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Delaware’s damning debt

A huge benefit to working for the state: a pension. But what if your pension is unfunded—and has been for years? Not only should state employees be concerned about their future retirement, but lawmakers and taxpayers should pay attention to what may be a looming fiscal crisis.

Delaware’s $1.9 billion in unfunded pension benefits have been largely ignored for years. This total is massive: for perspective, our pension debt is more than a quarter of the state’s annual budget. Instead of addressing it, lawmakers continue to eye pet projects and kick the can down the road. Their willing ignorance to the issue is not sustainable or beneficial for the state.

Delaware’s fiscal condition is ranked 44th in the nation, in part due to its unfunded pension deficit, and is why Truth in Accounting’s audit of Delaware’s financial situation resulted in an F grade.

Last year’s surplus of $200 million would cover 10% of the state’s pension debt, and only 1.7% of the overall state debt of $12 billion. Each Delaware taxpayer would need to contribute $24,000 in order to offset the debt.

Federal data shows that public pension debt nationally is increasing much faster than the growth of the economy, and state and local government pensions have failed to fully fund the new benefits earned by employees each year, let alone address current debts.

Part of the issue stems from repeated pushing for increased benefits in terms of health care and pensions in addition to increased wages and salaries. Additionally, governors and legislators often lack the courage to set aside the amount of money their analysts told them the state would need to add into the pension funds. Delaware is no exception here.

Delaware will eventually be obligated to pay its pensions, but may not have the money to pay for them when that day comes. That would hurt other budget items if money needs to be shifted to cover pensions, or will hurt taxpayers if they are asked to pay more.

In an interview, Warren Buffett explained the effect this issue might have on individuals and companies looking to establish themselves in a state with underfunded pensions:

“I say to myself, ‘Why do I wanna build a plant there that has to sit there for 30 or 40 years?’ Because I’ll be here for the life of the pension plan, and they will come after corporations, they’ll come after individuals…[T]hey’re gonna have to raise a lotta money.”

Chicago, which also has a pension problem, handled it just how we hope to avoid in Delaware. Mayor Rahm Emanuel initiated numerous taxes, from a large property tax hike in 2014 to a 911 communication tax. These taxes resulted in the average Chicagoan paying around $1,700 more in taxes each year.

People vote with their feet, and Delaware is already teetering on shifting into an exodus with a poor education system, a bad business climate, one of the highest income taxes in the nation, and more taxes on the table. If our lawmakers continue to ignore this issue, we could be facing a real problem.

With a current surplus from massive federal stimulus, and more money potentially on the way, Delaware could address its current unfunded debts without forcing future generations to foot the bill. This would leave the state prepared to manage new pensioners and forge a better path for the state’s budget.

One Program is A Quarter of Delaware’s Budget!

Delaware’s budget has some glaring issues that lawmakers continue to ignore: unfunded pension benefits, an anemic Rainy Day Fund, and the ballooning cost of Medicaid. In light of COVID-19 and the recent spike in healthcare demand it created, Medicaid may be the issue lawmakers need to tackle first.

Delaware’s Medicaid problem started before COVID: according to the Federal Bureau of Labor Statistics, the cost of healthcare has been rising at a pace 5.2% per year. This is concerning as it is higher than the 1.4% inflation increase over recent years. Delaware’s spending on healthcare for Fiscal Year 2021 has been estimated at nearly 40% of the state’s budget.

This is a dramatic increase from the historic 17% that Medicaid used to claim of Delaware’s budget. Currently, 59% of Delaware’s Medicaid program comes from the federal government, which is scheduled to decline slightly in the near future.

Since its start in 1965, Medicaid funding has been a joint state and federal effort. The federal government creates the ground rules for state participation in the program in exchange for large subsidies to the states. Before the Affordable Care Act (ACA), states received a “match rate” based on states’ per capita income, where higher-income states had a 50% match rate, and lower-income states received higher percentages. Each state then funds the difference with general state revenues and taxes on health care providers.

The ACA’s Medicaid expansion covered newly eligible adults with 100% federal funding from 2014 through 2016, but was reduced to 95% in 2017, 94% in 2018, 93% in 2019, and 90% thereafter. The ACA essentially duped states into expanding their Medicaid programs: the initial “free money” prompted 30 states, including Delaware, to take the deal.

This has wrecked state budgets.

The Associated Press says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment crushed estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%. The additional enrollees equal additional costs.

Rhode Island has one-quarter of its population on Medicaid, and the program consumes roughly 30% of all state spending. To fix this growing problem, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange. Delaware’s Medicaid burden is even higher at almost 50%: so what will that mean for taxes here?

States increased their FY 2015 spending by the biggest margin in more than 20 years, due to huge leaps in Medicaid spending under the first full year of the ACA. The national cost of the $500 billion program is expected to rise to $890 billion by 2024.

