More hidden costs of Iowa's generous business tax breaks

The excellent lead editorial in today’s Des Moines Register reminded me of a topic I didn’t manage to cover during the run-up to last week’s primary: the coming belt-tightening in Iowa’s judicial branch, which will affect thousands of Iowans who use the court system.

As with the under-funding of K-12 schools and higher education, the “crisis” in the judiciary is happening because state legislators and Governor Terry Branstad keep approving and extending unaffordable business tax breaks.

The judicial branch had requested a little more than $190 million for fiscal year 2017, which begins on July 1. Grant Rodgers reported for the Des Moines Register in January that the request included “$2.2 million for a 5 percent salary increase for judges and magistrates.” Iowa’s judges have received only one raise since 2008 (a 4.5 percent salary hike in 2014).

Instead of providing a modest increase in state funding for the court system, Iowa lawmakers allocated the same amount of money to the judicial branch for the coming year as they had done for the current fiscal year. A June 1 press release from the Iowa Judicial Branch detailed the consequences:

Supreme Court Approves Fiscal Year 2017 Budget that Includes Statewide Hiring Freeze

Des Moines, June 1, 2016 —Today, the Iowa Supreme Court approved the Fiscal Year 2017 Iowa Judicial Branch budget that begins July 1, 2016. The budget includes a statewide hiring freeze that is required because of a more than $5 million shortfall in this year’s legislative appropriation.

The $178.7 million appropriation is equal to the appropriation in FY 16 but is $5.4 million short of the amount needed to fully fund judicial branch operations at the current level of service. The shortfall is approximately 3% of the current operating budget. The increased costs to the judicial branch includes $5.1 million for salary annualization from FY 16, plus across-the-board and step increases for contract covered and noncontract covered employees, along with anticipated increases in the cost of health insurance in December of this year.

“With this budget, the supreme court tried to minimize disruption of services to Iowans despite the significant shortfall in our appropriation.” State Court Administrator David Boyd said. “The budget does not include court closure days or layoffs, but there will be consequences. With unfilled positions in courthouses around the state combined with fewer judges, Iowans can expect delays, and our troubled youth may not have as much interaction with juvenile court officers as they do now. Additionally, there are no guarantees this budget will resolve our problem. If the vacancies do not cover the shortfall, the court will have to reconsider the possibility of court closure days or layoffs.”

The legislature sets the salaries of judges and magistrates, subject to the governor’s approval. This year’s appropriation does not include a judges’ pay increase. Judges and magistrates have received one pay raise since 2008. The budget does institute a moratorium on the expansion of specialty courts, such as family treatment courts and juvenile drug courts. The budget also requires approval of the supreme court to eliminate any specialty courts currently in operation.

A hard freeze on judicial branch hiring is anticipated to cover $3.2 million of the shortfall with another $834,000 savings expected from keeping judges’ vacancies open for 6 months. The remaining $1.4 million necessary to balance the FY 17 budget will come from reductions to non-personnel line items including a 50 percent reduction in furniture and non-information technology purchases, a 20 percent reduction in office supplies and postage, and a 10 percent reduction in in-state and out-of-state travel, educational and training programs, and telephone services. The freeze and reductions apply to all components of the judicial branch, from the district courts and juvenile court services to state court administration and the supreme court.

A special page has been added to the Iowa Judicial Branch website with details of the FY 17 budget and the services provided by the courts, at . The web page includes an online suggestion box to hear from Iowans about the impact of these budget decisions and to hear suggestions regarding improved services.

As part of the effort to develop long term planning options, the court has asked the state court administrator to complete a workload study of all aspects of judicial branch operations. The results of the workload study will guide future judicial branch budget decisions.

“The court appreciates the continued support of judicial branch employees as well as the legal and business communities,” Chief Justice Mark Cady said. “The court will maintain regular meetings with the judicial council, judicial branch employees, attorneys, and business leaders to discuss the results of the judicial branch workload study, listen to the impact of budget decisions on services for Iowans, and develop long term planning options.”

