State budget grim, but leaders hope to avoid tax increases
As John Carney prepares to become Delaware's 74th governor, the state faces one of its largest budget gaps since being savaged by the Great Recession of 2008.
Lawmakers hope to close the estimated $350 million gap without seriously painful spending cuts or major tax increases. But after years of patching budget holes in the final days of the legislative session, state leaders acknowledge that more drastic steps could be necessary in 2017.
"The hope is that we can raise revenue without raising taxes," said Sen. David McBride, D-Hawk's Nest, who is poised to become Senate President Pro Tempore. "I do not think there is an appetite for that in either party."
The debate over which programs to prioritize and which to trim will likely dominate the session that runs from Jan. 10 through June 30.
MORE: Details on why the budget is so tight
MORE: A look at how last year's budget ended up
"We will be able to say we have the lowest taxes in the country and yet be able to do the things the people of this state count on us to do," said Sen. Harris McDowell, D-Wilmington North and chair of the budget-writing Joint Finance Committee. "We may have to go a little outside the box more than usual. We may need to do some reforms. It's not going to be easy, but we're going to get it done."
If McDowell and his colleagues can't find enough efficiency, legislators will have to either cut programs or raise taxes.
Those hoping for new spending from state government should prepare for another grim year. After years of relative austerity, there are many requests. Here are a few examples:
• Delaware Technical Community College says its aging buildings are falling apart.
• Education advocates in the Wilmington Education Improvement Commission are clamoring for extra resources for high poverty schools.
• And agencies throughout state government say scarce pay raises have left them struggling to hire qualified workers –– from judges to prison guards.
"There are a lot of good ideas out there, and there were some good ideas last year," said Speaker of the House Pete Schwartzkopf. "But it is going to be tough. Frankly, the money's just not there."
There is little worry that Delaware lawmakers won't be able to balance the budget by the constitutionally required deadline of July 1. That has happened in other states with bigger budget crises.
But everyone is not going to walk away happy.
"I'm willing to sit down and listen to any creative solutions that someone wants to bring to the table," Schwartzkopf said. "I think all of us, whichever party we're in, understand the size of the problem. My hope is we can come at this in a bipartisan way."
A long-term problem
The state is facing financial pressure on two fronts:
• The Delaware Economic and Financial Advisory Council (DEFAC) is projecting the state will have $3.9 billion to spend, about five percent less than the $4.1 billion it can spend this year. Blame that on tax revenues decreasing, particularly the corporate income tax.
• Spending is rising before legislators even touch the budget. School enrollment is increasing and health care costs for state employees are rising, to name two automatic increases.
It's a mix of these two that leads to the estimated $350 million shortfall, and it's possible the outlook could improve, or get worse, during the session.
DEFAC, which sets the state spending cap, will meet several times throughout the year.
Gov. Jack Markell builds the recommended budget that serves as a template for legislators, but all eyes are on Governor-elect Carney, who takes office on Tuesday.
MORE: A look at some of the people Carney has chosen for his cabinet
"I think everybody's sort of frozen in place waiting for him to give us a starting point," said House Minority Leader Danny Short, R-Seaford. "He's the quarterback. And his team doesn't want to be down the field until they know the play."
During the campaign, Carney said a tough look at spending should be the first priority, which he reiterated in a statement Thursday.
"I will work immediately with Democrats and Republicans on a budget reset that looks comprehensively at state spending and how we're paying for government services," Carney said, promising to involve the public in that effort.
State leaders are also apprehensive about how incoming President Donald Trump and a newly-empowered Republican Congress will act. With solid control of the federal government, conservatives could cut federal spending to states.
"It's been very quiet on our end because people are sort of mesmerized by the national situation," Schwartzkopf said. "And that's not just because of how unique Donald Trump is. It's possible they could do things at the federal level that would have a big impact on us."
It would be one thing if this were the first year of serious budget woes. But McDowell said state leaders have been "budgeting out of scarcity" for six of the eight years of Gov. Jack Markell's tenure.
"The good news is that we've been here before," McDowell said. "But that's also the bad news. We have picked most of the low-hanging fruit."
A focus on spending
There have been many proposals for trimming spending, but lawmakers have avoided them for fear of angering constituents who may lash out in the voting booth.
Both Markell and Carney have called attention to state employee health care plans, which are more generous than the private sector and constantly getting more expensive. Markell tried to place new employees on a less-generous health savings account program, but was rebuffed by the legislators who argued the health plans make up for lower-than-average salaries.
Markell also proposed eliminating, or at least reducing, an annual property tax credit of up to $500 for senior citizens, money that goes to education.
Some of the deficit might be fixed by a long, arduous process of scrutinizing state agencies for possible savings. McDowell and his JFC co-chair, Rep. Melanie George Smith, say their committee is taking a more in-depth look this year in hopes of finding programs that are not running efficiently. They hope to find positions that might be eliminated.
