CHICAGO – Iowa’s weaker-than-projected revenue collections – which have prompted a debate over whether the state needs to turn to cash flow borrowing – are so far manageable, Moody’s Investors Service said in a commentary.

Gov. Kim Reynolds earlier this month announced the use of $50 million in reserves to close a revenue gap in the fiscal 2017 budget that runs through June 30 as revenue collections have fallen short of previous forecasts which have been revised downward multiple times.

“The state still has ample budgetary reserves” of more than $500 million, or 7% of revenues, even after drawing them down to help deal with the shortfall, Moody’s wrote in a weekly outlook piece published Friday. “We expect Iowa will manage its spending to match lower expected revenue receipts and return to more comfortable cash margins over the coming biennium as it adjusts to a cyclical downturn in the farm economy.”

Kim Reynolds, then lieutenant governor of Iowa, speaks at the Republican National Convention (RNC) in Tampa, Florida, U.S., on Aug. 28, 2012. She became governor in May 2017 when Terry Branstad resigned.
“We are still seeing growth. It is just not as robust as we had anticipated," said Iowa Gov. Kim Reynolds. Bloomberg

State Treasurer Michael Fitzgerald has sounded alarms over the state’s ability to pay its bills on time due to revenue shortfalls and suggested it’s time for the state to consider a fiscal 2018 cash flow borrowing. The state has not turned to borrowing to manage liquidity in a decade.

“This would ensure we make payments on time, including school aid and tax refunds. Iowans should not be concerned about the need to issue a cash-flow borrowing. It is the right thing to do when you have unpredictable cash-flows,” he said in a statement.

“People should be concerned about the fact that the state has consistently been unable to project revenue in a time when Iowa unemployment is at a low of 3.1%, the stock market is at record highs and we are not facing a national economic crisis,” Fitzgerald said. “Nobody can give a clear explanation of why we are short, but tax cuts with unpredictable results appear to be catching up with the budget.”

Fitzgerald is a Democrat in a state where Republicans control the governor's office and the legislature.

The Legislative Service Bureau has reported a $97 million shortfall for fiscal year 2017 based on collections through May. The state had previously trimmed more than $100 million in spending for the year and drew $131 million from its various cash balances and reserve accounts.

“Receipts falling short of estimates is becoming a trend,” the treasurer wrote suggesting that fiscal 2018 predictions used to craft a $7.3 billion budget may be too rosy. “We could easily see more budget cuts and additional draws on reserves in our future. This is no way to run a government and is certainly not how a AAA rated state should approach its finances.”

Fiscal 2017 revenues were initially projected to grow by 6.3 %but have been lowered to 2.8%.

Reynolds, the former lieutenant governor who was sworn into office last month after Terry Branstad departed to take the post of ambassador to China, has so far rejected the use of cash flow borrowing.

“We are still seeing growth. It is just not as robust as we had anticipated," Reynolds said earlier this month in announcing the $50 million draw on the state’s economic emergency fund.

Democrats in the legislature have jumped on the latest figures saying they show previous tax law changes and cuts were not affordable.

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