Budget Address of Governor Ruth Ann Minner
January 30, 2003

Governor Minner may deviate from prepared remarks

Lieutenant Governor Carney, President Pro Tem Adams, Speaker Spence, members of the 142nd General Assembly, members of the Delaware judiciary, members of my Cabinet, distinguished guests, my family and my fellow Delawareans

We gather today in uncertain times, gripped in a national economic recession and with the threat of war looming. The outlook for our countrys economy and thus our states finances is unclear. But we are charged, you and I, with the stewardship of our state, and so I am here to present my long-term plan to steer Delaware through the uncertainty, toward fiscal stability and economic prosperity.

During the flush years of the 1990s, Delaware was fortunate to have the surplus revenue and thus the ability to do many worthy things. We expanded state services in the areas of public safety, health care for the most needy, and public education. We also reduced personal income taxes in those years by 25 percent, cuts that had the effect of reducing state revenues by $380 million.

But, the national economy has slumped and Delaware is weathering the storm better than most. As I said last week, Delaware is one of the only states that has survived the last two years without raising taxes, drastically slashing services, laying off employees or raiding its emergency reserve funds.

We have not had to do what other states have because we have chosen the sensible path.

The effects of the national economic slowdown took hold on my second day in office, when I was told that we had a $35 million shortfall and I immediately ordered a series of cuts to bring our budget into balance. When revenue projections continued to drop and costs continued to rise, we continued to cut and save -- four more rounds of budget reductions, for a total of almost $200 million.

In the most recent round of cuts, our plan to fill a $95 million gap included a freeze on state hiring, a three percent across-the-board cut in all agencies, reengineering and retooling existing programs, and a review of all state purchases.

These aggressive steps early in the fiscal year along with one-time funds from the states largest ever abandoned property settlement have closed the gap for Fiscal Year 2003, assuming revenue estimates hold from now until June 30. Now, the challenge is to construct a balanced budget for Fiscal Year 2004.

And it is no small challenge. The gap between projected revenues and expenditures on the Fiscal Year 2004 budget I am proposing today was $300 million when I began to work on it. Let me explain the factors that have contributed to a structural problem in our state budget.

The revenues projected by DEFAC for the next two fiscal years 2004 and 2005 are considerably lower than what we are spending right now, in Fiscal 2003. In fact, according to DEFACs forecast, it will be Fiscal 2006 before our revenues again match our current year spending.

On top of the drop in revenue, there are the constantly increasing costs of things like Medicaid, health care, the state pension plan, debt service, schools and corrections system.

It is time to solve the structural problem that exists in our budget and put Delaware on a firm financial footing for the future. Because without significant change, this problem will exist for years to come.

We won't meet the challenge with one-time measures and financial gimmicks. In the last few years, other states have relied on one-time items to balance their budgets, like appropriating more than 98 percent of revenues and raiding emergency reserve funds.

Those states were betting that the economy would turn around quickly and, as we all know, it didnt. As a result, we read in the paper what those states are now being forced to do: release prison inmates early; close schools one day a week; eliminate state police officers; layoff large numbers of employees; close state parks and DMV lanes; or use one time tobacco fund money for ongoing non-health care costs.

None of us can predict the future, but each and every one of us has the responsibility to prepare for it. If we were to raid our rainy day fund or appropriate all of our revenue, what would we do if, as some economic forecasters are now saying, the economy takes another dip?

What if we have a hurricane, a terrorist attack, or some other unanticipated emergency? Who among us wants to resort to what the other states are doing because they failed their citizens in making the tough choices?

No, our goal should be to fix the structural problem that exists in our state budget for the long-term. That means putting our revenues and expenditures back into alignment.

We will do what every Delaware family would do if faced with the same problem. Suppose your family reached the point where, on an ongoing basis, your income from your paycheck and investments was $1,700 a month, and your mortgage, bills and other expenses added up to $2,000 a month.

You could raid your savings account to make up the difference this month. But what if you have an emergency, like fixing the family car or making a necessary home repair, or someone got sick or needed a root canal? And then, what about the next month?

No, responsible Delawareans would say cut back on spending, or find a way to make some more money. Or both.

My proposal today will be to do both. While I believe that we have cut costs and made government more efficient, I also believe that there are certain obligations government has and certain services the state provides that should not be eliminated. We cannot solve a $300 million problem completely through cuts without affecting children, the elderly, the poor, public safety and our states competitiveness.

