When Gov. John Carney unveiled his $4.25 billion budget proposal, he was asked what the biggest challenge would be in selling the 3.5-percent spending bump to lawmakers.
His response: Convincing them not to spend even more.
That job has gotten harder since January.
Delaware is now expected to rake in $350 million in added revenue next year — $100 million more than Carney expected when he released his spending proposal.
The extra cash is teeing up a much different budget battle than Delaware has experienced in recent years.
Rather than deciding where to make cuts, this year’s march to June 30 will largely center on where to target new spending.
And there are a lot of candidates.
Some involve restoring budget cuts that were imposed last year. Others would assist vulnerable populations, most notably children and adults with physical and intellectual disabilities.
Also in the mix is tax relief for casinos, along with requests to raise the pay of parole and probation officers, adjust the rates for school bus contractors and offer a tax cut to homebuyers.
Combined, those half dozen or so proposals would cost roughly $65 million next year and only balloon in succeeding years.
Lawmakers likely won’t be able to fund them all — at least not beyond next year.
Carney is warning that approving too many spending proposals could force legislators to have to come back and slash those same initiatives later.
That’s largely because much of the additional revenue slated to roll in next year will be one-time money.
“In a lot of ways, this is a much harder debate to have,” Carney said this week. “There are issues out there we all want to address but we can’t keep appropriating into a bubble and then cutting our way out when we can’t sustain that spending. We’ve got to do things differently.”
With seven weeks left in the legislative session, the governor is trying to manage expectations of lawmakers who are hoping looser purse strings will help sooth state agencies and constituent groups that have absorbed harsh cuts — or been asked to hold the line — through nearly a decade of austere budgets.
“Our message to legislators all the way through will be you don’t want to come back next year or the year after and start cutting again,” Carney said. “It makes all of our priorities more difficult to achieve in the long run.”
The final say is not in the governor’s hands, however.
The legislative branch is responsible for crafting the state’s final spending plan each year. Most of that work is done by the Joint Finance Committee, a 12-member body made up of Democrats and Republicans from both the House and Senate.
“Because we have this extra revenue, I don’t expect that we’ll have to make any cuts to what the governor has proposed,” said JFC co-chair Rep. Melanie George Smith, D-Bear.
“But we have some very difficult choices to make beyond that,” she said. “It’s going to be a balancing act and in the end someone is going to walk away unhappy.”
The big ticket
A tax-relief deal the Carney administration negotiated with Delaware’s three casinos is already causing some unrest at Legislative Hall.
If approved by the General Assembly, the proposal would reduce the state’s annual income by $15 million next year and $20 million thereafter.
The casinos — which collectively employ close to 3,000 people — have long argued that Delaware’s tax structure is threatening their ability to stay afloat, particularly given increased competition in surrounding states.
Dover Downs, one of Kent County’s largest employers and Delaware’s only publicly traded casino, lost more than $1 million in 2017 — its second annual loss in four years. That deficit came only after the casino finished paying $75 million to the state and the Delaware Standardbred Owners Association.
“This is actually a jobs bill,” said Dover Democratic Sen. Brian Bushweller, a member of JFC and lead sponsor of the casino tax cut proposal.
“Over the years, we have jacked up the tax rates on these businesses so high that we’ve threatened their ability to stay afloat,” he said. “If we don’t take special steps to correct that very soon, hundreds of jobs will be in jeopardy.”
Critics say forgoing a large chunk of the casino revenue — something Carney did not include in his initial spending plan — would place more pressure on lawmakers to meet expenses with one-time revenue and possibly hasten the same future budget mess the governor is warning legislators to avoid.
Those concerns made the casino bill one of the most politically volatile options on the table, as well as one of the most expensive.
“It absolutely makes it harder,” Carney said when asked if his support for the legislation will undercut his push for fiscal restraint.
“But I look at it as an investment in our economy and jobs,” he said. “These casinos are our business partners and in a normal business transaction, a vendor or contractor would want to renegotiate before they go out of business … and we can’t afford for them to go out of business.”
