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5Q: Michael Houghton, chair of Delaware Economic and Financial Advisory Council

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Michael Houghton was recently appointed chair of the Delaware Economic and Financial Advisory Council (DEFAC) by Gov. John Carney. The longtime Delaware resident is a partner at Morris, Nichols, Arsht & Tunnell LLC.

DEFAC members are appointed by the governor, representing both the public and private sectors of the Delaware economy. The agency is charged with providing advice to the governor and the secretary of finance on the state’s overall financial conditions, current and projected economic conditions and trends, tax policy and current and projected trends in the national and local economies that may affect Delaware.

The council is also charged with providing non-partisan and objective revenue and expenditure estimates to the governor and General Assembly.

Gov. Carney said you were an ideal choice for this role, citing your deep understanding of how state government works. What experience and knowledge do you think you’ll leverage as chair of DEFAC?

My background is 35 years as practicing lawyer in Delaware with a practice that has dealt with state government and those who deal with state government. In my tenure I have represented banks, and have worked on task forces that have revised and rewritten the bank franchise tax. I am familiar with the banking industry and the framework for regulation of the banking industry.

I’ve also had occasion to represent the Department of Insurance. So I’ve represented the regulated and regulator, and that gives one a pretty complete picture of how government works from both ends of the spectrum. I think I have a pretty extensive experience in and around state government in particular. The first time I worked with Gov. Carney he was deputy chief of staff for [then Gov. Tom] Carper and I was representing the state in negotiations for the acquisition of the port from the city of Wilmington.

I’ve learned a lot about government from being involved in advocating and lobbying legislation, and worked closely with legislators and members of the General Assembly on matters affecting both business and government.

DEFAC’S most recent forecast adds another $9.1 million to the state’s 2018 deficit, which stood at $386 million following last month’s meeting. It now sits at $395 million – increasingly sobering numbers.

The numbers are the numbers. It is a mathematical equation. We’re confronted with circumstances but our job is to deal with it. We are a group that questions and tests the models that are presented and the conclusions reached by various arms of government. It’s not an adversarial role but it’s a role designed by [former Gov. Pete] du Pont 40 years ago to create a panel of people to raise questions about various revenue sources and trends. So it’s not just a free-for-all the way it is in some states.

You indicated that in your work with DEFAC you hope to look at things like structural revenue reform, and analyze the impact that financial and tax policy, and economic trends, have on Delaware residents and businesses. You also mentioned having DEFAC serve as a more consistent financial policy resource for the state. What might that look like?

I’m new to this process – literally, I just had my first meeting. What I want is to hear from other members about what DEFAC can be. But by nature it suggests a larger role for DEFAC – it is not a political role – it doesn’t take sides politically or philosophically. We were designed in a bipartisan way to educate and advise the Governor and legislature on trends and challenges facing the Delaware economy. I don’t have a particular agenda.

Perhaps we should look at what roles we could play. We have bright people from the economic, business and public sectors. How we can better function? I hope to have a consensus view of a few additional things we can do to be of greater assistance in 2018.

Maybe we could bring in someone from the Federal Reserve Bank of Philadelphia or from the private sector – economists who are available to our larger institutions to give a report and insight on challenges to economies of business, broadening our base of available information.

The organization just released the aforementioned numbers – including an increase to the budget gap. It’s easy to be a critic. What do you think people don’t realize about the role of DEFAC?

What people need to consider is that the expenditures and revenues we’re talking about relate to $4 billion. There is both excitement and criticism of the state forecasting resources and, indirectly, DEFAC, if numbers from month to month vary by $10 million, $20 million or $50 million. Not to make light of those revenue shortfalls.

But understand a $30 million variance on a $4 billion budget is still a pretty good prediction by most stretches of the imagination. In a private sector context, that would be a pretty good performance.

I’m not suggesting they’re not meaningful and don’t have consequences, but perhaps give benefit of the doubt to state analysts and resources who try and get the numbers as sharp and close as they can – rather than suggesting there’s some kind of impenetrable and difficult process that results in a variance. There is volatility in revenue sources – that creates challenges not only from forecasting perspective but also as Gov. Carney has noted – challenges in terms of managing finances of the state.

It seems like an economic fire drill every year in Delaware when it comes to the budget. How do we change that?

Fire drill is in eye of the beholder. Lay the Delaware experience on budgeting against other states where you don’t have a DEFAC or a general consensus through the filter of DEFAC, but you have the equivalent of a political food fight – throwing numbers back and forth through compromise or exhaustion.
If instability or fire drills are characterized by a swing of $10 million to $20 million or $50 million based on a $4 billion budget, I would ask people to take that into consideration.

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