Therefore, I propose today a Fiscal Year 2004 budget of $2.432 billion, an increase of 1.69 percent over Fiscal 2003 while meeting mandated costs. This proposal includes a balanced approach. Of the $300 million gap between revenues and expenditures for Fiscal 2004, I propose that more than half be made up by cutting costs and a little less than half come from raising revenue.

Delaware has a strong tradition of working together to solve the states problems. I am deeply grateful for the positive, proactive working relationship between my administration and the 62 members of the General Assembly.

We have worked together to solve Delawares problems and I stand before you today, renewing my commitment to solve a challenge that will have implications for years to come.

I propose to make up about $155 million of the $300 million gap by eliminating and reducing programs, positions and discretionary funds, by reengineering programs for greater efficiency and effectiveness, and by driving down the growth of mandated costs.

Eliminate and Reduce Programs and Positions

First, I am recommending that all sustainable cuts made in Fiscal 2003 be carried over into Fiscal 2004, for a savings of $15 million. While some of these cuts have been painful, they must be done. All agencies and branches of government have been affected -- including education, health and social services, the judiciary, higher education, the legislature and executive department.

But to solve our problem, we need even more cuts to our base budget. Included in my budget proposal is a difficult but fiscally responsible plan to close the Governor Bacon Health Center.

The fact is that the state is currently operating three long-term care facilities with enough extra space and empty beds that we can fit all of our current Gov. Bacon residents in the remaining two, and still have room for expansion. We can operate two hospitals more efficiently than three, saving almost $2.5 million while maintaining quality service for the clients at all of the facilities.

Because so much of government funding is tied to personnel at the state level, I believe more must be done to reduce the size of state government in tough times. It is important not just to freeze the growth of state government, but to take a hard look at what we are doing and eliminate positions where we can.

As a result, I am recommending that we reduce the number of state positions between now and June by more than 3 percent. That means 400 positions and more than $6 million in savings.

I am not proposing layoffs. Layoffs are not cost effective because a laid-off employee and their family would only need other support from the state through unemployment benefits, and in some cases Medicaid, food stamps, welfare and other services. We also lose productive members of our workforce and the resulting taxes those workers pay.

My proposal is to reduce the size of state government by analyzing the positions that are currently vacant, finding ones we can live without and eliminating them permanently. This reduces the size of state government and saves taxpayer funds without laying off existing state workers or eliminating essential services.

Finally in reducing the base budget, I am forced to ask school districts to take about a 1 percent cut in the amount of funding that they receive from the state. I will once again urge administrators to find ways to do this without affecting children in the classrooms, by focusing instead on administrative costs and discretionary funds that exist in districts and schools.

Despite the fact that funding to schools makes up a third of our operating budget, we have not, up until now, had to make cuts in this area. But at this point, it is necessary and I thank our schools and districts for joining with us in solving our structural problem.

Reengineer Existing Programs

Just as important as reducing costs is ensuring that essential programs are run as efficiently as possible. Reengineering government and improving the way we do business is one of the most important initiatives of my administration.

Many of these ideas come from state employees and I must thank them again for their diligence and dedication to serving Delaware. Change is difficult, but government must change in order to meet the challenge we face.

To make sure Delaware is well prepared for any threat or conflict, natural or man-made, I have re-tooled existing state resources and today propose the creation of the Department of Safety and Homeland Security.

This new department would consolidate the Delaware State Police, Delaware Emergency Management Agency, Capitol Police, Office of Highway Safety, EMS Office and emergency communications staff and allow them to concentrate on preventing and responding to any possible threat.

With all of the key emergency and security personnel in the state under the direction of Secretary Ford, homeland security operations will be seamless. Statewide strategies and planning will continue to be developed by Secretary Ford in conjunction with Homeland Security Advisor Phil Cabaud and Adjutant General Vavala, bringing together the best expertise in our state for these critical programs and preparations.

To allow the Department of Safety and Homeland Security to focus on its core mission, I propose integrating the Division of Motor Vehicles into the Department of Transportation.

This reorganization will align the various departments in state government responsible for collecting revenue for the transportation trust fund in one agency and will ensure that all clean air initiatives, particularly for vehicle emissions, operate smoothly in the years ahead.

Protecting over $100 million in federal funds that come into Delaware is an ongoing struggle under clean air requirements and this change will assist in those efforts. This move will also produce a cost savings to the General Fund of $9.7 million.

I am proposing today that the state replace the decrepit Sussex County DMV lanes and building. This long overdue project is the only new capital spending in my proposed budget.

Also included in my budget proposal are additional ideas for streamlining government, including moving the Insurance Coverage Office to the State Budget Office, moving Boiler Safety to the Department of Natural Resources and Environmental Control, and others.

