Money matters. Keeping Iowa's fiscal house in order requires careful management and precise accountability. A conversation with key executives, state Treasurer Michael Fitzgerald and state Auditor David Vaudt on this edition of Iowa Press.
Borg: Theoretically public money is everyone's money. Ultimately, public funds belong to Iowa citizens, taxpayers. But paraphrasing an old adage, when everyone is in charge, no one is in charge. Iowans elected democrat Michael Fitzgerald state treasurer 30 years ago. In that job he currently invests more than $3 billion in state operating funds and he is custodian of Iowa's three state pension funds. Republican David Vaudt is the taxpayer's watchdog. He was elected state auditor nine years ago overseeing not only stage agencies and the programs they administer but also counties, cities and towns and auditing them and school districts too across the state. Gentlemen, welcome back to Iowa Press.
Vaudt: Glad to be here, thanks Dean.
Borg: And across the Iowa Press table WHO TV Reporter David Price and Radio Iowa News Director Kay Henderson.
Henderson: Mr. Vaudt, this past week you issued an analysis of the state budget. There is a record surplus but you identified a structural deficit. How is that possible?
Vaudt: Well, what you have to understand is Legislative Services Agency actually calculates and presents the budget in accordance with Iowa law. Regretfully, Iowa law doesn't always follow good budgeting principles. So I take it a step further than what Legislative Services Agency does and actually contrast that against good budgeting principles. And under Iowa law you can actually take a surplus from one year, carry it forward and spend it in the following year. However, those are one-time monies. Just because you have a surplus this year doesn't mean you'll have a surplus next year. And under good budgeting principles you're not supposed to use those one-time monies for ongoing expenses. So once you factor in the $300 million or so surplus from last year that is carried forward to this year you can reduce that surplus that LSA presents under Iowa law down to about $65 million spending gap instead. And then there's another over $70 million worth of one-time monies that are also built into the fiscal year '13 budget. So when you add those in and a couple of other minor modifications you get to about $161 million spending gap that I presented under good budgeting principles.
Henderson: Mr. Fitzgerald, should Iowans be concerned about this?
Fitzgerald: Well, I give David credit for doing a fine job being the state auditor and such. But let's -- really let's look at the big picture here in Iowa. And Iowa, if you ask me how is Iowa doing, I'd say, it's the same thing as asking your kids when you come home from school, how are you doing in school. Well, what does the teacher say? And in Iowa the three major rating agencies in Wall Street -- Standard and Poor's, Moody's, Fitch -- all give Iowa AAA ratings. We're only one -- there's only seven other states that can say that. We have that because we have a balanced budget and we have reserves every year. As a matter of fact, we have a balanced budget with $1 billion of reserves on hand. And we had that last year. And every year in the past, past five years since we've had AAA, we've had a balanced budget and we've had reserves. That is outstanding and especially through the financial crisis that we've just been through. That speaks well for Iowa and also Iowa has a real disciplined way of putting its budget together, managing its finance. It has proved it. We have a non-partisan revenue estimating committee. They outline, this is how much the legislature can spend. They're only supposed to spend 99% and they follow it.
Borg: Are you saying, Mr. Fitzgerald, that Iowa is better off than the state auditor says we are?
Fitzgerald: Well, I don't mean to speak for David and I don't think David is really saying the state is that bad. I think he's quibbling with accounting practices and such. I'm saying if you look at the big picture of Iowa our finances are terrific. We're solid, solid shape especially considering what this country has went through.
Henderson: Terrific and solid, are those words you would use to describe the state's finances, Mr. Vaudt?
