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Belt Tightening: State Auditor David Vaudt

posted on December 24, 2008

Borg: Governmental belt tightening. Governor Chet Culver orders major cuts in the current year's budget but State Auditor David Vaudt says the state's fiscal commitments exceed expected revenue. We're questioning David Vaudt on this edition of Iowa Press.

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On statewide Iowa Public Television, this is the Friday, December 26th edition of Iowa Press. Here is Dean Borg.

Borg: Like many households these days, the number one topic in state government is cutting back on spending. Democratic Governor Chet Culver, acting preemptively, first selectively sliced $77 million from this year's planned spending and last week followed with a 1.5% across-the-board budget cut. Republican State Auditor David Vaudt hasn't exactly said I told you so but even before state revenues began declining he has been warning of more commitments than the state can afford. Welcome back to Iowa Press.

Vaudt: Glad to be here.

Borg: Did I state that accurately?

Vaudt: You're right.

Borg: Just wanted to be sure. Across the Iowa Press table, Des Moines Register Political Columnist David Yepsen and Associated Press Senior Political Writer Mike Glover.

Glover: Auditor Vaudt, let's start with the basics. Everybody understands the state has a budget problem, a budget shortfall coming up in this year and next year. Give us your sense of how bad it is. What is the extent of our budget problem?

Vaudt: If you take a look at the budget they'll be developing when they come in January for 2010 they're going to be looking at, at least probably a $600 million shortfall and that is on about a $6.5 billion budget. So, we're looking at close to 10% that we're going to be short to try and balance our spending.

Glover: And how do we get there? Give us a short course.

Vaudt: The short course how we got there is we've used very short-term approaches to balance the budget. We've been taking money out of other funds and special accounts, such as the Senior Living Trust Fund and tobacco settlement funds, and the problem is we can't go to those cookie jars any more, they're empty.

Borg: So, how long have we been doing that?

Vaudt: We've been doing that for the last several years. In fact, we started doing some of it in fiscal year 2001. But the sad part is revenue has been growing and we're still dipping into those funds and now they're starting to be empty.

Yepsen: Auditor Vaudt, why should anybody care? Why is this important? We talk about trust funds, it gets kind of arcane and boring to people. Why is this important?

Vaudt: It's so important to have a government that is sustainable, something that citizens can count on and the really sad part right now is we're hitting this problem when there's also an economic downturn and that is the last place that you want to really be cutting back on your services because your citizens need it the most during those times. So, we've got to be looking longer term. We've got to look at fiscal sustainability and how are we going to make sure Iowa can provide the services that it is committed to providing.

Yepsen: What are your solutions?

Vaudt: Definitely one of the things we're going to have to take a very hard look at is what are Iowa's priorities and how do we make sure that our revenue stream, our taxes and fees is in balance with our spending. Right now what we have is we have spending up here and revenues, taxes and fees down here. They need to bring those to in balance so it's going to take some very difficult decisions on both sides of the equation, both the tax and fee side and on the spending side.

Yepsen: What about raising taxes? You mentioned that -- you're a good republican -- are you suggesting we raise taxes?

Vaudt: That is one of the options they'll have on the table but this is a terrible time to try and raise taxes because that's when citizens can least afford it.

Yepsen: In a recession.

Vaudt: In a recession period time. And the other thing we have to be very careful is we have to look at where that tax and fee level is that makes sense from competitiveness. How can we compete with the neighboring states and with the nation in general.

Borg: How about state bonding?

Vaudt: State bonding is always an option that we can put on the table. Regretfully we have been taking money out of other funds that were for infrastructure so already in this budget year there's about $300 million of bonding proposed just for corrections improvements.

Borg: Philosophically, do you endorse bonding as a good way to go? Interest rates are low right now but overall any time is bonding a good idea to borrow money that way?

Vaudt: Bonding is good if you're going to use it for long-term assets and the other key point is you've got to set aside a future revenue stream to pay back those and many times we forget that we've got that principal and interest to repay.

