Political Football

Representative Jeff Kaufmann

April Newsletter

I hope you are enjoying this beautiful spring! I am a bit late for my monthly electronic newsletter but I wanted to wait for the complete analysis of the State Auditor’s report on the budget. If you do not read anything else, check this out. I have also included a list of the major highway projects this summer as well as an analysis of tax bills passed into law this last session.

Feel free to contact me throughout the spring and summer if you have any questions or comments.

Jeff

State Auditor: Budget Spends Too Much, Raises Taxes and Creates “Funding Cliff” in FY 2012

On Friday, April 16, State Auditor David Vaudt released his review of the FY 2011 budget approved by the Democratic Majority in the Legislature and signed by the Governor.

The Auditor states that they simply “kicked the can down the road” by using one-time funds and because of that, next year’s Legislature will again face a $1 billion spending gap.

Auditor Vaudt’s criticisms are divided into four areas:

1) Government reorganization fails to yield necessary results.  The Auditor calculates that the government reorganization bill and Executive Order combined to save $108 million in general fund dollars.  He says while this is significant, it represents less than 2 percent of the true cost of providing general fund services.  In addition, true total expenditures increase by $140 million, meaning that the Legislature approved $248 million of additional spending to offset the estimated savings.  Vaudt said “It’s like a family with a $250 a week grocery bill finding $4 a week in savings and deciding to celebrate by having a $9 steak per week, increasing the grocery bill to $255.  Would any Iowa family consider this ‘savings’ or is it just Iowa state government that does?” 

2)  Budget creates a funding cliff due to reliance on one-time resources.  According to the Auditor, the Legislature uses over $700 million in one-time resources that will not be available for use in FY 2012.  In addition, nearly $90 million of general fund costs are shifted to other funds.  This creates a huge spending gap in FY 2012 when the one-time money goes away.  This spending gap is referred to as a “funding cliff” because of the severity and suddenness of the drop in available resources.  This was one reason why all House Republicans voted against the entire budget.

3) Spending down the “rainy day” funds – cash reserves.  The Auditor states that he has continually cautioned that the state’s cash reserves would not last long in the face of a true fiscal crisis.  Vaudt’s advice has been proven correct.  The balance of the cash reserves is projected to be approximately $200 million at the end of FY 2011 – down nearly $400 million from FY 2009 when the reserve funds were full at 10 percent.  Reduced cash reserves create cash flow challenges and severely limit Iowa’s ability to deal with the continuing fiscal challenges looming ahead. 

4) Bumps in the road for Fiscal Year 2011.  Vaudt noted two challenges for the FY 2011 budget.  First, unfunded school aid totals $162 million.  Schools can deal with the reduction by cutting costs or raising property taxes.  “The Legislature chose to push the tough decisions down to the school districts,” the Auditor said.  Second, nearly $50 million in collective bargaining costs are unaccounted for.  This means additional furlough days or layoffs in order to fund the raises contained in the collective bargaining agreements.  Vaudt noted there will be a temptation to hold off on the layoffs until after the November elections so the public is not alerted to the problem.  Delaying the inevitable would simply double the negative impact to services over the second half of the fiscal year. 

The Auditor concludes by saying that due to the use of one-time funds, the Legislature will face a $1 billion spending gap next year.  “As was the case for FY 2011, we face a huge gap next year.  Iowa is, however, essentially out of easy options for dealing with the spending gap.  The taxpayers of Iowa deserve better than this continual ‘kick the can down the road’ budgeting approach.”

High Risk Pools Presents First Decision for States on Health Care Reform – Are We In or Out?

The first major piece of health care reform comes into focus on Friday, when states are required to notify the Department of Health and Human Services  whether they are going to run a new high-risk coverage pool in their states or let the federal government do it.

The high risk pool was created to provide a temporary source of coverage for Americans who are unable to get insurance due to having a pre-existing condition.  Under the new law, a person who has a pre-existing condition and has gone without health care coverage for six months would qualify for the high risk pool.  The monthly premium would not exceed the average cost of basic health insurance for person of that age.

This new plan is not without perils.  Thirty-five states, including Iowa, have already established high risk pools with different rules and rates.  An example of this is in Iowa, a person must exhaust their COBRA coverage before signing up for coverage under the Iowa Comprehensive Health Association.  Some states fear that the difference in programs is, in essence, a penalty imposed on those people who signed up for the state programs.  Since they already have coverage, they are ineligible to switch.

