Warning that "Iowa must use all available tools to prepare for strained general fund cash flows" in the current fiscal year, State Treasurer Michael Fitzgerald formally asked Governor Kim Reynolds yesterday to authorize short-term borrowing this fall. Reynolds has previously said she is confident the state will be able to pay its bills without such action.
The country's longest-serving state treasurer counters that "prudent" management of state finances justifies cash-flow borrowing to ensure that Iowa can meet its obligations, including school aid payments, in early 2018.
Fitzgerald's August 30 letter, enclosed in full below, made the case for issuing tax and revenue anticipation notes (TRANs), explaining:
A TRANS is a cash-flow financing which ensures that payments can be made on time. Iowa must use all available tools to prepare for strained general fund cash flows in FY18. Not paying our obligations on time can have serious impact on lowans, for example, delaying payments to school districts could force them to borrow money and incur unnecessary costs they cannot afford.
Fitzgerald noted that when fiscal year 2017 began on July 1, 2016, "we had $44 million in general fund surplus and $729 million in reserves to rely on to supplement general fund cash flows." But at the start of the current fiscal year,
the general fund surplus has been spent. The reserve funds are down to $610 million with talk of at least another $50 million draw to balance last fiscal year. As these sources of money dwindle, the timing mismatch between revenues and expenditures will put pressure on the general fund.
Because state revenues don't come in evenly throughout the year, Iowa can develop cash-flow problems, especially in March and April, before most citizens submit their income tax payments. The Department of Administrative Services currently estimates that the lowest balance for the general fund will be approximately $27 million in April 2018. Fitzgerald's letter observed,
During each of the last four fiscal years, actual receipts have lagged enacted projections. Final numbers are not yet available for FY17, but at the end of the legislative session the shortfall was expected to be upwards of $274 million. We must prepare for the distinct possibility that revenues will lag projections in FY18 by more than $27 million.
Iowa delayed some tax refunds earlier this year, when the general fund was "underwater."
Fitzgerald told Reynolds that "Iowa has used TRANs sixteen times since 1985," most recently in 2007. He explained that TRANs are not "debt," but rather a cash-flow tool, paid back in a matter of months. For that reason, "Issuance of TRANs does not increase the long-term liabilities of the State." In the past, short-term borrowing has typically "generated earnings" because the state can invest the money at a slightly higher interest rate. "If we act quickly, current market conditions indicate that this financing could once again generate earnings."
The treasurer added that there is no downside to "being prepared" for a possible cash shortfall.
I liken this to stocking up at the grocery store when the forecast warns of a blizzard. If the storm hits, we are grateful to be ready. If the storm takes a different path, we are relieved and no worse off for having taken steps to prepare.
I have sought comment on whether Reynolds will be more receptive to Fitzgerald's formal proposal than she was to the treasurer's public statements earlier in the year. I'll update this post as needed.
For reasons Bleeding Heartland discussed here, there is no fiscal case against short-term borrowing, given Iowa's chronically underperforming revenues, which could easily fall further below current projections. A desire to avoid a public-relations problem this fall appears to be driving the governor's reluctance to follow Fitzgerald's advice. The strategy carries some big political risks, though, as rival Republican gubernatorial candidate Ron Corbett continues to hammer Reynolds for what he calls a "culture of indecision" in the governor's office.
UPDATE: The governor's office ignored my inquiry, but the Des Moines Register's William Petroski quoted communications director Brenna Smith:
"Michael Fitzgerald is again engaging in his tiresome, headline-grabbing scare tactics. Iowans should not be fooled by this dangerous, reckless rhetoric," Smith said. "Iowa’s bills are being paid fully and on time. We have $610 million in our reserves, and it is unwise to suggest the state cannot pay its bills."
Smith said the state is effectively and responsibly managing taxpayer dollars at a time the nation’s federal deficit is approaching $20 trillion. "Now is not the time to be borrowing money," she added.
Iowa House Speaker Linda Upmeyer echoed the criticism, with a bonus apples-to-oranges comparison in her written statement.
Treasurer Fitzgerald continues his attention-seeking ways of running to the press to sound false alarms and scare the public rather than speaking with Governor Reynolds or legislative leaders. If he had serious concerns about the budget, then he would have brought it up while the Legislature was in session or reached out over the summer.
The Department of Management has assured legislative leaders that the reserve accounts have enough funds to cash flow the state this fiscal year.
What's interesting is that Treasurer Fitzgerald didn't sound these same alarms in 2009 before former Governor Culver enacted a 10% across-the-board cut. Instead he pointed to our AAA credit rating, which we still have today, as evidence that we would be able to pay the bills. He's creating a fake issue to score political points, plain and simple.
Fitzgerald never said the state isn't paying bills on time now. He has been raising concerns about a possible cash-flow problem in the spring of 2018 since early May, shortly after a stretch of eleven days when the state didn't have enough reserves to meet all obligations. The legislature adjourned for the year on April 22.
The treasurer doesn't need legislative approval for short-term borrowing. He's been down this road sixteen times under previous governors.
Putting their faith in the official estimate of ample reserve funds, Upmeyer and the governor's spokesperson fail to acknowledge an inconvenient fact mentioned by Fitzgerald: "each of the last four fiscal years, actual receipts have lagged enacted projections." Revenues came in hundreds of millions of dollars below projections in fiscal year 2017 alone. Former Iowa revenue estimator Jon Muller expects that trend to continue during the current fiscal year.
The 2009 across-the-board cut happened after the "Great Recession" caused "the largest collapse in state revenues on record" across the country. No one is suggesting state revenues will drop by so much in the next few months. Fitzgerald wants to hedge against a timing issue during the weeks before state personal income tax returns are due.