March  15,  2008

Financial advisors expect a
major decline in state revenue

Delaware Economic & Financial Advisory Council is about to promulgate one of the steepest downward revisions in the 30 years that it has been forecasting state government revenue.

Its revenue committee will recommend that the full council lop $125.9 million off the revenue estimate for the current fiscal year which was made when the council last met in December. If the new estimate holds up, the state would take in $38.4 million less than the $3.29 billion received in fiscal 2007.

More significant will be downsizing the fiscal 2009 estimate by $200.5 million from the December projection to $3.25 billion. That indicates an expected growth rate of 2.2% in the coming year. State law requires the General Assembly to use 98% of that forecast as the basis on which to craft the general fund budget.

That would indicate a spending limit in the neighborhood of $3.19 billion. Governor Ruth Ann Minner originally asked for a $3.41 billion budget.

The council will issue its new forecast when it meets on Mar. 17. Usual practice is to accept the revenue committee's recommendation. The council will have three opportunities to make further revisions with meetings scheduled for the middle of April, May and June. The Assembly will enact budget legislation near the end of June.

Committee chairman Ken Lewis said he will make it a point to avoid using the R-word when he presents the recommendation to the council and urged his colleagues to exercise similar restraint and not refer to recession during the discussion which will follow his presentation.

"It has become more of a political term than an economic term," he said, adding that he does not want to see a newspaper headline proclaiming that the state's official economic advisors have declared the state and national economies to be in recession.

"We have to give very clear and careful explanations why we're doing what we're doing," Lewis said, referring to its recommendation to significantly revise the council's forecast. "I don't think we should use charged language."

A recession is defined as two consecutive calendar quarters during which the U.S. gross domestic product declines or -- to use trade jargon -- 'exhibits negative growth'. Lewis, who is an economist, said it is the province of the National Bureau of Economic Research to determine, after the fact when all the data is in and necessary revisions are made, if the country was in recession and for how long.

David Gregor, the state Department of Finance's liaison with the advisory council, said Global Insight, the Waltham, Mass.-based econometric consulting firm the department uses as its economic data source, currently is forecasting gross domestic product to be found in negative territory during the first and second calendar quarters of this year before reversing course -- primarily in response to the economic stimulus package that Congress enacted -- in the final two quarters of the year.

More to the point, he said at the committee's meeting on Mar. 14, information gathered from the state's revenue-generating departments appears to clearly confirm the Global Insight conclusion. "We can call it 'a colossal slowdown' or 'hitting the wall'. ... I don't care what you want to call it. I'm going to tell what my figures are showing. ... I'm looking at numbers that are consistent with the [economic] forecasts we're getting," Gregor said.

He added, however, that current thinking is to anticipate a "short and shallow" recession. "It won't be as bad as 2001 or 1991," he said. But, he added, there is "a 25% probability of a double dip"; that is, another decline after a relatively brief period of recovery.

State budget director J.J. Davis not only supported Gregor's view but also said she believes current information points to state government having to tighten its budget belt at least through fiscal 2010. "We're going to do more cutting. This is not a one-time thing," she said.

Lewis said his objection to referring to recession was not intended to imply that the state's fiscal picture is rosy. "We obviously have a problem here," he said.

Most significant component in the recommended revisions is proceeds from personal income taxes. The council will be asked to take its December projections down by $30.2 million this fiscal year and $44.5 million next year.

Gregor said there was a sharp drop in the amount that employers withheld from salaries and wages in the first two months of this calendar year. Particularly hard-hit were the construction industry and some service businesses. That indicates fewer people working and those who are employed are working fewer hours.

The advisory committee will not recommend changing this year's estimated revenue from the franchise tax paid by corporations and limited-liability firms from what was forecast in December, but will ask the council to reduce its  fiscal 2009 estimate by $28.5 million. The number of companies incorporated in Delaware is expected to decline by about 3,000 to about 290,000 between now and the end of this calendar year. There also will be little incentive to expand assets, form new corporations or make initial public offerings of stock during a slow economy.

Corporate income taxes paid by companies actually doing business in Delaware also are down significantly. The recommended downward revisions in that component, which contributes a smaller portion of total state revenue, are $35.8 million this year and $88 million next year. Those numbers anticipate a decline in profits.

Proceeds from the bank franchise tax would be reduced by $31.2 million this year and $31.5 million next year.

In the midst of a generally pessimistic discussion at the committee meeting, there appeared to be a glimmer of a silver lining. Committee member Andy Lubin said there is some evidence that the slump in the real estate market is bottoming out. The inventory of houses listed for sale has dropped a bit in New Castle and Kent Counties while sellers are realizing, on average, about 95% of the prices they are asking, he said.

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