Vaudt: No -- we've made huge improvements in the last two years, I will tell you that. But back in fiscal year '11 we actually had a $764 million spending gap. And just to make sure people understand, the reason we look at the budget and the way that I look at it under good budgeting principles, is to say can we sustain the level of service we're providing today into the future. And that is where we really have to be concerned. I agree that Iowa has a AAA credit rating but have you ever looked at the rating agencies' credit reports? If you haven't you should do that someday because I seriously question the depth that the rating agencies go to. I will tell you that I am surprised that I have served as Iowa state auditor for going on ten years now and I have never been contacted by a credit rating agency about Iowa's fiscal practices. And if you -- since the recession hit and the financial crisis, credit rating agencies have been highly criticized, and justifiably so, for their failure to do the right type of ratings. And as we look forward it is very important those credit rating agencies give a good picture to the public. And regretfully, credit rating agencies have kind of let ratings roll on but then once the crisis hits they tell us they're going to downgrade. Well, it doesn't help to tell us after it has already happened. So, it's so important that credit rating agencies do their job because the public is depending heavily on those.
Price: This past week you talked about progress. So you pointed to two years ago in the fiscal budget we were spending essentially $1.14 for every dollar we had coming in and this year's budget is more like $1.03 per dollar. Having said that though, if you start looking at the figures we all remember how Terry Branstad campaigned saying we needed reliability, predictability, none of these one-time monies. In his proposal, as you point out in this current fiscal budget, he himself, according to your numbers proposed spending more money than we would have coming in. So was he not following what he ran on?
Vaudt: I think definitely what you have to look at is the progress that we're making. It took us several years to dig the hole that we're in where we're spending more than we have available. So as I have always said from the start, it's going to take us a few years to climb back out of that hole. And so what I'm looking for is progress. And the good news is in fiscal year '12 and the fiscal year '13 budget I'm very encouraged because we're making improvements and continuing that improvement progress down the road.
Price: But going into this almost everybody was pointing that we should have some surpluses as the economy started going back and especially the ag economy. Why would he not put a budget together, though, that taking that into account spent less than what we're supposed to?
Vaudt: Well, because the real problem gets to be is when you're spending, like in fiscal year '11, $764 million than what the ongoing revenue stream will supply. If you're going to correct that all in one year you're going to have to drastically cut services to do that. And so the reasonable approach is to say let's head down the road in the right direction, make the types of changes that we can and implement that over a period of time. If it was a smaller amount it would be much easier accomplished. But when you dig that big of a hole it takes a while to climb back out.
Price: Mr. Fitzgerald, maybe this is semantics, but do you even agree that there is this structural deficit? Or are these just accounting terms?
Fitzgerald: Well, I think it's more accounting terms. What is the one-time funds? They're government funds. We went through the crisis and the federal government appropriated over $700 million for the state of Iowa. Our legislature spent it over two years to keep our state going through those tough times. But keep in mind, the legislature took -- how much money do we have to spend? That is why the legislature meets every year. How much money do we have to spend? They consider the one-time funds, federal government payments --
Borg: Stimulus funds.
Fitzgerald: Stimulus funds -- put together the budget and that is what Iowa spent. Now, the rating agencies, who I have a lot of faith in, and they do contact our office and management and they stay up on our financial records, have said we have discipline in the state of Iowa. You remember going through the tough times. Iowa did cut back. We did 10% across-the-board cuts. Those were hard to take but Iowa was a state that was proactive and met those challenges right on. We weren't poo-pooing it like a lot of states, like Illinois saying, oh things will get better. We dealt with it at the time, balanced the budget. We always balance the budget, we have to. Now we may use some one-time funds but we have a balanced budget and we have always had reserves and when the rating agencies see that oh, they say oh my gosh, no other state is in that good a shape. That's one of the main reasons we're AAA.
Henderson: Speaking of bad times, during the bad economy of the 1980s and into the 1990s it seemed as if former state Auditor Richard Johnson, a republican, and Michael Fitzgerald, a democrat, were singing from the same hymnbook in terms of the state's finances. Why isn't that the case these days?
