CHICAGO – Iowa recently wrapped up a legislative session that saw bipartisan passage of a sweeping property tax relief package that one rating agency warned could strain local governments.

Lawmakers also approved a new budget and plans to retire $116 million of debt, including bonds issued for a struggling state-run resort.

Though the Legislature has divided control with Democrats holding a majority in the Senate and Republicans in the House, they reached accord on key tax and spending policies that Republican Gov. Terry Branstad backed. 

“Both parties in both chambers came together to pass the most significant legislative achievements we have seen in a generation. These results will benefit generations to come, ensuring higher student achievement, job creation and healthier Iowans,” Branstad said of the session.

Lawmakers approved a $6.5 billion budget for fiscal 2014, which begins July 1, up about 3.4% over fiscal 2013. The package provides increased funding for education although not as much as Democrats wanted.

The budget taps a chunk of the state’s $800 million budget surplus to pay down debt and provide income and property tax relief. The state expects to close out the current fiscal year with an $844 million surplus, in addition to more than $600 million in reserves.

Lawmakers passed small income tax credits, increased the earned income credit, and adopted a sweeping property tax reform package estimated to lower property taxes by $3.9 billion across the state over the next decade. The state would  compensate local governments for an estimated $3 billion of the loss to their property tax coffers.

Moody’s Investors Service weighed in on the impact of the property tax reforms last week, warning they could curb local governments’ financial flexibility in the long run.

The package cuts a wide swath in reducing the taxable value of commercial and industrial property. Local governments will see modest reductions in their property tax collections in fiscal 2015 and larger ones possibly beginning in fiscal 2018.

The near-term impact of the changes is muted because the state will compensate local governments through 2017 for much of the loss associated with the changes. After that, the Legislature will determine annually whether to continue the reimbursements.

The reform package also creates a new class for multi-residential units, gradually reduces the percentage of telecommunications properties subject to taxation, and limits growth in assessed value for residential and agricultural properties.

The state estimates those three measures will reduce revenues of non-school district local governments by just $5.1 million annually starting in fiscal 2015, but lost revenues could grow to $140.5 million annually in fiscal 2024, Moody’s reported.

The state will not compensate for those losses. Local governments benefit from significant flexibility to adjust property tax levies and assess special levies but their use could strain governments’ abilities to deal with other costs.

“While local governments may pursue revenue enhancements to make up for lost revenues, accessing these resources may reduce the legal or political ability to tap these sources if other budgetary strains emerge,” Moody’s reported. School districts are relatively insulated from the changes.

The Iowa League of Cities in a statement said the property tax changes offered a mixed bag.

“Cities will have to deal with downward pressure on city revenues due to certain provisions of the legislation,” the statement read. The league said it would push in the next session for pension reform, alternative revenue sources, and other cost saving measures to help offset the fiscal impact.

Moody’s also warned about the impact of a measure approved by the Legislature on three public universities. The legislation provides a 2.6% increase in state appropriations for each university to supplement financial aid. However, it bans the universities from using tuition from in-state students for financial aid for out-of-state students. The bill is supported by Branstad.

Moody’s rates three public universities including the University of Iowa rated Aa1 with a stable outlook, Iowa State University of Science and Technology rated Aa2 with a stable outlook, and University of Northern Iowa rated A1 with a stable outlook.

The change “is a credit negative for those universities because it restricts their use of competitive pricing tactics used by nearly all U.S. universities,” Moody’s wrote. “The ability of universities to fund aid is a key part of the admissions process in an increasingly competitive student market.”

Under another piece of legislation approved by lawmakers, the state would create a bond repayment fund to retire $116 million of state revenue bonds to save on future interest costs. The targeted debt includes bonds issued for school infrastructure bonds, Iowa Jobs capital program bonds, prison infrastructure bonds, and $34 million of Honey Creek Premier Destination Park bonds. The state has been forced to subsidize repayment of the Honey Creek bonds as it struggles to generate the revenues needed for debt service.

The Honey Creek Premier Destination Park Authority bonds issued in 2006 helped finance a $58 million resort at a state park. The only state-run resort opened in 2008 and has struggled to generate the revenues needed to cover debt service on its own.

It generated $5.9 million of revenues in fiscal 2012 with expenses of $5.7 million for operating income of $192,000, according to an audit report from state Auditor David Vaudt released in December. Though short of a $6.4 million revenue goal, the 2012 results marked an improvement over the previous year and helped chip away at a $600,000 deficit carried over from the previous year.

Revenues fell short of what was needed to cover interest payments on the debt and management fees and the Department of Natural Resources tapped $1.5 million from conservation funds to make the payments, bringing to about $5 million total subsidies for the park.

The DNR had requested help to retire the bonds to end the diversion of conservation funds that fund statewide projects. The resort is located on Lake Rathbun and offers a 105-room lodge, 28 cottages, a water park and golf course. Its operators have sought to bolster its wedding and conference business in addition to promoting it as a vacation destination and are banking on an improving economy to improve its revenues.

The state was not technically on the hook to repay the bonds as they are limited special obligations of the authority and are payable solely and only out of the moneys, assets or revenues of the Honey Creek Fund pledged by the authority to debt repayment. Under the indenture, gross revenues from the operation of the park less operating expenses go to repay the debt.

“The availability of revenues to pay the Series 2006 Bonds is dependent on the successful operation of the Park. Bondholders must rely on the successful operation of the park … and on the willingness of the Iowa General Assembly to appropriate funds to replenish the debt service reserve account in the event net revenues are inadequate,” documents read.

The legislation also allocates more than $200 million in state funds to support public pension funds and pay for various projects under state agencies and for universities.  They include $19 million for the Judicial Retirement Fund, $91 million for the Public Safety Peace Officers Retirement System, $40 million for state university building projects, and $11 million for a women’s correctional center. The package also provides funds for water initiatives, soil conservation, and other investments.

Lawmakers created a new Iowa Health and Wellness Plan that will cover those state residents that would have qualified for an expanded Medicaid program under federal healthcare reform. The poorest adults could qualify for medical benefits similar to state employees and those making slightly more could receive state subsidies and access the state’s new health insurance exchange.

The plan represented a compromise as Republicans did not want to expand Medicaid but Democrats pushed for accepting federal subsidies.  The program would allow the state to still tap subsidies under healthcare reform, but the federal government must approve it.

Iowa fared better during the most recent recession than many of its neighbors and has maintained healthy reserves. The state’s special obligation bonds are rated AA by Standard & Poor’s and Aa2 by Moody’s Investors Service. The state, which does not issue direct general obligation bonds, carries top issuer credit ratings from both agencies.

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