Gov. Reynolds: Worsening Iowa budget will force reliance on cash reserves

William Petroski | The Des Moines Register

A steady decline in projected state revenues will force Iowa government to dip into a state economic emergency fund for $50 million, but across-the-board budget cuts will be avoided, Gov. Kim Reynolds said Tuesday.

Reynolds, who became state government's chief executive last month when former Gov. Terry Branstad was confirmed as U.S. ambassador to China, said she hopes to avoid calling a special session of the Iowa Legislature to address the state's budget problems.

But she pledged that all the state's bills will be paid, including state aid to school districts and payments for Iowa's Medicaid health insurance for low-income persons.

"The bottom line is that there will be continuity of government and Iowans will experience no change," the Republican said.

A new state fiscal year begins July 1, and the Iowa Legislative Services Agency has warned that state revenues for the past 11 months have fallen about $97 million short of projections. The Republican-led Iowa Legislature has already approved $118 million in budget cuts this year and has withdrawn another $131 million from the state's cash reserves to fill financial gaps.

Lawmakers adjourned in April after approving a $7.24 billion general fund budget for the upcoming fiscal year.

Reynolds told reporters Tuesday she has been monitoring state revenue collections on a daily basis, but the books won't be closed on the current fiscal year until Sept. 30. even though the fiscal year ends June 30. A state panel had forecast revenue growth of 2.8 percent compared to the past state fiscal, but it has only been growing at 1.2 percent.

"We are still seeing growth; it is just not as robust as we had anticipated," the governor said. She noted that Iowa unemployment is at 16-year low at 3.1 percent. The state has about $600 million in cash available to cover revenue shortfalls, she said, adding it is too late in the state fiscal year to make up the difference with budget cuts.

Reynolds said the Iowa Department of Revenue has been seeing lower than expected receipts for individual income tax collections as well as sales and use tax.

“On the income tax side, the softness has mainly been seen in two areas; capital gains revenues are lower than anticipated and depreciation expense is higher than expected," Reynolds said. Both issues are linked to changes in financial behavior, she added, including the fact that some Iowans are making decisions based on their belief the federal tax reform will be implemented yet this year.

On the sales and use tax side, the weakness is mainly in consumer purchases, which is caused in part by ripple effects of declining commodity prices and in part by consumer purchasing continuing to shift to out-of-state, online retailers, Reynolds said. She added that growing numbers of Iowans are going online to make purchases, which is causing sales tax collections to be stagnant, if not declining.

"It has been increasingly clear that our tax code does not align well with today’s economy. Our income tax is partially tied to federal government tax policy and Iowa has a very complex tax system," Reynolds said. "So as a result, projecting revenues is becoming increasingly difficult. Our tax system was designed for a different time when purchase behavior patterns were more static, and we are living in somewhat of a volatile economy and it is clear that state government is not immune."

Reynolds made no specific mention of a controversial tax law change benefiting manufacturers that was pushed through by Branstad. A state fiscal analyst has said the unexpected expense — the result of an expanded sales and use tax exemption on goods consumed in the manufacturing process, could cost the state $80 million more this year than projected.

Iowa House Minority Leader Mark Smith, D-Marshalltown, said Tuesday that Reynolds' plans to borrow money from the state’s savings accounts to pay the state’s bills "confirms the GOP’s corporate tax giveaways are unaffordable."

"The giveaways haven’t produced growth and, instead, have slowed the state’s economy and put the state budget in the red for the third time this year," Smith said. "If a special session is necessary later this year, I hope Republicans will work with us to change course and guarantee that Iowans no longer have to pay for these tax giveaways through higher tuition, fewer services for domestic violence victims, and higher property taxes.”

Iowa isn't alone in having budget troubles. A report issued Tuesday by the New York-based Rockefeller Institute of Government said preliminary data for the first quarter of 2017 suggest that more than a dozen states had declines in total state tax collections. Furthermore, preliminary data regarding April tax returns indicate significant declines in estimated payments and final returns.

"The states' overall fiscal outlook remains bleak because of uncertainty about the potential changes in federal tax policy, as well as potential cuts in federal aid to the states proposed by the Trump administration," the Rockefeller report said. "State tax revenue growth is likely to remain slow and highly uncertain throughout the remainder of fiscal year 2017 and in the forthcoming fiscal year 2018."

Reynolds didn't entirely rule out calling a special session of the Legislature because of the volatility of state revenues, although she hopes to avoid it for now. She also said she has no plans to furlough state workers.

Despite the budget woes, Reynolds said she intends to continue to propose tax reform in the 2018 Legislature's session and she is not ruling out the possibility of tax cuts.

"We are going to put everything on the table," she said, adding she will not be boxed into any specific approach.

The governor also remarked that she favors a "holistic" approach to tax reform and she noted that proposed plans for federal tax reform could affect what changes are considered by Iowa lawmakers. One of her concerns, she said, is that Iowa business and industry remain competitive with other states.