Fiscal agency foresees budget gap, lower 2010 revenues

It appears likely all the money in the state of Iowa's wallet and all of its "overdraft protection" may not be enough to cover the bills coming due at the end of the fiscal year.

Based on current numbers, a Legislative Services Agency fiscal analyst predicted Tuesday the state will spend all of the $45 million ending balance legislators anticipated when they adjourned in April. Gov. Chet Culver has the authority to transfer $50 million from reserve accounts, but that may not cover the bills, the LSA's Jeff Robinson said.

It's premature to speculate on what the final budget numbers will look like, a spokesman for Gov. Chet Culver said after reviewing the LSA memo.

"There are always ups and downs during the fiscal year, but there is no clear evidence that this is anything more than a normal month-to-month variation," Troy Price said.

"We're going to be right at the edge," House Minority Leader Kraig Paulsen, R-Hiawatha, said after seeing the projection. The ending balance and the governor's transfer authority may be enough to close the books on fiscal 2009. "But now there's no question we're looking at a $1 billion budget problem next year."

LSA chart

Robinson's projection follows a "very negative" trend in state receipts in recent months. "June is likely to be another poor month," he said.

Halfway through the final month of the fiscal year, Robinson sees a $34 million drag on receipts caused by a combination of a $12 million to $15 million drop in the tax insurance companies pay based on their premiums, a decrease of at least $10 million income tax quarterly estimate payments and a calendar issue that boosted withholding taxes in May at the expense of June.

"Since net June receipts were about $540 million last year, the $34 million represents a 6.3 percent hole for June 2009 to overcome with other growth," Robinson said. "That is not very likely given the recent trend."

If there was any good news, Robinson said that June probably won't be as negative as April and May. In May, net state receipts fell by 12.4 percent and pushed tax collections into the negative column by 4.5 percent, the LSA reported. The Revenue Estimating Conference revised its projections downward, to peg the yearly drop in state tax receipts at 2.6 percent below last fiscal year's $6.02 billion in tax collections.

The state may not know the full extent of the gap when the fiscal year ends June 30. It may not become clear until it closes out the books on fiscal 2009 in September.

Robinson said there are ample funds in state reserve accounts to cover any foreseeable budget gap.

"It's not that we're bankrupt, but a question of where the authority will come from to transfer more money," he said.

If the ending balance and a $50 million transfer by the governor don't cover the bills, a special session of the Legislature could be necessary.

"It is too soon to speculate on what options the governor could take until we know for sure what the final figures are," Price said.

Paulsen called it a "very definite possibility" the governor will have to call lawmakers back to make budget adjustments. It would be better to make those reductions earlier in the budget year than wait until the 2010 session starts in January - halfway through the 2010 budget, he said.

Robinson has little doubt the downward trend in receipts "probably translates into a worse-than-expected" 2010. Sales tax receipts "won't be as good next year as this year and this year isn't good" and personal income tax withholding "could grind to a halt." Income tax growth this year stems from state government employment, retirement funds and unemployment compensation.

"Expectations are being modified," Robinson said.