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Too difficult to forecast revenues with two-year budget

April 27, 2011
The Daily Freeman Journal

To the Editor:

Overdriving your headlights. That's what it's called when you drive too fast on a foggy night. You can't see obstacles in the road until it's too late to avoid them.

That's why I oppose Gov. Branstad's insistence on a two-year budget. The headlights here are forecasts of future revenues. We just can't forecast revenues accurately enough that far into the future. Making two-year spending commitments without knowing we can pay for them is irresponsible. Just like overdriving your headlights.

And that's very troubling, given the importance of state finances to our local schools, to local economic development, to health care, and to public safety.

I've worked with the independent Legislative Service Agency to see just how accurate our state's revenue forecasts have been. Each December the nonpartisan Revenue Estimating Conference estimates revenues for the six remaining months of the fiscal year. They also estimate revenues for the following fiscal year, which ends eighteen months later. For almost thirty years, state law has required that this second estimate determine the size of the state budget.

Over the last 12 years, the average error for the six-month forecast was almost 3 percent, and the average error for the 18-month forecast was close to 6 percent. Just like forecasting the weather, the farther into the future you try to predict, the less reliable you're going to be. A new report from the Pew Center confirms that other states have the same problem.

The REC currently does not do 30-month estimates, which is what would be needed to write a two-year budget. One can only imagine how far off those estimates would often be. 10 percent? 12 percent? No one knows.

Under current law, if actual revenues fall short, state law can require the governor to either make disruptive across-the-board budget cuts or call the Legislature back to rework the budget in a special session.

Gov. Branstad says his goal is to make the budget process more stable. I agree with that. The governor's two-year budget proposal, however, would do just the opposite. It would make midyear across-the-board cuts larger, more frequent, and more disruptive.

Gov. Branstad should slow down and drive within the state's headlights. That's the best approach for all of us.

Sen. Herman Quirmbach

D-Ames

Associate professor of economics, ISU

Thank you,

Senator Herman Quirmbach

To the Editor,

Overdriving your headlights. That's what it's called when you drive too fast on a foggy night. You can't see obstacles in the road until it's too late to avoid them.

That's why I oppose Governor Branstad's insistence on a two-year budget. The headlights here are forecasts of future revenues. We just can't forecast revenues accurately enough that far into the future. Making two-year spending commitments without knowing we can pay for them is irresponsible. Just like overdriving your headlights.

And that's very troubling, given the importance of state finances to our local schools, to local economic development, to health care, and to public safety.

I've worked with the independent Legislative Service Agency to see just how accurate our state's revenue forecasts have been. Each December the nonpartisan Revenue Estimating Conference estimates revenues for the six remaining months of the fiscal year. They also estimate revenues for the following fiscal year, which ends eighteen months later. For almost thirty years, state law has required that this second estimate determine the size of the state budget.

Over the last 12 years, the average error for the six-month forecast was almost 3 percent, and the average error for the 18-month forecast was close to 6 percent. Just like forecasting the weather, the farther into the future you try to predict, the less reliable you're going to be. A new report from the Pew Center confirms that other states have the same problem.

The REC currently does not do 30-month estimates, which is what would be needed to write a two-year budget. One can only imagine how far off those estimates would often be. 10 percent? 12 percent? No one knows.

Under current law, if actual revenues fall short, state law can require the governor to either make disruptive across-the-board budget cuts or call the Legislature back to rework the budget in a special session.

Gov. Branstad says his goal is to make the budget process more stable. I agree with that. The governor's two-year budget proposal, however, would do just the opposite. It would make midyear across-the-board cuts larger, more frequent, and more disruptive.

Governor Branstad should slow down and drive within the state's headlights. That's the best approach for all of us.

Signed,

Herman C. Quirmbach

Senator, District 23

Associate Professor of Economics, ISU

 
 

 

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