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Solutions for the Budget Shortfall

Dover, Delaware - Delivered by Governor Jack Markell - March 19, 2009

Thank you for coming. This will not be easy to hear, and these decisions were not easy to make. But these are difficult times that deman
difficult choices. We have no choice but to rise to the challenge.

As you know, our nation is confronting its most profound financial challenges in at least sixty years. And Delaware is not immune. The
people of Delaware are struggling to keep their jobs, their homes and their health care. Many are struggling to put food on the table.

The revenues that pay for the services provided by Delaware’s state government have been hit hard – just when those services are
needed most. The result is a budget shortfall larger than anyone could have imagined - $750M. And it may get bigger.
Our solution to this historic challenge is a balanced plan, guided by the principles that:

Our decisions will be fiscally responsible,

We will be compassionate by keeping our government’s core commitments and

We will spread our sacrifices so no one citizen or group bears a disproportionate burden of this challenge.

Our plan relies mostly on cost cutting, but it does raise revenues. It is not perfect, and there are many elements of it that I would prefer
not to have to propose. But I believe it is a responsible and reasonable approach to a historic challenge.

We are open to discuss other ideas to meet our financial challenges, and in fact encourage your ideas because the $750M we face now
may be our best-case scenario, if the fundamentals of the national economy do not improve.

[Slide : Our exposure to the national economic crisis]

Over the last six weeks, during the 50 briefings on the budget challenge we held across the state, one of the questions we were most
often asked is – how did this happen?

More than most states, Delaware was exposed to cracks in the foundation of our national economy. Delaware’s reliance on manufacturin
and financial services made our hit particularly hard. As you can see here, our unemployment rate nearly doubled over the last 12
months to 6.7% and will get worse as employees laid off at the end of last year continue to enter the unemployment rolls.

Not surprisingly, Delaware’s revenue streams have been hit hard as well. Personal and corporate income taxes, bank franchise taxes,
dividends and interest, real estate transfer taxes and corporate franchise taxes, among others, are suffering from the fallout of the nation
economy. There are fewer people coming across the state line to shop in our stores, reducing their revenue and the state’s income.

Unlike most businesses, when revenue drops along with demand, our revenues dropped at the same time people need government mo
for things like Medicaid, housing assistance, increased use of the courts, even students moving from private to public schools.

[Slide: Declining revenues present historic challenge]

The results have been severe. Last June, we expected our revenue for 2010 to be $3.542B.

In September, as the dam was beginning to break on our financial markets, our revenue projection fell to $3.451B.

By December, the revenue expectation collapsed to $3.085B – almost a half billion dollar drop, creating a $600M shortfall, larger than an
in state history.

But even that historic deficit falls short of our current challenge. At the March forecasting meeting, our revenue fell yet again, by anothe
$150M to $2.9B.

[Slide: Historic decline continues]

As you can see, this is a sobering trend. It is very possible that, when we enact a balanced budget on June 30th, as we must do by law
the decisions will be even more difficult because our deficit could be greater.

The hurdles may only get higher - the decisions more critical.

There are no easy answers to solving this challenge and as you can see, the trend does not appear to be in our favor. We now face a
$750M shortfall.

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This is more than the cost of every dollar in state support for our teachers. More than the entire combined budget of 14 departments,
including Homeland Security, which includes our State Police.

And the forces that led to that drop -- economic insecurity, rising national and local unemployment, a soft financial market – mean that
each month we move forward, that shortfall may well grow.

[Slide: Other states propose severe solutions]

The national nature of this challenge means that other states face similar shortfalls, although much smaller on a percentage basis, and
they’re proposing severe actions– layoffs, criminals released early back into the general public, cuts to cancer care, reductions to
homecare for the vulnerable disabled and elderly.

[Slide: Delaware’s decisions guided by core principles]

So the question is – where do we go from here?

We approached each of our solutions with three guiding principles that informed each decision.

To solve this shortfall, we will:

1) Demand fiscal responsibility. Reductions and new revenue proposals must be real, sustainable and position us for economic grow
We should avoid irresponsible cuts that generate short-term savings at the expense of long-term prosperity. We should not make
long-term commitments based on short-term funds.

2) Exercise compassion by keeping our government’s core commitments. What are they? I believe we must ensure the health and
safety of our families, foster the growth of our economy and protect the quality of our air and water. We must give every child an
opportunity to succeed. Assist our senior citizens and those with disabilities when needed. Protect the rights of all of our citizens at all
times. This budget keeps those promises, and pays our legal obligations such as debt service and Medicaid.

