Iowa’s budget shortfall projected to get worse

Iowa's fiscal 2017 budget, already propped up with nearly $118 million in cuts and transfers and $131 million in IOUs from reserves, took another hit Monday when a state agency reported a $104 million shortfall from even those downgraded expectations.

The news, although not a final accounting of the fiscal year that ended Friday, increases the chances that lawmakers will be called back to Des Moines in special session yet this year to deal again with the budget.

Gov. Kim Reynolds says she has the authority without legislative approval to grab $50 million from reserves to cover a shortfall. But the figure released Monday by the nonpartisan Legislative Services Agency is more than twice that.

Democrats, in the Statehouse minority and eager to make inroads against Reynolds and other Republicans before the 2018 elections, pounced on the news.

'They've chosen not to address the runaway cost of tax credits and tax breaks to out-of-state companies, and have put Iowa into an unsustainable cycle,” said a statement from Chris Hall, D-Sioux City, the ranking member of the House Appropriations Committee. 'With a special legislative session looking more likely each week, will Republican leaders fix the budget mess they've created or will they just borrow more?”

To be sure, the state budget is growing despite the setbacks. The legislative agency Monday estimated the general fund budget to be $6.862 billion as of June 30, the end of the fiscal year. That's more than $190 million above the 2016 budget at this time last year.

But it's far less than what was expected.

The state's Revenue Estimating Conference has three times scaled back its forecasts of how much money the state would take in.

Legislators already clawed back tens of millions of dollars that had been approved and that state agencies had planned to spend.

When the estimate fell again, legislators agreed to take $131 million out of the cash reserve with the promise of repaying it within two years.

In all, with the latest shortfall added, the state seems on track to collect some $350 million less for 2017 than planned.

Reynolds has said she won't decide whether to call legislators back for a special session until the books close on the fiscal 2017 budget. Although the budget year just ended, receipts are still trickling in and tax refunds are still being paid, so the total will change.

But tweaking the budget by about an extra $55 million in three months is a tall order. In 2016, in comparison, net revenue grew about just $15 million by the time the books were closed.

Besides the need to dip into reserves to cover the shortfall for the 2017 budget year, the downgrades raise the possibility of another round of budget clawbacks next year.

Legislators already have taken into account in future budgets the need to repay the $131 million borrowed so far. But that doesn't account for any more borrowing from economic reserves, or for further softening of expectations.

Moreover, Reynolds, who is running for governor in 2018, is calling for a state income tax overhaul next year. Senate Republicans are formulating a plan that would shrink income brackets to three, gradually phase out federal deductibility in order to cut rates and provide at least $500 million in relief to Iowa taxpayers by 2022, according to Sen. Randy Feenstra, R-Hull, chairman of the Senate Ways and Means Committee.

Proponents say the changes are necessary to stimulate growth.

This year, income tax receipts are not keep pace with expectations. The Revenue Estimating Conference projected they would increase by 4.1 percent over 2016. But the legislative agency said Monday they are showing only a 2.6 percent increase so far.

'Iowa is not in a recession,” Sen. Joe Bolkcom, D-Iowa City, the ranking member of the Senate Appropriations Committee, said in a statement criticizing Republican priorities. 'Iowa is experiencing slow revenue growth because the policies of Gov. Reynolds and legislative Republicans are out of whack. Delaying tax refunds for Iowa families and other gimmicks will not solve this budget mess.”