Just like many other areas, more money doesn’t mean better outcomes. Around 55% of doctors in major metropolitan areas refuse to take new Medicaid patients and Medicaid enrollees who do find a way to see a doctor typically experience outcomes worse than those under private insurance: more in-hospital deaths, more complications from surgery, worse post treatment survival rates, and longer hospital stays than similar patients with private insurance. Often the only place a Medicaid enrollee currently can get healthcare is in an emergency room or hospital, both of which are very expensive to the system.

The answer that will seem the most logical to Delaware lawmakers will be to increase taxes, but this is an unsustainable model. As the cost grows, so will taxes—for as long as it continues to expand, which may be indefinite without reform.

A better answer to this problem is to repeal Delaware’s outdated and harmful Certificate-of-Need laws, also known as the Delaware Health Resource Board. This entity drives up costs and limits access to care. Without this in place, Delaware could save $270 per capita in healthcare costs and could add 5 more hospitals to serve its residents. With cheaper and more accessible healthcare, there may be another option available for some Medicaid enrollees, and some of Delaware’s budget that could instead go towards other necessary programs, or even result in lower taxes on residents who are already seeing increased taxes with a poor taxpayer return on investment.

The time is now to address our ballooning Medicaid issue.

The best budget fix? Less spending.

It’s no surprise that Delaware lawmakers continue to promote new taxes and tax increases to cover their bloated spending. This has become the new norm and is likely to continue as healthcare spending balloons, new programs are established, and administrative costs climb.

Delaware spends more per capita than it’s neighboring states Pennsylvania, Maryland, and even New York. In fact, Delaware’s state and local government expenditures are higher than 43 other states, but why?

Our health care funding is out of control but has yet to proven to be worth it, with poor health outcomes and limited access to care. Our growing education budget has not improved the landscape for our students either.

No wonder our taxpayer return on investment (ROI) is 44th in the nation: Delawareans just aren’t getting any bang for their buck.

Despite this, we keep taxing and spending. The spend-then-tax structure that has been utilized through recent sessions has been to the detriment of many Delawareans, who cannot afford to pay more taxes, especially during the pandemic.

This spend-then-tax structure also impacts the businesses that provide jobs to Delaware citizens. Since the 2007 recession, state lawmakers have raised every Delaware business tax, many of them multiple times. These tax increases have been passed on to the people in higher prices and lower gains in wages. And it’s about to happen again.

At some point, taxpayers can’t afford to dole out their hard-earned money to cover an irresponsible spending structure. Instead of looking for new and pervasive ways to fund the budget, lawmakers should consider re-evaluating certain costs, programs, and regulations in order to reduce our spending.

This system isn’t just a burden, it’s unsustainable.

Delaware lawmakers could look to Illinois, who is looking to finally address their budget crisis. The state is considering adopting pension reform, right-sizing its union contracts and focusing education spending on classrooms instead of on administrative bloat.

If Illinois had implemented this plan just four years ago, the spending reforms would have saved a total of $12.6 billion, the bill backlog would be $4 billion lower, and could have enabled cutting the income tax. Illinois lawmakers could issue the tax cut as early as fiscal year 2024, or use surpluses to add to the state’s rainy day fund.

Delaware too could benefit from these exact measures.

There have been measures proposed in recent years to address this that continue to stall. The bipartisan Governmental Accountability Act would require agency evaluations for budget proposals and would promote more efficiency state spending. The constitutional amendment to codify our current budget stabilization measures would ensure that future Governors are also mindful of state spending by not allocating one hundred percent of the budget.

Implementing these measures that have already been drafted and proposed would help set up the First State for a better future, just as Illinois is attempting to do.

We can never escape this game of playing catch-up with our current model. Taxpayers will continue to carry the burden of the state as spending grows and unfunded debts climb. This is far from the path we should take to ensure a better future for our residents, families, and businesses.

Delaware’s Stimulus Sugar High

While Delawareans have been tightening their purse strings, Delaware’s nearly $5 billion budget continues to bloat, with spending increases, pay increases, and several massive one-time spending projects. The total of these projects is $260.5 million of taxpayer cash, $60.5 million more than the expected “surplus” of $200 million last year, which was simply the exact revenue total generated by Carney’s tax increases in his first year as Governor in 2017.

The federal stimulus “sugar high” allowed the Governor to bring up these massive pet projects once again. While Delaware’s expected revenue shortfall for FY 2021 was avoided, it was only due to $900 million in federal monies from the CARES Act that were drastically out of proportion to the state’s direct COVID-related expenses.

Carney touted Delaware small businesses received 83% of the CARES Act funding that has been spent so far, but this is only due to a tough fight from business leaders and multiple chambers of commerce—after months of pleading for assistance.