Fitzgerald: Well, I don't know if we're that far apart. One of the things we didn't have back in the old days, when the legislature would come to town or the governor would present a budget he'd just pick a number out of the air. I think we're going to have $5 billion in revenue this year. Well, our new system says we're going to have a non-partisan, three person revenue estimating committee put together academically what is reasonable revenue projections. And they have had a good track record, within two percent over the last ten years. Nobody can predict 100% accurately but they have been very, very accurate. And then the legislature says they can only spend 99% of those figures and they have tried to follow it. There's been a couple of years, notwithstanding, they spent the money. But in most years they have followed that. And then the big part, we have adopted what we call GAAP accounting, generally accepted accounting principles. The important part there is somebody else is setting the rules. Now maybe they're not perfect rules, David may have some good criticisms. But we follow outside rules. So we have a balanced budget under GAAP accounting and we have reserves. That is why we're AAA and that is why we're a good state.
Henderson: So, Mr. Vaudt, do you think that the state's two fiscal officers, I'll just come up with that term for you, do you think you are collaborating on this? Or are you painting two disparate pictures for the public?
Vaudt: No, I don't think so. I think what I'm trying to emphasize is what the federal government has failed to do which is be able to sustain the level of services that we're providing. So when you take a look at it it's like a family and let's say one of the wage earners receives a bonus at the end of the year, so the family decides that they're going to buy a larger house and take on a larger mortgage. Well, they're going to use those one-time monies to help pay for that larger mortgage. The problem is the following year when those one-time monies aren't there, they don't get another bonus, they can no longer afford that larger mortgage payment. And that's what I'm trying to do is to say, how do we sustain the level of services that we have today?
Borg: Mr. Fitzgerald, a minute ago you used an analogy of a student coming home from school and the parent asking, how was school and how are you doing? And you asked, how is Iowa doing? How is Iowa doing right now prospectively with corn fields and soybean fields burning up right now? Does that cause you -- and I'll ask you the same thing, Mr. Vaudt -- is that causing you some sleepless nights? Because the statistics that I have here from the Iowa Department of Agriculture says that overall in the year 2011 the corn crop in Iowa was worth $14.5 billion and the soybeans were worth $5.5 billion. That adds up to a $20 billion initial impact of just the crop value itself, not to say the multiplier effect. That would have a huge hit, that is a crop loss this year, on Iowa's economy would it not?
Fitzgerald: Oh, it is very much a concern. But this is the middle of July, hopefully we'll get a little more rain. I can't predict whether this -- how serious this drought will be.
Borg: I'm not asking you to predict the rainfall for the next couple of weeks, I'm saying are we in trouble if we don't get rain and big trouble?
Fitzgerald: Oh yeah, Iowa's economy, the engine of Iowa's economy is agriculture. And we've done so well in the last few years. The last three years have been the best years ever for agriculture in Iowa. Land prices boomed, commodity price -- corn is now over $7 a bushel, soybeans up there, farmers are making money and that means John Deere has record profits and everybody that spins off of it. But, you know, Iowa is not quite in the bad shape we were in the 80s, Kay. We were just agriculture back then. We have expanded and diversified our economy here in Iowa. Our banking and insurance industry is growing and it's strong. You know, the Principal's and the Wells Fargo’s and people like that. But also we have become, we have added thanks to our past administrations, Governor Vilsack and Culver, and give Grassley a lot of credit. We have developed alternative energy in this state, paying off big time. Ethanol, biodiesel and wind energy, that is adding to it. So yes, the corn crop, if we have a severe drought that is going to hurt us but not like the 1980s.
Borg: You're saying we're diversified. Mr. Vaudt, causing you some sleepless nights prospectively?
Vaudt: Definitely. I mean, we look at the ag economy, I think it had a huge impact on what Iowa has performed so well over the last couple of years.
Borg: And are we prospectively in trouble?
Vaudt: I think definitely we have to be very concerned because what happens is if that economy is impacted by the ag economy, which it will be, that means revenues will probably flatten out or at least not grow as fast or it could even become worse and decline. And that is why it's so important that we don't use one-time monies in this fiscal year to pay for ongoing costs because then those one-times monies go away along with the revenue growth and you're in a double whammy as far as trying to provide services in a very difficult time.
