Iowa’s State Funding Shortfall Gives Governor Candidates a Hot-Button Issue

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Iowa Statehouse on July 28. Photo: Lyle Muller/IowaWatch

An Oct. 19 Revenue Estimating Conference report showing $133 million less than anticipated in Iowa’s revenue projections for this fiscal year have primed the state’s gubernatorial campaign with a hot topic: how finances are being managed.

Opponents of Gov. Kim Reynolds, who took office May 24 after previous Gov. Terry Branstad became U.S. ambassador to China, have set their sights on her: either as manager of the budget or as Branstad’s partner during a series of budget cuts and patches made since Jan. 1.

“I think this is a big problem that Kim Reynolds has failed to understand,” state Sen. Nate Boulton (D-Des Moines) said. “When she was asked, ‘what is the effect of these budget cuts’ she said that there’s been no effect on state services. And that’s just, it’s difficult to swallow.”

Boulton is one of seven people seeking the Democratic gubernatorial nomination to run in the 2018 general election and three, Reynolds included, seeking the Republican nomination in what will shape up to be a lively primary on June 5, 2018.

“We’re still growing,” Reynolds countered, referring to the council’s report that state revenue had grown 2.4 percent so far this fiscal year, which began July 1. “So, I think it’s always important to point that out to Iowans, and that is that our revenue is still growing. It’s just not growing as fast as the projected rate of the Revenue Estimating Council.

The revenue is supporting a $7.2 billion fiscal 2018 state budget.

The Republican-led Legislature cut almost $118 million in spending early this year to handle a shortfall in anticipated tax receipts. Later in the session, and with Branstad’s approval, it shifted $131 million from its reserves when it became evident that the cuts would not handle the shortfall. The reserves account had $738 million at the time.

With Reynolds in office, the state closed the books on fiscal 2017 in September by shifting another $13 million from reserves to balance the ledger. Reynolds says she anticipated repaying $20 million of the money this fiscal year, which ends June 30, 2018, with the rest to be repaid the following fiscal year.

State Treasurer Michael Fitzgerald.State Treasurer Michael Fitzgerald.

Democratic State Treasurer Michael Fitzgerald said he worries about the state making payroll.

“A year ago when we started, we had a $44 million surplus. We had $750 million in our savings account,” Fitzgerald said. “So we were prepared for bad times. Now, there’s absolutely no surplus. And that $750 million reserve funds is down to $600 million. So we’re going in the wrong direction.”

Four years ago, Fitzgerald noted, the state had about $1 billion in reserves.

He blamed Republican-led efforts to cut the property tax businesses pay as part of the problem. Democrats did the same thing with tax credits, he said, when giving the movie industry large credits to shoot movies in the state around the turn of this century.

But Democrats point to the 2013 law Branstad signed that gave what Branstad called the state’s biggest tax cut ever to businesses that own property. The law called for:

  • Spending $50 million annually on business property tax credits in the fiscal year that began July 1, 2014.
  • Spending $100 million annually for the credits after July 1, 2015.
  • Spending $125 million annually for the credits after July 1, 2016, and in subsequent years.

    Pine Creek Grist Mill at Wildcat Den State Park, near Muscatine, Iowa. The Iowa Legislature cut $1.2 million from the Department of Natural Resources fiscal 2017 budget in a money-saving move. Volunteers with Friends of the Pine Creek Grist Mill have supported this historic site, in conjunction with the state, since 1996. Photo: Lyle Muller/IowaWatchPine Creek Grist Mill at Wildcat Den State Park, near Muscatine, Iowa. The Iowa Legislature cut $1.2 million from the Department of Natural Resources fiscal 2017 budget in a money-saving move. Volunteers with Friends of the Pine Creek Grist Mill have supported this historic site, in conjunction with the state, since 1996. Photo: Lyle Muller/IowaWatch

That totals $400 million since the law took effect in revenue the state previously would have collected. Branstad pushed for the law, saying businesses should not have had to pay property taxes at 100 percent of their property’s assessed value when homeowners get a break through rollbacks in taxable value of their property.

Republicans point out that a slow agriculture economy is keeping state tax receipts lower than anticipated. Some have accused Fitzgerald of playing politics when criticizing moves under Branstad and Reynolds to fix the budget.

But Republicans, too, have their criticisms. Cedar Rapids Mayor Ron Corbett, running for the Republican gubernatorial nomination for next year’s election, said Reynolds should have called a special legislative session to deal with the budget.

Corbett said the state needs to reform how it spends money. “They need to get more spending controls in place, not just borrowing money to balance the budget,” Corbett said of the Legislature.

“Next year, when they come back in January, the first appropriation they have to make isn’t to K-through-12 schools. It isn’t to human services. It isn’t to the Department of Corrections. It’s to the debt.”

Iowa Gov. Kim Reynolds talking with Bruce Montis of Waukee during the Iowa State Fair in Des Moines on Aug. 14. Photo: Lyle Muller/IowaWatchIowa Gov. Kim Reynolds talking with Bruce Montis of Waukee during the Iowa State Fair in Des Moines on Aug. 14. Photo: Lyle Muller/IowaWatch

Reynolds said the state made targeted cuts instead of across-the-board cuts to balance spending this year. That differs from a 10 percent, across-the-board approach taken by Democratic Gov. Chet Culver in 2009 during the recession. Republicans’ criticisms of Culver have included that cut and, in general, how he managed the state budget.

“We held harmless pre-K-through-12 (education), Medicaid and the backfill,” Reynolds said. The backfill refers to the money paid by the state to cities to compensate for the business property tax break.

Democrats point to dire possibilities when on the campaign trail.

“What happens if we see a 5 percent downturn in the Iowa economy?” Boulton asked. “Are we equipped to deal with that, and still have the essential services that are required for our state to continue to function?”

Fred Hubbell, also seeking the Democratic gubernatorial nomination, said the state should reduce tax breaks for businesses that don’t return the benefits they get from the breaks. A sunset clause is needed on tax break legislation to ensure that the breaks do not become entrenched, he said. “Inertia is a strong force of government,” Hubbell said.


This story was produced by the Iowa Center for Public Affairs Journalism-IowaWatch.org, a nonprofit, online news website that collaborates with Iowa news organizations to produce explanatory and investigative reporting.

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