The Indiana State Budget

Contents

Introduction
Revenues, Expenditures and Balances
Where Does It Come From, Where Does It Go?
Recession and Revenue Forecasts
The Budget in Recession
The 2003-05 Biennium

Introduction
Indiana's state government makes a lot of information available about its state budget, but it's in a form that many people find hard to understand.  There are revenue projections from the State Budget Agency, revenue reports from the Department of Revenue, budget bills considered by the General Assembly, and lists of appropriations and fund balances from the Budget Agency.  State budget accounting is necessarily complicated.  Still, there ought to be a way to combine the revenue, appropriation and fund balance information so everyone can understand.

The state's budget, after all, is not so different from a family's checking or savings account statement.  The state starts the year with balances in its checking and savings accounts--the general fund and rainy day fund balances.  During the year money comes in from various sources, mostly from taxes.  During the year money goes out, in payments authorized by the budget which the General Assembly has passed.  At the end of the year balances are left in checking and savings.  If the state has spent more than it has taken in during the year, balances are lower than at the year's start.  If the state has taken in more than it has spent, balances are higher.  And, just as your bank objects when you bounce a check, so the Indiana Constitution requires that the state keep a positive balance in its checking account.

Revenues, Expenditures and Balances
The Indiana State budget was in great shape in fiscal 1998, 1999 and 2000.  Fund balances were near $2 billion at the start of each fiscal year (July 1 of one year to June 30 of the next).  Total revenues grew by hundreds of millions each year, and so did expenditures.  There were tax cuts, special appropriations, and the state socked money away in the rainy day fund.  This budget summary table shows how good the good times were.

Indiana State Budget Summary, FY 1998-2003, with Proposed 2004 and 2005
(millions of dollars)

This table shows revenues, appropriations and balances for the Indiana's general fund, property tax replacement fund and rainy day fund.  This is not all of state government, by any means.  There are many "dedicated funds" as well.  Almost all highway maintenance and construction expenditures are made from such dedicated funds, for example.  But the general fund is the focus of the General Assembly's budget debate every two years, and the balances in these funds measure the health of the state's finances.

Start of year balances show the money in the state's general fund, tuition reserve and rainy day fund accounts at the start of each fiscal year (that is, on July 1). 

Revenues show how much was collected from three major tax sources (the big three: sales, individual income and corporate income), and from all other sources.  All other includes cigarette and tobacco taxes, alcoholic beverage taxes, the insurance tax, inheritance tax, interest earned on fund balances, and some other smaller sources.  During 1998-2000 total revenue grew about 4% per year, up more than $700 million.

Expenditures are taken from the state's biennial budget appropriations.  Budgets are written in odd-numbered years, during long sessions of the General Assembly.  The budgets for fiscal 1998 and 1999 were written in the 1997 long session, and the budget for fiscal 2000 was written in the 1999 long session.  During 1998-2000, appropriations grew by almost 7% per year, $1.2 billion. 

The current year surplus/deficit simply subtracts expenditures from revenues.  In each year there were current year deficits, because expenditures exceeded revenues.  In 1998 and 1999 the deficits were small.  In 2000, though, the deficit was $528 million.  This was mostly intentional.  Writing the budget in 1999, the General Assembly saw balances of near $2 billion.  All thought that this was too much, and the only way to reduce balances is to spend more than current revenues.  The target level of balances was about $1.2 billion. 

The next three lines of the table show adjustments to balances.  Transfers from (to) Other Funds are just that, movement of money from the general fund to other funds (negative numbers in parentheses), or movement of money from other funds to the general fund.  In 1998 and 1999, the negative numbers represent shifts of money from the general fund to the rainy day fund.  In 2000, the rainy day fund exceeded its maximum cap, so money was shifted back to property tax replacement fund, which is closely tied to the general fund.  Transfers into the general fund increase available revenues and increase balances; transfers out do the reverse.

Reversions occur when state agencies spend less than their appropriations.  This happens every year to some degree, for example when bills don't come due until the next fiscal year, when tasks are delayed from one fiscal year to the next, or when tasks can be accomplished for less than the amount originally expected.  Since reversions are money not spent, higher reversions reduce expenditures and increase balances.  Reversions varied between $87 million and $215 million in 1998-2000.

Payment delays take advantage of the fact that the state is on a July-June fiscal year, while local governments are on a calendar year fiscal year.  For example, the state owes school corporations 12 monthly aid payments during a year.  Ordinarily these payments will be made once each month during the calendar year, six in one state fiscal year (January through June), and six in the next state fiscal year (July through December).  If payments are delayed, though, the June money may be paid in July.  The state ultimately pays the same amount, but there are only five payments in the first six months, and thus only eleven payments in the fiscal year.  The state has saved one payment, and thus reduced its fiscal year appropriations.  Payment delays reduce expenditures, so they add to balances.  Sometimes payments are accelerated, moved from a later to earlier state fiscal year, and this would subtract from balances.