The Carney-backed deal passed the Senate last month, 17-3. The measure is now awaiting action in the House — where it could remain for some time.
House Speaker Pete Schwartzkopf, D-Rehoboth Beach, has been outspoken about his opposition to the bill in its current form. He’s also frustrated House leaders were not briefed on the negotiations before the final bill reached the chamber.
“I don’t understand why we’re trying to commit ourselves to a $20 million bill when we could be looking at a possible deficit again next year,” he said. “Even if you had a $1 million deficit at each casino and you doubled it, that’s still only $6 million.”
Schwartzkopf said he plans to take his time bringing the current proposal to the floor.
“I’m not doing anything until we figure out what we’re doing with some of these other big money things that people want to do,” he said. “It will get a hearing eventually and an up-or-down vote. But I’m not going to vote for a bill like this.”
The speaker indicated he might be open to a tax cut roughly half the size of what’s been proposed. That, at least, would allow the General Assembly more breathing room to address other funding requests.
“We took 20 percent away from our nonprofits last year,” he said, referring to an across-the-board cut to the Legislature’s Grant-In-Aid funding. “If this bill passes, that’s $20 million off the table that we can’t use to replace any of the money that we took away last year. To me grant-in-aid is the priority.”
Restoration of cuts
Those comments are music to the ears of Sheila Bravo, CEO of the Delaware Alliance for Nonprofit Advancement.
The group represents hundreds of organizations that saw their state funding cut by a combined $8 million in the waning days of last year’s legislative calendar. At that time, lawmakers needed to close a $400 million budget hole. Volunteer fire companies also were hit by the cuts.
“For a lot of our members, those cuts meant they had to eliminate hours or positions,” she said. “We understand that legislators have to make tough decisions, but that doesn’t mean the demand for services goes away. And when that demand isn’t being met by nonprofits, it only increases costs for the government.”
They are not the only ones looking to have state dollars cut last year replenished.
Public school superintendents say they are looking to have the $26 million cut from last year’s education budget restored, for instance.
“We don’t always agree on everything but all 19 of us have signed on for this to be our top priority,” said Heath Chasanov, head of the Delaware Chief School Officers Association and superintendent of Woodbridge School District.
Many districts, he said, opted to cover the loss of those funds by eliminating positions. Woodbridge, the small four-school district that straddles the Kent-Sussex county line, reduced its staffing by five teachers, an administrator and a custodian.
“We’re realists and we recognize restoring the full amount in one year is probably not doable,” Chasanov said. “But we would at least like to see us get back the $11 million that the General Assembly cut on the very last day.”
Real estate brokers in Delaware do not get state funding. But a hike in the state’s real estate transfer tax last year is having a chilling effect on the local market, according to the Delaware Association of Realtors.
To help break an impasse that caused the General Assembly to miss its June 30 budget deadline for the first time in decades, lawmakers last year voted to raise the levy on real estate sales a full percentage point to 4 percent — one of the highest rates in the country. That hike is expected to generate roughly $73 million next year.
“Taking that money off the top is keeping both new homebuyers out of the market and reducing the inventory,” DAR President Bayard Williams said. “Current homeowners can’t afford to pay it twice, once when they buy a new home and again when they sell the home they’re in now. That means they’re staying put.”
JFC member Rep. Mike Ramone, R-Pike Creek, pointed to next year’s anticipated influx of cash as clear evidence the real estate transfer tax hike was not needed.
A bill he introduced in January would eliminate last year’s increase altogether. That measure has not come up for a vote in the House.
Instead, lawmakers are more likely to pass a bill sponsored by Schwartzkopf that would exclude first-time homebuyers from having to pay their half of the real estate tax increase — a proposal that would carry a more manageable $5-million price tag.
“To me, our first priority should be righting the wrongs of last year,” Ramone said. “Once those are taken care of we should then look to help those most in need who are being squeezed and last should be new spending. We can do a little of each but that should be the order of priority.”