Another concern is funding.  Congress provided $5 billion for the states to use over the life of the program.  Iowa’s share is $35 million.  The Iowa Insurance Division has estimated that this would allow the state to provide coverage to only 1000 citizens.  No one is sure how many would be eligible, but it is believed to be a lot more than what could be covered with the funding available.

The lack of funding and lack of a plan on what to do if it runs out is giving many states second thoughts about the program.  Already, states like Georgia, Nebraska, and Nevada have decided to opt out of the program.  They felt it was better to let Washington run the program and deal with the headaches when the money runs out. 

Handing control over to Washington does have its own set of issues.  Under the law, the feds would hire a non-profit entity in a state to run that program.  This means that a portion of the state’s allocation would be siphoned off for the administrative costs incurred by the non-profit, which could further reduce the number of people covered.

At this point, Iowa has not informed HHS in Washington as to what direction this state is going.  Either way, the people’s beliefs in health care reform will soon be put to the test.

IASB Appears Before Oversight Again

The Oversight committee issued it’s first subpoena last weekend to the former director of the IASB, Maxine Kilcrease, after repeated invitations to appear before the committee were ignored.  She appealed the subpoena with the district court on grounds that she is being compelled to appear before a biased committee.  This came about from comments made during previous committee meetings indicating that she was a “thief.”  The court denied her appeal and she appeared before the committee for the first time.  And while she seems to be a source of some of the turmoil surrounding the organization, there is more to uncover behind the scenes.

The committee met on Thursday, the first time since the legislative session ended.  During the five hour meeting several current and former IASB staff members testified.  That list includes:  Maxine Kilcrease, former Executive Director, who was terminated just this past month on allegations of raising her own salary and keeping the board of directors in the dark on financial matters of the organization; LeGrande Smith, currently employed as the legal counsel for the IASB; Mary Gannon, lobbyist for the IASB; Margaret Buckton, former associate executive director of the IASB; and Larry Sigel, former CFO of the IASB.

Ms. Kilcrease appeared along side her lawyer who gave her opening statement and consulted with her on nearly every answer she gave during the questioning.  She was not very forthcoming with answers, mostly pleading the fifth amendment and telling members that she cannot answer accurately due to her being blocked access to her documents and information.  Her contract was terminated with the IASB at the end of March. 

Others who testified before the committee were much more forthcoming with answers.  LeGrande Smith, IASB’s current legal counsel, answered much of the committee’s questions.  Former associate Executive Director, Margaret Buckton, and former CFO, Larry Sigel, also answered many of the committee’s questions.  Both Ms. Buckton and Mr. Sigel applied for the Executive Director position, along with Ms. Buckton’s brother, Jon Muller, when it was open last year.  All three were denied interviews and Ms. Kilcrease was given the job.  Muller left within days after this occurred, Sigel left a few months later, and Buckton was fired from the organization in September of last year.

The committee spent time asking Larry Sigel about his new company which he formed shortly before leaving the IASB.  The company, Iowa School Finance Information Services (ISFIS) provides financial consulting to schools.  A contract was signed between the IASB and ISFIS right before he left the association.  The contract had the IASB pay newly formed private company $300,000 over three years in return for various lobbying and financial-education services.  A lawsuit was filed by the IASB claiming ISFIS did not hold its end of the contract.  The lawsuit has since been dropped, but lawmakers questioned the situation telling Sigel it seemed like an unethical deal and that his company was “spying” on the competition to the school board’s programs.

Questions were also raised about the openness of IASB’s records.  The legislature passed a measure this year requiring the IASB to comply with Iowa’s open meetings and open records laws.  But the situation needs to be revisited, as it was hastily applied at the end of the session.  A measure to further increase transparency regarding non-profit boards was defeated when a disagreement between the two bodies of the legislature killed it.

One of the big questions on the minds of the Republican members of the committee that still remains unanswered is what are the financial dealings of Skills Iowa?  Two Des Moines Register articles have uncovered information showing questionable financial transactions regarding Skills Iowa.

Skills Iowa is an entity under the IASB that provides online learning tools for students and teachers called Assessment Center and Skills Tutor.  These programs are provided by a software company in Rhode Island called US Skills, Inc.  Skills Iowa was formerly called Following the Leaders (FTL) and was overseen by a group in the eastern US called the Education Learning Council (ELC).  FTL was started around 2002 and was tested in several states as a project to see how online learning could enhance student achievement.  It started out with impressive funding, receiving about $30 million in federal funding for the first 6 years.  After some mismanagement allegations and questions raised about ELC, and studies on the effectiveness of FTL showed poor or unknown results, the program floundered.  ELC let the program go and told states still using it that they were on their own.

