The 2017 legislative session has come to an end. Our lawmakers and governor have once again made budget decisions. Let’s look at some facts about our financial situation:
• The state’s general fund surplus, which was $928 million just four years ago, has been spent.
• The state’s reserve funds, which had been fully-funded since 2012, are below their target balances because $131 million was withdrawn to pay operating expenses.
• State programs are facing mid-year budget cuts due to lower-than-expected revenues.
Our current situation is similar to when we emerged from the great recession of 2008/2009: no surplus, under-funded reserves, and mid-year budget cuts. Back then, recently-elected Governor Branstad complained about inheriting a budget mess. It seems that soon-to-be-governor Reynolds could make the same grievance — though I doubt she will.
With Iowa unemployment at a low 3.1 percent, the stock market at record highs, and without the weight of a national economic crisis pulling us down, how did we end up here? There is no shortage of theories: Unsustainable tax cuts, out-of-control tax credits, slowing in the manufacturing sector, untaxed online sales, a farm economy struggling with lower commodity prices, difficulty in estimating revenue and many others. While each of these has contributed, a lack of fiscal leadership is the common denominator.
As we look forward, there is work to do and difficult decisions to make. The important thing is how Iowa reacts when faced with financial hardship. We are a AAA-rated state and we need to act like one.
First, we need to create and maintain a structurally balanced budget. Iowa’s budget is always balanced — meaning that we do not spend more than we have. This is required by law. But it is important to look deeper at how the budget is balanced. The budget must be sustainable. Revenue that comes in year after year — primarily taxes — must fully fund operating expenses. One-time money should only be used for one-time expenses. A budget that follows these simple rules is considered “structurally balanced” and this must be our goal. Any use of one-time money to pay for operating expenses should be openly discussed and clearly disclosed.
Second, we need to get a handle on revenues. The Revenue Estimating Conference provides estimates for general fund revenues that are used in developing the state’s budget. Actual revenues have come in lower than the state’s estimates for the last four years. We prepare for this by only spending 99 percent of our estimated receipts, but the gap has been widening in recent years. That tells me that the predictions have been too optimistic.
Third, we need to make a plan to repay money taken from the cash reserve fund and stick to it. Law establishes a goal of 10 percent of revenues for the reserve funds. Replenishment of reserves is key to demonstrating Iowa’s fiscal discipline.
All Iowans may not agree on how we should spend the money, but I believe we can all agree that we have to manage the finances so that we are not making last minute cuts to our current budget. We have to get back to the basics about what is important to Iowans: Good fiscal management.
If our new governor and legislature don’t right the ship soon, the pain we feel today will be much worse. We cannot spend more that we bring in and expect to maintain services to Iowans. We are a AAA state. Let’s prove it!