Price: In light of that, we don't want to think about this, but let's say this is a drought, this is a bad year and the ag economy really goes down. Do we have in our so-called rainy day funds, do we have enough in surplus for this year and next year or are we going to have to see some rather dramatic cuts to make up for that?
Vaudt: The good part is we do have our reserve funds pretty much full today. But keep in mind that only about 2.5% of the set aside 10% is actually related to economic emergencies so we're only talking about $150 million that is set aside under Iowa law for economic emergency funds. So that is not a whole lot. The other 7.5% relates to our cash reserve funds and we need those dollars there in order to be able to cash flow and make state aid payments on time before the tax revenues come in. So it doesn't give us lots of cushion.
Price: Are you comfortable with that cushion though? When you look at the dollars that we spend, $12 billion collectively with everything we spend is that enough or should the funds be bigger?
Vaudt: It's going to make it still more difficult to balance the budget and it won't mean that there wont' be services cut especially as costs go up, salaries and benefits and those types of things. It's going to be very difficult and that's why we need to really focus on longer term planning, thinking forward to say, yes I can balance this year's budget but how do I balance next year's budget if something impacts the revenue stream?
Price: Mr. Fitzgerald, are you comfortable with what we have in the bank, in the surplus?
Fitzgerald: I think David is a little more alarmist. We have $600 million in the reserve funds. The legislature can use all of that. They have access to it. They have higher vote totals they have to go through maybe two-thirds of the spending, but there's $600 million there. There’s also about another $600 million in surplus. And in Iowa, talking about have we been going through good times, the debate in the legislature is not -- most states if they're in trouble it is what taxes do we raise? We're not talking about raising any taxes. As a matter of fact, we've never raised income taxes as long as I have been treasurer of the state of Iowa. We're not talking about raising taxes, we’re talking about cutting taxes. The legislature passed this year and the year before a 20% income tax cut. The Governor is pushing a huge property tax for big businesses. So that’s where the discussion is. So yes, they want to take that money and the argument is how do we spend that money. So I say, we have money and buttress us against economic problems.
Henderson: Well, as Mr. Fitzgerald referenced, republicans in Iowa House have been talking about a big tax cut. Governor Branstad has been talking about tax cuts and property tax cuts. Mr. Vaudt, you suggested this week using part of that surplus money to shore up the Iowa Public Employee's Retirement System, the pension fund for tens of thousands of Iowans. That seems a little bit against the partisan tide here among your fellow republicans.
Vaudt: I think the key thing is Iowans want Iowa to be fiscally responsible and that is what we expect from our elected officials. And I think it's so important that we think longer term and think about what some of the liabilities are. When you take a look at IPERS it is important to understand that at the end of fiscal year 2000 we were 98% funded for that pension plan. And at the end of 2011 we're only 80% funded. So we have made a huge decline in funding and that is key --
Borg: Funded means for future obligations, for those who will be retiring?
Vaudt: Definitely. How many assets do you have set aside to cover the liability you’ve already incurred for those future payments? And when you drop that and you put it in terms of dollars we have gone from about a $327 million unfunded liability at the end of fiscal year 2000 to a $5.7 billion shortfall at the end of fiscal year 2011 and that is almost one year of general fund revenues. That is a huge piece that we've got to --
Borg: Are you giving IPERS retirees, future ones, an ulcer by saying that?
Vaudt: I think, no, I think one of the things that happens is in the short-term we're okay. But the sad part is even though we're 80% funded, which some people might argue is a good place to be, it also means we're 20% underfunded. And that is a real concern of mine and should be. And a lot of times people will say well we're not as bad as some other states and I will agree. Illinois is one of the worst states which is only about 50% funded. But I also say if your child comes home from school and tells you that they got a D on the math exam today but Johnny next door got an F should that make you feel better? No, we still have a concern and we’ve got to get that funded.
