Iowa didn't have money to pay tax refunds at previous pace without delays

Brianne Pfannenstiel | The Des Moines Register

Show Caption Hide Caption Iowans' state tax refunds delayed On April 15, when Iowa had $72 million in cash on hand, it was roughly $300 million behind the pace it set the previous two years in paying individual income tax refunds.

Iowans were told in January that their state tax refunds would be delayed several weeks in an effort to prevent identity theft and fraud.

But a Des Moines Register examination of state data shows another reason: Iowa didn't have enough cash to pay people at the same pace as in previous years.

On April 15, when Iowa had just $72 million in cash on hand, it was roughly $300 million behind the pace it had set the previous two years in paying individual income tax refunds.

Holly Lyons, fiscal services director for the state’s nonpartisan Legislative Services Agency, reviewed the data and said the department’s claims of fraud prevention “may be an early and partial explanation" for the delay in tax refunds, but that other factors appear also to have played a role.

Treasurer of State Mike Fitzgerald, an elected Democrat, was more explicit: "The state could not have made those payments" without delays, he said. "They just can’t."

A Department of Revenue spokesperson declined repeated requests to make Director Courtney Kay-Decker available to discuss or respond to the Register's analysis. Kay-Decker was appointed in 2011 under former Republican Gov. Terry Branstad.

Instead, department spokeswoman Nicole Watson cited increased security measures as Iowa joined other states across the country in seeking to prevent identity thieves from stealing the state's tax refunds.

Watson pointed to documents showing monthly cash-flow totals, which show that by the end of each month this year, Iowa had covered all of its expenses, including paying out tax refunds.

Among other findings in the Register's analysis:

Iowa's "checkbook" — which includes about 50 cash and emergency reserve accounts — hit its lowest balance since the Great Recession on April 15, 2017, when it contained just $72 million.

Those balances have been trending downward since they hit a high of $1.9 billion in August 2013. Annual low balances have dropped each year since.

Seventy-five percent of all individual income tax refunds were delayed until after April 15, the point at which state coffers began to recover, according to Legislative Services Agency data.

Beth Powers, a Council Bluffs resident, is among the hundreds of thousands of Iowans who has waited longer than usual to have her overpaid tax money returned to her.

“It’s part of my savings that’s missing,” she said, noting that she filed in January and as of June 15 was still waiting to receive a refund. "And it’s scary not knowing if this is going to be a trend from now on that I’m going to have to fight for what’s due to me according to their rules."

Powers works in Omaha for a telecommunications company and said she received her Nebraska refund and her federal refund in a timely manner.

"I’m just going to keep my fingers crossed and hold out hope that something happens and I’m given what’s mine — or at least a full explanation as to why it’s taking so long," she said.

Scope of delays

State records show Iowa issued about $706 million worth of individual income tax refunds between January and the end of May 2017.

By March 1 of this year, the state had paid $207 million in individual income tax refunds — compared with almost $326 million paid by that date in 2016, indicating a possible delay of nearly $119 million in refund payments.

That estimated amount of delayed payments doubled to almost $240 million by the end of March and peaked at $318 million on April 13.

For 11 days in April, the total amount of money in refund payments the state likely owed to taxpayers exceeded the amount of cash in the state funds used to pay for them.

“We were underwater there,” Fitzgerald said.

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Iowa's refund payments in 2016 and 2017:

Individual income tax refunds were paid out at an even pace in 2016. But this year, repayments went out slower than in previous years. On April 15, the state had paid $314 million less in refunds than it had the year before:

Source: Iowa Legislative Services Agency

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Last year, refunds were paid out relatively consistently and evenly each week.

But this year, repayments went out more slowly than in previous years before exploding immediately after April 15 — the point at which the state’s accounts saw a large influx of cash from people paying their tax liability. (The balance of those accounts rebounded from $72 million on April 15 to nearly $252 million by the end of the month, even as hundreds of millions of dollars' worth of refunds went out the door.)

In the weeks leading up to April 15, the department paid an average of $11.9 million in refunds each week.

In the four weeks immediately following April 15, the department paid an average of $124.5 million each week — a 946 percent increase.

An analysis of tax data for the previous five years does not reveal any other similar spike in refund payments.

“The numbers sure suggest — and the timing suggests — that those payments were held back (until April 15) because we didn’t have the cash to pay them,” Fitzgerald said.

Watson, in a follow-up email, wrote that "Iowa's revenues are in a sound position."

The average tax refund was $644 this year, according to department officials. Using that figure, more than 490,000 taxpayers would have been waiting to have their money refunded in mid-April as the estimated backlog peaked at more than $318 million.

Fraud prevention

The Department of Revenue contends security measures led to delays as Iowa and states across the country sought to prevent identity thieves from stealing refunds.

But Watson declined to provide insight into whether those ramped-up security efforts were effective.

Asked about the new fraud protections that were put in place, Watson said, "That is something the department never speaks in detail about."

"If you have practices and procedures to identify and deter fraud, you don’t want to publicize them, because then the people engaging in the fraud will change their behaviors,” she said.

Identity fraud has been an issue at the federal level, peaking in 2014, when the U.S. Internal Revenue Service identified 766,000 victims and blocked the issuance of $10.8 billion worth of fraudulent refunds, the Associated Press reported.

But with new protections in place, the number of victims has dropped by about 50 percent — to 376,500 victims last year.

About 188 million income tax returns were filed with the IRS in 2015, the most recent year for which data is available.

To combat overpayments and fraud, the IRS this year delayed the release of tax returns that claimed refunds through the Earned-Income Tax Credit and the Additional Child Tax Credit.

The agency said it began releasing those refunds to taxpayers beginning Feb. 15.

