Iowa’s state surplus tops $1.2B, could lead to tax cuts

DES MOINES — The state ended fiscal 2021 with a general-fund surplus of nearly $1.24 billion, Gov. Kim Reynolds announced Monday — much more than earlier forecast and money she has indicated could lead to further tax cuts.

While the state’s fiscal year ended June 30, there was an accrual period for three months afterward during which state agencies closed out the books.

"Iowa is in a very strong financial position due to our fiscal responsibility,” Reynolds said in a statement. “This surplus proves we accomplished exactly what we set out to do — overcome the financial challenges caused by the global pandemic and invest in education, workforce, healthcare, agriculture and technology. We will continue to invest in these important priorities going forward to meet the needs of our citizens and state.”

When the 2021 legislative session ended in May, the Legislative Services Agency estimated the surplus for fiscal 2021 would be $487.6 million. On Monday, the governor said the balance was almost $1.239 billion instead, and “that’s on top of the $1 billion in cash reserves and our emergency funds.” According to the legislative agency, the combined cash reserve and economic emergency fund for fiscal 2021 actually total $801.1 million.

Agency analysts attributed the surplus spike in the surplus to higher-than-expected net general fund receipts and lower tax refunds. Receipts collected — primarily from personal income, sales and use and corporate taxes — exceeded the estimate by $619 million. And refunds were less than anticipated by $117 million. That resulted in a net increase of $737.1 million.

During a political fundraising event over the weekend, Reynolds expressed pride in the accomplishments and told her Republican supporters the surplus likely would mean more tax cuts proposed in the future.

“This is why we cut taxes this year and eliminated the inheritance tax,” she said. “This is your money, not the government’s. And I will never forget that. Republicans in the Legislature will never forget that, which is why we will continue to cut taxes in Iowa.”

In closing down the 2021 legislative session, lawmakers removed barriers to ensure state income tax cuts will start in 2023, doubled eligibility for a child care tax credit, phased out the state inheritance tax, shifted funding for mental health care services from local property taxes to the state and phased out state funding designed to assist local governments that lost revenue due to previous property tax cuts. All the elements were part of a compromise as Republican leaders negotiated their respective wish lists for the session.

Legislative Democrats pressed for more state investments in K-12 education, regent universities, water quality, pandemic recovery and other perceived needs rather than stockpiling money for more tax cuts.

“They’ve underfunded the schools year after year,” state Sen. Janet Petersen, D-Des Moines, said Monday. “If they were actually putting the funds into services that Iowans need or keeping up with the cost of inflation, we wouldn’t be sitting on this budget surplus.”

Throughout the pandemic that first hit the state in March 2020, legislators, policymakers and budget analysts have indicated the state has been aided significantly by an influx of federal relief funds.

“It is important to give credit where credit is due. As mentioned by Iowa’s non-partisan budget experts at their last meeting, the state budget would not be in the strong position it is in today without the unprecedented COVID relief and recovery measures taken by President (Joe) Biden and Democrats,” said Rep. Chris Hall, D-Sioux City, ranking member of House Appropriations Committee.

“The truth is Gov. Reynolds adamantly opposed the key budget drivers that aided Iowa’s economic recovery — new child tax credits for families, lower health insurance premiums, and new investments in Iowa public schools,” he added.

Officials at Truth in Accounting, a think tank that analyzes government financial reports, said Iowa had money set aside to weather the pandemic, which has resulted in surplus assets. According to its analysts, states like Iowa with surpluses likely will be able to use the additional funds to help them weather any future public health or economic crises and downturns.

Linda Upmeyer, a former lawmaker from Clear Lake who co-chairs the Republican Party of Iowa, said Republicans have promised to put Iowa's fiscal health at the forefront of their agenda.

“Despite all the obstacles and challenges, as well as cries from legislative Democrats to spend more than the state takes in, Gov. Reynolds and Republicans held firm on their commitment to responsible state budgeting,” noted Upmeyer, who praised the “balanced” approach to the pandemic.

Sheila Weinberg, founder and chief executive officer of Truth in Accounting, said the uncertainty surrounding this current crisis makes it impossible to determine how much will be needed to maintain government services and benefits. “The nation’s fiscally healthiest state governments had been riding on the tail winds of the growing economy and energy boom,” said Weinberg. “But these states are not out of the woods yet. The ongoing pandemic could dramatically affect the finances of even the healthiest of states.”

During the 2021 session, Republicans who control the Iowa Legislature approved an $8.119 billion state budget for the fiscal year that began July 1, which boosted overall spending by $290 million. The 3.7 percent increase in spending includes $100 million for expanded broadband services in Iowa.

A recent Legislative Services Agency analysis showed that, overall, Iowa has received $9.36 billion in federal assistance in a variety of avenues that directly aided individual Iowans and businesses, while state agencies have been awarded $6.75 billion to support 72 federal programs with $4.35 billion already expended and about $2.4 billion still waiting to be distributed.

Included in that was $513 million that was used to aid needy Iowans covered by Medicaid and other federal medical assistance and $2.97 billion in federal money that Iowa Workforce Development officials used to assist Iowans who lost their jobs due to closures, shutdowns or other pandemic consequences.

Federal money helped cover an extra 75,000 to 100,000 Iowans receiving Medicaid benefits during the period where states were not allowed to un-enroll participants due to the effects of the pandemic.

Officials with the state Department of Human Services said the first wave of child care block grants has distributed $99 million of nearly $127 million available. A second phase of nearly $370 million has been obligated but awaits recommendations from the Governor’s Child Care Task Force “to determine how to best use the remainder of the funds,” said Human Services spokesman Alex Carfrae. The state has until Sept. 30, 2024, to decide.

Similarly, officials with the state Department of Education said various federal relief funds have been allocated to school districts but many are multiyear programs that are distributed as reimbursements. The legislative agency’s analysis indicated $413.4 million in education funding has been distributed, with the remaining $712.3 million likely to be allocated as schools determine how they want to use the money with deadlines ranging until September 2024, said Education Department spokeswoman Heather Doe.

The agency’s report also indicated the Iowa Department of Public Health has been awarded nearly $581.4 million but has expended about $69.9 million of it, leaving $511.45 million. A large portion of that money — $346 million — is targeted to epidemiology and laboratory capacity for infectious diseases. Health officials had not provided a response as of Monday for details.

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