Delaware FY 2020 revenue downgraded by $400M amid crisis

State fiscal analysts estimated a $416 million hit to revenues due to the coronavirus pandemic to date. DBT PHOTO BY JACOB OWENS

DOVER – State fiscal analysts released their first look at the coronavirus’s economic impact on Delaware on Monday, when they estimated that the current fiscal year has taken a $416 million hit so far, now leaving a deficit of about $784.5 million in the governor’s next fiscal year budget.

With estimated general fund revenue of about $4.32 billion, the state would face a deficit of $150 million heading into next fiscal year – a stark turn from December when the Delaware Economic and Financial Advisory Council (DEFAC) estimated that the state would enjoy a $246 million surplus at the end of the year.

How that deficit is closed isn’t something that DEFAC, a non-partisan group of business and community leaders, academics, and government professionals that sets the state’s official revenue estimates, is tasked to consider, but the state does have reserve funds in tow for such an emergency. The larger question will be how the state contends with an expected downturn in revenues through next fiscal year, which runs July 1, 2020, to June 30, 2021. 

Under state law, Delaware’s operating budget cannot appropriate any more than 98% of predicted revenue. Meanwhile, more than 60% of Delaware’s state expenditure is on core programs like public education, social services, and Medicaid.

Notably, $1.25 billion in federal stimulus funds for the state, shared with New Castle County, cannot be used to replace lost revenue, according to the terms of the legislation approved by Congress. The fund can reimburse states and municipalities for expenses related to the pandemic response effort. State officials reported Monday that about $8 million had been spent on the response effort with another $8 million signed in further encumbrances.

DEFAC downgraded several of its FY 2020 budgeted revenue estimates, including:

• Personal income tax by about $223 million, due in part to the delay of tax return filings from April to July, after the end of FY 2020.
• Corporate income tax by nearly $81 million, due to the tax filing delay and the pandemic’s negative effects on large companies’ business.
• Lottery revenues by $46 million, due primarily to the closure of Delaware’s three casinos.
• Gross receipts tax by about $28 million, due to the decreased consumer spending amid stay-at-home orders from states.

The analysts noted that these estimates were only as good as the limited data they had in hand, and many of the economic indicators released to date either preceded the impact of the pandemic in the state or only accounted for a small portion of it.

“We are, in a sense, still flying blind,” said David Roose, the director of research and tax policy for the Delaware Department of Finance. “Obviously, the length of the lockdown both in Delaware and nationwide is unknown at this point and the length, depth, and breadth of job losses is also unknown.”

Roose noted that state’s March unemployment data, released on April 17 by the state Department of Labor, predated the outbreak of the virus here, as state employment data is always taken during the week of the 12th. Updated data on gross domestic product and corporate profits, as well as reports on withholding and personal income tax, are similarly being awaited in May and June.

The lack of official information led DEFAC to consider other industry factors toward its estimates, including declines in air travel, hotel bookings, IPO filings, home sales, and even manufacturing indexes. While the April DEFAC meeting was the first to consider the emerging economic data, most believe its May meeting will be more insightful. That is typically the meeting from which legislators derive their foundation for June fiscal year budget discussions.

Key to what future revenues look like is what “shape” the eventual recovery takes, said Roose, referring to quarterly graphing of economic indicators like GDP, employment, and wages. That could range from a “V” recovery, or one with a sharp decline and sharp increase, to a “U” recovery, with a slower recovery, to a swoosh, or a more gradual recovery.

“We won’t know [the shape] until it is well underway,” he added.

What is not debated, however, is that the pandemic will have a long-term financial impact, according to the analysts. Revenue estimates for fiscal years 2021 and 2022 were also lowered by DEFAC by $273 million and $317 million, respectively.

With a new estimated FY 2021 appropriation limit of $4.21 billion, it will send Gov. John Carney and the General Assembly back to the drawing board for budget deliberations to close a roughly $784.5 million deficit. In January, Carney proposed a record $4.63 billion operating budget for next fiscal year.

At an April 17 press conference, Delaware Business Times asked Carney if he was considering pushing for a continuing resolution to extend the state legislative session past its normal June 30 endpoint in order to better understand tax revenues that will become known in July. The governor said that he was not in favor of such a move.

Delaware Office of Management and Budget Director Mike Jackson addresses the media at an April 21 press conference in Wilmington. | DBT PHOTO BY JACOB OWENS

“I spent six years in Congress and we never had a budget; we had continuing resolutions all the way through. I don’t think that’s a good way to do your fiscal management,” said Carney, who served in the U.S. House of Representatives from 2011 to 2017 before being elected governor.

At an April 21 press conference, Carney said that he was not yet considering layoffs or furloughs for state employees to help close the budget gap, but conceded that “we’re going to have to take whatever measures are necessary to close the gap.”

Delaware Office of Management and Budget Director Mike Jackson noted that the state’s $126.3 million budget stabilization fund, a savings account created under Carney’s watch as a budget stopgap, could help close the FY 2020 deficit, but won’t be able to do so entirely.

Jackson told DBT that the state would avoid drawing from its “rainy day” Reserve Fund until all other options were exhausted. The coffers of the state’s rainy day fund is one of the factors taken into consideration by bond rating agencies, and Delaware currently holds the highest rating level at all agencies.

By Jacob Owens

jowens@delawarebusinesstimes.com