As fiscal floods recede, Iowa set to balance books.

Iowa is back on track. After being weighed down by a burdensome deficit the last six years, the state is poised to eliminate the gap in fiscal 1995, which begins July 1.

Iowa will erase its $240 million deficit, as measured by generally accepted accounting principles, despite financial strains caused by the worst flooding in the state's history last summer.

In his Condition of the State address in January, Gov. Terry Branstad said that Iowa's "remarkable comeback from the flood is matched by the dramatic turnaround in our state's finances."

Rating agency officials agree. In March, Standard & Poor's Corp. upgraded $9.7 million of Iowa Facilities Improvement Corp. lease revenue bonds to A from A-minus, citing the state's progress toward financial stability through conservative budget practices and fiscal reforms.

Under state law, Iowa cannot issue general obligation debt.

"I,m really proud of what the state has done," said state budget director Gretchen Tegeler, pointing to budget reforms and tightened spending. "I would hold ourselves up to any state because we're really getting our arms around issues that make a difference long-term, such as Medicaid and the size of government."

Accomplishments

The state's fiscal accomplishments include:

* Funneling about 108,000 of the state's 220,000 Medicaid patients into managed care programs, which has helped contain the state's health care costs.

* Reducing the executive branch by 2,100 employees, or 1.0%, since 1991.

* Creating a cash reserve fund that is projected to grow from 2% of the fiscal 1995 general fund budget to 5% by fiscal 1997.

Iowa's $3.64 billion fiscal 1995 budget approved by the legislature this month, would also eliminate $10 million of the state's GAAP deficit and produce a $60 million surplus, Tegeler said.

Tegeler noted that efficient management of state programs, combined with a 1 cent increase in the state sales tax approved two years ago, has helped the state in its effort to wipe out its deficit.

The state's GAAP deficit reduction plan assumes that the remaining $230 million of the deficit will be eliminated by accounting changes expected to be implemented by the Government Accounting Standards Board in 1995, according to Calvin McKelvogue, the state's GAAP coordinator.

A state law passed in 1989 required the state to eliminate its GAAP deficit by the end of fiscal 1993. After deciding that the 1993 deadline was unattainable, lawmakers pushed the deadline back to fiscal 1995.

Iowa's GAAP deficit, which reached a high of $409 million in fiscal 1992, has been a major source of many of the state's fiscal problems.

Municipal market participants recall that the GAAP deficit made it difficult for the state to get credit enhancement in 1992 on a $96.5 million certificate of participation issue that financed the construction of the state's fiber optic network. AMBAC Indemnity Corp. eventually insured the deal.

More Than Required

In the fiscal 1995 budget, the appropriation for the network is $5.6 million more than the annual $5 million that the state is required to provide until 1996 under state law, according to Ted Chapler, chief financial officer for the network.

The additional funds were needed because of revenue shortfalls, stemming from delays in signing on community colleges and other schools to the communication network, Chapler said. Last year, the state issued $18.5 million more COPs to pay for equipment for the network.

Tegeter said that its improved financial condition should enable Iowa to eliminate an annual tax and revenue anticipation note sale within about two years. This year the state expects to issue about $125 million of Trans that will be used mostly to make school aid payments, she said.

Though the resurrection of a lawsuit filed by a taxpayers group threatens the issuance of the notes, the state still plans to issue them shortly, according to Karl Koch, chief finance officer of the Iowa treasury.

In December, the Iowa Supreme Court reversed a District Court ruling that dismissed the suit, which alleges that the state's cash accounting system hides a long-term deficit. The suit also claims that the state's issuance of the Trans is effectively a refinancing of long-term debt and is therefore unconstitutional.

In its decision, the state Supreme Court remanded the suit back to the District Court level, Koch said.

While the taxpayers' lawsuit has potential repercussions for Iowa's finances, two adverse court rulings in the current fiscal year and flood-related expenses have already proven costly to the state.

The court rulings, which collectively cost Iowa $62 million, required the state to pay retroactive state income tax refunds to federal government pensioners and retroactive business taxes on the dividends of foreign firms.

Federal disaster funds covered much of the $36 million cost of flood-related repairs, according to state officials. Local governments will also be able to issue double tax-exempt bonds to pay for flood damages.

Given Iowa's healthy revenues in the current year, the state covered the entire $98 million liability with its general fund revenues, Tegeler said.

As a precaution, she said, the state included about $10 million in the fiscal 1995 budget for additional costs related to last year's flooding.

Rating agency officials said that Iowa has made significant reforms in the management of its finances.

Kathy Quail, a director at Standard & Poor's, said that the implementation of reserve policies, cost-containment measures, and tighter budget controls has improved the state's financial position. "For all intents and purposes, [the measures] should work very well for them," Quail said.

Robert Kurtter, a vice president in the state ratings group at Moody's, said that the state has made "significant progress" in eliminating its deficit in a "short period of time."

"They had dug themselves into a hole. But their refom plan is well-conceived. They have also set aside significant reserves," Kurtter said.

Branstad's critics say that the governor's policies contributed to the formation of the deficit.

Charles Robbins, a spokesman for U.S. Rep. Fred Grandy, R-Iowa, who will face Branstad in the June gubernatorial primary, said that amassing a deficit is "no way to do things."

"I find limited mileage in praising Branstad, who is finally ceasing to [use] budget gimmicks," Robbins said.

Branstad has been governor since 1983.

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