Iowa governments must manage new limits on bond elections

An Iowa state law adopted this year means local governments and school districts will face a new hurdle in issuing municipal bonds.

House File 718, which Gov. Kim Reynolds signed into law in May, decreased the options for municipalities and school districts to hold bond elections.

Until now, cities and school districts in Iowa had two to three times per year in which they were allowed to hold bond elections. Now, those elections may only be held one time per year, in November.

 As municipalities experience full budget cycles post-adoption of the law, it will become clearer exactly what the impact will be. But Alan Kemp, executive director of the Iowa League of Cities, says the change could clearly be an issue for fast-growing communities, since it may delay construction of necessary infrastructure.

“That will add to the project timeline, which is manageable, but could delay a project if a city fails on the first vote and has to wait another year,” Kemp said. “In the recent past, such a delay meant increased project cost due to ongoing inflation.” 

He added that local governments have expressed concern that there may be multiple projects on the ballot, which could be confusing to voters.

The biggest concern for the Iowa Association of School Boards comes down to the fact that there’s a 60% threshold for approving bond issues — and most that fail do so by a very small amount, according to Emily Piper, a lobbyist with the association. Under the new law, districts will have to wait an entire year before they can resubmit to voters.

 “For a growing school district, for a school district that has really pressing needs with respect to rehabbing old buildings, if the bond issue doesn’t pass, it’s going to delay their ability to move forward,” Piper said.

 School districts now have to conduct their planning by working backwards from the one permitted election date per year.

They’ll have to make sure they’ve gone through all the steps to get a vote to the ballot, including making decisions about the cost of the project, getting approval at the board level and gathering the appropriate number of signatures, Piper said.

She echoed Kemp’s concerns about rising construction costs and said that if a bond issue fails this November, the costs outlined on the ballot may not be relevant come the following election. That means school districts will then not only be a full year behind, but they could also have to take the time to redo their construction estimates.

Public finance attorney Cristina Kuhn, a Des Moines-based partner at the Dorsey & Whitney law firm, pointed out that in Iowa winter can throw a wrench into design and planning. School districts and counties will no longer have the flexibility to hold a referendum in March, for example, and get started on a project in September. They will have to take their construction schedule into account when planning ahead for the one time a year they’ll be able to have one election a year.

“People are now faced with the prospect that you’ve got to hit the timing right,” said John Danos, another bond attorney and partner at Dorsey & Whitney. “You’ve got to get your design done at the right time because, of course with most of these elections, some substantial amount of the design work needs to be done ahead of the election so that voter education can be done.”

Will the change result in fewer bond issuances? Not necessarily, Danos said.

“Typically with these projects that are going to referendum, they need to happen more often than not — it’s not wish list stuff,” Danos said. “It’s need-based projects for the most part.”

Kemp agreed that the new limit likely won’t mean less issuance because cities don’t have a choice about whether or not they want to complete projects, and that the biggest impact will likely be higher project costs due to longer timeline and delays in getting projects complete.

In addition to changing the election rules, the legislation introduced property tax cuts that Republican legislative leaders estimated will result in $100 million in tax relief for property owners.

“We’ve heard Iowans across the state voice their concern about out-of-control property taxes and the impact on family budgets,” Reynolds, Senate Majority Leader Jack Whitver and House Speaker Pat Grassley said in a joint statement in May.

The bill requires cities and counties to use excess revenue growth to lower property taxes via a newly calculated formula for levy rates, and will sunset in four years unless legislators take further action. Cities and counties are divided into three tiers based on revenue growth: growth of less than 3%, between 3% and 6%, and more than 6%. The first tier won’t have to reduce its levy while the following two would need to limit levy growth to 2% and 3%, respectively.

The bill also consolidated existing levies for cities and set the combined levy at a maximum of $8.10 per $1,000 in taxable value.

In short, the legislation will put limits on the revenue raising environment in which Iowa local governments operate. Blake Yocom, senior director and analytical manager at S&P Global Ratings, said those limitations likely won’t impact local issuers from a rating and credit standpoint.

“We don’t anticipate any material changes to credit or ratings in response to the recent legislative changes,” Yocom said. He added that most of the firm’s rated universe is already levying at the maximum rates, and that levies being consolidated represent a small portion of the revenue stream — if the levies are being used at all.

There will need to be proactive management going forward given the new limitations on revenue growth, and cities and counties will need to control expenditures to structurally align their budgets, Yocom said. Pensions are also well-funded in Iowa, which puts their spending base in a strong place compared to others.

Ashlee Gabrysch, a director and regional manager at Fitch Ratings, also said the legislation is intended to and will have the effect of further restraining the revenue raising environment.

“The longer-term fiscal and credit effects will depend both on the specific Iowa local government and whether the sunset provision is modified over time to become a permanent feature,” Gabrysch said.