An estimated $785 million drop in revenue over two years has forced Gov. John Carney to rework his proposed $4.6 billion budget for fiscal year 2021 and the remaining months of the 2020 budget that ends June 30.
“We're confronted with a two-year problem of being able to fund our current year budget and being able to develop a budget for fiscal year 2021 in an environment where our revenue forecast is extremely uncertain,” said Mike Jackson, budget director.
Delaware's current operating budget is $4.4 billion, and Carney's proposed budget for 2021 was about 4 percent higher at $4.6 billion.
Estimates provided April 20 by the Delaware Economic and Financial Advisory Council showed a $416 million drop in revenue from March to April. DEFAC reduced the state's growth rate from a nearly 4 percent rise to a drop: -3.25 percent for the current budget year and -3.75 percent for 2021.
“That's a significant decrease from the time at which the budget was submitted where the financial plan at that time was proposing a modest budget growth of just under 4 percent,” Jackson said.
Sound financial practices such as Carney's budget smoothing executive order issued in 2018 has put Delaware in a strong position to weather this revenue downturn, Jackson said.
Carney's budget process uses a benchmark calculated by personal income growth, state population numbers, and revenue factors to determine state spending. The 2021 budget had more than $125 million in reserves built in, and speaking to the Sussex County Association of Towns on Jan. 8, Carney said at the time Delaware had a $200 million surplus.
Delaware also has a $250 million rainy day fund created for extreme financial circumstances. In order to use it, however, a three-fifths majority vote by the General Assembly is required.
Jackson said the budget reserves are an option to help plug a revenue deficit As for the rainy day fund, he said, not so much.
“I would say we would exhaust all our resources before we look to address and use our rainy day fund whether it's for fiscal year 2020 or fiscal year 2021,” he said.
Nearly half of Delaware's operating expenses goes to personnel – 47 percent – with Medicaid costs coming in second at 18 percent. Those Medicaid costs are expected to increase with the number of patients who have been hospitalized, Carney said, and the challenge will be figuring how much of a hit the state will take because of rising Medicaid costs. To fill the revenue gap, Carney did not rule out furloughing state workers or cutting state salaries.
“We're going to have to take whatever measures are necessary, obviously, to close the gap,” he said. “We cannot deficit spend … it'll be the biggest challenge for us because we've got to pay our Medicaid expenses. They go to providers, and those providers are under the gun right now whether you're talking about individual healthcare practitioners or whether you're talking about our hospitals.”
DEFAC will release its next revenue report May 20, and stronger action may be needed if revenues continue to decline, Jackson said.
“As we move forward over the next couple of months [we're going] to try to develop a financial plan that's going to be responsive to the current environment, but also one that takes into account that we have had savings in our budget over the last couple of years, and being able to use those to help any impacts to what we're experiencing with the revenue downturn,” he said.