Legislative Update

On Friday, June 18, the Joint Finance Committee (JFC), a panel consisting of representatives and senators charged with writing the operating budget, cast its final votes to assemble the Delaware’s $3.3 billion operating budget. Nondiscretionary items such as Medicaid, employee health care and pension obligations comprised 2.5% of the roughly 5.5 – 6% growth over FY 2010. In the FY 2011 budget, state employees will see the 2.5% pay cut from the current budget year restored. On a positive note, there were no revenue bills.

This past Friday, June 25, the Joint Bond Bill Committee, which like the JFC, consists of both representatives and senators, put the finishing touches on the state’s capital budget. The capital budget for FY 2011 comes to $408.9 million. $124.4 million will go to transportation projects and transportation-related debt service. The other $248.4 million is dedicated to education-related projects.

The JFC will meet on June 28 to finish work on the grant-in-aid bill. Funding to charitable non-profits and fire companies is provided each year via this piece of legislation.

On Monday, June 21, the Chamber issued its end-of-session legislative priorities. They were as follows:

• Avoid legislation and regulation that would increase the cost of doing business in our state.
Since the outset of this recession, the New Castle County Chamber of Commerce has called on policy makers at all levels of government to hold the line on government spending and to refrain from tax and fee increases and the enactment of legislation and regulation that would increase the costs of doing business in Delaware.

• Cash to Bond Bill:
On the subject of Capital spending, Mark Kleinschmidt noted: “The Chamber draws a distinction between responsible capital spending and additional operating spending by state government.

• Money for the Delaware Strategic Fund:
The Delaware Strategic Fund is a key tool for the Delaware Economic Development Office to provide financial assistance to businesses for attraction and retention purposes. As our state emerges from the worst recession since World War II, it is essential that we set aside funding for private sector job creation. The Chamber lobbied for and supports the Joint Finance Committee’s decision to allocate $15 million to the Strategic Fund for FY 2011.

• Hold the line on discretionary State spending:
On June 18, the Joint Finance Committee finalized the details of the proposed FY 2011 operating budget. Total spending comes to $3.3 billion, representing a growth of 5% over FY 2010, 2.5% of which is comprised of nondiscretionary items such as Medicaid spending. There are still structural budgetary challenges facing state government that will take years to address. Limiting discretionary spending by state government is critical to addressing those structural challenges.

• Regulatory Flexibility Legislation:
The Chamber supports House Substitute 1 to House Bill 390, an effort to provide much needed regulatory relief for small businesses in the First State. This legislation, introduced by Small Business Caucus co-chairman and 2010 New Castle County Chamber of Commerce Free Enterprise Award winner, Representative Bryon Short (D-7^th), would require state agencies to assess the impact of new regulations for their impact on small businesses, gauge their relevance to current market and regulatory conditions and whether those regulations are meeting their intended goals.

The conference report, blending both the House and Senate versions of the banking reform bill in one proposal for consideration by both chambers, was completed on Friday, June 25. Early indications are giving cause for concern on the part of U.S. banks, the State of Delaware and the business community at-large.

The measure is expected to pass the house but may encounter opposition in the Senate. Scott Brown (R-MA) has withdrawn his support for the bill after learning of a new bank tax imposed in the conference report.

The Congressional Budget Office projects that implementation of the financial services reform bill cost approximately $22 billion. Conferees imposed a $19 million tax on banks and hedge funds in order to defray most of that cost. Critics of this levy point out that this will remove $19 billion in capital out of our economy in order to fund the largest U.S. government intervention in financial markets since the 1930s.

The measure also limits the use by banks of commonly held securities known as “trust-preferred” to meet capital requirements. Although House Democrats sought a 10-year phase-in for financial institutions with assets between $15 billion and $100 billion, negotiators agreed to a five-year phase-in period for $15-$100 billion institutions and a full exemption for those with less than $15 billion.

In a compromise on Senate Blanche Lincoln’s (D-AR) proposal to require that banks completely separate their derivatives trading operations, derivatives tied to interest rate swaps, foreign exchange swaps, gold and silver, and investment-grade credit default swaps will be exempted, while derivative trading related to agriculture, commodities, energy, equities, metals, and below-investment-grade credit default swaps must be walled off from a bank’s federally insured deposits.

In another compromise, the Volcker Rule – a proposed ban on proprietary trading by banks and bank holding companies - was changed to allow banks to engage in proprietary trading on up to 3% of their tangible common equity.

The conference report preserves some of the most troubling aspects of both the House and Senate versions. Two key issues for the State of Delaware were the preservation of federal pre-emption of state banking laws and the issue of corporate governance. The conference report weakens federal pre-emption and requires that publicly traded companies allow individuals or entities owning at least 5% of a company’s outstanding shares to nominate and elect board members via a proxy vote.

The proxy vote provision was an element of Senator Chuck Schumer’s (D-NY) Shareholder Bill of Rights Act that made it into the banking reform bill after his measure stalled in the Senate.

The measure will also create a new bureaucracy with sweeping powers to regulate consumer finance, the Consumer Financial Protection Bureau. Many expect the increased regulation arising from this new body to increase the cost of borrowing for small businesses and households while imposing costly regulatory burdens on banks that many community and smaller regional banks will find difficult to bear.

The Chamber will provide a more detailed summary of this legislation as well as updates on its status.

Discussions with the Baker Administration and other City officials to address the profound concerns expressed by our membership, and the business community at-large, regarding the business climate in the City continue.

Among the issues that exist are as follows:

• The City’s aggressive audit and recovery tactics which many businesses, both small and large, find threatening and excessive;
  
• The year-over-year tax and fee increases imposed by the City. The City’s FY 2011 budget increases the property tax by 10% (following last year’s 15% increase). It also increases water and sewer fees by 19%. Last year, the City also increased its head tax – levied on Wilmington employers from $10 to $15 per employee.
  
• The City’s levying of a storm water fee on businesses which has little or no correlation to their actual impact on the City’s storm water system. A number of firms have been driven to near bankruptcy. The City has also filed a sheriff’s sale against the Norfolk Southern Rail Yard.
  
• The City’s attempt to treat subchapter-S distributions in the same fashion it does wages and salaries. Neither the federal nor the state government does this. Their aggressive program to target these corporate entities has resulted in a number of firms weighing whether to leave the City.