New initiatives
Despite reservations about undertaking large projects, a few major new funding requests appear to have broad support.
Two seek to enhance services for children and adults with developmental disabilities.
One would begin a flow of state funding to support students in kindergarten through third grade who require the lowest category of special education services, such as reading support or physical therapy.
Schools are required to provide those services but the funded staffing is at a lower level than in later grades. The state pays for higher-level assistance in K-3rd grade but its funding for the bottom end does not kick in until fourth grade.
A bill sponsored by Rep. Kim Williams, D-Newport, would gradually phase in state funding over four years, starting at nearly $2 million in the first year and growing to more than $12 million by 2022.
But without naming the bill specifically, Carney suggested he might not support the measure.
“The worst thing we can do is buy into a thing that costs us a million or two this year but four times that next year or the year after,” he said.
Another proposal for enhanced state funding seeks to improve services for nearly 5,000 adults with intellectual and developmental disabilities who depend on a network of nonprofits to provide them with day programs and residential housing.
The funding rates the state uses to subsidize those supports have not kept up with inflation or the rising cost of services since they fully funded in 2004, according to the industry group Ability Network of Delaware.
C. Thomas Cook, the executive director of Ability, says that gap has eroded the quality of services and soon could result in providers leaving Delaware altogether.
“The average pay for a direct support professional in the state right now is $11.50 an hour, which is below the starting pay for a cashier at Walmart,” he said. “The turnover in these jobs is tremendous and it’s the most vulnerable among us who suffer in the end.”
A study commissioned by the state in 2014 found Delaware would need to pay an additional $20 million a year to reach the fully funded market rate.
A bill introduced this week by Smith, the JFC co-chair, would go nearly halfway to that goal by providing $9 million of additional funding.
“We’ve got to do something there,” Carney said this week, drawing a comparison between the service providers and the casino tax-relief bill.
“They too are private vendors with the state that allow us to carry out our mission, in this case social welfare and supporting people with disabilities,” he said. “They are very similar in that sense.”
Looking forward
Members of the JFC said they are aware of the constellation of spending requests but they have not yet had in-depth conversations about prioritizing them.
That work will begin May 21 — the same day the latest revenue projects will be released by a panel of economists and state workers.
Those estimates will include actual income tax return data that is expected to reveal for the first time just exactly how the recent federal tax cuts championed by President Donald Trump will impact state revenues going forward.
Most lawmakers said they anticipate the revenue forecast will continue inching higher, continuing a trend that began in September.
Some, such as House Minority Leader Daniel Short, R-Seaford, say they know exactly what the state should do with the extra money.
He wants to take half that money and sock it away to help fund a “budget smoothing” proposal designed to eliminate the highs and lows of the annual budget-writing process.
A task force assigned with finalizing the details of that plan is expected to release its findings soon. But implementing that proposal would require an amendment to the state Constitution, a process that takes at least two years to complete.
“With the remaining money, we should prioritize the items that are a one-time expense,” he said.
That includes legislation he proposed that would create a fund from which the state would award grants to local school districts for safety improvement projects, such as panic buttons, secure vestibules and doors that lock from the inside.
His bill would allocate $5 million for those grants next year with future appropriations subject to the annual budget-writing process.
“I would hold the reciprocal things that would occur year after year for discussion down the road,” Short said. “We need to have a hard discussion on those items but if we’re going to hold to the governor’s budget and one-time expenses, then we’re done.”
Other lawmakers are not so sure.
“I don’t know that there is one solution,” said Senate Majority Whip Nicole Poore, D-New Castle, a member of the JFC. “Anyone can say we need to spend less. But our job is to find a balance and solve some of the problems that people elect us to tackle.”
Carney acknowledged that lawmakers have tough choices to make. But he’s confident his staff and the General Assembly can find a middle ground that does not push Delaware back into the red.
“There is general agreement on where investments are needed,” he said. “It’s just a question of how you do it and to what degree. At the end of the day, we’ll just have to come to some sort of meeting of the minds on these priorities.”