September 13, 2003

Despite the summer stock market rally, the fiscal year appears to have gotten off to a somewhat shaky start in the corporate world. and, as a result, the Delaware Economic & Financial Advisory Council will hold its state revenue forecast to about where it was in June.

After adjusting for additional revenue from Governor Ruth Ann Minner's fiscal package, enacted by the General Assembly in June, the council at its meeting on Sept. 15 will project general fund revenue in the year ending next June 30 to total $2,586.3 million. That would be up from $2,436.4 million actually collected in fiscal 2003.

However, the adjustment, which was made by the state Department of Finance after the council's June meeting, injected $179.3 million into the forecast. Without the adjustment, projected fiscal 2004 revenue would be $29.4 million less than last year.

The adjustment included $24 million more than the amount originally ascribed to the revenue package because the earlier estimate did not take into account the retroactive feature of the increase in franchise taxes and fees. As first reported by Delaware Grapevine, state officials were embarrassed by the oversight and did not make it public. Although the retroactivity applies to the last half of fiscal 2003, the money was not actually collected then and will be accounted for as fiscal 2004 income.

The council will forecast fiscal 2005 revenue to total $2,698.2 million. Its year-ahead forecast governs the budget for the coming year, which the governor will recommend in January and the Assembly will enact next June. The September estimate, however, is considered to be preliminary. What it comes up with in December will be meaningful for the governor's budget recommendation and the figure, as it  is refined next spring, will determine what the Assembly can do.

A large chunk of the advisory council's likely upside adjustment over its June forecast represents an expected increase in escheat income. That is what the state realizes from so-called abandoned property -- assets for which brokers, banks and companies cannot find owners, which the law requires they turn over to state government. The finance department told the council's revenue committee that, following a thorough review over the summer of collection activity now underway, it expects to bring in $230 million, or about 8% of the total state budget, this year. In June, it was looking for $158 million.

On the negative side, the committee will recommend and the full council is likely to agree to knocking $15.4 million off its previous projection of income from the corporate franchise tax. That would partly offset the $92.1 million upward adjustment to that income stream from the fiscal package. The tax is now expected to net $505.3 million, about 20% of the total budget.

The committee was told that the number of corporations chartered in Delaware is contracting, partly as a result of mergers and partly as a result of conversion to limited partnerships and limited liability corporations. While there has been only a handful of initial public offerings of corporate stock, this calendar year is expected to see a record number of the limited liability firms established. The council now projects a 105% increase in income from that revenue stream, but it accounts for only about 2% of the total budget.

David Gregor, the Department of Finance staff member who prepares and presents its forecasts, told the revenue committee and will tell the full council that increased emphasis on escheat collection in recent years has turned what previously was regarded as an iffy source of state revenue into a more steady, albeit still difficult-to-predict, one.

It was a significant escheat collection, cited by the governor as a 'windfall' in autumn, 2002, which brought in $45 million and was credited for the lessening of the budget crunch then being felt. Gregor said another $11 million is anticipated from that source -- which he and other state officials have not identified -- and that an audit now underway could yield a comparable result, possibly in this fiscal year.

Moreover, he said, 16 audits in the last fiscal year brought in an average of $2.5 million each and 46 others netted an average of $260,870.

He said the number of firms which are regarded as regular providers of escheat income "has shown no signs of contracting" and added that "the case inventory [in the enforcement program] "has never been stronger."

The department now has two employees devoting about 95% of their time to escheat activity and is in the process of hiring another. That compares to one devoting about 20% of his time to escheat activity two and a half years ago. There are now five auditing firms and two firms which specialize in dividing firms' escheat money among states entitled to receive it. That compares to one of each type previously. The number of active audits has incrased from five or six to about 100, of which 20 to 40 are expected to be completed in this fiscal year.

In addition, the number of firms which are coming forth voluntarily to make payments to Delaware has grown over that period from between 30 and 40 to 170. Of those, 60 to 80 are expected to reach settlement during the next six months but to be replaced by an equal number of new offers. Moreover, Gregor said, holders of money subject to escheat "know there is no way they can make a deal with us" and get off by paying less than what actually is due.

While the outlook appears favorable, he cautioned that there is a potential bubble-buster lurking nearby. Delaware, he recalled, benefited in 1993 from a U.S. Supreme Court ruling which held that a firm's state of incorporation and not its principal place of business determined which one should get escheat payments. Delaware brought one of two cases involved in that ruling against New York, where most major brokerage houses are located. Proposed legislation was introduced into Congress the following year that would have overturned the ruling as regards future payments, but a settlement among the states involved in the cases -- Texas and Virginia were the other two -- halted legislative activity. That 10-year agreement expires in 2004.

Also in the 'what's coming next' category, the committee was told that Delaware appears likely to loose more than half of its revenue from slot-machine gambling by fiscal 2006  if Maryland and Pennsylvania soon enact legislation permitting such establishments. The bigger hit -- a 41% decline in revenue -- would come if Maryland does so. In both states, proposals to legalized slots gambling have been the subjects of considerable political controversy.

Those estimates are based on a study using the home addresses of winners of large pots, who are required to report that for tax purposes, and assuming they are more likely to patronize gambling venues closest to their homes. Two-thirds of the big winners at the three Delaware establishments hailed from out of state. The study, however, does not take into account likely promotional efforts by the Delaware venues or such intangibles as customer loyalty and perceived ambiance and other factors which might attract out-of-staters.

2003. All rights reserved.

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