DES MOINES, Iowa — Iowa lawmakers will not return to the state Capitol for a special session following news last week that a projected budget shortfall was drastically smaller than expected. Still, Iowa’s finances remain on shaky ground in the midst of new borrowing and unknown costs. Here are some things to keep in mind about Iowa’s budget:
Iowa approved roughly $7.2 billion in state spending for the budget year that ended in June. This summer, the nonpartisan Legislative Services Agency said incoming revenue for that budget year was lower than expected and about $100 million behind. The same agency cautioned the possible shortfall could fluctuate up or down.
Republican Gov. Kim Reynolds said the budget year would close its books officially at the end of September. On Wednesday, budget experts who work under her administration announced the shortfall was actually $14.6 million.
After final accounting, Reynolds will transfer, or borrow, $13 million from emergency reserves. She has authority to transfer up to $50 million without legislative approval.
Staff for the Iowa Department of Management and the Iowa Department of Revenue said last-minute adjustments, or accruals, are the primary reason the budget shortfall wasn’t larger. Simply put, a lot of revenue tied to the last budget year wasn’t accounted for until much later — to the tune of more than $70 million.
Accruals aren’t unusual, but it wasn’t expected to be that high. The Legislative Services Agency, a nonpartisan agency that offers budget analysis to the Legislature, estimated in March that accruals for this period would total about $38 million. LSA officials later said while their estimate was low, it was possible for the state to bounce back this way. The agency said data show a spike in tax revenue in the final months of accounting.
Some people, primarily Democrats, have expressed skepticism on how the math adds up.
Iowa has borrowed a lot of money from its reserve funds this year — about $144 million. Lawmakers plan to repay that money in the next two years. Republicans already budgeted returning about $20 million during the budget year that took effect in July. Now the $13 million announced last week will be added to that tally. It’s unclear how lawmakers will address that money, but it could mean additional cuts to state agencies.
In the budget year that begins next summer, Iowa will pay back the remaining balance it owes its reserves funds— about $111 million. Accomplishing that could also mean department cuts, but it’s too early to know.
Separately, Iowa health officials are still negotiating over how much more the state must pay three health care companies to run the newly privatized Medicaid program for poor and disabled people. A large amount could throw a wrench into the current budget.
WHY ARE WE IN THIS MESS?
Iowa continues to experience revenue growth amid a relatively healthy economy, which includes a low unemployment rate. So what’s the deal? Revenue growth has been below projections for some time, and different groups blame a range of factors for the budget crunch.
Republicans point in part to a sluggish farm economy and missed tax revenue from some online sales, though data show that alone wouldn’t cause the state’s problems. Democrats say tax credits, particularly those given to large corporations, eat up an increasing chunk of the budget. Some GOP lawmakers, who hold majorities in both chambers, have indicated an interest in revisiting these credits, though they also note Democrats helped pass many of them.
Also, a new sales tax exemption on manufacturing sales led to a larger-than-expected cut to the general fund.
Adding to the situation is that Iowa sometimes has tiny surpluses when a budget year wraps up. Known as the ending balance, that money can be used to offset unexpected costs incurred on any given year. It’s separate from reserve funds and doesn’t need to be paid back.
Just a few years ago, Iowa’s ending balance was nearly $1 billion. That’s now been depleted, meaning when shortfalls occur, the state must turn to options like agency cuts and reserve funds.
Democrats claim GOP lawmakers mishandled those funds. Republicans say the money was used on needs like replenishing emergency funds and investing in infrastructure. They also point out Democrats agreed to that spending.
HOW PROBLEMATIC IS ALL OF THIS?
In the past 12 months, state agencies overseeing a range of government services have experienced budget cuts. Some departments have already indicated plans to seek “status quo” budgets, which could make the cuts permanent. The reductions are felt in different ways: Officials at Iowa’s three public universities plan to raise tuition; an agency is making fewer visits to monitor nursing homes; Iowa closed its forestry bureau.
Democrats, including those challenging Reynolds in next year’s gubernatorial race, say the reductions ultimately hurt education, health care, the judicial system, public safety and other services. Republicans argue the cuts are tough but also necessary to balance the budget. They accuse Democrats of seeking unsustainable funding.
Republicans do not need Democratic support to pass legislation, and the majority party wants to pass tax cuts next year. The specifics of a plan aren’t available yet, but budget uncertainties could complicate that effort.
Separately, state budget problems could trickle down to local governments. The state passed commercial property tax cuts in 2013 with a provision ensuring local governments are given payments to offset the impact of the cuts. Reynolds last week indicated the payments aren’t guaranteed.