Indiana State Government Fund Balances

Contents
Introduction
Five Funds
Total Balances by Fund Since 1973
Balances as a Percent of Revenues
Outlook

Introduction
Back in 1998 we had a $2 billion surplus.  We were happy.  By mid-2003, we're expected to have a $500 million surplus.  We are sad. What is a surplus, and where did it go?

The "surplus" is actually the sum of the balances in three "funds" that the General Assembly allocates during the budget sessions (the long sessions in odd-numbered years).  A fund is like a checking or savings account.  Revenue from taxes flows into a fund, and checks are written on the money in the funds to pay for state services.  The surplus is usually counted as the sum of the balances in these three funds at the end of the fiscal year, which is June 30.

Five Funds
There are three funds matter most for biannual budgeting.

The General Fund.  This is the largest fund in state government, and it covers much of what we think of when we think of state government.  Most school aid comes from the general fund, as does aid to universities, spending on the state police and prisons, Medicaid spending, money for property tax relief, money to run the governor's office, legislature and courts, and many other functions.  In fiscal year 2002-03 (from July 1 2002 to June 30 2003), about $7.9 billion will be spent from the general fund.  

The Property Tax Replacement Fund.  This fund was invented in 1973 as part of Governor Otis Bowen's property tax relief effort.  It was to receive revenue from a 2% sales tax hike that was designated for the local property tax replacement credits. As it turned out, the obligations to pay property tax relief grew faster than the sales tax revenue, and in fiscal year 1983 the balances in this fund dropped to zero.  Since then each year revenue has been transferred from the general fund to the property tax replacement fund, enough to cover all the PTRC payments.  The property tax replacement fund balance is zero at the end of every fiscal year.  The transfer from the general fund was about $662 million in fiscal 2002.   

The Rainy Day Fund.  Officially, this fund is called the "Counter-Cyclical Revenue and Economic Stabilization Fund" (which is why we call it the rainy day fund).  It was invented in 1985.  The idea behind this fund is to pay into it in good times, and draw out of it in bad times, like a savings account. This way, large spending cuts or big tax hikes might be avoided when recessions hit and state revenues turn down.  There was $540 million in this fund at the end of fiscal 2000 (in June 2000).  At the end of fiscal 2003, the fund's balance is expected to be $228 million.

There are two more "funds" to be described, though each is actually a part of the general fund.

The Tuition Reserve. This part of the General Fund is segregated to meet local school tuition support payments by the state. State school aid payments are made each month, but state revenue comes in more sporadically (there's quite a bit of income tax revenue that arrives after April 15, for example). The tuition reserve is kept to handle the cash flow, so there's always enough to meet aid payment requirements. 

A fifth fund, called the Medicaid Reserve, appeared on the state's books for one year, fiscal 2001.  An Indiana Supreme Court decision in a case called Humphreys v. Day was expected to increase state Medicaid payments, so the state has segregated a part of the general fund to cover this estimated cost.

Total Balances by Fund Since 1973
The following chart shows the balances in these funds at the end of each fiscal year, that is, how much was in the checking and savings accounts as of June 30.

The amount for 2003 is estimated by the State Budget Agency, based on the budget the General Assembly passed in 2001, the estimated revenues for the coming biennium, and the changes made with tax restructuring in June 2002.  These figures were most recently revised in July, 2002.

Where's the $2 billion surplus?  Check out the biggest mountain on this chart, peaking in 1998.  On June 30, 1998, the sum of the general fund, rainy day fund and tuition reserve was $2,055 million, just more than $2 billion.  Since that peak, total fund balances have dropped.  If revenues meet current projections, by June 30, 2003 the surplus is expected to be $619 million.

What makes balances increase, what makes them decrease?  Pretty simple, really.  When the budget spends less than it collects in revenue, fund balances increase.  When the budget spends more than it collects in revenue, fund balances decrease.  The reduction in balances between 1998 and (projected) 2003 is about $1.4 billion.  That means that over these five years, the state has spent or will spend $1.4 billion more than it receives in revenue.

Balances as a Percent of Revenues
Measuring balances in dollars is useful, but the size of the budget balance should also be measured relative to the size of the budget.  The $550 million balance in 1975 was huge, then, but would not be adequate now.  Small percentage declines make for big dollar changes when revenues are large.  When spending is large, handling cash flow requires big dollar amounts.  A better way to compare the size of balances over the years is as a percent of the size of the state budget.  That can be measured by "operating revenues," which are sales, income, corporate income and other state revenues associated with these five funds.

Looking at balances as a percentage of operating revenues shows that balances were largest in the 1970s.  This was just after the property tax replacement credits were created, and revenue was flowing into the PTRC fund, awaiting use for property tax relief.  The late 1990s also saw a large balance percentage--24.2% of revenues.  The expectation is that balances will be only 4.9% of revenues by the end of this biennium in  June 2003.

There's one rule of thumb for how big balances should be.  It is said that balances should not fall below 5% of revenues.  Less than 5%, and it's hard to cover cash flow, which is the most basic thing balances are used for.  We nearly hit 5% during the deep recession of the early 1980s.  It was thought that balances would fall below 5% after the recession of the early 1990s, but the economy recovered quicker than expected.  The projected percentage in 2003 is slightly lower than this lower limit. 

The legislature will write a budget for the 2003-05 biennium in the long session of 2003.  The projected balances for the Governor's initial budget proposal show balances as a percentage of operating revenues lower than they've been since 1973.  At 2.6% in 2004 and 2.8% in 2005, their also less than the 5% minimum.  Can the state pay its bills on time with its "checking account" balances so low?

Outlook
As of January, 2003, the state expected to have about $500 million in balances by June 30, 2003.  The projected fund balances were based on the budget passed by the General Assembly in 2001, the changes made by the legislature and the Governor since then, and the revenue projections made in December, 2002.  $500 million is just about 5% of operating revenues, which is often thought to be the minimum a state needs.

The December 2002 revenue forecast revised projected revenues for the rest of 2003 downward.  Still, the state reported that in January 2003 revenues fell short of even this lower target. 

The General Assembly will write a budget for 2003-05 during the long session of 2003.  There is so little revenue available that the budget they pass will no doubt have very small balances, perhaps even below the 5% level.