3) Ensure shared sacrifice. No one person or group will bear a disproportionate burden of this challenge alone.

[Slide: Closing the ~$750M gap will require a combination of spending cuts and new revenue]

We held over 50 meetings across the state over the last six weeks to hear suggestions from the people of Delaware on how to solve thes
problems. We read through thousands of ideas from our fellow citizens on how we might cut costs. We worked with every agency to ma
clear our priorities and then worked with them to find solutions. We had to identify programs and services that so many of us viewed as
helpful and valuable but that we simply cannot afford anymore.

There were, and are, frankly, no easy answers -- just critical choices.

Guided by our principles, our solution to the $750M shortfall would:

Reduce spending by $331M

Reallocate special funds by $40M

Leverage $155M in federal stimulus funding

Raise $55M by re-authorizing a sports lottery and getting a fair deal for Delawareans

Increase our revenues by $166M

And raise fees and fines by $12M.

We cut much more than we raise. We looked line by line for savings. And, to be fair, we made sure the cost of these solutions were
shared across the state.

[Slide: Stimulus dollars have limited effect on the shortfall]

Although headlines have said that hundreds of millions of dollars are coming to Delaware through the federal stimulus bill, the truth is
that much of that money is tax cuts or credits that go directly to citizens; funding that goes directly to local governments; or specialized
spending focused on targeted areas such as schools, roads, energy and health.

In fact, just $155M is available to help us meet our shortfall.

I have appointed Lt. Governor Denn to be our state’s “Stimulus Czar” and launched the Governor’s Stimulus Solutions Group to ensure
we can make the most of the stimulus. While we have worked, and will work, across each agency to ensure we can make the most of th
opportunity to create jobs, the President was clear that this help is one-time assistance whose primary goal is to get people back to work

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on projects that matter.

These funds will not be here for us in the near future and cannot be counted on in any way as a long-term, sustainable solution to our
problem.

[Slide: Eliminate waste and inefficiencies]

From the beginning of my administration, we made job one reducing waste and inefficiency and finding common sense solutions to
ensure taxpayer money is spent wisely.

If people are going to have faith in their government, the government must be responsive, responsible and accountable to them. These
decisions just made sense. We are reducing the size of the state’s vehicle fleet by 20% and are limiting the use of take-home vehicles.

We restricted all non-essential travel.

We turned the thermostats down and launched other energy savings measures in state buildings.

And we are slashing both capital outlay and consultant costs. The cost of consultants working for the state will be reduced by millions.

[Slide: Savings Found from Performance Review]

Those are short-term solutions. To set us up for long-term economic growth, we need to make sustained changes in how government
does business. My first act as Governor was to tackle some of the waste and inefficiency inherent in government by taking what we call
“Honest Assessment” of state government, including a statewide performance review that is examining every department and division.

We received hundreds of suggestions from citizens and state employees from interviews and our website ideas.delaware.gov, including
the suggestions you see here. In the weeks and months ahead, we will continue to look for ways to cut costs and create efficiencies an
will continue to seek out suggestions. These ideas will take some time to implement, but could save us additional millions by the end of
next year.

[Slide: Reallocate special funds]

The budget also keeps critical services at existing levels by reallocating some special funds to the general fund.

It eliminates $38 million in dedicated revenue earmarked for farmland preservation, open space preservation and DelDOT and moves tha
money to the general fund operating budget to support direct services such as education and public safety.

[Slide: Cuts, Programs, Grants and Services]

Any time is a difficult time to ask for additional revenue, but this economic downturn makes that request even more difficult. Before looki
for any additions to the state’s top-line, we have to make meaningful cuts to our state’s bottom line.

We need to take a hard look at where state government spends its money, and decide what our core commitments must be to keep.
These were not easy decisions.

Each of these cuts represented something government was doing that was worthwhile.

But they were cuts we had to make to keep our core commitments.

The result was $188M dollars in savings.

We propose grounding the state police airplanes to save more than a half-million dollars.

We propose withdrawing state funding for two small museums. We propose saving significant dollars by eliminating the Delaware Healt
Care Commission and saving $7.7M by reducing the number of in-service days for our public school teachers from six to three.

[Slide: Programs, Grants and Services, cont.]