With each of these changes, we gain efficiencies in both operations and costs while maintaining quality services for our citizens.

Driving Down Mandated Costs

As we look to the cost of doing business in Fiscal Year 2004, items such as health care, pension and debt service loom large. Nationally, we have seen double digit increases in the area of health care with no end in sight. Other states have chosen the path of across-the-board elimination of benefits. My approach is different -- one that preserves essential health care services for the most needy Delawareans at the lowest possible cost.

Over the past two years, the state has worked to harness its health care purchasing power with tremendous success. We have bid all our health care plans together, negotiated lower prices with pharmacies, eliminated unnecessary reserve accounts and joined a multi-state coalition to purchase prescription drugs at cheaper rates.

For Fiscal 2004, my proposal recommends we continue to drive down health care costs through consolidation, purchasing savvy and tough negotiations. I propose that we do everything we can to squeeze the profits of corporations before we begin to eliminate people from our health care system.

New Initiatives

In addition to the construction of a new DMV facility in Sussex County and new funding for fighting cancer which I discussed last week, I would like to highlight the other few but important new initiatives in the proposed budget.

We have worked very hard and very successfully over the last decade to preserve farmland. This ensures not only that we maintain some of the look and feel of Delaware, but that we maintain our agriculture industry, a cornerstone of our local economy, as well.

But farmland isnt any good without farmers to work it. And the last few years havent been kind to farmers, with many on the brink of going out of business.

As recommended in last years Strategic Economic Council Report, I have proposed a small initiative, costing $600,000, to help Delaware farmers pay the cost of crop insurance. This will help farmers keep farming.

Even in tough times, I want to maintain our commitment to protecting children, especially those who are trapped in the dark and lonely shadows of abuse. Thats why I am proposing a $390,000 increase in the rates for foster care parents, an increase which will allow 100 families to care for the most difficult and distressed foster children in our state.

By reallocating expenses in Health and Social Services, we will be able to place 54 more disabled citizens into community settings including 24 from the Stockley Center.

I have included these new initiatives in my budget because, while they are relatively small sums of money, they will make a huge difference in the lives of some Delawareans.

Raising Revenue

The areas of expense reduction I have mentioned eliminating programs and positions, reengineering government and driving down mandated costs. These efforts make up just more than half of my proposed solution to our $300 million structural problem.

I do not believe that we can make further substantial cuts now without affecting the core services of state government: public safety, education, health and welfare services. I also believe it would be irresponsible to use one-time quick fixes to balance the Fiscal 2004 budget.

I believe at this time that the responsible response to the remainder of this challenge is a modest increase in our states revenue base.

During the flush times, we responded by returning excess funds to Delawareans in the form of aggressive tax cuts. The personal income tax, for example, has been cut nine times since 1980, an appropriate response by state government to return unneeded revenues to the taxpayers.

What we sometimes forget is that Delaware has also seen the need to increase revenues periodically as well, usually when we faced a weak national economy. Such tax increases were enacted in 1977, 1984 and 1991. They are needed again now.

What I propose to the General Assembly is a revenue package that will increase our revenues by $145 million in Fiscal 2004, slightly less than half of our $300 million structural problem. The package I am proposing is a balanced one.

I have studied our options carefully and am submitting moderate increases in areas that will cause the least pain to our citizens and our businesses.

No one wants to stand before you and call for tax increases. But leadership sometimes demands that we take on the tough issues now to prevent more severe problems in the future.

Let me describe the major elements of the revenue package.

Corporate Taxes and Fees

I propose today an increase of $89 million in the taxes and fees paid by corporations and other entities for the privilege of making Delaware their corporate home.

Historically, Delaware has enacted increases in these revenues about once a decade, reflecting inflation and the increasing cost of doing business. In 1984, Governor du Pont signed legislation with a 31 percent increase. In 1991, Governor Castle approved an increase of 43 percent. The increase I seek this year is about 17 percent.

Some 550,000 corporations and other entities make Delaware their legal home, and for good reason. We provide a sound legal structure, a superb court dedicated primarily to their needs, and excellent service through the Division of Corporations and a responsive General Assembly.

We have consulted with some key leaders of the business community and we are comfortable that these proposed increases are equitable and will not deter firms from continuing to make Delaware their corporate home. In the weeks ahead, we also will consult with the Corporation Law Council of the Delaware State Bar Association, which carefully reviews any proposed changes to our incorporation laws.

As I said, firms make Delaware their corporate home because of the many advantages that Delaware offers them.

