look for further
big decline in state revenue
government's official financial advisors are about to again
slash their expected scenario and, if the tone of
Friday-the-13th conversation among members of the Delaware
Economic and Financial Advisory Council's revenue committee can
be taken as an indication, they expect to continue doing so for
a long time.
After hearing a
gloomy report on the outlook for the national and Delaware
economies, committee chairman Kenneth Lewis asked Jim Craig,
senior economic analyst for the state Department of Finance,
what the panel can expect to be hearing a year hence.
"A year from now
we'll be sitting here saying, 'It looks like the worst is over
even though the unemployment rate is still high'," Lewis said in
answer to his own question. "We're looking at a two-year
problem. In December we were looking at a one-year problem." The
council and committee last met in December.
David Gregor, the department's director
of research and analysis, implied that might have been an
understatement. He reminded the committee that it received two
versions of Economic Insights' forecast in December. The current
forecast, he said, is worse than the 'worst-case-scenario'
version of three months ago.
"We're in uncharted territory.
We've never seen numbers like these; we've never seen an
environment like this," Craig said.
Global Insights, the economic
consulting firm the finance department uses, is now looking for
2.2% 'negative growth' in the real gross domestic product, the
most common measure of the national economy, in the current
fiscal year and 2.7% in the year which begins July 1. Its basic
forecast in December was 1.3% and 1.2%, respectively. Recovery,
will not come until fiscal 2011, which begins on July 1, 2010,
and will amount to only 0.6% growth, down from 1% it forecast in
On the basis of the current
forecast and the actual current experiences of the departments
with their components of the state budget, the committee will
recommend that the council, which meets on Mar. 16, cut another
$70.3 million from its revenue projection for the current fiscal
year and reduce the fiscal 2010 projection by a whopping $148.2
million. The full council customarily agrees with the
figures hold, the state will take in $3,154.2 million this
year, down 6% from $3,356.7 million in the year ended last June
30, and $2,937.7 next year.
State law requires the General
Assembly to base the general fund operations budget on the
council's forecast. The council will meet again in April, May
and June before the Assembly enacts the budget for the coming
Gregor told Delaforum after the
committee meeting that he could not translate the forecast into
specifics of the budget shortfalls the Markel administration
must cover this year and the Assembly must provide for in the
next budget. The state budget office will have to make those
calculations, but there is virtually no doubt that the
shortfalls will be deeper than the $56 million and $606 million,
respectively, that have been talked about up until now.
In a separate meeting on Mar. 13,
the council's expenditures committee estimated that state
spending on operations this fiscal year will total $3,314.7
million, or about 3% less than had been forecast in December.
State agencies are now expected to return $188.8 million in
unspent authorizations at the end of this fiscal year. That is up
from the $53 million being looked for in December.
Like most states, Delaware is
required by law to have a balanced operating budget. It is
uncertain whether short-term borrowing could be used to partly
fill the gaps or to what, if any, extent administration
officials and legislators would be willing to tap the so-called
Gregor told the committee that
tax changes in the new federal stimulus law will reduce the
state's take from personal income tax by $2 million this fiscal
year and $6 million next. Corporate income tax will produce $4
million less this year and $8 million next.
To the extent possible, he said,
conservative estimates of the likely beneficial effects of
the stimulus in turning the economy around, fostering employment
and increasing consumer spending have been factored into the
applicable categories of state revenue. Gregor cautioned,
however, that estimating stimulus effects is "an inexact
The most direct result of that is
committee's $2 million reduction in expected revenue from the
cigarette tax this year and $10 million next. Under the
stimulus, the federal tobacco tax will go up 75¢ a pack on Apr.
1. Gregor said those estimates are based on a combination of the
extent to which higher prices will reduce smoking and the
attractiveness of Delaware's lower tax, inducing residents of
Maryland and New Jersey to come here to buy their smokes.
The largest reduction called for
in the committee's recommendation is in proceeds from personal
income tax -- $25 million this year and $41.7 million next year.
That includes both the stimulus's income tax reduction, which
will be reflected in tax withholding from paychecks beginning in
April, and the adverse effects of higher unemployment and
declines in personal income. With a few modifications, Delaware
income tax is tied directly to taxpayers' federal obligation.
Downward revisions of the
December forecast of $18.7 million this year and $43.7 million
next in proceeds from the bank franchise tax and $12.5 million
this year and $19.9 million next from insurance taxes reflect
conditions in the financial services business.
Meanwhile, sluggish retail sales
and the significant decline in gasoline and other petroleum
prices from this time a year ago are primarily to blame for
reducing expected revenue from the gross receipts tax by $11.6
million this year and $13.8 million next, despite an increase in
the tax rate, Gregor said.
The only bright spot --
relatively speaking -- in the state's financial picture appears
to be coming from slot machines. So far, Delaware establishments
have not seen the decline in patronage that their Atlantic City
competition has experienced and Maryland's venture into that
brand of gambling is not expected to come on line before fiscal
2011. No change from the December forecast is recommended for
this year and next year's take is now expected to be $10 million
higher than it was previously.