Watson said Iowa did not touch returns that claimed those tax credits until mid-February. By then, she said, it had created a backlog as the agency sought to process those returns alongside others that were continuing to be filed.

The department also added its own set of fraud protection measures that slowed the process, as well as a system to ensure Iowans counted their federal tax refund as state taxable income, Watson said.

Department officials have not responded to a Des Moines Register public records request seeking the number and value of fraudulent returns recovered this year compared with previous years.

Verenda Smith, deputy director of the Federation of Tax Administrators, said tax agencies across the country are grappling with how to handle increases in fraud at the state level.

“There was a time when it seemed like a good idea — and many states would have called it a best practice — to send refunds out in three days,” she said. "… What’s happened is that as the fraud got worse and worse, it got harder and harder to ignore the fact that the tax agencies that tried to send out refunds without properly processing them have become their own worst enemies. And so now what’s happening is refunds are being processed in what I would call a proper time frame."

Smith said she believes state revenue departments need to reset expectations among taxpayers and consider telling them that, from now on, they will not receive refunds before a certain date.

She pointed to Utah, which passed legislation preventing refunds from being sent out before March 1.

Her preference, she said, would be to hold all refunds until April 15, allowing tax agencies to compare fraudulent returns against the legitimate ones. Once a fraudulent refund goes out the door, she said, it's very difficult to get that money back.

Iowa’s checkbook

The amount of money in Iowa’s “checkbook” — a combination of cash accounts and reserve funds that can be used to pay for expenses such as school aid and state employee salaries — often fluctuates dramatically from day to day.

Iowa’s payment to the private companies managing the state’s Medicaid program, for example, goes out all at once as a lump-sum payment of about $325 million and causes a wide swing on day-to-day balance sheets.

But much of that fluctuation is predictable.

The cash balance always spikes to its highest levels about Aug. 28, after the state stops making monthly payments to schools during the summer, which allows cash stockpiles to grow.

And every year around April 15, it falls to its lowest levels as tax refunds go out — that’s because early filers often are those who are owed refunds. The state typically pays the refunds as they come in, depleting the cash balance.

The cash reserves act as a buffer during that time, ensuring the state is able to pay those refunds and cover all of its other expenses until the late filers, who often owe the state money on their taxes, replenish the cash accounts.

“We start getting big inflows of income taxes starting April 15,” Fitzgerald said. “So we’re kind of out of the woods at that point.”

But the balance of Iowa’s cash accounts has trended downward since they hit a recent high point of $1.9 billion on Aug. 28, 2013. In April 2013, the low end of Iowa’s annual revenue fluctuation was $730 million.

In every year since, April has been marked by lower and lower low points, declining by an average of 41 percent each of the last four years.

The state's revenue estimating body in December 2016 downgraded its revenue estimates, and the state budget director said the state would need to make about $100 million in spending cuts.

It was in that same month that Iowa officials revised their estimated tax refund repayment schedule, budget documents show, decreasing the level they expected to issue in February and March and increasing the level they expected to issue in April and May.

Why not borrow?

Iowa is not out of money; its cash funds had bounced back to about $385 million by the end of May.

But the Legislature this year approved $118 million in budget cuts and transferred $131 million from reserve accounts as revenue came in below expectations.

Recent revenue forecasts suggest lawmakers may need to take another $100 million from reserves to cover what they’ve already spent in the 2017 budget year.

The Legislature approved a scaled-back budget for 2018, but more spending cuts will likely be required as lawmakers seek to pay back what they borrowed from the reserves. Republicans promised to repay the $131 million borrowed from the reserves within two budget years.

Economists, state officials and legislators point to a variety of factors to explain Iowa’s lower-than-expected revenue numbers. Those include a faltering farm economy which has ripple effects throughout the manufacturing sector, state-level tax cuts and uncertainty at the national level as Iowans await federal tax reform.

Fitzgerald has sounded alarm bells, urging Gov. Kim Reynolds to consider borrowing money to provide a cushion for the state to ensure it can pay its bills without delays.

But some Republicans have minimized his concerns, brushing them off as partisan attacks intended to disparage the Republican administration.

Some states across the country have issued Tax Revenue Anticipation Notes, or TRANs — a form of short-term lending that many state and local governments use to help absorb cash-flow fluctuations.

They are low-interest loans that must be repaid with current-year revenues. Iowa has issued them 16 times since 1985 — nine times during Branstad’s first tenure and seven times under Democratic governors Tom Vilsack and Chet Culver.

Fitzgerald said that in the past, the state has made money when it issues these notes because it’s able to invest the funds for a short time before paying them back.

Lyons called them a "tool" for state and local governments.

“I’m unclear why the state did not issue TRANs in fiscal year 2017," she said. "But it’s quite possible it may need to happen in fiscal year 2018. … Obviously, a state would want to borrow as little as possible for as short a period as possible. But it is a tool used by many states to smooth out the cash flow deficits experienced during the tax payment and refund season.”

But Tom Sands, a former Republican lawmaker and current president and CEO of the Iowa Taxpayers Association, said he believes borrowing to cover existing or projected cash flow problems is bad fiscal policy.

"Borrowing means there’s an interest charge — and it’s just an added expense that taxpayers should not have to pay for," he said. "It doesn’t do really anything to solve the problem, and the problem is you need more of a cushion. This is something we have been fighting for the last several years: You’ve got to keep your expenditures under your ongoing revenue."

Sands emphasized the need to tighten state spending, especially as projections have repeatedly overstated what Iowa ultimately collects in revenue.

In a press conference with reporters on June 13, Reynolds said borrowing money is “not an option” as the state seeks to cope with declining revenue.

“We’re not doing that, and I don’t believe it’s a necessity,” she said.