The Deyoe Dispatch: State Fiscal Condition

Dave Deyoe

Last week, I provided some information compiled by outside groups that rate how each state is performing on different education metrics. This week I thought I would share how outside groups are rating Iowa’s fiscal management compared to other states.

National Association of State Budget Officers (NASBO) published a report in December in which Iowa fared very well. Iowa was one of six states in the Midwest that had rainy day fund balances above the national median of 6.4 percent of general fund expenditures. Iowa’s rainy day funds are now full at their statutory limit of 10 percent.

Iowa received an “A” for their lack of fiscal maneuvers to balance their budget. A couple common shortcuts other states practice include using debt to pay for recurring expenses or transferring money from special funds to the general fund.

According to the alliance, “meeting promised public employee pension and other retirement costs remains perhaps the most formidable challenge facing many states.” Iowa, Nebraska, South Dakota and Wisconsin stand out for being in strong positions to meet these obligations.

Moody’s Analytics has released the results of their 2018 stress tests of state budgets.

They test the ability of states to withstand the economic downturns of a recession and the results have improved. They found that 23 states, including Iowa, had the resources available to withstand a moderate economic recession without major reductions in state spending or tax increases. That figure was an improvement over last year’s survey, which found only 16 states capable of handling such an event without taking major steps.

Moody’s Analytics, a separate company from the bond rating agency, devised the stress test for state budgets in the aftermath of the 2008-2009 Great Recession. This year’s test examined how states would fare when hit by a moderate recession and by a major recession modeled to be slightly worse than the 2008-2009 recession.

The survey found that Iowa would be able to withstand a moderate recession without significant actions to reduce spending or increase taxes. This is due to the existence of the Cash Reserve Fund and the Economic Emergency Fund. Iowa is not alone amongst regional states in a position to handle a moderate recession. South Dakota, Nebraska and Minnesota were found to be prepared, while Kansas, Wisconsin, Missouri, and Illinois all rated as being amongst the most unprepared states. As for a severe recession, only six states were found to be able to financially handle such an event. None of these were from the Midwest.

From its 2018 test, Moody’s Analytics has determined that there are three lessons that should be learned by state policymakers. While everyone understands that a recession means a drop in tax revenue, it is also important to realize that it will create a need for increased spending in certain programs, with the primary one being Medicaid.

The second lesson is that recessions affect revenues differently than they used to. This conclusion comes from states continuing to implement policies that make their tax system more progressive. Since income tax is related to personal income, they are much more volatile in downturns, while consumption-based taxes like sales tax are much more stable over time.

The third lesson from the survey is preparedness is the key. They cited the importance of having dedicated reserves that are intended for situations like a recession. Iowa’s reserve funds appear to be consistent with the suggestions from Moody Analytics. The report says: “A well-crafted reserve policy, fiscal flexibility and careful planning are still the best ways to protect a state’s budget and economy in times of economic distress.”

Dave Deyoe of Nevada is the Iowa State Representative from the 49th District. If you have any questions or concerns, please contact Dave Deyoe, home phone: 515-382-2352; or by email: Dave.Deyoe@legis.iowa.gov.