The Delaware Financial Advisory Council (DEFAC) recently estimated the
COVID-19 virus may reduce tax revenue nearly a billion dollars between the 2019 to 2021 budget years. During the 2009 recession the response to budget deficits was mostly to raise taxes which contributed to Delaware having one of the slowest economic recoveries in the country.
To avoid a repeat, CRI is providing suggestions on where to find the least painful ways to cut state spending. In our first article we suggested deferring $426 million in new one-time spending recommended by Governor Carney in his originally proposed 2020 Fiscal Year budget before the virus hit. The rationale is our first priority should be maintaining as much of our state services as possible before striking out in new directions.
Today we propose a series of steps to further trim the budget by $354 million in the least painful ways. In addition, about $378 million in our Rainy Day Fund, and other contingency reserve funds could be spent during this emergency.
- Suspend state hiring for two years. The original 2020 budget estimated state employment growth of 1.2%, or 377 people (average cost per employee with benefits is $76,250), so a pause immediately reduces the deficit by about $29 million. The US Bureau of Labor Statistics estimates annual turnover by state employees is 19% allowing the setting of an employment reduction target without layoffs. A 4% reduction target would save $100 million a year.
- Reduce contract services. Spending on contract services has increased 40% faster than the total state budget. A 10% reduction in contract services would save almost $60 million a year.
- Amend the state "prevailing wage." The state requires state funded construction projects to pay a prevailing wage. Delaware's prevailing wage survey comes out 20% to 25% higher than the federal prevailing wage survey. Amending Delaware's calculation to use the federal prevailing wage results could lead to a reduction of at least $105 million a year in road and school building construction costs.
- Implement Dependent Verification Audits. Thirty-eight states use Dependent Verification Audits for health insurance benefits often finding 4% to 8% reductions in the number of eligible recipients. Delaware will spend $1.24 billion in the current fiscal year on employee, retiree, and Medicaid health benefits. A 4% reduction from an eligibility audit would save $50 million a year.
- Divert 75% of Regional Greenhouse Gas Initiative (RGGI) to the General Fund for two years. Delaware participates in the RGGI auctions for allowance purchases for power plants to emit carbon dioxide. The agreement requires 25% of the funds go to low income assistance programs. Currently, the other 75% goes to the Dept. of Natural Resources and Environmental Control (DNREC), and the Sustainable Energy Utility, but both programs are carrying large surpluses of unspent funds from previous years. Delaware can join Connecticut and New York in diverting 75% of RGGI funds to the General Fund for two years for savings of $10 million a year.
Deferring one-time spending combined with the above budget cuts totals $780 million in savings in the 2020-2021 budget with no reductions in state services, or layoffs of state employees. More cuts may be needed in the future or the state could work on improving efficiency of state employees. (We welcome suggestions from our readers on what “step three” might include.)