State treasurer questions legality of planned budget fix

Governor Kim Reynolds’ plan to transfer $13 million from the Iowa Economic Emergency Fund to balance the fiscal year 2017 budget “would not be in compliance with Iowa law,” according to a letter State Treasurer Michael Fitzgerald sent to the governor today.

If his interpretation is correct, then a special legislative session will be required to cover the year-end shortfall. Reynolds’ staff dismissed and mocked Fitzgerald’s concerns.

Iowa law permits the governor to transfer up to $50 million in emergency funds. Many observers expected the year-end shortfall for fiscal year 2017 to exceed that amount, which would force Reynolds to call state lawmakers back to the Capitol to approve a transfer of funds.

However, Department of Management Director Dave Roederer announced last week that because of strong tax collections over the summer, no special legislative session would be needed. The governor would balance the budget with a $13 million transfer.

Staff in the State Treasurer’s office discovered a problem with the plan. Writing to the governor today, Fitzgerald referred to Iowa Code 8.55(3), which governs the use of the Iowa Economic Emergency Fund. I’ve enclosed that code section at the end of this post, following the full text of Fitzgerald’s letter.

The key provision is Iowa Code 8.55(3)(c)(1), stating that an appropriation can be made without legislative approval if “The revenue estimating conference estimate of general fund receipts made during the last quarter of the fiscal year was or the actual fiscal year receipts and accruals were at least one-half of one percent less than the comparable estimate made during the third quarter of the fiscal year.” Fitzgerald noted,

The REC did not meet in the last quarter of the fiscal year so in order to evaluate whether this requirement has been met, the actual receipts and accruals must be compared with the March 2017 REC estimate. According to the materials distributed at the [September 20] press conference, actual net general fund revenue totaled $7,095.53 million for FY17. This amount is $11 million, or .15%, lower than the March 2017 REC estimate of $11068 million. This falls short of the .5% ($35 million) threshold required by the Code.

If this contingency is not met, the transfer from the lows Economic Emergency Fund to balance the FY2017 general fund budget would not be in compliance with Iowa law. I would recommend that your staff or legal counsel review this section of the law prior to the transfer.

Speaking by phone today, Deputy Treasurer Stefanie Devin told me she was unaware of any other unilateral action the governor can take to balance the budget. The year-end shortfall has “got to be covered,” Devin said, and her understanding is that an emergency fund transfer is “the only thing the governor can do without legislative involvement.”

I’m seeking comment from Iowa House Appropriations Committee Chair Pat Grassley and his Iowa Senate counterpart, Charles Schneider.

Reynolds hasn’t been interested in Fitzgerald’s advice on budgetary matters, and today was no exception. The governor’s office ignored my inquiry, but Jason Noble reported for the Des Moines Register,

Brenna Smith, press secretary, offered a different perspective in a statement Friday from the Reynolds’ administration. The statement said the 2004 Legislature gave the governor the authority to transfer up to $50 million at the end of the year if the last estimate from the state’s Revenue Estimating Conference, known as the REC, was at least one-half of a percent less than the panel’s previous estimate.

In 2004, the Revenue Estimating Conference was required to meet each quarter, Smith said. But later the Legislature changed the law so that the revenue panel was required to meet three times rather than quarterly, with the last meeting in March.

“The purpose of the transfer law remains the same: to compare the last REC estimate to the previous one,” Smith said. “The REC last met, as required by law, on March 14, 2017. That estimate was 1.5 percent lower than the previous estimate, which triggered the governor’s transfer authority.”

Smith’s spin is not consistent with plain reading of Iowa Code 8.55(3)(c)(1), which refers to an REC estimate from the last quarter of the fiscal year “or the actual fiscal year receipts and accruals,” compared to the REC’s third-quarter estimate. The Attorney General’s Office has received Fitzgerald’s letter, but at this writing, Attorney General Tom Miller has made no determination on whether the present circumstances permit Reynolds to transfer emergency funds.

State Representative Chris Hall, the ranking Democrat on the House Appropriations Committee, commented on Twitter, “I’ve read the law. It violates the law.” Hall shares my suspicion that Reynolds administration officials did something fishy with the numbers to avoid calling a special session. He wrote to State Auditor Mary Mosiman this week, asking for “a special audit on the closing of the state’s books for Fiscal Year 2017” to determine “whether Governor Reynolds and Republicans used budget gimmicks (delayed payments), shell games (transfers), or two sets of books to close the fiscal year and avoid a special session.”

Over the summer, Mosiman vouched for the current-year budget as “stable” and “responsible,” so even if Roederer’s team did engage in creative accounting, I doubt we would hear about it first from the State Auditor’s office.

Final note: the reaction to Fitzgerald’s latest letter confirms my belief that Reynolds is ill-served by advisers who reinforce her instinct to attack and belittle those with differing opinions, rather than considering their point of view. In a tweet he soon deleted, the governor’s chief of staff Jake Ketzner mocked the country’s longest-serving treasurer as a “guy who wants to borrow money with $600,000,000.00 in bank!”

Fitzgerald’s short-term borrowing proposal would not have increased state debt. It was simply a hedge against a possible cash-flow problem in early 2018. If the state has trouble meeting any of its obligations next year, Reynolds’ decision will look foolish, and Ketzner’s trash talk more so.

