Delaware's Fiscal Picture

Smooth navigation through uncharted waters

BY RICK GEISENBERGER

STARING INTO THE COVID-19 ABYSS in April 2020, members of the Delaware Economic and Financial Advisory Council (DEFAC) could not have predicted the strength and speed of the State’s fiscal recovery. Yet just 15 months later, Governor Carney signed a Fiscal Year (FY) 2022 budget that included landmark investments in education, health, safety, transportation, and clean water infrastructure.

Extraordinary federal stimulus, low interest rates, stock market gains, and corporate profits all combined to drive 17 percent growth in State revenues between FY19 and FY21. Realty transfer, corporate income, and corporate franchise taxes grew a remarkable 53 percent, 42 percent, and 20 percent respectively over the two-year period.

Some of these gains have likely crested. However, low interest rates continue to fuel strong realty transfer tax growth; federal stimulus and inflation are driving gross receipts tax growth; and a returning workforce, higher wages, and capital gains are boosting personal income tax collections. Conversely, significant headwinds remain including pandemic uncertainty, supply chain issues and inflation.

Whichever way the wind blows, Delaware is well-positioned fiscally to navigate these uncharted waters. Beginning in 2018, Governor Carney and the General Assembly partnered to dramatically reduce the State’s tendency to budgetary “feast or famine”. The concept, known as budget stabilization, benchmarks operating budget growth at an economically sustainable level and dedicates “extraordinary” revenue to one-time expenditures such as investments in technology and infrastructure and added reserves to help weather future downturns.

For FY19 and FY20, the State enacted budgets slightly above the advisory benchmark growth rate set by DEFAC. Extraordinary revenues in those two years funded $373 million in infrastructure projects and created a Budget Stabilization Fund (BSF) that reached $126 million. Then, facing a pandemic-induced shortfall in FY21, the General Assembly prevented any budget cuts or tax increases by appropriating half the BSF. In FY22, the Governor signed a budget that increased slightly above the benchmark while dedicating a record $692 million for one-time capital investments and boosting the BSF to $287 million— about 5 percent of State revenues.

Budget stabilization has been shown to work in good times and bad. Now it’s time to further institutionalize these fiscal practices by placing in the Delaware Code the advisory benchmark and BSF that originated in Executive Order 21 and recent budget acts. This will codify the practice of building strong reserves in good times so the State is less reliant on budget cuts and tax increases during downturns. And with stronger reserve policies in place, the General Assembly can also modernize access to the State’s other reserve—the Rainy Day Fund (RDF)—which has never been used in 40 years. Rather than limiting RDF uses to the funding of unanticipated deficits or tax cuts, the RDF should be available for the General Assembly to address any severe economic downturn or emergency.

Predicting the pandemic and its continuing economic impacts remains a fool’s errand. But staying the course set upon in 2018 and institutionalizing these practices, we can be confident that Delaware’s fiscal ship will smoothly navigate through storm and calm.

Rick Geisenberger is Delaware’s Secretary of Finance.