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March 14,  2009

Forecasters look for further
big decline in state revenue

State 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 December.

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 committee's recommendation.

If those 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 year.

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 'rainy-day fund'.

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 science."

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.

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