How did Kim Reynolds crunch the numbers to avoid a special session?

Governor Kim Reynolds won’t call a special legislative session to balance the budget for the year that ended on June 30, her office announced this morning.

They haven’t explained how a fiscal year 2017 shortfall that non-partisan analysts estimated at $104 million in July and around $75 million a few weeks ago became a $14.6 million shortfall, according to the governor’s staff.

Reynolds didn’t take questions from the press today. She didn’t even attend the briefing where Department of Management Director Dave Roederer handed out a puzzling table.

Whatever the Reynolds administration did to avert a short-term political problem will likely worsen the strain on the state budget in the coming months.

Shortly after the last fiscal year ended, staff for the non-partisan Legislative Services Agency calculated that revenues were about $104 million below the level needed to meet spending obligations. A special legislative session appeared inevitable, because the governor can transfer no more than $50 million from reserve funds to cover such a shortfall. Senior legislative analyst Jeff Robinson explained at the time,

Because money is still moving, Robinson said, the $104 million shortfall could grow or decline before Sept. 30. Tax refunds, for example, will continue to be paid out in July and August even though they’re attributed to the 2017 budget. Other revenue could come in as companies and others pay what they owe. […]

Robinson said it would be unusual, though not impossible, for the state to find enough money between now and the end of September to stave off a special session.

“Most years, no, there’s not $55 million worth of variance in there,” he said. “Not normally.”

William Petroski reported for the Des Moines Register on September 1 that revenues had come in higher than expected the previous two months.

However, the state still faces a budget shortfall of close to $75 million for the 2017 state fiscal year, which ended June 30, said Jeff Robinson, a senior legislative analyst. Those numbers could still shift because the accounting books for the recently concluded fiscal year won’t be closed until the end of September, he noted.

The Cedar Rapids Gazette’s Rod Boshart reported on September 10, “Currently, the LSA projects actual fiscal 2017 receipts were about $76 million below” the Revenue Estimating Conference’s latest projections from March.

Reynolds said a few weeks ago, “We are monitoring revenue coming in. We are monitoring refunds … We will be making decisions in the near future,” and promised her staff would use generally accepted accounting principles.

Rather than waiting until the books close on September 30, the governor’s office released this statement today:

The expected shortfall for Iowa’s FY 2017 budget is $14.6 million. Gov. Reynolds will combine $13 million from the state’s economic emergency fund with the $1.6 million ending balance. This is the final action on the FY 2017 budget, which ended June 30, 2017. The state has $605 million in reserve funds after closing the FY 2017 books.

“This has been a difficult budget year, but I am pleased we were able to manage lower-than-expected revenues without cuts to education or Medicaid,” Gov. Reynolds said. “We have been monitoring funds daily since the end of the fiscal year on June 30 and took a measured approach in dealing with the state’s finances. We continue to closely monitor the current fiscal year’s balance sheet and do not believe action is needed at this time.”

Department of Management Director Dave Roederer held a budget briefing for members of the media Wednesday morning. He shared more with reporters, including:

· The Revenue Estimating Committee (REC) estimated 2.7% growth in the FY 2017 budget.
Actual growth was 2.5%.
· Accruals (tax payments due June 30, 2017, that came in after June 30, 2017) totaled $73 million.
· After stalling earlier this year, Iowa’s corporate income taxes came in stronger than expected at 5.6% vs. the REC estimate of 0%.
· Corporate taxes make up 6.5% of Iowa’s general fund.
· Projected FY 2017 revenue from the REC: $7.106 billion
Actual FY 2017 revenue: $7.095 billion
· Projected FY 2017 net appropriations: $7.254 billion
Actual FY 2017 net appropriations: $7.258 billion

I’m seeking further explanation on how the Reynolds administration arrived at the $14.6 million figure, some $60 million below the level non-partisan analysts projected earlier this month. Did the Department of Management find a way to delay payments for some services provided during fiscal year 2017?

State Representative Chris Hall, the ranking Democrat on the House Appropriations Committee, expressed similar doubts in comments released today.

For the third time this year, Gov. Reynolds is making Iowans pay for borrowed money and corporate tax giveaways. The numbers don’t add up. The state was $104 million short on June 30 and only $14.6 million today. Taxpayers deserve to know whether Governor Reynolds and Republicans cooked the state’s books to close the fiscal year and avoid a special session.

The same statement from Iowa House Democrats zeroed in on five “key questions Republicans need to answer about how they closed the state’s books without a special session.”

1) When the 2017 Fiscal Year ended on June 30, the non-partisan Legislative Services Agency (LSA) said the budget was short $104.4 million.* How was that number reduced to borrowing just $13 million to close the state’s books?

2) Since thousands of Iowans had their refunds delayed this year because the state didn’t have money to pay them,** how many refunds for tax year 2016 still need to be paid?

3) The Legislature appropriated $1.587 billion for Medicaid in FY17 and the MCO’s are losing millions of dollars. What is the final dollar amount spent on Medicaid in FY17? Have all payments for FY 17 services been paid to the MCO’s? If not, how many payments have been delayed and must be paid out of the FY18 budget?

