10 days to an Iowa government shutdown?

Iowa’s current fiscal year ends on June 30, which gives Governor Terry Branstad, Republican leaders in the Iowa House and Democratic leaders in the Iowa Senate just ten days to approve a 2012 budget without disrupting state government operations. Although the parties have settled on a total spending target for the next fiscal year, they are still at odds over funding for key programs. They appear to have made no progress toward a compromise on commercial property tax reform, which Branstad demands as part of any final budget deal.

Lots of links on spending priorities, rival tax proposals and government shutdown scenarios are after the jump.

UPDATE: Scroll to the end for further details Senate Democrats released on June 20 regarding a budget compromise.

A week ago today, prospects for avoiding a government shutdown seemed good. Democrats had agreed to the Republican-backed target of $5.99 billion in general fund appropriations for fiscal year 2012. That was a major concession, since the Iowa Senate had approved budget bills totaling roughly $200 million more in spending for next year. Within the $5.99 spending target, Democrats said they would continue to advocate for more education spending at all levels (preschool, K-12, community colleges, state universities).

Senate Democrats also are ready to approve some appropriations for fiscal year 2013. However, legislators want to retain authority to adjust spending numbers for the second year of the two-year budget. After resisting Branstad’s demand for biennial budgeting, Democrats agreed two months ago to allocate 50 percent of fiscal 2013 appropriations as part of a 2012 budget. A House Republican omnibus budget bill, passed on June 8, included 2013 appropriations at 85 percent of 2012 levels. Branstad has endorsed the House Republican budget. To my knowledge, he has not said how much 2013 spending must be included in this year’s budget in order to get his signature. In April, the governor rejected the Senate’s offer to approve only half of spending for the second fiscal year.

Legislative leaders from both parties had hailed progress toward a budget agreement on June 9 and 10. Last week’s budget negotiations did not go well, though. On June 15, House Republicans accused Democrats of demanding more spending, while Branstad said in a statement, “The Senate Democrats’ plan calls for spending more than we take in, while underfunding vital entitlement programs. This is unacceptable and Iowans will no longer be fooled by their deceptive budgeting practices.” House Speaker Kraig Paulsen claims the Democratic budget proposal would in fact spend approximately $6.1 billion, because supplemental appropriations to Medicaid would be needed later.

Both sides accused the other of seeking a government shutdown for political advantage. In rival press releases last Wednesday, House Republican Majority Leader Linda Upmeyer said Senate Democrats “have been threatening shutdown since May and today they just took another step closer.” Senate Appropriations Committee Chair Bob Dvorsky countered, “By failing to negotiate in good faith toward an honest budget deal, Republicans made it clearer than ever today that they are willing to risk a shutdown of state government unless they get enormous corporate tax breaks for out-of-state corporations.” Democrats note that Republicans loaded up their omnibus budget bill with contentious legislation the Senate had declined to pass earlier this year.

This week Senate leaders plan to move a new Democratic budget plan through the upper chamber. It will include $5.99 billion in spending for fiscal year 2012, some kind of appropriations for fiscal year 2013, and a property tax reform proposal. Judging from statements by several key Senate Democrats last week, the property tax reform will closely resemble a bill that the Senate approved earlier this session with a large bipartisan majority.

Todd Dorman summed up the Branstad, House Republican and Senate Democratic approaches to property tax cuts here:

Gov. Terry Branstad wants to slice the percentage of a commercial property’s value subject to tax from 100 percent to 60 percent, arguing that high commercial property taxes are an impediment to economic growth. That cut would take immediate effect for new properties. And for existing ones, it would be phased in over five years. In the meantime, the state would provide local governments with annual replacement dollars rising from $50 million to $250 million by year five. The cut is is much larger than that, but Branstad argues that commercial growth will offset losses.

Branstad would also limit the growth in residential and agricultural property values to two percent annually, down from the current 4 percent cap. He contends the move will head off potentially big tax hikes down the road.

Republicans who control the House are less aggressive, reducing commercial taxable value from 100 percent to 75 percent in five years, while providing a rising local government reimbursement of up to $150 million over five years. The House matches Branstad’s 2 percent cap, and expands the state’s share of K-12 education aid with an eye on reducing the share of property taxes that fund schools.

