This report was commissioned by the Delaware Business Roundtable to look at all the dimensions of Delaware’s fiscal sustainability, taking into consideration economic, revenue and expenditure factors that have led to the state’s shortfall.

Delaware managed to maintain balanced budgets and reserves through the Great Recession that were well above those of other states, but like other states it used a variety of temporary budget solutions in doing so. The shortfall that has emerged in recent years is partly due to the expiration of those temporary measures — especially the diminishing revenues from its uniquely aggressive abandoned property program — and its continued growth in expenditures, especially for K-12 Education and Medicaid.

Our long-term projection under current-law assumptions shows that, absent policy changes to solve the problem, Delaware will face a growing budget shortfall. We project that its annual operating deficits will expand to slightly over $600 million, or 11 percent of expenditures, by FY 2025. The widening gaps are partly due to inelastic revenues, but are also the result of rapid increases in health-related state costs and below-average economic growth.

Solving the budget shortfall through tax increases would not address the underlying spending issues contributing to the shortfall, would not help to boost the economy, and could make the tax burden on the citizens of Delaware among the highest in the nation. Because more robust economic growth is an important factor necessary to resolve Delaware’s budget problems, we believe that a high priority should be given to policies that will boost, rather than hinder, economic growth in the state.

Delaware spends 23 percent of its economy on state and local government services, ranking it 7th in the nation and higher than any of its neighboring states. By comparing Delaware to other states, we identify opportunities to help address its long-term shortfall by reducing or slowing the growth of spending in the areas of K-12 Education, Corrections, Public Welfare and personnel costs. Also, there may be significant opportunities to reduce state costs substantially by shifting some Medicaid costs to the federal government and reducing managed care rates.

The good news is that the state can go a long way toward restoring budget balance by restraining spending growth over time.

Next