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Expenditure Options To Address Shortfall

Every state has its own unique, even idiosyncratic budget conventions, arrangements and rules. In developing specific budgetary changes to balance a state’s budget there is no substitute for local experts who work with that state’s budget every day and understand its subtleties. In this section, we do not attempt to substitute our judgment for those of Delaware’s Department of Finance or legislative budget staff.  

Therefore we make no specific recommendations for reducing budgetary line items or specific programs. Instead, our analysis in this section focuses on the bigger picture of how Delaware compares to neighboring states and to the national average on four budget program areas and in several functional categories of spending.


We recognize that there is nothing inherently good or bad about being above or below average in these comparisons. Ultimately, the state’s spending priorities must be set by its political leadership and its people. We also recognize that there are difficult tradeoffs that need to be considered when contemplating reductions to program budgets.


However, faced with a long-term structural deficit equal to 11 percent of its budget, Delaware will have to consider whether its economy can continue to support historical spending levels, or alternatively whether it needs to dial back spending to a level more consistent with what the state’s economy can support. In considering options for spending restraint, policy makers might find it helpful to compare Delaware’s spending in specific program areas with that of other states.


The chart below compares Delaware’s expenditures with nearby states and the national average. For comparability, the table expresses these values as a percentage of personal income, a good measure of a state’s economic capacity to support government programs. Because states differ substantially with regard to the allocation of program responsibilities between state and local levels of government, the numbers displayed below reflect the totals for state and local governments combined. As the figure shows, Delaware is high relative to both the the national average, where it ranks 7th overall, and to its neighbors.

The following compares Delaware’s spending on four key program areas to that of other states. These areas — K-12 Education, Higher Education, Public Welfare and Corrections — account for 75 percent of state spending.

K-12 Education. As figure 16 shows, Delaware’s expenditures for K-12 Education are higher than the national average. In fact, its 4.6 percent of personal income going to K-12 places it about 11 percent higher than the national average by this measure. K-12 Education has maintained approximately the same share of the state’s General Fund budget over the last several decades — 32.2 percent in 1995, 32.4 percent in 2005 and 32.8 percent in 2014.


Another common basis for comparing states’ spending on K-12 Education is spending per pupil, or per average daily attendance. According to the National Education Association, Delaware spent $14,890 per pupil in K-12 education in the 2012-13 school year, which was 52 percent higher than the national average and higher than all the nearby states except New Jersey.


The major factors making up school spending are the number of teachers, teachers’ salaries (instructional costs) and non-direct classroom costs. The chart below compares Delaware to other states in two key instructional cost areas. Specifically, the table shows that Delaware’s teacher/student ratios are lower than the national average (i.e., it has more teachers relative to its caseload), about the same as Pennsylvania’s and Maryland’s, but much higher than Virginia’s or New Jersey’s. Its teacher salaries are substantially higher than the national average and Virginia’s, but lower than the nearby states of Pennsylvania, Maryland and New Jersey.


We calculate that the combination of lower-than-average student/teacher ratios and higher-than-average teacher salaries means that Delaware’s instructional costs per student in K-12 are about 15 percent higher than the national average. 

The next chart shows our estimate of K-12 costs for all items other than teachers’ salaries for Delaware and other states, as well as the national average. This catch-all includes a wide range of costs, including overhead costs such as administration and maintenance, but also such student-focused costs as counseling and transportation.


As the figure shows, Delaware spends about the same percent of its total per-ADA costs other than teacher salaries as the national average, but more than nearby states. We calculate that Delaware would reduce its costs for other than teachers salaries by 6 percent if it could bring these costs in line with the average of the other nearby states. 

Providing a high-quality education to its children is a top priority for every state. However, there is substantial disagreement as to whether there is any correlation between funding levels and educational achievement or performance. In light of Delaware’s standing as a state that allocates more of its economy to K-12 than all of its neighbors, with the exception of New Jersey, we believe that the data presented above suggests that there is room for the state to reduce its spending for K-12, or at least to slow the growth in that spending over time as part of a solution to the state’s long-term structural budget problems.


Higher Education. As the expenditures chart shows, Delaware spends below the national average for higher education. In fact, its 1.1 percent of personal income going to Higher Education places it about 10 percent below the national average. Delaware has dramatically reduced its spending commitment to higher education over the last few decades, devoting 9.9 percent of General Fund expenditures to higher education in 1995, 8.1 percent in 2005 and 6.2 percent in 2014.


Therefore this does not appear to be a part of the budget in which additional spending reductions to close the long-term budget shortfall would be likely. In fact, Delaware’s policy makers should consider whether such reductions in the state’s level of financial commitment to higher education is consistent with the need to increase economic competitiveness and the creation of more well paying jobs.


Corrections. As the expenditures chart above shows, Delaware’s expenditures for corrections are higher than the national average. In fact, its 0.7 percent of personal income going to corrections places it about 30 percent higher than the national average. Corrections has been taking a growing share of Delaware’s General Fund budget over the last several decades — 6.3 percent in 1995, 7.1 percent in 2005 and 7.2 percent in 2014.


