, limit- ing the size of appropriations to reserves could lead to appropriations of as much as 50% of extraordinary revenues to the op- erating budget, creating a new and coun- ter-productive source of budget growth. If the mandated split had been in effect in June 2021, the General Assembly would have been permitted to add $550 mil- lion to the operating budget. The federal government may send additional funding to states, and lawmakers should have flex- ibility to determine the best combination of appropriations and reserves based on future conditions.
VIII. Conclusion
Since 2018, public officials have prepared the annual budget using new fiscal controls designed to promote sus- tainable long-term budget growth. The experience has illustrated that details may need adjustment, but the principles are sound. Budget smoothing should be made a part of the Delaware Consti- tution and Code.
NOTES
1. Randy J. Holland, The Delaware State Con- stitution 231 (2d ed. 2017) (“1897 was the year of initial substantive control in Delaware of taxa- tion, raising revenue, the power to borrow, and the appropriation of public funds.”) (hereafter “Holland”).
2. Del. Const. Art. VIII, § 6(b). “[E]stimated State General Fund revenue ... from all sources” includes unencumbered funds from the preced- ing budget year, which is determined pursuant to a formula set forth in the provision. Estimates of General Fund revenue and unencumbered funds from the preceding budget year are adopted
each year by joint resolution of both houses and signed by the Governor. Id.
3. Subsection (c) states:
Notwithstanding subsection (b) of this sec- tion, any portion of the amount between 98 and 100 percent of the estimated State General Fund revenue for any fiscal year as estimated in accordance with subsection (b) of this section may be appropriated in any given fiscal year in the event of emergencies involving the health, safety or welfare of the citizens of the State, such appropriations to be approved by three-fifths of the members elected to each House of the General As- sembly.
DE Const. Art. VIII, § 6(c). This exception has been invoked only eight times. See Report on the Use of Fiscal Controls and Budget Smoothing Mechanisms in Delaware Advisory Panel at 9 (June 1, 2018) (“Delaware has only appropriated
above the 98% [l]imit eight times ... [each] to provide sufficient State matching funds for the Medicaid program, generally during or immedi- ately following recessionary periods.”) (hereafter “2018 Panel Report”).
4. Funds appropriated from the Reserve Ac- count must be restored the following year.
5. DE Const. Art. VIII, § 6(d).
6. Policymakers have offered various reasons
for the state’s failure to make use of its “rainy day fund.” See 2018 Panel Report at 12, 19. Notably, the predecessor to DEFAC had begun forecast- ing revenues and expenses before the state ad- opted a reserve account in the Delaware Code, and later in Subsection (d), allowing the state
to draw funds only for “unanticipated deficits.” See, e.g., Executive Order of Pierre S. duPont at ¶5 (March 3, 1977); 29 Del. C. § 6533 (enacted July 1, 1978). The Panel describes Delaware’s approach to its rainy-day fund as “uniquely conservative”: Delaware is the only state with a reserve account and a AAA bond rating that did not appropriate a portion of its reserve account during the Great Recession. See id.
7. See 2018 Panel Report at 12.
8. Further details about budget bills and the budget process are available in Part VI of Title 29 and on the Office of Management and Bud- get website, https://budget.delaware.gov.
9. DEFAC is a non-partisan group of business leaders, academics and legislators that, among other things, generates regular and reliable estimates of General Fund revenues and expen- ditures throughout the year. The body is created by executive order of the governor, and it has existed in slightly different forms since the mid- 1970s.
10. The unencumbered cash balance is deter- mined by subtracting from the cumulative cash balance the sum of the Reserve Account balance and continuing appropriations and encumbranc- es from the preceding budget year. DEFAC’s calculations for recent budget years are available on the Department of Finance website (https:// finance.delaware.gov).
11. See Final Report of the DEFAC Advisory Council on Revenues at 1 (May 2015) (discuss- ing the threat to the long-term health of the budget) (hereafter “2015 Council Report”); Ex- ecutive Order 4 of John Carney (Feb. 16, 2017) (citing years of constrained revenue growth and DEFAC forecasts of modest growth and poten- tial budget gaps for years to come).
12. The full name of the Panel is the Advisory Panel to the Delaware Economic and Financial Advisory Council on Potential Fiscal Controls and Budget Smoothing Mechanisms. See HJR
8 (June 25, 2017). The Panel’s work built upon the work of the DEFAC Advisory Council on Revenues (the “Council”), established in 2014 to study the long-term health of Delaware’s unique mix of revenue sources. Notably, one of the rec- ommendations in the Council’s 2015 report was to exclude unexpected surplus revenue from the calculation of the 98% appropriation limit and
to (1) use them to address “foreseeable future liabilities,” or (2) set them aside in a “budgetary smoothing account,” to be accessed when the state faces an operating deficit during a down- turn in the business cycle.
13. Id.
14. Withdrawals would be permitted only if (a) an operating deficit exceeds the 2% set-aside from the 98% rule or (b) when growth in the 98% appropriation limit is below the growth in the
budget benchmark. In either case, the amount withdrawn would be the lesser of one-half of the shortfall or one-half of the budget stabilization fund.
15. The Panel recommended that the size of the bond bill be restricted to either 1% of the operat- ing budget or its historical average size of $40 million.
16 See HB 460, 149th General Assembly, intro- duced June 12, 2018.
17. The executive order instructed the Director of the Office of Management and Budget to cre- ate a budget stabilization fund within the Gen- eral Fund for planning purposes; as a separate branch of government, the General Assembly retained authority to appropriate at its discretion. 18. See HB 225, Section 77, 150th General As- sembly, signed June 25, 2019.
19. The index consists of “equal weightings
of the 3-year average of: (i) Delaware personal income growth and (ii) Delaware population growth and inflation reflecting the pool of goods and services purchased by government....” Ex- ecutive Order of John Carney ¶ 2.a. The years used to calculate the three-year average are the prior, current and budget years. The components of the index are almost entirely comprised of economic measures drawn from independent sources. Delaware personal income growth for the budget year is a forecast generated by a Dela- ware Department of Finance model applied to national data and economic assumptions drawn from the U.S. Bureau of Economic Analysis. Delaware personal income growth and the state and local government price deflator are drawn from the Bureau of Economic Analysis in the United States Department of Commerce. Dela- ware population growth is determined by the Delaware Population Consortium, which pre- pares its annual projections using data from the most recent U.S. Census.
20. The Benchmark Appropriation is the sum of “(i) the product of (x) the Benchmark Index ... for the fiscal year and (y) the sum of the previous year’s budget act and appropriations for grants in aid, plus (ii) an amount not to exceed 1 percent of the previous year’s budget act, but only to the extent that such amount is directed as a supple- mental appropriation to the bond and capital improvements act for such fiscal year.” Executive Order of John Carney ¶ 2.b.
21. The funds drawn from the budget stabiliza- tion fund in connection with the FY20 budget were restored the following year.
22. For example, the General Assembly trans- ferred funds from the state’s unclaimed property account into the General Fund, made significant reductions in the Governor’s proposed capital budget and deferred a raise for state employees. 23. All FY21 budget bills are available at https:// budget.delaware.gov.
24. The earliest a Constitutional amendment could be effective is early 2023. Constitutional amendments must be passed by supermajority vote in two successive sessions of the General Assembly.
25. The draft amendment would allow ap- propriation of “such additional sums as may be necessary to address a severe economic downturn or an emergency involving the health, safety or welfare of the citizens of the State” by a three- fifths vote of the members in each chamber. HB 460, 149th General Assembly, introduced June 12, 2018.
18 DELAWARE LAWYER FALL 2021