As one example to find savings, Carney pointed to the Department of Education. At more than $1.3 billion, school funding is the largest part of the budget. Carney said he intends to "restructure" the department "as a support agency."
While there's little talk of cutting funding at the district level, some lawmakers have said the state-level Department of Education is ripe for belt-tightening because it added many positions during the massive federal Race to the Top grant program during Markell's tenure.
Budget woes could also filter down to cities and counties, with state lawmakers requiring local governments to pick up a greater share of government services. State government pays for policing some areas, carries the largest share of school funding and maintains most roads. In many other states, counties or cities have a larger responsibility for such programs.
McDowell, who created a committee that is studying the mix between state, county and local government funding, argues Delaware's state taxes are among the lowest in the country, yet state government bears a larger share of expenses than any state other than Hawaii.
County officials worry state leaders like McDowell simply want to pass the political burden of raising taxes on to them.
"It seems to me the only purpose of the committee is to determine what responsibilities of the state can be shifted to the county, instead of looking at how to better fund the responsibilities the state," said New Castle County Councilman George Smiley, who chairs the county's Finance Committee.
Smiley said if the state were to burden county coffers with another expense, county officials will have two options: trim services or raise property taxes.
No appetite for tax increases
Other than cutting expenses, the only way to climb out of a budget hole is to raise revenues. New Jersey recently hiked its gas tax by 23 cents a gallon last year as a way to end budget woes that had frozen much of the state's road and bridge construction. Six other states also passed such increases.
Proposed tax increases have popped up in Legislative Hall over the past few years, but they have seldom found enough support to pass.
In 2014, Markell asked lawmakers to raise the gas tax by 10 cents to put the state's transportation fund on solid ground. Lawmakers declined to make that move. Instead, in the final hours of that legislative session, the General Assembly chose to increase tolls and many fees at the DMV.
In 2015, Rep. John Kowalko, D-Newark, proposed adding a higher income bracket that would effectively raise state taxes on wealthier Delawareans, but that idea failed to gain traction.
Delaware famously does not have a sales tax, but almost no legislator publicly supports changing that.
In fact, high-ranking legislators from both parties prefer not to raise taxes at all, if possible. They, along with Carney, say a better approach is to grow the economy, particularly for small businesses.
"I think both sides — or at least I would hope both sides — tend to recognize that we can't just tax our way out of this," Short said.
Short references the Delaware Competes Act, a law created last year that changed the way corporate income taxes are calculated.
Almost no legislators opposed the move, which DuPont Co. officials credited as a big reason Delaware will get two of the three corporate headquarters that will emerge from the company's merger with Dow. The changes caused corporate income tax returns to sag. But incentivizing companies to come to, or stay in Delaware will be a long-term boon, lawmakers said.
"We need to be doing some of those same things for small businesses," Short argued. "If we can be a good place to hire people and pay good wages, then the revenue problem is solved. And that's a much better way to do it."
Another glum year
There are many groups statewide hoping for more money from Delaware taxpayers. Most say they won't stop pushing, but they acknowledge they could have long odds.
One of the highest-profile groups seeking an increase is the Wilmington Education Improvement Commission, which created a plan to give extra resources to high-poverty schools and redistrict Wilmington school districts. That plan was on the verge of passing in the final days of the session last year, but Senators told the group to return in 2017 with more specific spending plans.
Tony Allen, the commission's chair, acknowledged the financial prospects aren't any better this year. However, a lack of money does not absolve Delaware from fixing inequities in education.
"We're not saying you've got to bite the whole apple today," Allen said. "But you have got to start."
Dan Rich, a UD public policy professor and the Commission's policy adviser, said a budget problem shouldn't make legislators simply step away from any new spending.
"The question isn't, 'Are we going to spend a lot of money?' The question is, 'How are we going to spend that money?' " he said. "I would argue this is exactly the time to be rethinking how we allocate funds."
Sheila Bravo, CEO of the Delaware Alliance for Nonprofit Advancement, said the fiscal situation has created another year of uncertainty for community organizations seeking state funding.
"We're encouraging nonprofits to be really clear about the important impact that they are providing and to carefully plan," she said.
Bravo said years of relatively flat funding from the state and donors is causing many nonprofits to cut back as costs rise.
"The one thing these past ten years have taught us is that nonprofits have to be very nimble," she said. "They have to work together, and we are seeing that more and more."
A previous version of this story misstated the start of the legislative session. The General Assembly convenes on Tuesday, Jan. 10.
Reporter Xerxes Wilson contributed to this story.
Contact Matthew Albright at malbright@delawareonline.com, (302) 324-2428 or on Twitter @TNJ_malbright.