IN TIGHT TIMES, BONDING WILL BE BY THE BOOK
The Bond Buyer
By Alison Vekshin
February 11, 2002
While state officials anticipate slight revenue growth in the fiscal 2003 budget, they are concerned that balancing the budget will be more difficult given the reduced revenue and increased costs stemming from the recession and the Sept. 11 terror attacks.
"The rate of growth in our revenues has tapered off dramatically while the demands on the budget have not changed," Treasurer Jack Markell said. "Now it becomes more difficult to prepare a balanced budget, which we are required to do by law."
In a December revenue estimate report, the Delaware Economic and Financial Advisory Council cut its revenue estimate for the current fiscal year, which started July 1, by $17.1 million to $2.334 billion. Since the current $2.3 billion budget was approved in June, revenue estimates have dropped $30.9 million. The council -- consisting of government, business, and academic experts -- also reduced its revenue forecast for fiscal 2003 by $15.8 million to $2.362 billion. A $15.5 million decline in the forecast of net corporate income tax revenue drove the fiscal 2002 shortfall. Meanwhile, a predicted $15.4 million drop in net personal income tax revenue deepened the fiscal 2003 shortfall, the panel reported.
The council is required by law to determine a revenue estimate that state officials must use in planning the budget. The December estimates were critical, since they formed the basis for Gov. Ruth Ann Minner's $2.4 billion fiscal 2003 operating budget proposal, which was submitted last month to state lawmakers. The budget reflected a projected 2.2% growth in revenue, which would be the lowest increase in a decade.
Minner already has taken steps to cut spending in response to reduced revenue projections. In October, she asked most state department heads to set aside 2% of their spending through the end of fiscal 2002 after the council released a report reflecting reduced revenues. In response to December's reduced estimates, Minner ordered the agencies to trim $23.8 million from the current budget by making the cuts they had identified.
After several years of budgetary surpluses, most top state finance officials agree that balancing the budget in fiscal 2003 will be a challenge, but are encouraged by projections of slight revenue growth.
The state expects $30 million in revenue growth in 2003, according to the council's projections. Revenue grew by $50 million in 2001 and is expected to grow an estimated $4.6 million in 2002, according to the council. Budget director Peter M. Ross said state officials do not expect recovery until fiscal 2004, adding that Delaware is focused on containing expenses rather than growing revenue.
"We are experiencing a significant slowing in revenue, but we are still seeing some growth," Finance Secretary David W. Singleton said. "Even if we end up in a situation with some reduction in revenues, we're looking at numbers that involve pain but are manageable."
States nationwide are feeling the brunt of the recession that began in March, homeland security costs following Sept. 11, and plunging state revenues. These factors have prompted state budget shortfalls to grow to $40 billion, according to a December report released by the National Governors Association and the National Association of State Budget Officers. The shortfalls, afflicting 36 states, already are worse than those during the recession of the early 1990s, according to NGA executive director Raymond C. Scheppach.
State Sen. Patricia Blevins, chairwoman of the Bond Bill Committee, said Delaware was prepared for the economic downturn.
"We have front-loaded a lot of our capital projects knowing that we had surpluses and knowing surpluses don't last forever," Blevins said.
Blevins said the operating budget shortfall would be the biggest issue the legislature will face during this session.
Despite the state's budgetary needs, state finance officials insisted they would avoid issuing additional debt. State law limits spending to 98% of expected revenues and state bond issuance to 5% of expected revenues.
"We're not going to solve the budgetary stress by issuing bonds," Singleton said. "That's not the way we do business here."
Singleton said some capital projects might be phased in over a longer period of time. He added that officials are examining the state's outstanding debt for refunding opportunities.
Bonds will not be sold to supplement the operating budget, according to Michael Strine, chief of policy and operations at the Department of Finance.
"We will sell bonds to support capital projects within the state limitations that are on the books," Strine said. "We are not going to change the books because economic times get tough."
With the absence of an operating surplus, Markell said the state would rely more on bond financing.
"We are not going to be borrowing more than we have in the past," Markell said. "In the past we had cash and bonds. Now the percentage of cash to bonds will increase."
Ross said bonds would not be sold to pay for projects previously paid for in cash. Instead, since the funds are not available, officials intend to reduce spending.
Strine said the state has the capacity to issue an additional $118 million in new capital authorization general obligation bonds in the fiscal 2003 budget, in addition to what has been authorized in previous years. A majority of that amount would go to school construction.
"Certainly, the situation is tightening," said Mark Dufendach, associate secretary for finance and administrative services at the Department of Education. "We haven't had to defer any projects, but we have to try to make sure that we are only requesting funds for the amount actually needed in the fiscal year."
Dufendach said the state has previously provided immediate funds for school construction projects once a district passed a school construction referendum.
"With the tighter climate now, we have to be more careful in terms of spreading the financing of the projects over multiple years," he said.
In Delaware, a district is required to approve a referendum before the state allocates a percentage of the cost of construction through a bond bill.
"At this point, we expect that in 2002 we'll have sufficient funds to move all the projects forward without having to delay construction," Dufendach said.
He added that any new projects approved through referendums last year might prove difficult to fund this year.
The department received $95.8 million in bond money from the state in fiscal 2002 and expects about $110 million in fiscal 2003, according to Dufendach.
The Department of Transportation continues to receive a steady stream of tax revenue and doesn't anticipate postponing or rescheduling any capital projects, said Christina Bell, the department's director of financial management and budget.
The department's current capital budget consists of a projected $360 million, while the fiscal 2003 budget calls for $307 million in capital spending, Bell said.
"We're building a program to meet economic forecasts," she said, adding that the department is expecting revenues to grow slightly this year.
