DES MOINES — One of the first issues greeting lawmakers when they gavel in their 2018 session Jan. 8 will be addressing a projected shortfall in the current budget before they and Gov. Kim Reynolds can begin crafting a fiscal 2019 spending plan — which poses challenges, too.
Republicans who hold majorities of 58-41 in the Iowa House and 29-20-1 in the Iowa Senate left the Capitol last May having enacted a budget with a projected $107.3 million surplus. But once again tax collections failed to grow as predicted, leaving the current ledger at least $36 million out of balance.
“I’m expecting another tight year,” said Sen. Charles Schneider, R-West Des Moines, chairman of the Senate Appropriations Committee. He said work will begin this month on a de-appropriation package made up of savings from state agency belt-tightening, spending cuts and “peeling back” unobligated tax credits or other transfers available to help balance the budget by June 30.
Reynolds, who was sworn in as governor last May, already has indicated she wants to shield K-12 schools from any midyear cut. She plans to offer her first budget proposal — both for fiscal 2018 adjustments and fiscal 2019 spending priorities — when she delivers her Jan. 9 Condition of the State address.
To avoid getting hit with another downward adjustment to revenue growth projections in March, Schneider said he expects the GOP-run Legislature will have to make cuts that provide enough cushion in the fiscal 2018 ending balance to deal with economic volatility brought on partly by sluggish farm prices and sales tax receipts from online purchases going uncollected.
Turning to the upcoming fiscal 2019 budget, built-in commitments and anticipated expenditures — including $91.1 million to repay money previously borrowed from reserves to erase a past budget deficit — already outpace the projected growth in revenue.
That’s even without factoring in a boost in state aid for K-12 schools or other spending priorities identified by the governor and majority Republicans.
A key unknown is how much tax changes enacted at the federal level will positively impact Iowa’s revenue situation, given that Iowans will be deducting less federal tax liability on their state returns and wage withholdings beginning in February. Another unknown is whether legislators will use that money to address budget issues, or plow it all into state tax relief.
“My personal preference would be to use that to lower Iowa income tax for people,” Schneider said.
Reynolds, House Speaker Linda Upmeyer, R-Clear Lake, and Senate Majority Leader Bill Dix, R-Shell Rock, all place cutting and simplifying Iowa’s income tax system at the top of their priority lists, but say relief and reform must be within a sustainable framework that doesn’t negatively impact government services that Iowans expect.
“Iowans expect us to conduct like we have in the past,” Dix said. “They expect us, just like you would in a family budget — if money doesn’t come in, you have to reanalyze it and make some choices on what’s the most important. I feel like our caucus is prepared to do just that.”
However, House Minority Leader Mark Smith, D-Marshalltown, described the state budget as “in shambles” and failing to provide the quality K-12 education, health care services and affordable college that have been the hallmark of past bipartisan efforts.
“I will be interested to see what Republicans bring forward to try to balance our state budget,” said Senate Democratic Leader Janet Petersen of Des Moines. “I think our budget is in a horrible place right now. I think we need to focus on priorities Iowans count on — strong public schools, our economic development programs need to be more focused less on companies that don’t need funding and more on some of our towns and communities across our state that could use some job infusion.”
Reynolds and Upmeyer said it is too early to speculate on how much money the state might allot for K-12 schools, Medicaid and other major funding areas in fiscal 2019. But Schneider said he expects overall spending to rise by about 2 percent — shy of the 4 percent growth in tax collections the Revenue Estimating Conference forecast in December.
“To me, the lesson (from recent budget problems) is the state has to do a better job of managing spending,” Schneider said, “making sure we’re not spending more than we’re taking in.”
Schneider said school administrators he has met with are planning for “zero percent” growth in state aid “and right now it’s looking like that is more likely than not.” But even with no general aid increase, Legislative Service Agency officials project the K-12 funding formula still would generate about $56 million more money for school districts in fiscal 2019.
Reynolds said she still is formulating her agenda and spending proposal she plans to unveil next week, but she expects education will be a top priority.
“We were in the top four states in the country that have increased funding to education,” the governor said in an interview. “And in fact it was almost a 21 percent increase, where a lot of other states — especially going through the recession — have decreased and continued to do that or have not been able to increase their funding at all.
“I mean, $735 million in new money has gone into education since we took office” in 2011, she added. “That’s significant and it’s because we recognize the fact that that’s our greatest asset, that’s our future and we want to make sure that we’re educating them to be successful either in a postsecondary education or in a job.”