ITA Principles for Sound Budgeting - FY2003 Budget Review

Prelude

This is a review of the Fiscal Year 2003 Iowa State Government budgeting process. The goal of this review is to encourage the key fiscal policy developers and lawmakers of Iowa to consider these criteria as the budgeting process moves forward in 2003 and each year thereafter. To be clear, it is not the purpose or intent of this effort to render subjective judgment or declaratory comment on the merits of individual programs sanctioned by the various legislative or executive department actions.

 Each of the Iowa Taxpayers Association's seven "Principles for Sound Budgeting" is detailed below. Each principle is accompanied with examples, if applicable, from the FY 2003 General Fund budget. A plus sign (+) indicates the State abided by the principle and a negative sign (-) indicates the State deviated from the principle. ITA recognizes that in certain areas of the budget such as with Medicaid and entitlement programs it is difficult to determine the projected expense because of federal factors. ITA also recognizes the decline in the economy and budget difficulties of states nationwide; however, we maintain that adhering to these budgeting principles will ensure a sound budget in years to come.

The Fiscal Year 2004 review will be undertaken as the Governor and Iowa Legislature release their budget recommendations.

Avoid the use of one-time or time-limited sources for ongoing expenses.

When a non-recurring source of revenue is used to fund an ongoing expense, an "automatic increase" is built into the budget for the following year. This is because with the original source gone, another way must be found to fill the gap, plus provide for any growth that may occur. If a budget is already stressed in being able to fund annual growth with the annual increase in revenue, this can cause considerable additional pressure.

+The State avoided the use of one-time money to the General Fund by not transferring moneys from the Road Use Tax Fund

-  $22 million of tax-exempt bond proceeds from the School Infrastructure Fund was transferred to the Local Sales and Services Tax Fund and then subsequently transferred to the General Fund. This transfer was contingent upon the State Treasurer's determination that the transfer did not adversely affect the tax-exempt status of the Bonds.

-  $40 million was used in FY 2002 to fund teacher's compensation through the tobacco endowment fund and tobacco settlement funds, which will create a hole in the future.

-  $16+ million was appropriated from the Senior Living Trust Fund (moneys in this fund are projected to deplete within next three years) to Medicaid, which perpetuates the hole/problem in the future.

-  A new general fund appropriation was made for the Student Achievement and Teacher Quality Program, which received moneys from the Healthy Iowans Tobacco Trust Fund in FY 02.

Avoid implementing new programs for a partial fiscal year.

In tight budget years, it is difficult to find funding for new programs. Sometimes, if the full amount of funding cannot be found, a program will be initiated in the middle of the upcoming year and funded at half the annual amount in the budget. This makes it appear that the program costs less than it really does, and yet when it comes back for funding the following year its need could at least double. Once the program has started, it has a constituency; plus it is much harder to take something away than to say "no" up front. So, the result is another "built-in increase" in the budget in order to annualize its cost.

+  The budget did not reflect implementation of new programs for a partial fiscal year.

Avoid multi-year accelerating commitments.

Iowa 's budget is stretched to accommodate basic inflationary growth in any given year. There is no flexibility to do much beyond paying for current service levels; cuts in other areas must be made to finance new initiatives. In making multi-year accelerating commitments, decisions are being made without knowing what the trade-offs will be. Plus, financial conditions can change dramatically over time. Multi-year accelerating commitments create more "built-in increases."

-Collective bargaining units provide for annual negotiated pay adjustments.

Avoid new automatic, or "standing," appropriations.

Standing appropriations reside in the Iowa Code and authorize spending to occur each year without any annual legislative action. Once such an appropriation is created, the legislature never needs to revisit it again – the spending will occur automatically. Initially, standing appropriations were intended to give the executive branch flexibility to finance certain unavoidable expenses that are difficult to estimate. For example, there is a standing appropriation for expenses relating to natural disasters. Over time, standing appropriations have been created for certain high-priority items that officials wished to protect from the competition that occurs in the annual budgeting process. In other words, these items are effectively "off the table" and spending the entire amount requested is automatically authorized. The problem with standing appropriations is that they are extremely difficult to cut or eliminate. Unlike a regular appropriation where a gubernatorial veto can eliminate the spending, a veto of standing appropriation language in a bill means the law reverts to the pre-existing Code language. Restricting legislative authority to reduce spending through the use of standing appropriations is a practice that should be avoided.

+  The standing appropriation for the School Improvement and Technology Program was eliminated

+  Various earmarks and standing appropriations were eliminated in the Department of Economic Development budget due to consolidation of programs.

+  Existing standing appropriations to all three branches were decreased.

+  No new standing appropriations were made.

Accurately determine revenue and expenses.

Iowa 's Revenue Estimating Conference and associated laws are a model in the nation for solid estimating performance. Iowa 's method effectively neutralizes any pressure to inflate revenue estimates to cope with budgeting pressures. There is no such neutralizing force on the spending side, however. Expenses can be deliberately underestimated as a means to cope with budget pressure. Of course, the result is a need for supplemental (mid-year) appropriations. Therefore, the measure of accuracy in estimating expenses is the presence or absence of supplemental appropriations, though sometimes it is obvious even before the fiscal year begins.

+ Reduced the set education allowable growth rate from 4% to 1%. The 4% rate was set in 2001. Realizing that there was not enough revenue to fund allowable growth at 4%, the rate was decreased in 2002.

- The Revenue Estimating Conference (REC) lowered their initial estimate of FY 02 revenues 6 times, with the latest adjustment occurring two months prior to the end of the fiscal year.

-  The REC only estimates the revenue side of the budget.

-  The Department of Economic Development was appropriated a lump sum and was given the authority to appropriate the money for various programs to meet specified goals (set by the legislature). This could make it difficult to determine the amount of revenue and expenses within this particular Department.

Align expenses and revenue in the same fiscal year.

 Spending that occurs in a given fiscal year should be financed with revenue generated in that fiscal year, and not in a prior fiscal year. Using a supplemental appropriation (from unspent funds in the current year) to finance a program that will not begin until a subsequent fiscal year creates another "built in increase" in the future. It is not unlike the idea of using one-time funding for ongoing expenses.

Avoid shifting program funding to property taxes or fees.

Typically, budget pressure exists in the State General Fund. One way to find money for spending is to shift the source of funding from the General Fund to property taxes or fees. Sometimes these shifts are referred to as "hidden property tax increases." They are tax increases, nonetheless, unless the money saved in the General Fund is rebated back to taxpayers (which has never happened).

+  The machinery and equipment property tax replacement credit was fully funded and increased.

- Education allowable growth was not fully funded by the State which could result in a shift to property taxes.

-  The following standing appropriations were limited this year: personal property tax replacement, homestead property tax credit, and the agricultural land tax credit. Limiting these appropriations results in county budgets absorbing the cost in this year's budget and may result in increased property taxes or not fully funding these tax credits to those who qualify.

-  The confinement bill mandates a study of phosphorous by the Department of Natural Resources without giving the DNR funding for the study, which could result in increased fees to cover the cost of the study.

- DNR was given the authority to use Stormwater Discharge Permit Fees to fund the Total maximum Daily Load Program and for the review of Flood Plain Permit Applications.