Henderson: Mr. Fitzgerald, you're a voting member of the board that governs the Iowa Public Employee's Retirement System. Is it in trouble? And does there need to be I guess a state government bailout?
Fitzgerald: This is an area where David and I, I think, are somewhat in agreement. We have a little different perspective on it. IPERS is important to the state of Iowa the IPERS retirement system must be protected. I think there's 330,000 Iowans depend on IPERS in one way or the other. And, as David pointed out, it was doing just great up until 1998, well 2000, but in 1998 the governor made a change and democrats went along with it too, this is not a partisan issue, that the cap was taken off IPERS. It was set up back in the 50s, IPERS was and the state employees and our employees put money in and the state puts some in too, it's not a freebie. They put in money and professionally invest it and it is run very, very well. It should pay for itself. Well, it was overfunded in the 90s, in the heyday of the 90s so what they did -- it used to have a cutoff of about $45,000 income so a teacher would retire, it was set up for teachers, they could have maybe a $20,000 pension fund every year. It worked just great. Well, what happened? They took that cap off and now you have some employees in state government that make as much as $250,000, can retire and get like$160,000 a year pension. That has broke the bank.
Price: So we need a cap?
Fitzgerald: I have advocated for putting a cap back in maybe at $100,000 so the top pension would be like $60,000 a year. That is pretty darn good, that would help folks. It's not supposed to be the cure all for everybody. But IPERS needs some fixing. But let me be clear, it needs to be protected. The people in Iowa that are relying on it, rest assured, IPERS is solid and yeah, compared to other states we're right in the middle of the pack now. But we should have it up there about 100% funded.
Price: Mr. Vaudt, what about the cap? Does that make sense?
Vaudt: Yeah, I mean, I think whenever you look at a defined benefit plan, which is what the IPERS plan is, you need to make sure that it's fiscally sound and the key thing is there are actuaries that calculate what the contribution rates have to be. And that means if we're going to promise those benefits we've got to be able to make those contributions. And that is where we have failed. We have increased contribution rates recently, however, we were behind the ball on making sure that we were keeping up with those required contributions.
Price: You've both followed what they've done in Wisconsin where they have made far bigger changes to what state employees can expect to get. So is that where we're headed here? Do you feel that -- are we going to have to ask employees to contribute more and expect less at the end whether it be caps or elsewhere?
Vaudt: I would say from my perspective I think definitely we've already asked employees and the state and other governments to increase their contributions because it is what we need to actuarially make it work. But I would also tell you that there's the state of New York that is actually 100% funded in their pension liability which somewhat surprised me knowing the state of New York. But also Wisconsin will be held out as being 100% funded but what they don’t' tell you -- the state auditor from Wisconsin and I were talking -- and they actually borrowed money to put it into their retirement plan in order to bring it up to date. So they're still way behind because they're paying off that debt in order to get there. So you have to look at a lot of the factors behind it too.
Price: Mr. Fitzgerald, should they expect less in the end?
Fitzgerald: Well, first, let me say this -- I think the state and the employees do put money into IPERS. It needs to be protected. But we don't need to go to the taxpayers for any more money for IPERS and continue to have the employees put in their fair share. And they are doing that in Iowa now. I think we can make some adjustments. IPERS should be solid. But there is a trend, and I think it is disturbing in this country, about public employees who are all of a sudden the bad guy. Governor Branstad doesn't miss a chance to blame public employees for one problem or another, puts them in a negative position. And that's just not the case. Public employees add to the very fiber of our society. They do important things whether it is school teacher, fireman, policeman or they drive the snowplow. And I know these people. They take their jobs very seriously and they are committed to them and we shouldn't be pitting one part of society against another and that is kind of what has happened to public employees right now.
Henderson: Governor Branstad, a couple of weeks ago, said that he would voluntarily give up part of his pay to pay 20% of his health care premium. Mr. Vaudt, you said you would do the same. Mr. Fitzgerald, you said you would investigate. Have you made a decision?