It took 69 days, a weak regional effort, and continued pressure from various stakeholders to finally establish Delaware’s Pandemic Resurgence Advisory Committee, and Delaware’s efforts to help its own businesses were next to nonexistent, spare the H.E.L.P. loans that are only available to the hospitality industry.

It’s wasn’t that we couldn’t afford to help our small and family-owned businesses: we had just given $2.5M to a British bank that only a year prior took 500 jobs out of Delaware. Our leaders simply chose not to help.

At the start of the pandemic, Delaware’s senior most politicians admitted their focus was not to help businesses. Other states with more favorable business climates had already recognized the importance of this assistance and taken steps early on to mitigate the problem, but Delaware continued to hold off on state assistance and releasing CARES funds once they were received.

Instead of helping, Delaware General Assembly leadership sent a letter to Rep. Lisa Blunt Rochester and Senators Chris Coons and Tom Carper, begging that federal funds be opened up to be used for other purposes than addressing COVID-related expenses, like the state budget. Luckily for Delaware businesses and workers, the package was restricted to COVID-related funding, and could not be spent for traditional budget items.

After months of delay (which exacerbated Delaware businesses’ needs) the state finally released the money meant to help them recover, once they realized their blanket spending requests would not be met.

The state’s current revenue is propped up from two federal stimulus packages that are a false safety net for the economy and generating one-time increased tax revenues, like those from our the highest in the nationreal estate transfer tax, and worst in the nation corporate tax burden. Rick Geisenberger, Delaware’s Finance Secretary is weary of assuming stable revenues as the pandemic still has no end in sight.

More focus should be on preparing for other budget catastrophes, like those seen in 2008 and 2017. Delaware ranks 45th in the nation for short-term financial stability, yet we spend as if the future is guaranteed. The Joint Finance Committee reviews and authorizes the Governor’s budget during the month of February: call the JFC members if you’re concerned about the lack of rainy Day Funds, the unfunded pension liabilities, the ballooning Medicaid costs, and the repeated delays in support for small business.

The Governor’s budget kicks the can

Governor Carney announced his proposed Fiscal Year (FY) 2022 budget of $4.7 billion last week, a 3.5% increase from FY 2021. Although this meets the Delaware Economic and Financial Advisory Council (DEFAC) benchmark and replenishes reserve funds used during the pandemic, it also continues to kick the can down the road on major items.

The current budget proposal continues the trend of prioritizing spending increases, pay increases, and several massive one-time spending projects, instead of addressing long standing issues like a comparatively small Rainy Day Fund, unfunded pension obligations, and a ballooning health care budget.

Delaware’s percentage of its budget in Rainy Day Funds is less than 31 other states, resulting in only 20 days of operation on reserve funding. Delaware’s Rainy Day Fund allocations have been below the 50 state median since 2017. The COVID-19 pandemic and other recent state budget crises in 2017 and 2008 should push us to do more to build up these reserves.

Without the CARES Act federal assistance, which was drastically out of proportion to the state’s direct COVID-related expenses, our Rainy Day Funds would have only lasted us for 6% of the Governor’s State of Emergency that has been in place for over 300 days. When the next revenue crisis comes, Delaware may be forced to go back to bad practices like raising taxes to make up the difference, since our reserves are anemic.

Even more concerning is the state’s $1.9 billion in unfunded pension benefits, which have been largely ignored for years. This total is massive: for perspective, our pension debt is more than a quarter of the state’s annual budget. Our pension crisis is looming, and lawmakers have continued to turn a blind eye as they allocate surpluses to pet projects.

The responsible thing to do with any surplus at this point is put it towards paying down this debt. Last year’s surplus of $200 million would cover 10% of the state’s pension debt, and only 1.7% of the overall state debt of $12 billion.

If the legislature is forced to pay out its obligations at some point and turns to the taxpayer, each Delaware taxpayer would need to contribute $24,000 in order to fix the financial crisis. This is why Truth in Accounting’s audit of Delaware’s financial situation resulted in an F grade, because we are failing our residents and future.

Perhaps the biggest and most visible concern that we continue to kick down the road is Delaware’s unsustainable health care costs. For a long time, Medicaid was approximately 17% of the state’s budget, but in recent years has risen to over 25% of the budget.

For now, over half of Delaware’s Medicaid program comes from the federal government, but that money is expected to shrink in the future, placing the burden on the state. Delaware’s health care budget is already one of the highest per capita in the nation, and cannot sustain any more growth.

Delaware leaders must look to alternatives to our current system, especially since Delaware’s health outcomes are extremely poor compared to other states, despite the massive spending. Taking steps like eliminating the Delaware Health Resources Board, which raises costs and limits access to care, would be a step in the right direction to allow for a better system.

As we move into Delaware’s budget hearings throughout the month of February, it is critical for the Joint Finance Committee (JFC) members to stop kicking the can down the road. With the cushion of federal money and a resulting surplus, now is the time to address our budgetary concerns that could cripple us in the near future.