Delaware's budget hole deepens by $35.6 million

Delaware's budget problem grew by $35.6 million on Monday.

Gov. John Carney and the General Assembly were previously facing a $350 million deficit, now they will need to find tax increases and spending cuts that amount to at least $385.6 million.

"As I have been saying for months, we have a structural budget problem that requires a balanced long-term solution and shared sacrifice," Carney said in a statement.

The news prompted Carney's budget director to issue a memo to cabinet secretaries and department heads urging them to curtail new hiring, employee reclassifications, and contracting, among other spending.

The Delaware Economic and Financial Advisory Council estimates the state will have about $3.9 billion to spend in the next fiscal year, which starts July 1.

That is $242 million less than that it had to spend for the current year. The cost of growing school enrollment, Medicaid and other government programs is automatically growing by about $150 million.

That means the state is short nearly $400 million — roughly an eighth of its total budget, budget director Mike Jackson said.

"It is a significant challenge," Jackson said. "But it isn't something we haven't overcome in the past as a state, working collaboratively with senators and representatives in the General Assembly."

There will be three more DEFAC projections before a budget is finished in June. Carney is expected to release his spending plan, which legislators use as a starting point, on Thursday.

CONTEXT: Get a sense of what kind of cuts and taxes this could spur

Before he left office, former Gov. Jack Markell released a budget proposal that raised taxes on income, incorporation and cigarettes while cutting budgets across state government and reducing employee health care benefits, among many other changes.

Secretary of Finance Rick Geisenberger said the state's biggest financial problem is that corporate income taxes and proceeds from unclaimed property are falling off.

"That's a structural challenge, where resources aren't growing with national or local [economic] growth," he said.

When asked how Gov. Carney intended to fix the structural budget issues, Geisenberger said to "stay tuned Thursday."

Some of these sagging revenue sources could get worse before they get better.

Unclaimed property has long been a Delaware cash cow, bringing in hundreds of millions of dollars a year, but it has recently come under legal siege. A federal judge blasted Delaware's strategy of collecting unclaimed property, saying the state was too zealously auditing companies and seeking property going back before companies had records.

State officials rewrote the law in hopes of preserving some unclaimed property money, but experts say the state will likely never collect as much from that source as it once did.

The deepening budget hole will make it even harder for Carney and other state officials to fulfill the many requests for new spending.

Perhaps the most urgent is the call to fix staffing shortages at Vaughn Correctional Center in Smyrna, where a correctional officer was killed during a Feb. 1 siege.

Carney plans to add 50 new officers at Vaughn and 25 new officers at Baylor Women's Correctional Institution next year, which would cost $2.3 million. He also wants to spend $1.2 million on new equipment next year. But the union that represents correctional officers says the state won't be able to address under-staffing without better pay.

Carney's administration has said it is studying possible pay increases, but he has not explicitly said he would include them in his budget proposal.

Meanwhile, Carney has told other groups that their calls for new spending won't be answered this year. He told members of the Wilmington Education Improvement Commission that the state can't afford its plan to redistrict city schools and provide more money to high-poverty schools, though he did say he was considering changes to give more money to help serve at-risk students.

Contact Matthew Albright at malbright@delawareonline.com, (302) 324-2428 or on Twitter @tnj_malbright.