Senate Democrats would provide a tax break that would allow the first $30,000 of commercial property value to be taxed at the same value percentage as residential property, around 50 percent of assessed value. The breaks would increase to $200 million statewide over five years, with a maximum credit of $600 per property. The state would fully fund the credit, and Democrats contend the credits would help small businesses.

Senate Ways and Means Committee Chair Joe Bolkcom held hearings on property tax reform on June 14. Statements he released before and after those hearings suggest that the Republican plan is a non-starter in the Senate. Here’s an excerpt from Bolkcom’s opening statement at that hearing (emphasis in original):

“The Democratic commercial property tax cut puts Main Street ahead of Wall Street.  When fully implemented, 83% of Iowa commercial property taxpayers will see their taxes cut by 45%.  Let me repeat that: 83% of Iowa commercial property taxpayers will see their taxes cut by 45%.

“The Republican plan, on the other hand, spends almost twice as much and yet provides only a 25% cut to each commercial property taxpayer.  Under their plan, a relatively small number of large out-of-state corporations receive millions that should go instead to Iowa small businesses.

“Why, for example, do Republicans insist on giving Wal-Mart a huge state tax break worth almost $4.5 million?  Will Wal-Mart even notice?  Will that corporate welfare create even one job in Iowa?

“Unlike the Republican plan, the Senate Democratic commercial property tax cut is fully funded with a $200 million annual appropriation.  That’s why it is NOT a tax shift onto the backs of Iowa’s residential property taxpayers.

“The House Republican proposal costs an estimated $394 million, yet Republicans provide only $150 million in state replacement dollars.  The $244 million shortfall will land on the Iowa homeowners.  Some cities have already indicated local residential property taxes would increase by as much as 20 percent under the House plan.

“Senate File 522-the original Senate version of property tax reform-passed the Iowa Senate by an overwhelmingly bipartisan vote of 46-4.  The House proposal has never had such deep, bipartisan support.  In fact, it is strongly opposed by Iowa’s local governments and schools.

“Any competing proposal has be AT LEAST as good as the Senate Democratic proposal, which can be summed up in these three key points:

1.      83% of all commercial property taxpayers get a 45% cut in their property taxes.

2.      NO shift of costs onto the backs of residential property taxpayers.

3.      NO impact on local schools and services.

The House Republican plan fails on all three points.  In fact, the Republican plan can fairly be described as a job killer for Iowa’s smaller towns and as the largest residential property increase in state history.

This is from Bolkcom’s press release later the same day:

“After today’s public hearing, the threat posed by the poorly thought-out Republican corporate tax plan is more clear.

“While Wall Street corporations get millions, homeowners get the largest property tax increase in Iowa history.  Local job creation efforts will be devastated and bond defaults caused by the Republicans’ haphazard approach will mean additional residential property tax hikes.

“In contrast, under the Senate Democratic commercial property tax cut, there is more commercial property tax relief for more property taxpayers, no tax shift onto residential property taxpayers, and no harm to local government services, bonding or economic development.

“No wonder Republicans threaten a government shutdown if they don’t get their way.  Throwing a political tantrum is the only hope for this disastrous corporate tax plan.”

Not a lot of wiggle room there.

House Speaker Paulsen says Republicans will fight for their property-tax plan, which was included in the omnibus budget bill passed on June 8. The Democratic approach would start by cutting $50 million in commercial property taxes, increasing by $50 million per year to a maximum of $200 million if–and this is a big “if”–state revenues increase by 4 percent per year. Paulsen doesn’t want to make future cuts contingent on growing revenues:

“There is no guarantee that that property-tax relief in the Senate Democrat proposal ever comes to fruition,” [Paulsen] said. “There’s no guarantee. The Legislature has a history of underfunding tax credits, and that’s basically what they’re creating. We want real, meaningful and guaranteed tax relief.”

Even if Iowa House and Senate leaders reach a compromise on property taxes, which seems unlikely at this writing, Branstad may demand deeper cuts for business. As of last week the governor didn’t sound satisfied even with the House Republican plan, saying commercial property taxes must come down to 60 percent of the property’s value to make Iowa competitive. He did concede that property tax changes may have to be stretched out over a longer period to get to that 60 percent level.