We will act on ideas from state employees and from public citizens, who offered them in meetings and through ideas.delaware.gov. We
made hundreds of reductions to programs that we would love to fully fund, if our challenges were not so great and our focus not solely
based on what we need to do, as opposed to what we would like to do.

Some of them are listed here.

These cuts maintain our core services as best as we can. They do not create long-terms costs for short-term gains, and keep our state
positioned for economic growth.

As we made these decisions, we had to turn to what is, by far, the largest percentage of Delaware’s expenses.

Almost 46% of our costs go to pay our state employees. Our teachers, our social workers, our State Police, our nurses … public servan

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of every stripe.

We have no choice but to ensure that government will be smaller by 2011. By keeping our hiring freeze in effect and by reducing the siz
of government through retirements and attrition, we will meet that goal and save several million dollars each year.

But that is not enough. To meet the challenge before us, we must reduce the total cost of our state workforce and we must do so now.

Businesses and other governments around the country are laying off thousands of employees each week and given our revenue shortfa
we, too, had to consider layoffs.

We recognized that the demand for state services was going up at the same time we had to consider letting people go. We recognized
that laying people off could create additional financial obligations in the form of unemployment benefits.

But most importantly, we heard over and over from state employees that they would prefer a shared sacrifice where everyone gives up
something instead of some giving up everything.

[Slide: Employee Costs]

So we decided for now to focus on the area of shared sacrifice.

To that end, we are proposing a temporary 8% across the board cut in the salaries of all state employees, which will save us $91M in
fiscal year 2010.

This proposal trades three fixed holidays per year for state employees for three floating ones, which will allow us to cut back on overtime
costs and save an additional $1M.

This proposal will, for the time being, freeze career ladder adjustments for an additional $1.2M in savings.

The state pays almost $400M per year for employee health care. And while full-time state employees will continue to receive medical
benefits, we will support legislation to eliminate the “double state share” for married state employees. In addition, we propose instituting
an in depth evaluation of the state’s health plan for employees and retirees with the expectation that employees and retirees will pay for
larger portion of their health care than they do today -- a portion that will be closer to but still significantly less than most Delawareans
pay for their healthcare.

This combination of salary and benefit reductions means the average state employee will be taking home 10% less next year than they d
today.

To reach the same amount of savings by layoffs instead of salary reductions, we would have had to lay off 1,500 people.

This decision, while difficult, keeps our public servants employed and our core commitments met without adding to our unemployment
rolls.

[Slide: New Revenue]

Unlike the federal government, we cannot borrow our way out of these difficult times.

And while far more than half of our budget solution is cuts and reductions, those cannot be our only solutions, not when our families, ou
friends, our neighbors, our seniors, our children and our small businesses are turning to state services more than ever.

We need to seek additional revenue.

I said earlier that no one person or group will bear a disproportionate burden for this budget shortfall alone, and that is as true in our
sources of revenue as it was in the hundreds of millions of dollars we cut from the budget.

We have tried to be fair, and balance the needs of families and the businesses that employ them. We have tried to be very careful and
precise not to put more pressure on families that can least afford it and not lean too heavily on one sector to bear too much of the load.

By increasing the cigarette tax by $0.45 per pack, we will raise an additional $37M over two years– enough to keep open and operate ou
state’s Veterans Home.

By increasing by 50% an alcohol tax that has not been reset in decades, we will generate $9.5M over two years–enough to cover the cos
of our Children’s Health Insurance Program.

By increasing the top marginal rate by one percent to 6.95% for individuals in our top state tax bracket -- those making more than $60,00
annually -- we should generate $108M over two years – roughly the cost of keeping 1,134 inmates incarcerated. Again, this new rate
applies only to income in excess of $60,000. Individuals who make less than $60,000 will not be affected and individuals who make more
will only pay the extra one percent on money over $60,000.

[Slide: New revenue, cont.]

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By raising the top rate for corporate franchise taxes to $180,000 and increasing the multiplier from $250 to $350, we will generate in two
years approximately $170.6M, or enough to fund the operations of our state police.

By rolling back the gross receipts tax cut and resetting its rate, we generate $26M over two years – enough to fund the state share of
nearly 400 public school teachers.

And a public utility tax is expected to generate $15.0M over two years – which is the cost of protecting our state’s water quality.

