Delaware Budget-Writers Could Look to Reserves

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With Delaware state revenues flagging due to the coronavirus (COVID-19) economic disruption, there is a possibility budget-writers could look to two reserve accounts to bridge a shortfall.

The first of these reserves, often referred to as the Rainy Day Fund, is one of the most misunderstood mechanisms in state government.

Adopted in 1980, Article 8, Section 6(d) of the Delaware Constitution established a “Budget Reserve Account within the General Fund.” Although commonly known as the “Rainy Day Fund,” that name does not appear in the law.

Under limits also contained in the constitution, government officials cannot spend any more than 98% of projected revenues, leaving a 2% buffer of “unencumbered money.”

After the end of the fiscal year, a portion of the remaining unencumbered funds (if any) are paid into the Rainy Day Fund if it is below its statutory limit. The fund is capped at 5% of estimated General Fund revenues. At present, it contains $252.4 million.

Delaware law states the General Assembly can appropriate the Budget Reserve Account “as may be necessary to fund any unanticipated deficit in any given fiscal year or to provide funds required as a result of any revenue reduction enacted by the General Assembly.” Any appropriation from the fund requires a three-fifths vote (60%) in both the House of Representatives and the Senate.

Despite the broad language of the statute, lawmakers and executive branch officials have come to view the Rainy Day Fund as something never to be touched short of a catastrophic occurrence. It has never been tapped, even in 2009 when the state faced a FY 2010 budget gap topping $750 million.

Delaware is among the fewer than one-third of U.S. states with the highest AAA bond rating. As a result, the state can borrow money at lower rates, saving taxpayers millions-of-dollars annually. Some state officials have attributed the rating, in part, to the untouchable nature of the Rainy Day Fund, although this point has been disputed.

The Pew Charitable Trusts issued a series of reports identifying best practices for building better rainy day funds, “emphasizing that states should study how sensitive their tax systems are to economic volatility; identify concrete objectives and an appropriate savings target; link deposits to economic or revenue growth; and establish withdrawal conditions that encourage use during periods of fiscal stress.”

A second reserve account was established about two years ago by Gov. John Carney under Executive Order 21. The Budget Stabilization Fund is available to be used to cover unexpected budgetary shortfalls. There is currently $126.3 million in the account.

Lawmakers will have more than two months to consider their options and the constantly shifting economic conditions. A new state operating budget must be enacted by July 1.