Glover: Auditor Vaudt, one of the suggestions that has been put on the table is selling some major state assets, probably the most prominent that's been mentioned so far is the state's lottery, either selling or leasing the lottery. What is your take on this? Is that a good financial idea?

Vaudt: You know, whenever you're taking a look at selling assets the sad part is we've had piles of money such as the tobacco securitization money and we proved that we can't really manage those funds well so what we'd end up doing is probably wasting those dollars up front and giving up a future revenue stream. So, I think that's a very short-term, band-aid approach for what is a longer-term problem of bringing your ongoing revenues in line with your ongoing spending.

Glover: So, you don't like the idea?

Vaudt: Don't like the idea.

Glover: Are there any other assets the state has that you think the state could do without? If you don't sell the lottery because it's a future revenue source anything else the state has it maybe could to without?

Vaudt: Nothing comes to mind right now. I think that's where we need to do longer-term planning. If we did some longer-term planning we could take a look and say, where are we headed? What do we need? And what makes sense for Iowa to be involved in and what not?

Glover: And you made some mention of it earlier, it hasn't been discussed for a while but it was discussed at one point which is privatizing the state's prisons, taking a large asset, the state's prison system, and letting a private company run it. Does that makes sense to you?

Vaudt: You've always got to take a look at all the options that are on the table and we need to make sure that Iowa is providing its services in a cost effective, efficient way. And that is one of the places where you want to look to the outside and say, is there something that you could do for us and do it more economically, because government needs to take a hard look at how we deliver our services and we can't continue to just do the same things we've been doing because if we do it's just going to cost more each and every year.

Yepsen: What is the condition of the state's pension plan, the IPERS plan?

Vaudt: The legislature and the Governor signed a bill a couple of years ago that increased contribution rates by both the employee and the employer. So, that was a good move, we needed to do that. Obviously with the decline in the market values on many of the investments we're not near as well funded as we were before. Short-term we're okay but long-term it's going to depend on how these investments come back and whether we're going to need to increase rates even more in the future.

Glover: Is there anything that needs to be made in terms of a decision on that right now? Or is that something you wait and see on?

Vaudt: I think at this stage it's something to wait and see. We've already got some increases that are staged in and we're going to have to take those into account.

Borg: When you say increase rates, you mean rates on those who are public employees paying into the system?

Vaudt: Yes, both the employees are paying in more and the state government is putting in more to match there.

Yepsen: How does our pension plan in this state compare to other states?

Vaudt: You know, previous to the big market decline we were one of the top ones. We're definitely in good shape as far as total funding. There are plans that are much worse than ours. But obviously we need to increase our contribution rates because what happens so many times is we increase benefits and sometimes those benefits get out of control.

Yepsen: Is it time to back off some of those benefits? The fact is the state pension plan is better than a lot of private sector workers have. Is it time to move away from the current benefit structure and go into say more of a 401K like many private sector workers?

Vaudt: I think every government is going to have to take a very hard look at that because if you look at private industry defined benefit plans have gone away a great deal because of the commitments and you're not sure how you're going to fund those commitments. So, we have to take a look at going forward is the defined contribution plan a better way to go for Iowa? And is there a more affordable way but still allowing for our citizens to put money away?

Glover: And Dean mentioned in his open one of the steps that Governor Culver has taken is he ordered an across-the-board spending cut for the budget year we're in right now, the one that ends June 30th. He's a democrat so I don't expect you to agree with everything he's done. But give us your assessment of how the Governor has done in handling this budget mess. Has he been too slow to react?

Vaudt: The really sad part is when this budget was adopted and signed by the Governor all the warning signs were there, all the experts were telling us it looks like we're either in a recession or we're entering into a recession, they were telling states to be conservative, they said there's a lag before it hits the state revenue side so the really sad part is we set ourselves up for a lot of the problems that we're facing because the legislature did not follow the law which allowed them to use a different revenue estimating conference, revenue number which provided another $50 million of spending authority. At the time when they were developing that budget that was not the thing to be doing. So, the depth of the problem that we're dealing with now is much more severe because of the decisions that were made.