End of year balances are what's left at the end of the fiscal year (on June 30), after revenues are added, expenditures are subtracted, and fund transfers, reversions and payment delays are accounted for. There are four fund balances shown here, the general fund, tuition reserve fund (used for paying state aid to schools), Medicaid reserve fund (a one year fund balance to cover the costs of a court case), and the rainy day fund (the state's savings account).   In total, balances were more than $1.6 billion by the end of fiscal 2000 (June 30, 2000).

Total balances as a percent of revenue simply divide end of year balances by total revenue.  This is a rough measure of the state's fiscal health.  One use of balances is to insure against unexpected shortfalls of revenue.  The larger is state revenue, the larger unexpected shortfalls could be, so the larger must fund balances be to cover them.  Balances were 17.8% of revenues at the end of fiscal 2000.  That's a very healthy budget.

Where Does It Come From, Where Does It Go?

Revenue for the general fund comes from two big taxes, and many smaller sources.  The big taxes are the general sales tax and the individual income tax.  The sales tax is collected at 6% of taxable sales.  The individual income tax is a flat 3.4% of taxable income.  Together, these two taxes raise about 80% of general fund revenue, $8 billion of the $10 billion collected.

Tax restructuring changed the slices of the pie substantially.  The sales tax slice is bigger, because the sales tax rate increased.  The cigarette tax tripled in size, with the big increase in its tax rate.  The gaming tax slice appeared for the first time, since restructuring put gaming tax revenue into general revenues.  Restructuring increased the tax rates and expanded the scope of gaming.  The corporate income tax slice got smaller, with the elimination of the gross corporate income tax for most corporations.

More than half of appropriations are for education.  K through 12 education and higher education together make up 51% of the budget in fiscal 2002-03.  Add to this Medicaid and property tax relief, and you've got 78% of total appropriations.

The budget pie points out the difficulty the legislature has when revenues fall short.  Medicaid is an entitlement program.  Its spending is determined by the rules of eligibility for its services.  Medicaid spending has been growing rapidly for many years, as the costs of medical services have risen.  Property tax relief is determined by formula.  It too increases with the rise in the property tax levy.  Tax restructuring increased property tax relief by about a billion dollars.

The budget faces a deficit somewhere between the size of the health and human services slice and the Medicaid slice of the pie.  If property tax relief and Medicaid must increase, and if no taxes are increased, the budget must be balanced by cutting the other categories.  To keep education from being cut, the health and social services, public safety and all other slices must be cut by at least 40%.  If that's not possible, then education must be cut.  The fact that education is such a large part of the budget means that in hard times it is vulnerable to budget cuts.

Recession and Revenue Forecasts
Revenues came in above projections throughout the second half of the 1990s.  Then, starting in fiscal 2000, revenues fell short of projections.  The shortfalls became huge in 2001, 2002 and 2003.

The following table compares revenue forecasts in each year with the actual revenues collected.  Read across the rows to see how revenue forecasts for each year changed.  Read down the columns to see what revenues were expected as of each year.  Read down the diagonal (the numbers in italics) to see actual revenues in each year.

Indiana Revenue Projections and Actual Revenues, 1998-2003
(millions of dollars)

Numbers in italics are actual revenues for that fiscal year.
2003(1) shows projections made before tax restructuring in June 2002.
2003(2) shows projections made after tax restructuring, and include the sales, cigarette and gaming tax increases, as of April 10, 2003.

Consider the column labeled "1999", reading down.  These were the revenue forecasts that were used to make the 1999-2001 biennial budget.  Actual revenue in 1999 was $8,883.2 million.  Revenues for 2000 were forecast to be $9,301.6 million, and for 2001, $9,773.3 million.  Steady growth was expected.

And why not?  The revenues actually received in 1999 were more than $200 million more than had been forecast just a year before.  1998's forecast of 1999 revenues had been $8,647.2.  And actual revenues had grown 5.5% between '98 and '99, from $8,421.4 million to $8,883.2 million, an increase of $460 million.  In 1999 revenues were forecast to rise 4.7% in 2000 and another 5.1% in 2001.

It didn't happen.  Hints of a problem appeared when the numbers for fiscal 2000 were added up in July of that year (this is called the "closeout").  Actual revenues were $9,142.7 million, $159 million less than forecast the year before.  Revenues increased only 2.9% from 1999 to 2000, not the projected 4.7%.  The revenue forecast for 2001 was revised downward by $130 million, to $9,641.7 million.

