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After
adjusting for additional revenue from Governor Ruth Ann Minner's
fiscal package, enacted by the General Assembly in June, the
council at its meeting on Sept. 15 will project general fund
revenue in the year ending next June 30 to total $2,586.3
million. That would be up from $2,436.4 million actually
collected in fiscal 2003.
However,
the adjustment, which was made by the state Department of
Finance after the council's June meeting, injected $179.3
million into the forecast. Without the adjustment, projected
fiscal 2004 revenue would be $29.4 million less than last year.
The
adjustment included $24 million more than the amount originally
ascribed to the revenue package because the earlier estimate did
not take into account the retroactive feature of the increase in
franchise taxes and fees. As first reported by Delaware
Grapevine, state officials were embarrassed by the oversight and
did not make it public. Although the retroactivity applies to
the last half of fiscal 2003, the money was not actually
collected then and will be accounted for as fiscal 2004 income.
The
council will forecast fiscal 2005 revenue to total $2,698.2
million. Its year-ahead forecast governs the budget for the
coming year, which the governor will recommend in January and
the Assembly will enact next June. The September estimate,
however, is considered to be preliminary. What it comes up with
in December will be meaningful for the governor's budget
recommendation and the figure, as it is refined next
spring, will determine what the Assembly can do.
A large
chunk of the advisory council's likely upside adjustment over
its June forecast represents an expected increase in escheat
income. That is what the state realizes from so-called abandoned
property -- assets for which brokers, banks and companies cannot
find owners, which the law requires they turn over to state
government. The finance department told the council's revenue
committee that, following a thorough review over the summer of
collection activity now underway, it expects to bring in $230
million, or about 8% of the total state budget, this year. In
June, it was looking for $158 million.
On the
negative side, the committee will recommend and the full council
is likely to agree to knocking $15.4 million off its previous
projection of income from the corporate franchise tax. That
would partly offset the $92.1 million upward adjustment to that
income stream from the fiscal package. The tax is now expected
to net $505.3 million, about 20% of the total budget.
The
committee was told that the number of corporations chartered in
Delaware is contracting, partly as a result of mergers and
partly as a result of conversion to limited partnerships and
limited liability corporations. While there has been only a
handful of initial public offerings of corporate stock, this
calendar year is expected to see a record number of the limited
liability firms established. The council now projects a 105%
increase in income from that revenue stream, but it accounts for
only about 2% of the total budget.
David Gregor,
the Department of Finance staff member who prepares and presents
its forecasts, told the revenue committee and will tell the full
council that increased emphasis on escheat collection in recent
years has turned what previously was regarded as an iffy source
of state revenue into a more steady, albeit still
difficult-to-predict, one.
It was a
significant escheat collection, cited by the governor as a
'windfall' in autumn, 2002, which brought in $45 million and was
credited for the lessening of the budget crunch then being felt.
Gregor said another $11 million is anticipated from that source
-- which he and other state officials have not identified -- and
that an audit now underway could yield a comparable result,
possibly in this fiscal year.
Moreover,
he said, 16 audits in the last fiscal year brought in an average
of $2.5 million each and 46 others netted an average of
$260,870.
He said
the number of firms which are regarded as regular providers of
escheat income "has shown no signs of contracting" and added
that "the case inventory [in the enforcement program] "has never
been stronger."
The
department now has two employees devoting about 95% of their
time to escheat activity and is in the process of hiring
another. That compares to one devoting about 20% of his time to
escheat activity two and a half years ago. There are now five
auditing firms and two firms which specialize in dividing firms'
escheat money among states entitled to receive it. That compares
to one of each type previously. The number of active audits has
incrased from five or six to about 100, of which 20 to 40 are
expected to be completed in this fiscal year.
In
addition, the number of firms which are coming forth voluntarily
to make payments to Delaware has grown over that period from
between 30 and 40 to 170. Of those, 60 to 80 are expected to
reach settlement during the next six months but to be replaced
by an equal number of new offers. Moreover, Gregor said, holders
of money subject to escheat "know there is no way they can make
a deal with us" and get off by paying less than what actually is
due.
While the
outlook appears favorable, he cautioned that there is a
potential bubble-buster lurking nearby. Delaware, he recalled,
benefited in 1993 from a U.S. Supreme Court ruling which held
that a firm's state of incorporation and not its principal place
of business determined which one should get escheat payments.
Delaware brought one of two cases involved in that ruling
against New York, where most major brokerage houses are located.
Proposed legislation was introduced into Congress the following
year that would have overturned the ruling as regards future
payments, but a settlement among the states involved in the
cases -- Texas and Virginia were the other two -- halted
legislative activity. That 10-year agreement expires in 2004.
Also in
the 'what's coming next' category, the committee was told that
Delaware appears likely to loose more than half of its revenue
from slot-machine gambling by fiscal 2006 if Maryland and
Pennsylvania soon enact legislation permitting such
establishments. The bigger hit -- a 41% decline in revenue --
would come if Maryland does so. In both states, proposals to
legalized slots gambling have been the subjects of considerable
political controversy.
Those
estimates are based on a study using the home addresses of
winners of large pots, who are required to report that for tax
purposes, and assuming they are more likely to patronize
gambling venues closest to their homes. Two-thirds of the big
winners at the three Delaware establishments hailed from out of
state. The study, however, does not take into account likely
promotional efforts by the Delaware venues or such intangibles
as customer loyalty and perceived ambiance and other factors
which might attract out-of-staters.
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