Glover: Give us a little perspective here if you could. Iowa has a budget problem but as I look around the country I see Wisconsin, they're about 25% short of meeting their budget requirements. Other states seem to have a much deeper hole. How bad is Iowa compared to other states? And is it okay to say, well, we're kind of okay so let's not worry about it this year?

Vaudt: No, it's not, definitely on the last part because what happens is the only one that's going to dig us out of this problem are Iowans. And yes, we aren't as bad as some states like California and some of the others. However, the key is how do we make sure that we can turn our situation around. And if you look at the federal government I think there's going to be a lot more pinch on the dollars available to states from the federal government. So, it's going to require us to do even more belt tightening when it comes to Iowa's budget.

Yepsen: Let's talk a little bit about what this means, the term belt tightening and there's going to be pain and we hear these kind of euphemisms. But give me some real world examples of the sorts of cures that you think the state is going to have to administer here. How is this going to affect anybody?

Vaudt: If you take a look at it there is no way that we can avoid impacting the services that Iowans are receiving. When you're trying to cut big numbers out and you take a look at where our numbers go 75% goes to either education or to Medicaid, two big areas that Iowans rely upon. So, we're going to have to tap into those areas and we're going to have to look at how we're delivering those services, can we do it more effectively and efficiently than we've done in the past. That's going to be a key part of every department, every agency taking a look at their services and saying, can we do them differently.

Yepsen: Are we looking at cuts in Medicaid benefits, cuts in healthcare to the poor? Are we looking at laying off teachers?

Vaudt: I think a lot of those will be put on the table because we're going to have to figure out how we're going to do it for less money and it's hard to avoid some of those types of things. Now, I know they don't want to do some of those things but when we get right down to it a lot of your dollars are spent on people because it's a service industry. So, we're going to have to look at people costs.

Glover: One of the things I've heard since the Governor announced his budget cuts is there seems to be a little bit of a passing the buck here. If the Governor does an across-the-board spending cut then he goes and tells state agencies okay, you decide who has to get laid off and you decide who has to get their spending cuts and you go to schools and you say, okay, you decide if you want to lay off teachers or have bigger classrooms. I won't make the decision but I'll make you make it. Shouldn't the state be in the business of making those decisions, not passing them off?

Vaudt: I think a key part of it is you always want to reach out to your leaders within each agency or area of education and say you know where you're spending your money, you know how we might be able to do it differently, if we work together we can come up with some really good solutions, I think.

Yepsen: Consolidating government. We always talk about it in Iowa. 99 counties, nine hundred and some cities, three hundred and some school districts. Is this the time that a budget crisis, if you will, forces local governments to do some merging?

Vaudt: I think definitely whenever you go through tough times it makes everybody step back and look at doing things differently. So, the good part of going through tough times is it sometimes makes you address difficult decisions and make changes that you wouldn't have otherwise thought about doing. So, I think definitely that's part of that whole how do we deliver our services and can we afford the level of government we have now. The real key part is how do we make sure that our services are really impacting the citizens and how can we control costs by sharing services, working together and doing some of those things at the local level and at the state level.

Yepsen: Is this budget problem any different than the other ones that we've all heard about? We had one in the farm crisis, Governor Vilsack had to go through one, we spent too much and revenues were too low. I've seen this movie before. Is it any different at the end?

Vaudt: I think it is this time because not only have we taken all the money out of these other funds and special accounts that we've been using but look at it nationally and look at it globally and the consequences everyone is facing and I think what that's going to do is say we're going to have some problems and nobody is going to come in and bail us out, the federal government can't bail us out along with everything else they're bailing out.

Glover: What's the plan here? Most people say that 2009 is likely to be a pretty tough year, unemployment may get up to around 8%, something like that, the federal government is going to have a budget problem, the state is going to have a budget problem. How long does this recession last in a sort of typical economic cycle that we're in? How long are we in these tough times?

Vaudt: From what I've heard from the experts in that area they're definitely saying that 2009, 2010 are going to be difficult years. So, that means our 2010 and our 2011 fiscal year budgets are going to be very, very difficult. So, we've got a couple of very challenging years coming up.

