State lawmakers got some sobering projections from tax and budget experts Friday indicating that multiyear commitments made last session could erase an $854 million surplus by fiscal 2018, even if they maintain modest spending growth and don’t embark on new initiatives.
The fiscal picture painted by Legislative Services Agency (LSA) senior analysts Dave Reynolds and Jeff Robinson got significantly worse when they factored in the possibility of an economic recession during the study period through fiscal 2020 that could blow a gaping hole in the state budget under a worse-case scenario.
“I think there’s this expectation around the building that we’re flush with money,” said Sen. Joe Bolkcom, D-Iowa City. “This would kind of indicate that may not be the situation.”
Using assumptions of 3.8 percent average yearly revenue growth and annual spending increases of 2 percent for K-12 school aid, 4.8 percent for Medicaid, 2.5 percent for employee salaries and benefits, and 1.7 percent for other government programs, the LSA fiscal experts projected legislators would have to make a $40 million adjustment in fiscal 2018 to meet the state’s expenditure limitation law.
“The projections are fairly reasonable,” Reynolds told members of the Legislature’s Fiscal Committee.
Reynolds noted the figures were not predictions but rather benchmarks intended to help lawmakers gauge the effect of property tax cuts and education reforms they passed last session.
The property tax relief will grow to $278.7 million a year in fiscal 2017 while the education reforms will cost $60 million annually until they become incorporated into the yearly K-12 state aid formula.
LSA documents indicated the state closed fiscal 2013 last June with a $927.9 million ending balance surplus on top of the $649.6 million in the cash reserve and economic emergency fund. The current fiscal year’s surplus is projected at $854.1 million while the fiscal 2015 surplus is projected at $622.1 million.
Committee co-leader Sen. Bob Dvorsky, D-Coralville, said the budget numbers show the state is in “really good” financial shape, but cautioned lawmakers to be prudent in their decision making. He said there are economic signs that state revenue will grow stronger than the average 3.8 percent yearly increase used in the projections.
Sen. Jack Whitver, R-Ankeny, ranking member of the Senate Appropriations Committee, said he is concerned the state will spend down its ending balance over the next four years. He expects lawmakers will have to make some tough decisions beginning in the upcoming 2014 session to head off future problems by curbing their urge to spend.
“We’re going to have a lot of people coming to us with ideas for one-time spending,” he said. “We have to understand that a lot of that has already been spoken for.”
Using historical data of past economic cycles, the LSA analysts devised a recession scenario employing the same spending assumptions but projecting two years of 2 percent declines in state revenue for fiscal years 2016 and 2017. That would be followed by a rebound of 6.7 percent yearly growth during a three-year recovery.
Under that outlook, the budget had a $66.8 million imbalance in fiscal 2016 that grew to $993.3 million the following year.