bankruptcyEveryone is talking finances and bankruptcy these days. What debts can, and cannot, be included? Should student loans be able to be discharged in a bankruptcy? Taxes definitely cannot be discharged. What happens to homeowners who are foreclosed on? Should one just walk away? What about the federal government budget deficit? Or is it total debt? Whose numbers do we believe? What should we worry about?

The financial status of state governments is also of concern. Fortunately, state governments – by law – must officially balance their budgets. Though some states use a variety of budgeting and accounting gimmicks to do so, the Governors and Legislatures are hopefully more accountable.

The Public Notice Project recently released a report titled “Bankrupting America,” which summarizes key state budget, tax, and economic information.[1] Iowa is doing better than many, but not as well as some. Several of our neighboring states are in fiscal trouble.

Encouragingly, the Iowa budget deficit numbers are trending significantly lower. In FY 2011 the deficit was just over $1 billion. In contrast, the FY 2012 projected deficit is only $149 million dollars, ranking 41st lowest in the country.[2] As retiring House Majority Leader Pro Tem Jeff Kaufmann said on June 4, “Getting our budget under control and ending the practice of funding continuing state expenses with one-time, federal, money is the accomplishment I’m most proud of.”[3]

The amount of federal tax money returned to Iowa, after being funneled through Washington, D.C., bureaucrats (most of whom make significantly more than the taxpayers providing the money) was $6.2 billion in FY 2010. The amount of “stimulus” money sent our way was $2.2 billion.[4] This money is the one-time funding that Representative Kaufmann was referring to.

In a regional comparison, South Dakota has a lower budget deficit at only $127 million, while Illinois continues to run one of the highest deficits in the nation at $5.3 billion. Additionally, the Illinois State employee pension fund is the worst in the country, with only 51 percent of the long-term liability actually funded.

The unfunded pension liability in Wisconsin, at over $79 million, is also significantly higher that that of Iowa. Iowa’s unfunded liability – while not the best in the nation – is less than $27 million.[5] Wisconsin Governor Scott Walker (Republican) was elected, and then re-elected, based on his campaign promise to take strong actions in dealing with the unfunded pension liability and government-union demands.

Of the six states surrounding Iowa – Illinois, Minnesota, Missouri, Nebraska, South Dakota, and Wisconsin – most of the per person state government expenditures are in the $4,200 to $5,700 range. Wisconsin has one of the highest levels of expenditures per person at $7,051 for each of its 5.6 million residents.[6] This is in addition to the high pension liabilities. Wisconsin is clearly a negative regional outlier.

The economic growth seen in Iowa over the last two years is second highest in the region, at 3.1 percent. Only Minnesota, at 3.2 percent, has seen more economic growth coming out of the recession. For example, the Minnesota Gross Domestic Product is now almost twice as high as our $129 billion, at almost $250 billion.[7]

Though the U.S. is officially out of the 2008 recession, housing and home foreclosures remain of concern. The highest regional foreclosure rate is 1 of every 383 houses in Illinois. On the other end of the scale, only 1 in every 4,000 houses has been foreclosed on in South Dakota. The Iowa rate is 1 in 804: not great, but not as bad as either Illinois or Wisconsin (1 in 578).[8]

State governments can avoid bankruptcy by cutting current and future spending and/or increasing taxes. If all else fails, homeowners can declare bankruptcy and let the house be foreclosed on. Students, however, don’t have that option with college loans. Seventy-two percent of the students graduating from colleges and universities in Iowa have student loan debt. Additionally, they have the third highest amount of student loan debt in the country, with an average of almost $30,000 each.[9]

The biggest negative for Iowa in the “Bankrupting America” report is that our top state income tax rate of 8.98 percent is the highest in the region and our state and local sales tax rate is 7 percent.[10] Lower rates in both areas would potentially make the state more competitive.

It is good that Iowa State government is not on the verge of bankruptcy, and our economic growth has been recovering. The state budget has also been brought under control. Now it would be smart if the State House and State Senate could see their way clear to reducing the income tax and commercial property tax rates. And it would be smarter still if the Regent schools would end tuition set-asides and reduce tuition rates so that our workers, families, and students do not end up in bankruptcy court – yet still have huge student loan debts to pay.

[1] “State Fact Sheets 2012” Bankrupting America, May 2012, accessed on June 4, 2012.
[2] Ibid, p. 15.
[3] State Representative Jeff Kaufmann, June 4, 2012, Johnson County Republican Central Committee meeting, Coralville Public Library, quoted with permission.
[4] “State Fact Sheets 2012,” p. 15.
[5] “State Fact Sheets 2012,” pp. 14, 15, 23, 25, 27, 41, and 49.
[6] Ibid.
[7] “Widespread Economic Growth Across States in 2011,” Bureau of Economic Analysis, U.S. Department of Commerce, June 5, 2012, accessed on June 5, 2012.
[8] Ibid.
[9] “Student Debt and the Class of 2010,” State Summary, Project on Student Debt, accessed on June 4, 2012.
[10] “State Fact Sheets 2012,” p. 15.

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