Any relevant comments are welcome in this thread.

UPDATE: The governor’s senior legal counsel Ryan Koopmans has not responded to my request for comment on whether his reading of the Iowa Code is consistent with what Smith told the Des Moines Register.

Meanwhile, Rod Boshart reported for the Cedar Rapids Gazette on October 2,

At her weekly news conference Monday, Reynolds, a Republican, said her administration followed the intent of state law. Fitzgerald, who sits next to her during weekly Iowa Executive Council meetings, never raised the issue with her until issuing a letter as the books were closing Sept. 30, she said.

“I would say I guess if the Legislature has a concern with it then they can hopefully address it or clarify it in the next legislative session,” she told reporters.

“But again I’ll tell you: I meet with Treasurer Fitzgerald every Monday at the Executive Board and I would hope that if he had a concern with that he could have brought that up to me,” the governor added. “We’ve got to communicate. We need to talk about this. We’re all serving the same taxpayer out there and this gotcha stuff has got to go away. That’s what I’m trying to do and I would just hope that everybody else out there would do the same thing.”

Reached later, Fitzgerald said that “I wasn’t playing gotcha politics.” He said he sent the letter before the books had closed, asking her to check that issue to make certain the budget met all the legal provisions.

“I think she should have,” the treasurer said. “It’s not an emergency if this isn’t met. To me, that’s a violation of the Iowa law. It’s a serious issue. In Iowa, we follow the law. If we don’t, we get in trouble.”

Insisting that the governor follow the law is now “gotcha” politics?

Iowa Code section 8.55:

8.55 Iowa economic emergency fund.

1. The Iowa economic emergency fund is created. The fund shall be separate from the general fund of the state and the balance in the fund shall not be considered part of the balance of the general fund of the state. The moneys credited to the fund are not subject to section 8.33 and shall not be transferred, used, obligated, appropriated, or otherwise encumbered except as provided in this section.

2. The maximum balance of the fund is the amount equal to two and one-half percent of the adjusted revenue estimate for the fiscal year. If the amount of moneys in the Iowa economic emergency fund is equal to the maximum balance, moneys in excess of this amount shall be distributed as follows:

a. The first sixty million dollars of the difference between the actual net revenue for the general fund of the state for the fiscal year and the adjusted revenue estimate for the fiscal year shall be transferred to the taxpayers trust fund.

b. The remainder of the excess, if any, shall be transferred to the general fund of the state.

3. a. Except as provided in paragraphs “b”, “c”, and “d”, the moneys in the Iowa economic emergency fund shall only be used pursuant to an appropriation made by the general assembly. An appropriation shall only be made for the fiscal year in which the appropriation is made. The moneys shall only be appropriated by the general assembly for emergency expenditures.

b. Moneys in the fund may be used for cash flow purposes during a fiscal year provided that any moneys so allocated are returned to the fund by the end of that fiscal year.

c. There is appropriated from the Iowa economic emergency fund to the general fund of the state for the fiscal year in which moneys in the fund were used for cash flow purposes, for the purposes of reducing or preventing any overdraft on or deficit in the general fund of the state, the amount from the Iowa economic emergency fund that was used for cash flow purposes pursuant to paragraph “b” and that was not returned to the Iowa economic emergency fund by June 30 of the fiscal year. The appropriation in this paragraph shall not exceed fifty million dollars and is contingent upon all of the following having occurred:

(1) The revenue estimating conference estimate of general fund receipts made during the last quarter of the fiscal year was or the actual fiscal year receipts and accruals were at least one-half of one percent less than the comparable estimate made during the third quarter of the fiscal year.

(2) The governor has implemented the uniform reductions in appropriations required in section 8.31 as a result of subparagraph (1) and such reduction was insufficient to prevent an overdraft on or deficit in the general fund of the state or the governor did not implement uniform reductions in appropriations because of the lateness of the estimated or actual receipts and accruals under subparagraph (1).

(3) The balance of the general fund of the state at the end of the fiscal year prior to the appropriation made in this paragraph was negative.

(4) The governor has issued an official proclamation and has notified the co-chairpersons of the fiscal committee of the legislative council and the legislative services agency that the contingencies in subparagraphs (1) through (3) have occurred and the reasons why the uniform reductions specified in subparagraph (2) were insufficient or were not implemented to prevent an overdraft on or deficit in the general fund of the state.

d. There is appropriated from the Iowa economic emergency fund to the executive council an amount sufficient to pay the expenses authorized by the executive council, as addressed in section 7D.29.

e. If an appropriation is made pursuant to paragraph “c” for a fiscal year, there is appropriated from the general fund of the state to the Iowa economic emergency fund for the following fiscal year, the amount of the appropriation made pursuant to paragraph “c”.

f. Except as provided in section 8.58, the Iowa economic emergency fund shall be considered a special account for the purposes of section 8.53 in determining the cash position of the general fund of the state for the payment of state obligations.

4. Notwithstanding section 12C.7, subsection 2, interest or earnings on moneys deposited in the Iowa economic emergency fund shall be credited to the rebuild Iowa infrastructure fund.

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