Yepsen: And the experts also say Iowa lags going into a recession, a national recession but we lag coming out so this conceivably could go on into 2011 could it not?

Vaudt: Definitely, I think there's a very good chance and especially if you look at the depth of what we're experiencing across this nation and across the world.

Yepsen: One thing the democrats say in response to all this is yes, we have a problem here but that the state has a 10% cash reserve and we have a AAA bond rating. What do you say to that?

Vaudt: Well, there's two things. Obviously we do have the largest cash reserve balance we've ever had, about $620 million, but that's only because they made decisions on where they took money from. We took money out of the Senior Living Trust Fund and out of tobacco funds and stuff. Instead if we'd have taken the money out of the cash reserve funds we wouldn't have any money there. So, it was really a choice. It's a good thing we still have some reserve funds but it's just a choice of where you went.

Borg: One of those reserve funds is that rainy day fund and there's talk now -- we had rain and people got flooded. Do you advocate taking money from that rainy day fund?

Vaudt: If you take a look at the rainy day fund in total there's a 10% reserve set aside, 7.5% goes to cash reserves and 2.5% goes to economic emergencies. So, about a quarter of that is available for economic emergencies like the floods and so forth. The other piece we need to have there in order to cash flow, make school aid payments and stuff on time because of the timing of tax receipts and so forth so, yeah, I definitely think it's there for one of those resources. The problem is it can't solve all of our problems and it's going to be difficult.

Yepsen: Back to my bonding question, my AAA bond rating question. Isn't that a cause for some ...

Vaudt: People get a lot of comfort out of that but if you take a look at it, Freddie Mac, Fannie Mae, Enron used to have good bond ratings too. So, I'm not real impressed by that. I think the real key is are we planning long-term and are we looking at things? I think the bond rating agencies are under some scrutiny right now and they should be as far as what are they looking at as they give these ratings out because I think people have lost confidence in the ratings that have been granted.

Glover: You talked about general tax increases as part of this solution. What about user fees? There's a lot of talk about going in and having people pay for specific services they get, probably the most prominent is the gasoline tax we use to fix highways. What is your take on that? Is it an equally bad time to be raising user fees?

Vaudt: It doesn't matter if you call it a user fee, if you call it a tax, somehow you're paying for it and the real key is what can citizens afford, what can Iowa taxpayers afford today? So, it's not an easy time to be increasing any types of fees or taxes on our citizens.

Glover: Some of the people, particularly in eastern Iowa where they were impacted very badly by floods, have asked for the ability to do a local option tax, saying we want to tax ourselves to fix our problem if you're not going to fix it for us. What is your take on that?

Vaudt: Once again, you're talking an increase in taxes or fees which is very difficult for citizens today to accommodate and especially with the economy and even in those locations there's a lot of businesses that aren't open, haven't reopened and maybe never will reopen so that's not a good time to be adding a lot of fees to the citizens ...

Glover: What do you say to somebody who says I want to, I voluntarily want to pay more in taxes to help fix the problem? We know we have a problem, we want to fix it.

Vaudt: Obviously they can come together and write a check if they'd like to, nothing is going to prevent that. But I think we have to be very careful on what we do. What we have to do is look at taxes and fees in total. It doesn't matter if it goes to a local government, goes to state government, goes to federal government, it's all coming out of the taxpayer's pockets and we need to make sure that we look at those in total and we don't in isolation try and do one thing that might harm us in total.

Yepsen: Mr. Vaudt, I want to go back to a question we talked about earlier and that is solutions. Write some prescriptions -- most businesses get in trouble and they go to the auditor and say what do we have to do to get out of this -- so, write some prescriptions here for the Governor and the legislature. What specific sorts of things do you want to see them do in the next session?

Vaudt: I think definitely we need to take a hard look at planning longer-term. We've got to look past just this year's budget and say where are we going to be in 2011, where are we going to be in 2012 and say how do my plans fit within the longer-term plans that I need to be making to make sure when we make decisions we're going the right direction. The other thing that we need to do is we need to reach out to every government, every agency and department and say, take a look at the services you're providing, tell me which ones are the high priority services and how we might look at doing those differently. If we work with our state employees and our local government employees we'll come up with ways to do things better.

