Facing $131 million budget shortfall, state will likely dip into reserves
William Petroski and Brianne Pfannenstiel , Des Moines RegisterPublished 2:52 p.m. CT March 14, 2017 | Updated 16 hours ago
A decline in the state's revenue forecast will force the Iowa Legislature to plug a $131 million budget gap for the fiscal year ending June 30, which will likely require lawmakers to dip into cash reserve funds.
Iowa's economy is still expanding, but at a slower rate than previously forecast as prices for farm commodities such as corn and soybeans remain low and other factors hamper revenue growth, said David Roederer, director of the Iowa Department of Management. He chairs a three-person state panel that agreed Tuesday to approve a state revenue forecast of $7.106 billion for the current fiscal year, which represents growth of 2.7 percent compared to the 2016 budget year.
Just three months ago, the same panel had forecast revenue growth of 4.2 percent.
"With just a few months left in the fiscal year, the governor is obviously going to be working with legislative leaders as we proceed through this," Roederer said. "But the governor believes we will probably need to use some funds from our savings account — from our cash reserve — understanding that the money will be paid back."
Because of a previous decline in the state's revenue forecast announced in December, Branstad has already signed a bill that reduced the state's budget for the current fiscal year by about $118 million. This included cutting state programs, eliminating some state jobs and making other spending adjustments. However, the Legislature so far has avoided cuts to K-12 schools, the state's Medicaid health care program for low-income people, and property tax credits. But a host of other state spending has been affected, including state universities and Iowa's prison system, which has been forced to temporarily close some prison units.
Sen. Charles Schneider, R-West Des Moines, chairman of the Iowa Senate Appropriations Committee, said Tuesday's budget forecast was not a surprise. State officials have known that crop prices have been low and it has impacted all sectors of the farm economy, he said. Both Schneider and Senate Majority Leader Bill Dix, R-Shell Rock, agreed with Roederer that lawmakers will likely need to rely on reserve funds to address the shortfall because there is less than four months remaining in the fiscal year.
Considering budget cuts have already been made for this fiscal year, additional spending reductions are not reasonable, Dix said. The $131 million shortfall includes a reduction in the state revenue forecast of $105.9 million, plus $25.2 million in fund transfers.
“We must not cripple our schools, public safety and many other essential services with further cuts this year. Our savings account exists for moments such as this," Dix said. But he added that refilling the state's reserve accounts will be a priority of Senate Republicans in the ongoing budget process.
"We must also remain steadfast in our efforts to examine all state government spending, to include tax credits and streamlining state government services, as we prepare Iowa to become more fiscally sound and responsible," Dix said."This path will lead to predictability for taxpayers and growth in our economy which will create an environment for small businesses to invest and new career opportunities for all Iowans.”
'Sacred cows need to be re-evaluated'
Rep. Pat Grassley, R-New Hartford, chairman of the House Appropriations Committee, said any plan to tap into the state’s cash reserves will be contingent on approving a plan to replenish those funds. But he added that the state needs better revenue estimates from the three-member panel of experts and he said lawmakers need to take a hard look at state spending and ensure that Iowans' priorities are being met.
Grassley also promised that all state tax credits are on the table for reconsideration.
"The sacred cows need to be re-evaluated to make sure taxpayers are getting a good deal. A complete approach needs to start immediately instead of the piecemeal, year-by-year strategy that has been in place," he said.
But Sen. Joe Bolkcom of Iowa City, the ranking Senate Democrat on budget issues, complained that policies pursued by Branstad and Republicans have become a "train-wreck" for Iowa families and their communities. He said that in 2010, Branstad and Lt. Governor Kim Reynolds were elected to office based on two promises: Raising family incomes by 25 percent and creating 200,000 new Iowa jobs within four years. In both cases, they have failed, he said.
"Now, with complete control of the Iowa Statehouse, Republicans are pursuing an agenda that is driving down incomes and destroying jobs," Bolkcom said.
However, Bolkcom pledged that Senate Democrats will work Republican lawmakers, Branstad and Reynolds to restore fiscal stability to state government. He suggested that approach should include investing in schools and job-creation initiatives, and taking a serious look at "out-of-control spending on tax credits"
Rep. Kirsten Running-Marquardt of Cedar Rapids, the ranking Democrat on House budget bills, also blamed Republicans for what she described as a "budget mess." She criticized Republicans for an "extreme, special-interest-first fiscal policy" that is failing Iowans.
Several factors affecting revenues
Revenue forecasting panel member Holly Lyons, director of the Fiscal Services Division of the Legislative Services Agency, said a host of factors are affecting state revenue. There is no indication the state is headed into a recession, but state, national and international factors all have an effect on Iowa revenue growth, she said. Furthermore, while there are some bright spots in Iowa's business outlook, including strong sales of existing homes, low energy prices and national data that is mostly positive, rural Iowa is still suffering the effects of a negative farm economy, she said.
David Underwood, a business consultant from Clear Lake who also serves on the panel, remarked that an examination of tax returns indicates that many Iowans have not had the income they had in the previous tax reporting year. In particular, he said that farm income, "which was down to just about nothing," has fallen even further. He also expressed concern about weakness in the Midwest's retail sector, including store closings and bankruptcies.
The Revenue Estimating Conference meets three times a year — typically in October, December, and March — to reach a consensus on state revenue forecasts. Revenue estimates developed by the committee in December are used by the governor in preparing his budget recommendations to the Legislature and by the Legislature in establishing the state's budget. If the March recommendations represent an increase in estimated revenues, the governor and Legislature must use the lower figures estimated in December. But if the March estimates are lower than December, the governor and Legislature must use the lower figure.
For the upcoming state budget year, which begins July 1, the panel has forecast total revenue of $7.364 billion, an increase of 3.6 percent, but a decline of $191.8 million compared with an estimate made three months ago. For fiscal year 2019, which starts July 1, 2018, the revenue forecast is for $7.626 million, up 3.6 percent over the previous year