Delaware Economic and Financial Advisory Council (DEFAC)

The long term health of the Delaware budget is threatened by the revenue challenges posed by the recent economic fluctuations and consistent expenditure pressures. It is so unfortunate that the states budget and portfolio has not responded to the current economic growth prospects, it has some sources that are volatile and others that are competitive. This paper is purposed to critically analyze the elected state agencys FY 2017 budget a represented in the FY 2018. We will start by looking at the agencys mission and operations and then look at some important facts to note from the previous years approved budgets for their agency. The next thing we will look at the budget changes, what caused the change and what impact will the change have on service delivery. We will also explain the ratio of budget categories to the whole budget for the agency. The analysis will also explore the available opportunities and then give some recommendations to control the budget for their assigned agencies. Finally, this paper will also include the Epilogue which will summarize the effects of the budget and then the conclusion.

Agencys Mission

The DEFACs mission is to improve Delaware's financial heath equitably and proficiently by estimating, creating, collecting and accounting for incomes critical to essential government services (Finance.delaware.gov. (n.d.).

Agencys Operations

The Delaware Economic and Financial Advisory Council is the financial agency that is tasked with projecting state income figures which are the used to compute the state budget

Previous Years Approved Budgets for Their Agency

From the previously approved budgets, we can note several features of the budgets.

Delawares heavily relied on the Personal Income Tax (PIT). According to U.S. Census Data for 2012, Delaware 18% of the revenues state revenues were composed of the PIT.

Delaware revenues are very centralized and have very low per-capita property taxes. Property taxes only provide 10 % of local and state revenues nationally. Their revenues a re concentrated on the national level with local governments representing only roughly 20% of states own-source revenues.

Delaware state depends on two large non-tax sources; abandoned Property and lottery for 20% of its state revenues.

Delaware has no broad retail deals impose (RST) and is one of only a modest bunch of states with a Gross Receipts Tax (GRT). The normal state in the country infers approximately 16% of state income from the RST, and just four different states forego an RST.3 Delaware's GRT in part balances this absence of an RST, including generally 6% of state incomes.

When it comes to the composition of its revenue portfolio, Delaware appreciates an abnormal state of relative spending at a low taxation rate on its residents.

The Ratio of Budget Categories to the Whole Budget for the Agency

The general fund is the main operating fund for the state. It accounts for the operation and administration of the state. The Governors Fiscal Year 2018Recommended General Fund Operating Budget is $4,128.4million. In the fiscal year 2017, this fund was $ 2,790.7. The following are the major budget appropriations in the FY 2017.

General Fund Operating Budget Fiscal Year 2017

Appropriation GF % of Budget

Personnel Costs $ 2,147.7 76.96% Contractual Services 615.2 22.04% Capital Outlay 11.9 0.43% Supplies and Materials 10.4 0.37% Travel 5.5 0.20% Total $ 2,790.7 100.00% Personnel Costs - $2,147.7 - The agency had budgeted 27.0 FTEs (all funds) for Fiscal Year 2017.

Contractual Services - $615.2 - The largest expenses for this appropriation are related to professional services, State personnel charges, maintenance, equipment rental, telecommunication costs and tuition reimbursements.

Capital Outlay - $11.9 - Funds that are used in the purchase of relatively small equipment items like desktop computers, auditor laptops, which usually cost more than $1.0 each.

Supplies and Materials - $10.4 - The biggest expenses for this budget are related to office supplies, book, and publications.

Travel - $5.5 - Expenditures to cover the cost of travel mainly for training and meetings for accreditation and upkeep of professional documentations.

Changes in the Budgets and the Causes

The estimates for the financial year 2017 expanded by $79 million, in the wake of trimming $7 million in income in light of lower personal income tax incomes because of job cuts at DuPont following its merger with Dow Chemical. The revenue available in the fiscal year 2016 was 3,944.8 but in 2017 revenue increased to $ 3,978.8. Delaware's anticipated state incomes have decreased by an extra $26 million over DEFAC's September 2016 income estimate. DEFAC now extends that state incomes for the 2017-2018 monetary year will be about $200 million dollars not as much as the current 2016-2017 financial year. The diminished income projection to $3.9 billion equivalents around 5% not exactly the $4.1 billion being spent amid the State's present monetary year. That is $242 million not as much as that it needed to spend for the current year. The cost of developing school enrollment, Medicaid, and other government programs is naturally developing by about $150 million. That implies the state is short almost $400 million around an eighth of its aggregate spending plan, expenditure Chief Mike Jackson said. Though the decline in anticipated incomes, the cost of state government is anticipated to increment by $150 million dollars with Medicaid spending, state worker human services costs and expanded school enlistment driving the acceleration in state expenditure (McNichol, & Johnson, 2010).