At a time when were asking them to pay more to incorporate here, its especially important that we review the services we offer and make sure were doing everything we can to retain their business. I pledge to do so.

Cigarette Tax

The next revenue I propose is an increase in the cigarette tax.

Since 1991, Delawares tax has been at 24 cents per pack. This rate is far below our neighboring states, which all collect $1 or more. I am proposing an increase of 26 cents, which will make our new rate 50 cents per pack. This increase will bring in $23.5 million in Fiscal 2004, but will still leave our tax rate far lower than neighboring states.

Besides bringing in more revenue, an increase of this size should also bring about some reduction in smoking, especially among our young people. I sincerely hope that it will.

Decoupling

The third major component of my package is to partially cut our ties to the federal tax system, also known as decoupling. This proposal will return $14 million of revenue in Fiscal 2004, and could prevent the loss of even more in the future.

Because of the way we piggyback our state tax system on the federal tax system, a tax cut by the federal government often results in a drop in our state revenues. The two major tax bills already passed during the Bush administration will result in an estimated $36 million reduction in our revenues in Fiscal 2004. The dividend tax exemption proposed earlier this month by the President could cost us millions more on top of that.

The federal government can run a deficit, but our state constitution wisely dictates that we cannot. Like most governors, I had hoped that the President would include some financial relief to the states in his stimulus proposals, but he did not.

We cannot afford to remain so tightly linked with a federal tax system that causes such huge losses of revenue, all without a vote of the General Assembly.

Decoupling from the federal elimination of the estate tax will bring $14 million in additional revenue in fiscal 2004. The estate tax is paid by a very small number of Delawareans, about 300 a year. Only estates of $1 million or more pay any estate tax at all, and that amount will grow to $2 million in 2006. I propose setting Delawares estate tax at the level before the 2001 federal change, making Delaware one of the states that would not be tied to the federal estate tax.

If the Presidents dividend exemption is passed, I plan to submit legislation to decouple Delaware from that change as well, preventing another unbearable revenue loss.

Video Lottery

The final major piece of my revenue package is additional revenue from the video lottery industry.

I am proposing that we increase the states take by $16 million, or about 8 percent. Even with the effects of the Clean Indoor Air Act, the casinos remain a large and vibrant industry that can contribute more to the general fund during these difficult times for our state.

I believe that there are opportunities to increase revenue by strengthening the video lottery business, better preparing the industry to face the inevitable competition from Maryland and Pennsylvania.

I propose that we expand the hours when the tracks may operate and allow them additional video lottery machines to handle times of peak business. I propose the state take a larger share of the increased revenues that will result.

I also plan to submit legislation in March to permit a number of new marketing tools that will help the tracks become more competitive. I do not favor adding more casinos in our state, but I do feel that its appropriate to take steps that will strengthen our existing industry.

So the main elements of my revenue plan are: an increase in taxes and fees from the corporations; an increase in the cigarette tax; a partial decoupling from the federal tax system; and increased revenue from the video lottery industry. All together, this plan will bring Delaware an additional $145 million above the current revenue estimate for Fiscal 2004. It is balanced, it is responsible, and it prepares us for the future.

Conclusion

As has happened the past two years, there is the possibility the revenue forecast for the next fiscal year might improve between now and June 30. If it does improve, we must first look at what kind of revenue it is.

If we see one-time revenues increase, we must not use those short-term improvements to avoid consideration of these long-term revenue solutions. Instead we should look to use any one-time revenue increases for one-time capital projects, such as the Sussex County DMV facility or a biotechnology center in Dover.

The proposal I have presented today for eliminating the $300 million structural problem in the Fiscal Year 2004 budget is a balanced one, with a little more than half of the problem solved through cuts and a little less than half solved with new revenue.

The revenue package is balanced, with no one group of taxpayers shouldering the brunt of the increase.

The proposal I have presented today seeks to make government more efficient and effective while preserving the essential services of state government.

The proposal I have presented is responsible, because it does not use one-time quick fixes to balance the budget today in a way that could cause a serious, serious crisis tomorrow.

The proposal I present to you today is in keeping with our states tradition over the last 25 years of making responsible decisions that are focused on the future, even if they may be unpopular with some in the present.

As I said last week, many of us here have experienced these times of challenge before. We know we must set aside partisanship and work together. We must continue the tone of cooperation and mutual respect that has led this state from fiscal crisis to financial stability over the past quarter-century. We must continue to solve this challenge in the Delaware way.

In addressing our structural budget problem, we have a choice between the sustainable and the temporary, between the responsible and the shortsighted. I look forward to working with you to choose the right course for the people of Delaware.

Thank you.