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Can DEFAC take a larger role in fiscal policy?

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State Treasurer Ken Simpler

Observers compare Delaware’s budget process to a triage ward where everything’s on the operating table.

This year’s projected $395 million shortfall has businesses and nonprofits on edge, because they don’t know how if they’ll be slammed on June 30.

Each year the economy shrinks, projections show the state won’t be able to sustain its current spending. Sometimes, settlement money comes in at the last minute to save the day; other times, a tax payment is smaller than expected and plans are dashed.

State Treasurer Ken Simpler has been quietly campaigning for changes that would allow the 40-year-old Delaware Economic and Financial Advisory Council to take a large role in fiscal policy. DEFAC, considered a national model for state budget projections, has been a major factor in rating agencies grating the state a AAA bond rating.

Simpler wrote two memos to fellow DEFAC members. He speaks about it when he attends meetings like the Cash Management Policy Board and the State Employee Benefit Committee and the Agricultural Lands Preservation Trust He’s taken his ideas on the road to any community group that invites him to speak. (“I will shamelessly accept any speaking opportunity. I have never turned one down, except for scheduling conflicts.”)

He’s not calling press conferences like his media-conscious predecessor Chip Flowers, whose term ended with a controversy over his use of state credit cards to take his female deputy on a side trip after a business convention. Simpler, a soft-spoken hotel owner and former manager of a billion-dollar investment fund, doesn’t need to do anything to attract attention in Dover. As the first Republican state treasurer of the 21st century, he already stands out at overwhelmingly blue Leg Hall. “The response I got early on was, quite humorously, “˜Is that the Republican?’ Like I was a unicorn,” he said with a laugh.

More than two years later, Dover has acclimated to its Republican treasurer and Simpler has acclimated to government finance. He gets that the state treasurer lacks the sway a private CFO might enjoy. He’s not the only fiscal figure in town. There’s the auditor, the budget director, the comptroller general and the secretary of finance.

Simpler envisions a state system with a stock portfolio that is better fit to the state’s needs even if some capital gains might be due, a fiscal framework securely tied to means or needs, some shifts in tax deadlines to make revenues more predictable, and a budget stabilization fund that automatically captures revenues above a set amount when the economy is good and releases funds when the economy falters.

“Every year, for six months, there’s always this rending of garments and gnashing of teeth. It’s just always a chaotic process every year,” Simpler said, adding that the legislature can change the rules to make things work more easily. “These people (the original DEFAC members) were geniuses, but it’s 35 years later, and nothing stands up for 35 years. The problems they faced were different than the problems we face.”

“A lot of this stuff is at the strategic level,” he said. “It would take time, but it’s not building the pyramids.”
He’s hopeful change might possible with a new governor, a new secretary of finance and a new chair of 40-year-old DEFAC.

Michael Houghton, the Morris Nichols Arsht & Tunnell partner who took over as DEFAC chair last month, said he thinks the 30-plus members of DEFAC should look at their mandate and look at what more they may be able to achieve to help the state.

“We’re not the legislature. We’re not the governor. We don’t develop the budget, We don’t pass the budget,” Houghton said. “We are, I believe, a resource. To me, the question is not meddling but being a resource.”

“I’m not discounting anything that Ken has raised, but I’m not subscribing to any particular part. I’m not interested in taking apart and putting back together something that seems to have worked pretty well for 40 years. My role is not to be a deconstructor,” he said. “In the broader sense, it does make sense for us to examine the underlying documents – the executive orders – and examine how we should do what we do and whether we can do more.”

Houghton said he hopes that those who read about the $395 million shortfall consider that it’s within the context of a $4 billion budget. “A lot of times, the DEFAC projections may adjust by the millions – 5 or 10 or 15 or more – in the home stretch of the fiscal year, but, when you consider that’s out of a $4 billion budget, those adjustments are often 1 percent or less. It’s not as dramatic as people may think, and the state process of projection seems to historically be pretty good.”

Ed Ratledge, director of the Center for Applied Demography at UD who has served on DEFAC all 40 years, said there are several members of the legislature and five members of the governor’s cabinet on the DEFAC board and he supposes that, if they wanted an opinion from DEFAC members, they would have asked.
Ratledge said several DEFAC members have the strong economic background to create a new system, but staffing would be one issue and avoiding politics would be another.

“Ken has raised a series of questions, and some of them certainly have merit,” DEFAC member Gary Hindes, chairman of The Delaware Bay Co., said he can see a wider role for DEFAC, but he doesn’t want to comment it until the new chair has a chance to consider the group’s next step.

Finance Secretary Rick Geisenberger said DEFAC’s role is forecasting – not deciding – where the state spends its money. He said the general assembly decides that.

Geisenberger said Simpler raised some good questions, however. “He’s got some very interesting ideas we’d be happy to discuss,” he said. “I’m certainly open to any of those ideas he has proposed.

“DEFAC has to make those determinations as to what they see their role as,” Geisenberger said. “The executive order governing what DEFAC does or doesn’t do is 16 years old, and it’s not a bad idea to revisit it.
“I think everybody on DEFAC is open to the discussion.”

Gov. John Carney’s said DEFAC has served the state “extremely well” over nearly 40 years, and he has no immediate plan to modify the executive order, but he looks forward to hearing any recommendations from Houghton and the DEFAC members on ways to enhance the council’s mission.

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