April 2017

Is it Raining in Iowa?

By Amy K. Frantz

The Revenue Estimating Conference (REC) that sets the amount the Legislature and Governor use in putting together the state’s budget has reduced the estimated rate that tax receipts will rise twice now in the past few months.  Because the Legislature and Governor had decided to spend right up to the maximum allowed under the law, they were forced to adopt a de-appropriations package earlier this year, cutting $117.8 million from the budget.  Following the REC’s meeting in March, the state was facing another round of spending cuts totaling $131 million.  However, because there are only about three months left in the fiscal year (which ends on June 30), the Governor has proposed using “Rainy Day funds” to make up the difference.

What exactly is Iowa’s “Rainy Day fund?”  First of all, it is not just one fund.  Iowa Code has established two funds – the Cash Reserve Fund (CRF) and the Economic Emergency Fund (EEF).  These funds are separate from the General Fund, and have legal requirements for putting revenue into the funds as well as how those funds can then be used.

Iowa’s 99 percent spending limit takes the REC estimate and multiplies that by 99 percent to determine how much the Legislature and Governor can spend.  The limitation law also includes 95 percent of any “estimates of new revenue enacted by the General Assembly that were not included in the REC estimate.”[1]  It then decreases that amount by 100 percent of any “estimated revenue decreases enacted by the General Assembly that were not included in the REC estimate.”[2]  Finally, “any excess funds from the prior year’s General Fund surplus (after the reserves are filled to the statutory maximum balance) are added to the expenditure limitation.”[3]  This final number is the Adjusted Revenue Estimate.

“Once the state’s finances for a fiscal year are finalized, the General Fund surplus (ending balance) is distributed to various funds.”[4]  The surplus funds first flow to the Cash Reserve Fund, until the fund reaches a maximum of 7.5 percent of the Adjusted Revenue Estimate.  “If the CRF is not at the maximum of 7.5% of the Adjusted Revenue Estimate, a General Fund appropriation of up to 1.0% of the Adjusted Revenue Estimate is made to the fund.”[5]  The funds in the CRF may be used if the following criteria is met:

The General Assembly may appropriate from the CRF for nonrecurring, emergency expenditures if the appropriation is the only subject matter of the bill and the appropriation does not cause the Fund’s balance to be less than 3.75% of the Adjusted Revenue Estimate. An appropriation that reduces the balance below 3.75% must be approved by a three-fifths majority in both the Senate and the House of Representatives, and signed by the Governor.[6]

Any additional surplus funds then flow to the Economic Emergency Fund, which receives up to a maximum of 2.5 percent of the Adjusted Revenue Estimate.  “If the amount of moneys in the Iowa Economic Emergency Fund is greater than the maximum balance, the excess is required to be transferred to the General Fund.”[7]  The Iowa Code also establishes criteria for the use of the EEF.

Governor Branstad has proposed using funds from the Cash Reserve Fund to cover the $131 million that would otherwise have to be cut from the current fiscal year (FY17) budget.   The Governor’s revised budget proposal for FY18 calls for “repaying $104.8 million in fiscal 2018 and $26.3 million the following year to the cash reserve.”[8]  At the beginning of this year’s legislative session, the total fund balance in the CRF and EEF combined was estimated to be $738 million.[9]

The state has had to cut spending and is now facing using reserve funds to support the level of spending that was adopted for this fiscal year.  Instead of making cuts or using reserves half way through a fiscal year, the Governor and Legislature should consider not spending clear up to the maximum allowed under the law, and leave a cushion they can use to keep the commitments they made when they adopted the budget.

Amy K. Frantz is Vice President of Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Dave Reynolds, “State of Iowa Expenditure Limitation Process, Issue Review, Legislative Services Agency Fiscal Services Division, March 10, 2017, p. 4, <https://www.legis.iowa.gov/docs/publications/IR/797619.pdf> accessed on March 29, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid, p. 5.

[5] Ibid, pp. 5-6.

[6] Ibid, p. 6.

[7] “What is the Economic Emergency Fund?” Iowa Department of Management, <https://dom.iowa.gov/faq/what-economic-emergency-fund> accessed on March 28, 2017.

[8] Rod Boshart, “Branstad scales back spending proposal,” Cedar Rapids Gazette, March 30, 2017, p. A1.

[9] Dave Reynolds.