Yepsen: Isn't this just a matter of Iowans like a lot of government services we just don't like to pay for them?

Vaudt: Exactly. What has happened is we've continued to do the spending side but not keeping up with the tax and fee side and that's going to get you into a problem. So, the real key is citizens also need to understand that we can't do everything unless they're going to pay more taxes and fees and if they don't want to pay more taxes and fees then they're going to have to take the consequences.

Glover: One of the things we like from state government is leadership. Give us some ideas of where you would start. What is something the state is doing that you could think maybe somebody wants it but the state can do without it?

Vaudt: I think that would be -- if I were in the position at the executive branch -- if I was there I would first be reaching out to every one of my department directors and I would be saying your challenge and what I'm going to be actually saying how you performed is based upon what you take a look at within your department and how you work with your division directors to say what's necessary, what's not necessary, what can we do differently that would save things. You just have to look at some of the programs the state has put in place, this lean manufacturing and some of those types of things, we have turned around the amount of time it takes to issue a permit and stuff. We need to do those same things with all our government services. We haven’t' done that.

Yepsen: Do we use your office properly? I heard from state officials and state employees that the bean counting that goes on in state government is excessive, just to buy a pencil sharpener it's a big hassle. But at the same time I don't see any state agency looking ahead. Is it time to get the state auditor's office out of the business of doing arithmetic and making sure the numbers add up and getting more into performance auditing, some of this long-term planning, sort of an Iowa version of the general accounting office?

Vaudt: Yeah, I mean, I think the accountability piece is very important for taxpayers so we've still got to do that audit process to make sure we're following the law and doing things reasonable. But we need to look more at performance and whenever the legislature or the governor is looking at a new program they need to say, what am I expecting to produce by that, here is my performance measures and then we can go back and look at those performance measures and say, did you really accomplish what you're trying to accomplish.

Yepsen: What about the flip side of that tax equation, it's called tax expenditures, the tax breaks that we hand out? Is it time for somebody, you, the legislature to start looking at what we get for all the tax breaks we hand out?

Vaudt: It is interesting. A few years ago no one could have given you an idea of what those numbers' really impact was but in more recent year they have started to put some estimates together on what those tax breaks are. And we need to take a look at those. When we're going to try and do some of those things we have to say, what are we trying to accomplish by that tax break? What is the cost of doing that tax break? Because even though we're not writing a check it still has the same impact. So, we are starting to track it and now we need to do some performance on it.

Borg: Another way of asking that question Dave just asked earlier is, you're sort of like a canary in a coal mine. You've been crying wolf for a while and it has come to pass. Do you feel that I've cried and nobody listens?

Vaudt: No, I think people have listened but they haven't been willing to make the difficult decisions that go along with that. That's either cutting back on your spending or increasing your taxes and fees. And the reason they always say is, well, we have to worry about the services or we have to worry about the kids. We could all do that with our own personal finances -- I did it but I did it for the kids -- but when you reach that point of all your credit cards are maxed out was that good for the kids? No, it wasn't. So, the key is take fiscal responsibility and incorporate it just like any family needs to to say that means I have to make some difficult decisions and I have to decide what are true priorities, what do we really have available to spend and how do I stay within that spending limit.

Glover: Mr. Vaudt, it wouldn't be an official Iowa Press show if we didn't spend a little time talking about politics. You are one of two statewide elected officials of the republican persuasion that brings discussion that potentially you might be a candidate for governor at some point. Do you have any ambitions for that? What is your time table?

Vaudt: Obviously it's flattering that people would look at me and say we think Auditor Vaudt would make a good governor, I'm flattered by that. But right now I still have two good years left in my state auditor role, we're at a very crucial time from a financial standpoint that Iowa needs to be making some very difficult decisions. So, I'm going to be extremely focused on my role as state auditor. Considering that would be down the road, especially after the legislative session.

Glover: And it would take a couple of years to put a gubernatorial campaign together, the next election Governor Culver is up, he said he's running again. Who do republicans have? If not you, then who?