4) What other invoices from FY17 have not been paid to date? What is the total amount of the FY 17 invoices that will have to be paid in the FY18 budget?

5) The REC estimated the state’s net accruals in March would be $29.1 million this year. Over the last four years, accruals have ranged from $-16.2 million to a $19.6 million. To close the books this year, the state is now reporting net $73.5 million in accruals, which is the highest number in the last decade. Why is that number so high over the estimate?

Context for question 2: the Des Moines Register’s Brianne Pfannenstiel reported in June, “Iowa didn’t have enough cash to pay people [state tax refunds] at the same pace as in previous years.”

Context for question 3: the Iowa Department of Human Services hasn’t signed current-year contracts with the private insurance companies that now manage Medicaid for some 600,000 Iowans. Some politics-watchers have speculated that state negotiators may be offering higher future payments to the managed-care organizations in exchange for not billing the DHS for part of last year’s costs until after September 30.

Most Republican lawmakers will be relieved not to come back to the Capitol to deal with another budget mess. They’ve promised for years not to use “one-time money” for “ongoing expenses” but already approved $131 million from the cash reserves earlier this year to bring the 2017 budget into balance.

Reynolds likely also feels pressure to take as little now from the reserve funds as possible. Her main rival for the Republican nomination for governor, Cedar Rapids Mayor Ron Corbett, has accused her of borrowing more money than former Democratic Governor Chet Culver. State Treasurer Michael Fitzgerald has repeatedly warned that the state’s cash reserves may not be sufficient to pay all bills on time during the first half of 2018. The governor rejected Fitzgerald’s short-term borrowing proposal and sent her surrogates out to accuse the treasurer of partisanship.

In a September 19 memo, Hall warned,

Given the ongoing budget mess, there are only two options left for Reynolds and the GOP to fix the state’s budget deficit. Governor Reynolds can a) call the Legislature back for special session and request to borrow another $50-$104 million from the state’s savings accounts or b) take less than $50 million from the state’s savings accounts and instead use budget gimmicks (delayed payments), shell games (transfers), or two sets of books to cover the deficit.

If Reynolds shifted tens of millions of dollars in payments into the current year, state lawmakers will have to make larger cuts during the 2018 legislative session.

If Reynolds adopted the tactics once used by her mentor, “Two-books Terry” Branstad, I’m concerned the governor’s staff will lean on the Legislative Services Agency’s non-partisan analysts to adjust their year-end numbers (due to be released in early October) to match the administration’s new math.

Today’s “final action” is far from the last word on Iowa’s 2017 budget.

P.S.- Today’s statement from Republican Party of Iowa chair Jeff Kaufmann will not age well.

“The budget is balanced and Iowa will pay its bills on time. Thanks to Governor Kim Reynolds steady, stable management, and her partnership with Republican legislators, we’ve closed the books on FY’17.

“In contrast to Democrats in the legislature and those vying for higher office, who panicked and prematurely called for a special session, Governor Reynolds and Republican legislators chose not to play political games. Where Democrats attempted to spend the FY’17 ending balance money on ongoing expenses, Republicans instead stayed levelheaded, closely monitored revenues and spending, and consistently deployed fiscally responsible practices to ensure taxpayer money was spent wisely.

“As a livestock farmer, I know our agriculture economy has had a tough few years, and that takes a major toll on the state budget. I trust Governor Reynolds and Republican legislators to run the state efficiently regardless of the challenges that may face us, and I know they’ll craft a responsible budget that protects taxpayers and provides the services Iowans need.

“With one of the lowest unemployment rates in the country and the highest graduation rates in the country, Iowa is headed in the right direction. Republicans are proud of that, but we also believe more must be done to help Iowans in every corner of the state. Now that we’ve closed the door on FY’17, we can push forward and do just that.”

The tough farm economy is Iowa Republicans’ favorite excuse for state revenue shortfalls. However, Jon Muller explained here why the health of the agricultural sector has much less impact on state revenues than GOP leaders would have you believe.

UPDATE: Responding to my request for comment, Corbett noted that Reynolds borrowed $144 million to balance the 2017 budget, “almost three times” the $46.5 million Culver borrowed from reserve funds. “This only solves last year’s budget,” Corbett added, noting that future debt payments “only reduce funds available for schools” and other needs. “The FY 18 current budget is under suspect and we haven’t even begun to discuss FY 19.” As for next year, “the picture isn’t promising,” because Reynolds has not committed to continuing funding to backfill local governments for money lost through the 2013 commercial property tax cut.

SECOND UPDATE: A Legislative Services Agency fiscal update on September 20 shared the numbers reported by the Department of Management, without explaining why accruals were so much higher than anticipated (“Fiscal Year 2017 accrued revenue totaled $73.5 million, an increase of $43.5 million compared to the adjusted March FY 2017 Revenue Estimate”). I am seeking clarification on why LSA staff had previously estimated that the final shortfall would be in the $75 million range.

Although Reynolds dodged the budget briefing (presumably not wanting to take reporters’ follow-up questions), she found time to attend a campaign fundraiser later on September 20.

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