States look beyond fiscal woes, focus on economic development

Lawmakers in Indiana, Iowa and North Dakota hope 2003 will not only be remembered as a year when they faced and filled large holes in state budgets; they also want it to be the beginning of an economic recovery in their state.

With Midwestern lawmakers having to fix budget deficits of all sizes this year, a legislative focus on fiscal survival seemed destined to dominate the 2003 sessions.
Some state leaders, though, had other plans. They instead used slumping state economies and falling tax revenues as an impetus to push for major tax reforms along with new far-reaching economic development strategies.

By:
Tim Anderson
Stateline Midwest: Council of State Governments
Lombard, IL
http://www.csg.org/ http://www.NASVF.org

The tough work of balancing the coming fiscal year’s budget has still commanded plenty of attention. But in Indiana, Iowa and North Dakota (where sessions adjourned or neared completion in late April), lawmakers want 2003 to be remembered as more than just a time when their state survived a fiscal downturn, but also when the enactment of new public policies helped ensure long-term economic prosperity.

State targets economic expansion

Indiana legislators adjourned early this year, an improbable accomplishment considering what they faced in 2003: divided government, a projected deficit of $800 million for the next biennium and pressure to pass a major economic stimulus plan.

Fixing the deficit was helped by early agreement on key issues by leaders in both parties. Neither wanted to raise taxes, and both sought to increase education funding.

"The House and Senate agreed to flat-line spending on corrections and Medicaid," says Indiana Sen. Robert Meeks, a Republican from LaGrange. "And then we went out and tried to find other savings wherever we could get it."

According to Meeks, the Legislature’s actions this session cut the structural deficit by about half. "We didn’t get an $800 million deficit in one year, and we shouldn’t expect to get out of it in a year," he believes.

Barring a major upturn in state revenue collections, Indiana’s new biennial budget will have to be modified either later this year or in 2004 in order to be balanced. For example, although some revisions were made to the Medicaid program to offset costs, eligibility requirements remain the same. As a result, spending on the health care entitlement program will almost assuredly have to increase.

Meanwhile, the state will continue to search for additional governmental savings as a way of balancing the budget. This year’s final agreement calls for the creation of a Government Efficiency Task Force, a panel of private sector leaders that will review all state government operations and programs.

But perhaps the greatest help to state legislators would be an increase in state tax revenues. With that in mind, the 2003 budget bill includes a comprehensive economic development package that aims to spur immediate job growth and long-term expansion in targeted high-tech sectors. The measure will provide more dollars for university construction projects, create a venture capital fund, bolster job training efforts, put money into rural development initiatives, and extend the state’s research and development tax credit. In addition, the state will increase its investment in the 21st Century Research and Technology Fund, which provides grants for partnerships in Indiana’s academic and commercial sectors.

Democratic Gov. Frank O’Bannon wanted to pay for the plan through a securitization of future tobacco settlement payments, but lawmakers instead chose to use existing tobacco settlement money, general fund revenue and federal dollars.

Seeking elusive compromise

Like their counterparts in Indiana, Iowa lawmakers entered the legislative year with a challenging budgetary task and an ambitious economic development agenda. They left Des Moines with some unfinished business. Leaders expected to reconvene in special session sometime this month to work out an elusive compromise on tax and regulatory reforms and an Iowa Values Fund.

The values fund was touted early on by Democratic Gov. Tom Vilsack. His original five-year, $500 million bonding proposal called for a focus on investments in the life sciences, value-added agriculture, advanced manufacturing, insurance and information solutions. State dollars would be used to improve workforce training, expand the state’s alternative-energy industry and double the state’s number of college-experienced workers.

Lawmakers embraced the goals of the proposal, but similar to debate in Indiana, many preferred a "pay-as-you-go" method, which would bring in less money upfront but also keep the state from having future unpaid bills.

"Members have been uneasy about getting into debt," says Iowa Democratic Sen. Joe Bolkcom of Iowa City. "Plus, having that much money sitting in some fund in Des Moines would probably create too big a temptation to use it if we have other financial problems." Alternative proposals have included raising the sales or cigarette tax, and making a greater commitment to collect revenue from Internet sales.

Many Republican legislative leaders have said a compromise with the governor on the fund also must include a commitment to reform the state’s regulatory and tax system. Both chambers already approved measures that would alter Iowa civil liability laws, workers’ compensation rules, and permitting and licensing procedures. In addition, the Iowa House approved changes to the state’s income tax code (reducing the number of tax rates from nine to three) and property tax system (basing it on square footage rather than assessed values).

The Legislature was able to work out a budget agreement before ending the regular session. Savings on next year’s budget (which had a projected deficit of $400 million) came from a proposal made by the Public Strategies Group, a Minnesota-based consulting firm hired to find ways to "reinvent" state government. In all, the group proposed about $120 million in savings, the majority of which comes from cuts to local governments. In addition, Iowa’s Medicaid program was altered to save money. Those modifications include requiring larger co-payments from recipients for certain medicine, reducing the amount of money paid to pharmacists and creating a preferred drug list.

Forced to hold special session

Unfinished issues also forced North Dakota into special session this year, although the differences centered on the budget, rather than economic development proposals. Early on, the Legislature and Gov. John Hoeven agreed to change the state’s corporate income tax code. The measure decouples the state income tax from the federal tax, dropping the top rate from 10.5 percent to 7 percent. Policymakers say the top rate had been discouraging business from moving to the state.

Meanwhile, lawmakers agreed to invest state dollars in new venture capital funds for entrepreneurs and an ethanol incentive program. Universities also will be given funding to create Centers for Excellence, which the state envisions being hubs for the development of high-tech ideas and commercial products.
"We were limited on the amount of funds we could put into those programs, but the things we did do should be successful [in helping the economy]," says North Dakota Senate President Pro Tempore Herb Urlacher, a Republican from Taylor.

In contrast to agreements on these economic development issues, lawmakers reached an impasse on several budget-related issues. Differences between the governor and GOP legislative leaders on the state’s education, corrections and information technology budgets ultimately led to a special session. Hoeven, for example, wanted to make sure that additional state dollars for schools went to teacher-pay increases, while lawmakers were prone to give local districts more funding discretion.

Both sides accepted a plan to move some prison inmates to county facilities, but Hoeven said more money was needed to pay for such a proposal and to avoid layoffs to corrections officials. A final agreement on the budget was expected to be reached in early to mid-May.

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