Impact on Service Delivery

The State of Delaware has faced, for some years, a structural deficiency. Stated simply, there is insufficient revenue to support expenses. The State projected deficiency, as of 4/11/ 2017 is ~$386 Million for fiscal 2018. To address the structural deficiency, the Governor is suggesting a combination of actions directed toward both revenues and expenses. The projected impact on Christina School District is ~$5.86 Million

One of the proposals under discussion is to provide authorization to School Boards, with taxing authority, the ability to raise taxes against assessed property value. Based on the amount above, and allowing for delinquency (assume 5% vs. 10% authorized by Delaware Code), the tax rate necessary to raise ~$3.9 Million is 7.3. The budget changes will make basic investments in education, medicinal services, the environment, and in the correctional system. It will create more jobs; reform the department of correction and combat Delawares addiction crisis by increasing access to substance abuse treatment and strengthening oversight of opioid prescriptions. This new budget, the agency is focusing on understanding genuine spending reforms and enhancing the way they deliver state services. G real spending reforms, and to improving the way we deliver state services.

Governor Markells Recommendations

Governor Markell hasrecommendedsome adjustments to the 2017 budget to figures that will meet the DEFAC revenue estimates of $212.2 million in the fiscal year 2018.To tap the growth opportunities and control the budget imbalances the agency should make the following adjustments in the budget(Markell, 2017).

Increase the General Fund by $60.0 million by redirecting $55.0 million of the Realty Transfer Tax revenue and $5.0 million of the Public Utility Tax income back to the General Fund.

Increase the Corporate Franchise Tax by $135.0 million for inflationary adjustments and establish a new top rate.

Increase the Cigarette Tax by $18.6 million.

Personal Income Tax: Broadening the Personal Income Tax base will improve the portfolios responsiveness without increasing volatility or reducing competitiveness. They can do this by adjusting thetop rate to Personal Income Tax, eliminate the itemized deductions and increase the standard deduction to increase the budget by adjusting the top rate to Personal Income Tax, eliminating itemized deductions and increasing the standard deduction by $28.0million.

Epilogue

The agency is responsible for ensuring that the state's budget is at balance. The proposed budget includes slightly higher income taxes, hikes in property taxes and cuts in money going to school districts. The proposed budget is in line with the agencys personnel growth. The $ $4,128.4 million budget, the first recommended by the governor, marks a .29 percent increase over the current fiscal year.

Under his proposal, each tax bracket would increase by .2 to .4 percent and itemized deductions would be eliminated. As a counterbalance, the standard deduction would be increased from $3,250 to $5,000.Of the six current tax brackets, all but the highest $60,000 and above have been the same since 2000.The franchise tax, a fee paid by companies incorporated in the state, would see its ceiling lifted from $180,000 to $250,000 for the largest companies. Another level of $200,000 would be added, and lower ranges would be adjusted as well. The cigarette tax would jump from $1.60 to $2.60, and other tobacco products, such as snuff and electronic cigarettes, would also have higher taxes. If increased, Delawares cigarette tax would be tied with Pennsylvania as the 10th highest in the country. So this proposal is not just from a revenue perspective, but in the long run, it helps to reduce long-term health care costs by increasing the disincentive to smoking.

Conclusion

The DEFAC reports point to flat revenue growth for upcoming fiscal years, which could lead to an annual cycle of seeking revenue enhancements. Even if Delaware can successfully restructure its future revenue portfolio, state spending could outpace new revenues. Delawares gloomy fiscal picture has been static for the past several years, with many elected officials focused solely on generating and increasing revenues to the state. If Delaware has finally reached a fiscal crossroads, maybe its time to take a serious look at state spending. The old playbook of raising corporate franchise taxes, raising gross receipts taxes and many other fees may not be sustainable. At some point, companies that incorporate here may seek out other states or nations for incorporation. The sky isnt falling but sticking to the same formula of increasing revenues without serious consideration of reducing state spending will not be viable in the long term.

References

Finance.delaware.gov. (n.d.). State of Delaware - Department of Finance - About the Department of Finance. [online] Available at: http://finance.delaware.gov/aboutagency.shtml [Accessed 11 Aug. 2017].

McNichol, E., & Johnson, N. (2010). Recession continues to batter state budgets; state responses could slow recovery. Center on Budget and Policy Priorities, 1.

Markell, J. (2017). STATE OF Delaware FISCAL YEAR 2018 Governors Recommended Budget.