Citing an e-mail from Boyd to judicial branch employees, Rodgers reported for the Des Moines Register on June 1,

Currently, there approximately 70 vacancies in the judicial branch statewide, Boyd said in the memo to employees. The hiring freeze will have “very limited exceptions,” he said. […]

Currently there are two open district court judge positions in the state, both in the fifth judicial district that covers Polk and other counties in central and southern Iowa, said Steve Davis, communications director for the branch. Two more seats on the bench will become empty in July following the retirement of two judges in eastern Iowa, he said. […]

In his Wednesday memo to branch employees, Boyd faulted state lawmakers for not making the court system a “top priority.” He expects similar uncertainties surrounding funding to continue when the legislature reconvenes for its 2017 session, he said.

So many problems could have been alleviated if the legislature had provided $5 million to $10 million more in judicial branch funding. But if the court system wasn’t their “top priority,” what was?

As Bleeding Heartland has discussed before, the commercial property tax cut approved in 2013 is expected to cost the state of Iowa $279.6 million in fiscal year 2017 alone, because of standing appropriations “designed to reimburse local governments for the reduced property tax revenue.” In a recent analysis of that 2013 law at this blog, Jon Muller concluded,

It left a big hole in the State’s General Fund. It delivered handsomely on its promise to cut taxes for commercial property owners, at least in the short run. It provided modest help to the working poor. For its $500 million (plus) price tag, it has accomplished little else.

Meanwhile, various business tax breaks already on the books before this year’s legislative session were expected to cost the state treasury $272.6 million in fiscal year 2017, as Peter Fisher showed in this backgrounder for the Iowa Fiscal Partnership.

Compounding the problem, in March state lawmakers approved and Branstad signed a bill harmonizing Iowa tax code with federal provisions. That legislation was expected to cost $97.6 million, mostly due to a provision on “Section 179 expensing,” which benefits corporate taxpayers and many farms or small business entities taxed through the individual income tax.

That same bill passed in March also included a scaled-back version of a new sales tax break for Iowa manufacturers, expected to cost the state $21.3 million in fiscal year 2017, rising to more than $25 million in fiscal year 2021.

Every year, state lawmakers extend all existing business tax breaks, and most years the legislature finds new ways to reduce corporate taxes as well. Besides being unaffordable, those tax breaks are not justified, because “Iowa business taxes are already quite competitive.” Today the Des Moines Register editors blasted state lawmakers who use “We don’t have the money” as an excuse for continuing to underfund vital public services like schools and courts:

If they don’t have the money to pay for those services, they have no one to blame but themselves. It’s a problem entirely of their own making. […]

Every year they refuse, however, and then try to characterize their poor budgeting and irresponsible giveaways as some sort of fiscal responsibility, as if refusing to set aside money for basic, contractually obligated expenses is a hallmark of sound financial planning.

Consider the predicament now facing the Iowa court system, which Iowans rely on not only for public safety, but also for the processing of small claims cases, probate services, child support, real estate liens, involuntary hospitalizations and many other services. […]

In the long run, this won’t actually save the state any money, as the workload won’t be reduced. All it will do is delay the processing of the work, slowing the progress of cases as they move through the court system while pushing some of the related expense into the next budget year.

The editors also noted that the moratorium on expanding family treatment and juvenile drug courts “will actually result in increased costs for taxpayers farther down the road,” because more defendants will be prosecuted and sent to prison rather than to programs that better address drug addiction.

Although statehouse Democrats have battled Branstad and Republican lawmakers to increase school funding and reduce the scope of new business tax breaks, the problem now afflicting the court system isn’t a simple case of “elections have consequences.” Iowa expanded business tax breaks when both chambers of the legislature and the governor’s office were controlled by Democrats from 2007 through 2010. Most Democrats in the Iowa House and Senate voted for the commercial property tax cut in 2013 too.

I don’t know what it will take to get the legislature to rethink its budgeting priorities.

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