Iowa was the largest user of FTL, so management of it was transferred to IASB and Skills Iowa became the arbitrator of the program.  Sen. Harkin took particular interest in Skills Iowa, funneling over $12 million in federal funds to the IASB for it in the form of earmarks.  The program is even called “a special project of Senator Tom Harkin.”

In 2007 and 2008 when federal funding could not be secured for Skills Iowa, the Democratic legislature appropriated $3 million and $500,000 to Skills Iowa.  Federal funding resumed again in 2009.  Over the course of the last 8 to 10 years it appears that Skills Iowa and FTL have received nearly $40 million in taxpayer money. 

Where it gets dicey is who the money is going to.  FTL contracted out to Achievement Technologies for their programs, a company run by Michael Perik.  US Skills, the company contracted by Skills Iowa, is also owned by Michael Perik.  Millions of dollars have been spent by FTL and Skills Iowa on software provided by Perik’s companies; about $6.2 million since August of 2007.  Perik has donated more than $1 million to campaigns across the country, including $50,000 to Governor Culver and $13,500 to Senator Harkin.

Coincidence or not, it’s clear that Skills Iowa needs to show its financials to the committee for review. 

The Oversight committee plans to meet again in May.  How many more meetings remain, though, is still up in the air.  Senator Olive said he felt one more meeting might help close the issue.  Rep. Watts disagreed, saying there are still more people to question and more answer to find. 

Still waiting to appear are Kevin Schick, former CFO, and Jack Hill, former president of the Board, who resigned this week.  Republican members would also like to see Susie Olesen, director of Skills Iowa, appear to provide answers on that entity.  She has been with Skills Iowa in one capacity or another since around 2002.

Road Construction Projects Summary

Approximately $450 million in state highway and bridge work is scheduled for this busy road construction season. This is an amount far below the $600 million that was spent last year when federal stimulus funds and I-JOBS money supplemented the construction project funding. This year’s project list does include some carryover projects that were awarded to contractors last year. The Iowa DOT hopes that some federal stimulus money will continue to supplement the highway budget. In addition to the funding being down, the DOT estimates that only about 4,500 to 4,800 people will be out working on the roads this season; a decrease from last season’s 5,200 workers.

Des Moines Projects:

• Bridge work on Interstate 35/80 over Walnut Creek in West Des Moines
• New bridge deck on Iowa Highway 17 (Granger) over the Des Moines River (bridge closed through mid-August)
• Extension of Martin King Luther King Jr. Parkway (completed this year)

Western Iowa:

• Urban reconstruction on I-29 (Sioux City)
• Urban reconstruction on I-80 (Council Bluffs)
• Reconstruction on I-29 between Missouri and Sioux City

Central Iowa:

• Grading for U.S. 20 between Sac County Rd. N14 and Iowa Highway 4 (Rockwell City)
• Four-lane paving on U.S. 20 between Iowa Highway 4 and Webster County
• Grading and paving of four-lane U.S. 30 between Colo and Marshalltown
• Reconstruction of I-35 from Decatur County to Osceola
• Reconstruction of I-35 between Iowa Highway 175 and U.S. 20

Eastern Iowa:

• Construction of four-lane bypass of Tama-Toledo on U.S. 30 (open with two-lanes late this fall)
• Grading and bridge work for U.S. 61 bypass of Fort Madison (open fall 2011)
• Widen I-80 to six lanes near Iowa City
• Bridge Repair on I-80 over the Mississippi River (Quad Cities)

Vietnam Veterans Bonus and Trust Fund Update

Vietnam Veterans Bonus

Created in 2007 and established in section 35A.8 of the Code, $500,000 was appropriated to the newly created Vietnam Conflict Veterans Bonus Fund.  Iowa residents who served on active duty for at least 120 days between July 1, 1973 and May 31, 1975 are eligible for this bonus program. The eligibility was expanded in 2008 and changed the starting eligibility date to July 1, 1958.  This expansion is repealed June 30, 2011.

As of the end of March there had been 1289 approved applicants, for a total awarded amount of $231,745.50.  This leaves $268,254.50 in the account.  There have been 750 denied requests and 10 are currently deferred, waiting more information.  The deferred applications amount to $862.50.

Veterans Trust Fund

Created in 2007 and established in section 35A.19 of the Code, the Trust Fund allows the Veterans Commission to approve disbursement of money to veterans in need.  A set list of expenditures are approved in Code and an application process is in place to make sure applying veterans meet certain income and need criteria.  The Commission can approve expenditures from the interest earned on the principal balance once it exceeds $5 million, which it did in FY08. 