[Slide: Sports Lottery]

There is another way to generate revenue. It does not come from raising taxes and it helps solve our shortfall without making cuts to our
core services. It also will put people back to work, which is critical.

I believe the time has come for Delaware to reauthorize a sports lottery.

The proposal we are putting forth allows us to capture what I believe is the best deal for Delaware.

The plan will help the economy, create jobs and help shrink our state budget shortfall by capitalizing on our competitive advantage and
ensuring that the citizens receive a fairer share of what will likely be an increase in gaming revenues.

Specifically, I am proposing that we re-authorize a sports lottery at the three existing racinos; extend that opportunity to up to 10 other
venues such as sports bars and entertainment centers; and add up to three more casinos, which would also feature sports betting and
video lottery machines.

I am also proposing we increase the state’s share of video-lottery revenue by eight percentage points, giving Delaware a fairer share of
proceeds. The revenue for these existing venues has grown well beyond original expectations. Delawareans deserve to capture a fair
share of the total proceeds from the exclusive licenses it provides to video lottery venues.

When you consider the revenue that the casinos expect to be generated by sports betting and the increased play at video lottery
machines, this proposal is expected to bring in $55 million for Delaware’s general fund in the first year of operations.

When you look at the severity of the other choices before us, this choice was clear.

[Slide: Critical solutions, not easy answers]

So that is our plan.

This budget is as grim as the financial times we face. It pulls no punches, offers no gimmicks. It makes some tough choices, and makes
them clearly.

This budget spends hundreds of millions of dollars less than the one that was passed last year, when the demand on our services was
less.

We cut more than we raise in new revenue. We placed fiscal responsibility first and kept our core commitments. We ensured that where
income taxes were raised, they only took effect after the first $60,000 in income.

Its reductions are responsible, sustainable and position us well for economic growth in the future, but that does not make them any less
painful.

By refusing to pin the burden of new revenues on the back of one group and demanding instead a spirit of compromise and community
the costs of our new revenue are broadly shared.

It is not a pleasant burden, or one we bear lightly, but it is one we assume only after hundreds of millions were cut in costs.

At this point in the process, a debate usually commences over which cuts could be avoided, which fees should be rolled-back, which
program should be spared. This year, that debate could be very different because the likely outcome over the next few months will be
greater shortfalls that demand more sacrifice, not less.

It is quite possible that when Delaware’s economic forecasting group meets again, the budget shortfall that grew by hundreds of millions
between June and March could grow by millions more each month between now and June.

If that is the case, these cuts may only get deeper; our reductions more severe and the need for shared sacrifices more certain.

[Slide: Compassion, Keeping Core Services]

It is easy when you need to focus on what you cut, to lose sight of what you keep.

I want to make clear what is still in this budget and what Delaware’s state government will be doing in the year ahead. I want to make
clear what Delawareans will get in return for their sacrifice.

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Police will still ensure our families’ health and safety.

Schools will continue to prepare our children for the future.

Our higher education system will remain centers of innovation and opportunity.

The state will continue to monitor the quality of our air and water for improvement.

We will continue to support small and other Delaware-based businesses to create new and lasting careers.

The most vulnerable populations in Delaware including the medically needy, our children, veterans, elderly and disabled will receive the
protection they deserve and the assistance they need.

We will keep these core commitments while being fiscally sound. We will position our state for long term growth.

[Slide: The Road Ahead]

These are difficult times and these are difficult decisions.

However, I remain firmly convinced that our state’s best days are ahead of us. These problems may confront us, but they will not define
us.

I ask you today to challenge the prevailing wisdom that our hands are tied until the national economy improves.

I ask you to help us create new solutions, by sharing your ideas with us on how to create a more efficient, effective, responsive and
responsible government.

I ask you to commit to volunteering during these difficult times, to strengthen our community through service.

I ask you to commit as well to the long-term growth of our state.

If we do this, we will get through this difficult period and get our economy moving again.

We will leverage our resources to make Delaware a center for innovation and opportunity.

We will turn our small size to our advantage and be more nimble, more responsive and simply more energetic than anyone else around
us to recruit and retain new jobs.

We will leverage our sense of community and our collective wisdom to eliminate obstacles before they become limits to growth.

We will foster companies who know their purpose and want to create not just jobs but quality careers for Delawareans.

And we can, and will, move together with a purpose that makes clear that we have the power to define our future for generations.

2009 Budget Solutions Presentation

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