Iowa Continues Prudent Spending with FY 2025 Budget

Officials demonstrate fiscal restraint even as they continue to up the state’s investment into education and healthcare.

The passage of the appropriations bills that make up the Fiscal Year (FY) 2025 budget marked the final major legislative action of the session. Since spending is the primary driver of public policy, a priority for Governor Kim Reynolds and legislative leaders has been conservative budgeting. This centers on prudent fiscal decisions and controlling the growth of spending.  The final passage of the FY 2025 budget demonstrated a milder version of fiscal restraint than what has occurred in past sessions. The $8.9 billion FY 2025 General Fund budget represents a 4.7 percent increase from the $8.5 billion FY 2024 budget.

Before the session began, the Iowa Conservative Budget recommended that spending should remain within the limits of population growth and inflation. This meant that, based on the $8.5 billion FY 2024 budget, spending should not have surpassed $8.8 billion.  Though the new budget is slightly higher than the Iowa Conservative Budget recommendation, the tax cuts passed at the end of the session brings it back into line.  Limiting spending to the growth of population plus inflation should be a principled objective for every budget; a budget should reflect the average taxpayer’s ability to pay.

The FY 2025 budget spends 92 percent of projected revenues, which is higher than the FY 2024 budget, which spent only 88 percent of projected revenue. The FY 2025 budget also discredits critics of Governor Reynolds and the legislature who argue that the Republican trifecta is hollowing out government. Government spending continues to increase, just not as fast as some would prefer. Only in government could a 4.7 percent spending increase be considered a “cut” in spending.

Education is the leading budget driver and, unless there is a major budget crisis, it is always guaranteed to increase. Public education accounts for 56 percent of the General Fund budget.

The debate over education often revolves around how much to increase education spending, which is a common issue, not unique to Iowa. This session saw debate over reforming the Area Education Agencies (AEAs), increasing the state per pupil aid to $7,826, increasing teacher salaries, and dedicating more funds for Education Savings Accounts (ESAs) due to high demand from parents seeking better schools for their children.

Other significant budget drivers include the Department of Health and Human Services (DHHS), particularly the growing cost of Medicaid. The DHHS budget is the second leading driver of the budget, with Medicaid being the largest program.

Altogether, education and DHHS consume 81 percent of the General Fund budget. This crowds out funding for other necessities, especially for public safety and the judicial system, which did see a slight increase in spending.

Even with a 4.7 percent increase in spending, the legislature is still practicing prudence. By law, the legislature can spend up to 99 percent of projected revenue. The 99 percent spending limitation is Iowa’s weak spending limit established in the code. However, the FY 2025 budget spends only 92 percent of projected revenue, demonstrating fiscal prudence even with a slightly higher increase in spending.

This means that Iowa is once again on track to have another budget surplus, just as it has in recent years. In FY 2023 Iowa’s budget surplus was $1.8 billion and surpluses are projected for FY 2024 ($1.9 billion) and FY 2025 ($2.4 billion).

Iowa’s reserve accounts will continue to be filled at their statutory maximum and the Taxpayer Relief Fund will continue to grow. The Taxpayer Relief Fund has a FY 2024 balance of $3.6 billion, which is projected to increase to $3.7 billion in FY 2025. Conservative budgeting over the past several years has resulted in budget surpluses, which have swelled the Taxpayer Relief Fund.

Controlling spending is never easy and a plethora of special interests are always ready to advocate for why they need more (or new) funding for their respective programs. Going forward the legislature will have to be on guard to ensure that conservative budgeting continues. “Both Republicans and Democrats need to realize that tax policy is affected by spending. And when you start seeing spending creeping up for annual, year after year, new good ideas, you can’t have good tax policy,” stated State Senator Jason Schultz.  Senator Schultz is correct, and any future tax policy changes will be contingent on controlling the growth of spending.

After another session of keeping the growth of state government at bay, legislators will eventually begin to look to 2025 and beyond. An additional spending restraint they should seriously consider strengthening is Iowa's 99 percent spending limitation. A more robust spending limit, placed into the Constitution and possibly limiting spending changes to the growth of population plus inflation, would be an even stronger check on the spending desires of future legislators. This would be a very direct way to ensure that spending is limited.

It is often argued by the progressive left that lowering income tax rates is dangerous because it could potentially lead to a budget crisis. There is some truth in this argument, especially if a legislature recklessly increases spending while cutting tax rates. This is not what Iowa is doing, nor has it been done in our state. Iowa has been balancing conservative budgeting with pro-growth tax reforms, and even with those rate reductions, revenue collections remain strong.

A greater warning is what Iowa can learn from our neighbors in Minnesota, Illinois, and other progressive states such as New York and California. The lesson is that increasing spending and taxes will lead to a fiscal disaster. All these states are confronted with budget uncertainty, and they are suffering an exodus as residents leave these high-tax states in droves.

Sound public policy begins and ends with conservative budgeting.

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