At the end of March the principal balance in the Trust Fund was $8,493,526.  Remaining in the interest balance of spendable money is $21,868,50.  There has been 318 applications approved over the life of the fund, with 176 denied.  17 have applied this calendar year.

Ways and Means Bills Become Law

Several Ways and Means bills were passed by the House and Senate and sent to the Governor in the final days leading up to the adjournment of the 2010 session.  In recent days, Governor Culver has signed a number of these proposals into law.  While average Iowans will not notice one way or the other once many of these laws take effect, a few of them will negatively impact the pocket books of Iowa employers, which could in turn come down hard on Iowa families.

Senate File 2380 – Tax Credit Overhaul

The law establishes a Tax Expenditure Review Committee composed of five members of the Senate and five members of the House which are responsible for evaluating all tax expenditures every five years and providing recommendations on changes to the programs.  The law also creates two interim study committees on the Enterprise Zone Program and the 260 E Job Training Program. 

The law also does away with a number of tax credit programs.  The Venture Capital Fund, the Value Added Ag Products Investment Tax Credit Program, and the Economic Development Revolving Loan Program are eliminated under the new law. 

The new law reduces the supplemental Research Activities Credit from 6.5% to 3% from companies that make more than $20 million per year.  And, increases the same credit from 6.5% to 10% for companies making less than $20 million per year.  These tax credits are extremely important to Iowa employers that conduct breakthrough research spurring job creation. 

The law also puts the Film, Television and Video Promotion Tax Credit on hold until July 1, 2013.  In addition, it cuts Iowa’s investment in important economic development incentives by $65 million annually.  The law cuts Iowa’s investment in a handful of other economic development tools by approximately 10%, reduces the state’s investment in venture capital by $40 million and reinstates Iowa’s share of the Death Tax. 

The House passed Senate File 2380 on a party line vote of 54-43 on March 19, 2010.  Governor Culver subsequently signed it into law April 15, 2010. 

Senate File 2375 – Streamlined Sales Tax Compact Compliance

The new law will make various changes to definitions in Iowa’s tax code to bring Iowa into compliance with the national streamlined sales tax compact.  The streamlined sales tax compact is an agreement between multiple states and the business community to streamline the way sales and use tax is collected.  It also seeks to collect sales tax on remote sellers that otherwise would go uncollected. 

The House passed Senate File 2375 unanimously by a vote of 95-0 on March 25, 2010.  Governor Culver signed the bill into law on April 21, 2010. 

Senate File 2387 – Blood Bank Sales Tax Exemption

The law authorizes a sales tax exemption for specified purchases of equipment and other supplies necessary for testing blood at a regional blood testing laboratory licensed by the federal food and drug administration.  The sales tax exemption is contingent upon location of a regional blood testing lab to Iowa.  If the facility does not establish its operations in Iowa, then the sales tax exemption is repealed. 

The House passed Senate File 2387 unanimously by a vote of 94-0 on March 26, 2010.  Governor Culver signed the bill into law April 21, 2010. 

Senate File 2371 – Royalty Fees On Dredging Operations

The law requires the Department of Natural Resources to issue reduced royalty fee permits for dredging along the Cedar River in specific areas.  The new permit would reduce royalty fees paid to the state for the removal of sand and gravel from lands and waters. 

The House passed Senate File 2371 unanimously by a vote of 94-0 on March 26, 2010.  Governor Culver signed the bill into law April 23, 2010.

Senate File 2373 – Utility Replacement Tax

The law was a devised by the Utility Replacement Task Force and relates to the utility replacement tax and cogeneration facilities.  It seeks to resolve a problem between the city of Clinton and Archer Daniels Midland (ADM) involving double taxation of ADM’s cogeneration facility.  The issue arose because current tax code does not take into consideration a facility operating with steam and electric.  ADM’s cogeneration facility uses a substantial amount of steam while simultaneously using electric power.  Current law does not require the Department of Revenue to tax companies that use steam power, while electric is a taxable utility by the state.  The new law requires cogeneration facilities to be assessed centrally by the state, and locally.  The Department of Revenue will determine an amount for the replacement tax, while the City Assessor’s office will assess the value of the property.  The amount determined by the Department of Revenue will then be credited to the local valuation. 

The House passed Senate File 2373 unanimously by a vote of 95-0 on March 25, 2010. Governor Culver signed the bill into law on April 23, 2010.

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