Branstad still wants “new and remodeled parcels” to be taxed at the 60 percent level right away, while taxes on older commercial properties would gradually come down to that level. If that idea is part of a final package, get ready for more empty spaces on small-town main streets and in older city business districts. The state would create a new incentive for sprawl by taxing business owners less if they build on greenfields than if they use existing buildings. Branstad and House leaders have claimed business growth increase local government revenue by more than enough to make up for lost property tax collections, but cities’ losses will be compounded if more businesses move from older neighborhoods out to newly-developed suburban areas.

Local government representatives have expressed alarm that the Republican approach to reducing commercial property taxes would leave gaping hopes in city budgets. Several city and county officials testified about the property tax reform proposals during a June 14 Iowa Senate hearing. Click here for links to their full testimony; IowaPolitics.com posted highlights from the hearing here.  At the same hearing, two bond attorneys warned the Republican plan could cause local government defaults, leading to residential property tax increases (video here).

Local officials want to avoid a repeat of their experience after Iowa phased out property taxes on machinery and equipment during the 1980s. Branstad frequently touted that reform during last year’s gubernatorial campaign, saying it inspired companies to open facilities in Iowa. Senate Majority Leader Mike Gronstal has called the property tax change on machinery and equipment “pretty close to the biggest unfunded mandate in the history of the state,” saying it led to property tax increases for farmers and homeowners as local governments tried to make up for lost revenue.

What happens if no budget deal is reached by July 1? No one knows. Minnesota Governor Mark Dayton has released detailed contingency plans in the event of a government shutdown, but Branstad is not following his lead. Iowa politicians have never failed to approve a state budget in time in time for the start of the next fiscal year, so there is no precedent.

It’s not clear whether the Branstad administration is keeping the public in the dark or simply doesn’t have a plan for starting the next fiscal year with no budget in place.

An open records request by American Federation of State, County and Municipal Employees, or AFSCME, Iowa Council 61, IowaPolitics.com and several other media outlets Friday produced 160 emails and 84 documents.

But the vast majority of the emails were press clippings – copies and website links to newspaper stories. They also contained copies of a newsletter by Iowa Senate Minority Leader Paul McKinley, R-Chariton, and copies of the requests for information about the potential government shutdown.

“There is no shutdown plan, and there is no shutdown document,” Branstad spokesman Tim Albrecht said. “We have said all along that government will not shut down on July 1, and that remains the case. As such, there is no document that outlines a shutdown.”

Albrecht maintained that the administration had complied with state law by fulfilling the open records request and providing every single document requested. AFSCME had asked the administration to release all contingency plans, any layoff plans, a list of essential services, and any other correspondence and information related to a possible government shutdown.

Iowa GOP leader Matt Strawn says the governor has “made very clear” that “essential services that Iowans rely upon will be there for them.” Trouble is, the Branstad administration won’t say which services it considers “essential.”

Congress has often passed continuing resolutions to keep federal government spending at the previous year’s level while the House and Senate work out budget differences. I don’t know whether Branstad and statehouse leaders would agree to a similar short-term solution to keep government services functioning after July 1.

Share any relevant thoughts in this thread.

UPDATE: Senate Democrats announced on June 20 that their new budget proposal meets “the top two demands of Governor Branstad and House Republicans: Spending less than $5.99 billion and approving a two-year budget.” Here are some key features of the compromise, according to Senate Democratic staff:

*The budget includes the earned income tax credit expansion passed by the Iowa House and Senate earlier this year, which Branstad item-vetoed in April.

*The budget foresees no allowable growth in K-12 education budgets for the 2012 fiscal year, followed by 3 percent allowable growth in fiscal year 2013. Republicans had first proposed zero allowable growth for two years, then compromised to no growth in 2012, followed by 2 percent in 2013.

*The budget would fund the universal voluntary preschool for four-year-olds at lower level than status quo, but at a higher level than Republicans favor. Senate Democrats had been fighting for the current weighting formula, which provides funding per preschool student enrolled at the equivalent of 0.6 of a K-12 student. House Republicans voted earlier this year to eliminate the preschool program. Their omnibus budget bill approved this month kept the preschool program, but with only half the money (funding per student enrolled at 0.3 of a K-12 student). The new Senate budget foresees preschool funding at 0.5 percent of a K-12 student.  

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