Based on the data available to us, it is not clear what accounts for Delaware’s relatively high rate of spending in this area. On the one hand, Delaware’s incarceration rate is just 15 percent above the national average (even though its violent crime rate is almost 50 percent higher than the national average), which suggests that it is spending substantially more on a per-prisoner basis than the national average. On the other hand, Delaware has one of the highest ratios of prisoners to prison employees. One possible explanation is that non-employee costs are much higher in Delaware than elsewhere.


We recommend that the state conduct a more detailed analysis of correctional expenditures to identify opportunities to reduce costs in this area without jeopardizing public safety.


Public Welfare. As the expenditures chart above shows, Delaware’s expenditures for Public Welfare are higher than the national average and higher than any of its neighbors. In fact, its 4.8 percent of Personal Income going to Public Welfare places it about 33 percent higher than the national average. Public Welfare has been taking a growing share of Delaware’s budget over the last several decades — 24.2 percent in 1995, 25.1 percent in 2005 and 28.7 percent in 2014.


The major cost-driver in this area is the state’s Medicaid program, which makes up over 60 percent of state General Fund spending in this area.


In order to maintain a structurally balanced budget in the long term, Delaware will need to contain cost growth in its Medicaid program. The outlook for future growth in these costs is daunting, with the Centers for Medicare and Medicaid Services projecting that for the nation as a whole, total Medicaid costs will increase by 6.7 percent in 2015, and 8.6 percent in 2016 and by 6.8 percent per year on average for 2016 to 2023.


Delaware’s Medicaid program costs have grown at rates above the national average for decades, — 50 percent higher than the national average rate of cost growth since 1990 and 65 percent above the national average in the period 2010-2013. Our own forecast assumes some restraint in Medicaid cost growth relative to these national figures, recognizing efforts that have been made to contain costs. However, even taking these into account our baseline forecast assumes annual growth rates in this program of about 6 percent per year, or nearly one-third faster than the projected growth in Delaware’s personal income.


The chart below compares Delaware’s Medicaid expenditures to other states in 2013, expressed as a percent of gross state product, both for total program expenditures and for state General Fund expenditures.

As the figure below shows, Delaware’s total program costs are slightly lower than the national average and substantially below Pennsylvania’s, but higher than New Jersey’s and Maryland’s. But, the figure shows that Delaware’s state General Fund costs are much higher than the national average — 55 percent higher, in fact — and second only to Pennsylvania among its neighbor states.


This difference in Delaware’s total and state General Fund costs is not due to the stated federal sharing ratio. In fact, Delaware’s Federal Medical Assistance Payment (FMAP) is higher than those of all of its neighboring states. Instead, it appears to be due to the state’s low utilization of specialized federal funding mechanisms, such as “intergovernmental transfers (IGTs) and certified public expenditures. While we are not experts in Medicaid financing, there are several firms that consult with states on ways to improve their federal shares in this program. If the state has not already done so, we recommend that it consult with one or more of these firms because it is possible that it could reduce its General Fund costs in this area by many millions of dollars per year by increasing the federal share of total Medicaid costs.


We also understand that the state Department of Health and Social Services (DHSS) has taken a number of steps to mitigate costs in this area, including efforts to begin to move long-term care patients into a managed care setting. Many states have reduced their managed care rates by creating a “management target” for efficiencies to be achieved by virtue of better care management. We recommend that the state research the possibility of reducing its Medicaid costs in this way. Delaware also is taking part in the federal State Innovation Models (SIM) Initiative, which is designed to support states interested in moving toward value-based payment models to improve population health and reduce costs, although the benefits of such efforts will take time to materialize.


Personnel Costs. While the functional breakdown of the budget discussed above accounts for
75 percent of Delaware’s General Fund expenditures, personnel costs — salaries, wages and benefits — cut across all program areas. According to the Census, salaries and wages account for about 47 percent of all expenditures for current operations by Delaware’s state and local governments combined.


The chart below compares Delaware’s total state and local personnel costs to other states. The result is a somewhat mixed picture. Delaware’s average salaries for all public employees are 12 percent higher than the national average, yet it’s total costs per employee are only 4 percent above average thanks to its lower than average contributions to employees’ health insurance and pension plans. However, the state devotes about 10 percent more of its total personal income to state and local government personnel costs than the national average. 

We believe that these results suggest that the state should look for ways to reduce the size of its state and local government workforce over time, either through freezes and attrition or by targeting specific programs for reduction or elimination. We also believe that, while its health insurance contributions are not high relative to its neighboring states, its benefits are high relative to private sector plans, and there are opportunities to restrain growth over time.


Savings could be achieved through, for example, changing premium cost sharing ratios for more expensive plan options, as well as changes in plan designs. We note that a related proposal was offered by the Governor in his budget proposal but it was not enacted by the General Assembly.


On a positive fiscal note, Delaware has shown significant restraint in its pension plans as measured by the magnitude of its benefits, which are already substantially lower than the national average and all of its neighbor states. In addition, while unfunded pension obligations present major long-term fiscal problems for many other states, Delaware has largely avoided this problem by consistently fully funding its annual required pension contributions.



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