Vaudt: I've heard a lot of names out there, I don't want to list them because I don't want to leave somebody out, but I think there are a lot of people that are at least starting to think about it and the real key is we need to put forth a good candidate that wants to take a look at some of the core republican principles such as fiscal responsibility, limited government, helping people help themselves and really get that person ...

Glover: Let's put a finer point on it. You're going to be very focused on the state's finances during the legislative session. Are you saying that after the legislative session you may take a look at this?

Vaudt: Yeah, people have asked me to at least give it some consideration so I haven't ruled it out. But right now I'm going to stay focused on how we get Iowa through this next budget cycle.

Yepsen: How do you respond to the criticism democrats make that you're just playing politics with this, that this is just a republican auditor criticizing democrats, no big deal?

Vaudt: I would say just go back and look at my role since I took office. When the republicans were in control of the house and senate I was just as critical of the things that they were doing that were improper and I will continue to do that. The whole thing is the facts are the facts, there's no such thing as republican numbers versus democrat numbers and we just need to face up to those.

Yepsen: To that end didn't republicans who ran the legislature contribute to some of these problems? Weren't they doing some of these same things?

Vaudt: If you take a look at it we were doing some of the same things when the republicans were in control and that's the real key, how do we make sure that we stop doing that. The most discouraging thing to me is the fact that we continue to do that and even though we've increased taxes and fees if you take a look at a two year period fiscal year, 2008 and 2009, revenues went up about 10% during that two year period, 5% average annual growth so it's pretty good revenue growth but yet we're still tapping these other funds for like $450 million a year to pay for all of the spending that we want to do.

Yepsen: You just mentioned about the need for the party to talk about fiscal responsibility. Didn't republicans throw away that issue under the George Bush presidency, the national debt what it is? How can the Republican Party look at the American people with a straight face and say we're the party of fiscal austerity?

Vaudt: I think it's definitely where everybody needs to step back, republicans and democrats alike, and say what is fiscal responsibility and focus in on that and I think the republicans definitely are. I think we've learned lessons from past practices and I think we will continue to be focused on core fiscal responsibility and I will definitely be one of those out there leading that charge.

Glover: As a good republican I think we would not be out of line to say you would think the last election was probably not the high point in republican history. In fact, it was a pretty bad election. What happened? What went wrong?

Vaudt: I think a lot of it was just the economy and the way things are and whoever is in control at the top, the president in this case is a republican, all the blame tends to go there. But I would also point out that the democrats have control of the governor's office and the legislature for two years already and they're going to be controlled for another two years. So, we need to make sure that they're going to be held accountable for where we stand today and what we need to do to address that.

Glover: Did the republicans do something wrong? Look at the state level. It was a perfect election for democrats at the state level too. Did republicans have the wrong message? The wrong candidates? Was it a combination?

Vaudt: I think it's definitely one of those things where the top of the ticket had some impacts, some big impact but the other thing is we need to make sure we're focusing on our core republican principles and that is fiscal responsibility and limited government and helping people help themselves. If we focus on those areas and we work together and make sure that Iowans understand what we're really all about we can make a huge difference that way.

Yepsen: Is there too much emphasis on social issues?

Vaudt: From my perspective social issues are always going to be a discussion within the Republican Party but I think we still have to go and say, where do we all agree? What are the key points we can agree on? And we need to stress those because that's what Iowans are concerned about.

Borg: Thank you very much for spending time with us today.

Vaudt: Thank you.

Borg: On our next edition of Iowa Press we're ringing in 2009 by glancing back at 2008 events that will be shaping 2009 politics. It's our year end Reporters' Roundtable with David Yepsen and Mike Glover who have been here today along with Radio Iowa's Kay Henderson and Charlotte Eby of the Lee Newspapers. And we're inviting you to eavesdrop on what they're saying. It's the usual Iowa Press airtimes ... 7:30 Friday night and 11:30 Sunday morning. All of us here at Iowa Public Television are extending to you our wishes for an enjoyable holiday with your family and friends. Hope you're enjoying yourself. I'm Dean Borg. Thanks for joining us today.

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