Ouch:

Gov. Chet Culver announced an across-the-board budget cut today and said education and Medicaid won’t escape unscathed.

Culver announced a 1.5 percent across-the board reduction in an attempt to deal with the state’s declining revenues.

The governor said staff reductions and employee furloughs are likely, which will be determined by each department. “It’s going to be painful,” he said.

The cuts announced today amount to $91.4 million and will have an effect on services, Culver acknowledged. In addition, Culver ordered a transfer of $10 million of unused money into the general budget. Most of that transfer money will come from an underground storage tank account, which is used to investigate and clean up any past petroleum contamination from underground storage tanks.

A week ago, Culver announced $40 million in cuts, largely through a hiring freeze and limiting out-of-state travel. In addition, Culver said he will ask the Legislature to withdraw plans for a $37 million new office building.

Combined with cuts announced Dec. 9, the total is $178.4 million in reduced expenses in the current budget year that ends June 30.

Clearly spending cuts in the current year are unavoidable because of the decline in projected revenues.

When state legislators draft next year’s budget, though, I hope they will not rely only on spending cuts to make up for projected lower revenues. David Sirota explains why:

Almost every single economist agrees, the last thing we want to do in a recession is slash government spending. We want, in fact, to increase that spending so that it is a counter-cyclical force to a deteriorating economy. So the question, then, is how to most safely generate the revenue to maintain or increase that spending. By  “most safely” I mean how to raise the revenue in a way that will minimize any negative economic impact. And the answer comes from Joseph Stiglitz:

 

“[T]ax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.”

So, first and foremost, you don’t want dramatic spending cuts (beyond the usual rooting out of waste/fraud) and you don’t want to raise taxes on middle- and lower-income citizens who both need the money for necessities, and are the demographics that will most quickly spend money in a stimulative way. That leaves taxes on the super-rich, and Stiglitz – unlike anti-tax ideologues – has actual data to make his case.

For more information, see Budget Cuts or Tax Increases at the State Level:

Which is Preferable During an Economic Downturn?

Will Democrats dare to raise taxes, knowing that Republican candidates and interest groups will hammer them for it in 2010?

I have no idea, but if drastic spending cuts send the economy further into recession, 2010 isn’t going to be a picnic for Democrats anyway. I doubt they’ll rally the troops with “At least we didn’t raise your taxes” as a campaign message.

When analyzing the new Iowa House Democratic committee assignments, Chase Martyn noticed,

Almost all vulnerable Democratic incumbents have been kept off the Ways and Means committee.  In a year of budget shortfalls, Ways and Means will likely have to send some tax-increasing bills to the floor.

Post any thoughts about the budget/spending/taxes debate in this thread.

UPDATE: The press release from Culver’s office is after the jump.

SECOND UPDATE: If you think Iowa’s budget outlook is grim, read this short piece about the situation in California.

THIRD UPDATE: Nancy Sebring, the superintendent of the Des Moines Public Schools, announced plans to cut $3.3 million from the current-year budget (about 1 percent) in light of the state budget cuts. Presumably most if not all school districts in Iowa will need to take similar action. I wouldn’t be surprised if fiscal constraints force more of our small school districts to merge.

 

Gov. Culver: Takes action to meet ‘historic’ national economic challenges

12/18/2008

Contact:

Troy Price, Governor’s Office

(515) 281.0173

Troy.price@iowa.gov

Announces 1.5% across-the-board reduction, seeks $10 million in fund transfers

DES MOINES – Governor Chet Culver has announced new steps he is taking to meet the budget challenges facing the state of Iowa caused by a global economic downturn, including an across-the-board cut in State spending.

“We are in the midst of an economic challenge that is historic in its scope,” said Governor Culver.  “While its cause comes from actions on Wall Street, supported by misguided federal policies from Washington over the past eight years, the result has been an economic recession that is hitting Main Streets and factories and farms and families across the nation.  This world-wide economic recession is affecting every state in the nation, no matter if they are big or small, rural or urban, Democratic or Republican. We are all facing this challenge together. And together, we must accept the reality and share in the sacrifice.”

The Governor is taking action after last week’s meeting of the Revenue Estimating Conference (REC) determined that state government would see a decline in revenues during the current fiscal year.  After meetings with state budget officials and members of his Council of Economic Advisors, the Governor determined the end of the economic downturn has not yet reached Iowa and that the REC could make further reductions to revenue estimates.

The Iowa Constitution requires a balanced budget; the state cannot deficit spend. Today’s actions by the Governor meet the demands of the current and projected declines in revenue, and balance the state budget. He has taken the following steps:

1.                  He has directed the Department of Management (DOM) to revise its projected balance sheet for the General Fund at the end of December in order to adjust for the recent REC action and make other adjustments based upon DOM’s best projections of income and expenditures.  This action has already been done, which projects a negative balance at the end of the current fiscal year. A copy of the revised sheet is attached.

2.                  Pursuant to Iowa Code, the Governor will sign an Executive Order making an across-the-board reduction in General Fund expenditures, currently expected to be 1.5%.  This is estimated to save the state $91.4 million.  However, the Governor will protect funding for Corrections Officers and State Troopers, and will ask the legislature to backfill these cuts when they convene next month.

3.                  He will work with legislative leaders and members of the legislature to transfer $10 million to the General Fund from accounts and funds in state government that have balances that exceed the amount needed for the current fiscal year.

Governor Culver assured Iowans that he would hold the line on taxes, saying, “Maintaining a balanced budget and staying in front of this national economic crisis requires sacrifice throughout state government, as well as business, workers, urban, rural, and all of Iowa.  And I intend to do this while holding the line on taxes.”

Today’s announcement represents a $101 million reduction in general fund expenditures for the current fiscal year.  When combined with last weeks announced $77 million in cuts, this represents nearly $180 million in budget savings for the current fiscal year.

During his remarks today, the Governor reassured Iowans that Iowa is in a strong position to meet the challenges presented by the national economic downturn.

“I don’t want to be alarmist or suggest to Iowans that their state government is in financial trouble,” the Governor said.  “The fact is we have more than $620 million in reserves that will help us through this situation. We have a AAA bond rating that would allow us to do some things that other states may find impossible.”

The Governor added: “We have a history, under both Democratic and Republican leadership, of balancing our budget and acting appropriately to economic tough times. And we have a strong, unmatched, talented citizenry who demands that their political leaders pull together to keep Iowa strong.  The difficult, current economic circumstances may not be the fault of Iowans, but it is something we must all face together. Like most Iowans, I am both optimistic and confident about what the future holds for our state. We have always met challenges with solutions, problems with answers. And we always will. ”

Below is a listing of budget savings announced by the Governor in recent weeks.

SAVINGS ANNOUNCED ON DECEMBER 9TH

Freeze on Out-of-State Travel, Filling of Vacancies, and Equipment Purchases and savings from Judicial Branch, Legislature, and the Regents:

$28.0 million

Transfers from Alcoholic Beverages Division and Executive Council:

$12.0 million

De-appropriation of New State Office Building:

$37.0 million

Total: $77.0 million

ADDITIONAL SAVINGS ANNOUNCED TODAY

1.5 % Across-the-Board Reduction:

$91.4 million

Transfer of Funds

$10.0 million

Total: $101.4 million

Total Budget Savings: $178.4 million

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