Fitzgerald: Well, this was a surprise to the executive council. This was -- when somebody comes to a big important decision like health insurance and says, sign right here, he didn't give us any information and we have an insurance committee at the executive council that investigates these kinds of things. So it was a big surprise. He says we have a couple more weeks to make up our mind. That's why I viewed it as a political stunt. He is trying to, again, castigate the public employees as mooching off the rest of us and that is not the case. For 40 years, Kay, 40 years the Governor and labor has negotiated what salary, wages and benefits should be and are and it has worked well for the state of Iowa. When he pulls this little caper he doesn't, you know, public employees are angry because this is a guy that lives in a free mansion from the state of Iowa. He gets $130,000 salary. On top of that he gets a $50,000 IPERS pension that none of the other people can have.
Henderson: Mr. Vaudt, do you have a rebuttal?
Vaudt: I think definitely what the Governor, from my perspective, is trying to do is to say that he feels it is appropriate for state workers to contribute. And the real key here is it is voluntary. No one is required to contribute, it's all voluntary. And what he'd like to do is be able to set the stage to say I'm willing to step up and are others of you willing to do the same thing? And I think one thing we have to keep in mind is when we look at compensation we need to look at the total compensation package, both salaries and benefits.
Borg: What about your answer, Mr. Fitzgerald? Are you going to contribute 20%?
Fitzgerald: Well, you know, now there's also been legal case -- I'll answer your question -- legal cases, there's been a legal case filed against this whether it was illegal, tampering with the labor contracts --
Borg: By AFSCME.
Fitzgerald: By AFSCME, it's a legitimate lawsuit. You know, the Governor has lost a number of these and we have paid out hundreds of thousands of dollars of legal fees for the Governor when he pulls these things and I will follow the process that we go through and if it is legally set up that we -- and public employees maybe should have to start paying some health care insurance and I will --
Borg: What are you going to do?
Fitzgerald: I will follow what is legally established and now that it's in the court system what comes back I'll pay what we're required to pay.
Henderson: Mr. Vaudt, do you think the employee contract was at all violated or tampered with by the Governor's action?
Vaudt: I'm not a legal expert at all. I stay in that accounting and auditing profession. However, I would tell you that when you look at it as being voluntary I don't see what the real issue is because no one has to participate, it's just another voluntary contribution if you want to make it and you don't have to participate if you don't.
Price: Mr. Fitzgerald, do you feel then, are the democrats going to hold back on this? I don't think I've heard any prominent democrats come out here and say no I'm not paying this. I've heard some people say this is wrong but no I'm not going to pay -- so is everybody going to wait back and see where this AFSCME suit goes?
Fitzgerald: Democrats are just like everybody else. Health insurance, that's a complicated issue and it's a long process that we go through every year. David and I have members on or are members of the insurance committee that we sort through the issues, what it costs, how do we develop programs. Some families -- we offer different programs for families in the state. It's a complicated issue. So to just want you to jump in right now, that takes some time and it puts public employees over a barrel. And remember, Governor Branstad is just about ready to go on Medicare, it's only about one percent of his pay.
Henderson: Let me jump in. Both of you would be up for re-election in 2014. I'm not going to ask you if you're running. Would either of you voluntarily choose to return to the private sector? Mr. Vaudt?
Vaudt: I think I've had experience in the private sector and what I really enjoy about the public sector is I can bring some of those experiences to the table to help Iowa taxpayers.
Borg: Mr. Fitzgerald, quick.
Fitzgerald: I've worked in the public sector as well and I enjoyed it but I've also enjoyed my public service and hope I can continue for a while.
Borg: We can't continue though, we're out of time. Thanks for being with us. Next week on Iowa Press, insight into Iowa's labor unions. We'll be talking with public employee union AFSCME's Danny Homan and Iowa Federation of Labor state president Ken Sagar. Usual times, 7:30 Friday night, noon Sunday. I'm Dean Borg. Thanks for joining us today.