State punts on federal assistance

Once again, the State of Iowa appears to be leaving money on the table that could be used to help the citizens of Iowa. Federal fiscal aid, likely in the neighborhood of $400 million, could be used to support the budget now being debated in the Iowa Legislature.

But there is no apparent interest among the legislative leadership or the Governor’s office in drawing on those funds. In fact, legislation has passed the House (HF895) that gives the Governor discretion over those federal funds, leaving no place for it in the budget now being set.

That money could be used to increase school funding, to finance badly needed improvements to Iowa’s child care system, to adequately fund mental health, to expand affordable housing initiatives, or any number of other issues that would help Iowans, many of which were among the stated priorities of legislative leaders and the Governor.

The American Rescue Plan (ARP) will provide Iowa with $1.48 billion in state fiscal assistance. This carries three important elements that Iowa’s leaders should keep in mind:

• A portion of it can be used this year to cover revenue shortfalls caused by the pandemic — funding is intended to allow states to maintain services, very broadly defined. Some of that money could be incorporated right now into the budget for next fiscal year.
• Over the 3 1/2-year period covered by the ARP law, Iowa will have more available and it makes sense to plan for that now, and not — as is happening for FY2022 — leave it to an afterthought or the priorities of one office. The Legislature has a role.
• Decisions being made right now on tax cuts will affect federal aid. It is likely to be reduced by some amount, as much as $200 million or even more, depending on which current proposals are passed in these final days of the Legislature.

The U.S. Treasury Department last week issued guidelines for the ARP funds that could help guide decisions on the use of the money in the coming fiscal year. Under those guidelines, the revenue shortfall Iowa experienced is measured by comparing actual state revenue during 2020, when the brunt of the recession was lowering tax revenue, with a baseline: what that revenue would have been in the absence of the pandemic.

While the Legislature needs advice on the expected impact from its fiscal experts at the Legislative Services Agency and the Department of Revenue, some estimates can be made. (See below — “Estimate: Some $400 million could augment new budget” )

The Governor gave back millions for COVID testing, and has announced she is cutting off hundreds of millions in unemployment benefits that could have helped Iowa workers and bolstered the state economy. Now we appear to be ready to forgo funds intended to sustain important public services in the face of declining revenues.

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Estimate: Some $400 million could augment the new budget

The Treasury guidance defines the baseline as revenue during fiscal year 2019 (pre-pandemic) plus 4.1 percent annual growth. That produces baseline general fund revenue for calendar 2020 of $8.35 billion. Iowa general fund revenue was actually only $7.93 billion for calendar 2020, which implies a revenue shortfall of over $400 million. 

Peter Fisher is research director for Common Good Iowa.