Then came serious trouble.  In fiscal 2001, only $9,052 million was collected, over $600 million less than the revised forecast from the year before.  All together, revenues for 2001 were $721.3 million less than the forecast on which the budget was based.  Revenues had actually fallen from the year before, by one percent. 

The revenue forecast made in 2001 for the 2001-03 biennium assumed the worst was over.  Growth of around 5% a year was expected.  The budget was written based on the expectation of this normal revenue growth. But again, 2002 was a revenue disaster.  Actual revenues fell $820.1 million short of the previous year's forecast.  Revenues had fallen for a second straight year, this time by 3.8%.  No one could remember a time when revenues had fallen two years in a row.  The forecast for 2003 was revised downward by $705 million.

In June 2002 the special session of the General Assembly restructured taxes.  Sales, cigarette and gaming taxes were increased.  At the time, it was expected that this would add $1,001.6 million (just over one billion) to revenues.  The forecast for 2003 increased to $10,251.1 million. 

Fiscal year 2003 ends in June 2003, so at this writing (April 2003) actual revenue for that year is not yet known.  Revenues fell short of forecasts most months since July, however, so in December the state reduced its revenue forecast for 2003 in December, by $325.6 million, and again in April, by another $50 million. 

All told, from 2000 through 2003 (so far), revenues have fallen short of original forecasts by more than $2.7 billion.  This is significant because those original forecasts were used to write the budgets, to set spending levels for the state government.  Revenues fell far short of what was required to carry out the state's budget plans.

The Budget in Recession

What effect did these revenue shortfalls have on the budget?  The budget summary above tells the tale.  In 2001 revenues were $9,123 million (that's the $9,052 million from the forecast table plus some miscellaneous revenues that aren't in the forecasts).  This was less than in 2000, and way less than the amount needed to cover the appropriations budgeted for fiscal 2001 by the 1999 session of the legislature.  Revenues were short of expenditures by $1,066 million--over a billion dollars. 

Partly, the budget was balanced with revenues from other funds.  Money from the Build Indiana Fund was shifted to the General Fund.  Reversions were not particularly high in 2001, only $103 million.  Mostly the budget was balanced by running General fund balances almost to nothing.  The state started the year with $833 million in the General Fund, and ended the year with $19 million.  We tapped our checking and savings balances to maintain our spending in the face of revenue shortfalls.

In 2002 revenues fell short of forecasts again.  Again, the $8,796 million received by the state equals the $8,709 million in the forecast plus some miscellaneous revenues.  Revenue fell short of expenditures by $1,511 million, one and a half billion dollars.  This time, balances weren't enough to cover this gap--balances at the start of 2002 were only $910 million.  Other budget-balancing strategies had to be used.  $973 million was transferred from other funds to the general fund.  This included $200 million from the Build Indiana Fund, $100 million from the Medicaid Reserve (note how the Medicaid Reserve balance disappears from 2001 to 2002), $277 million from the Rainy Day Fund (reducing balances by about half), and almost $400 million transferred from other dedicated funds.  Reversions increased to $145 million, as executive branch agencies were told to spend less than was appropriated.  And, $374 million in payments to schools and local governments were delayed from the 2002 fiscal year to the 2003 fiscal year.  After all this, balances totaled $534 million, only 6.1% of revenues.  This was the lowest percentage since 1982.

The current fiscal year, 2003, brought more of the same.  Again, revenues are expected to fall a billion dollars plus short of expenditures.  To cover this shortfall, revenue will be transferred from the Build Indiana fund, Rainy Day fund and other dedicated funds, more payments will be delayed, and executive branch agencies will be required to spend over $400 million less than they were authorized to spend under the budget written in Spring 2001.  By June 2003, it's expected that the state will have only $494 million in balances, 4.9% of revenues.  That will be the lowest percentage for the last 30 years.

Both revenues and expenditures jumped in 2003.  That's the effect of tax restructuring.  Tax restructuring increased general fund revenues by about a billions dollars for fiscal 2003, but it also increased required expenditures by almost $600 million.  Most of these added expenditures are for property tax relief.  Tax restructuring did help fill in the budget gap in 2003--it would have been closer to $1.5 billion again without it.  Clearly, though, the added revenue for the budget was not nearly enough to close the budget gap (nor was it intended to be).

The 2003-05 Biennium

The last two columns show the Governor's proposed budget for the 2003-05 biennium.  The revenues are those projected in December, 2002.  The big jump in revenues in 2004 is due mostly to the fact that the sales tax hike will be in effect for a full fiscal year, not just seven months as in 2003.  In 2005, revenues are expected to rise 4.7%, a return to more normal growth.

Expenditures rise very little--only 2.2% per year.  Almost all of these increases are for added property tax relief, required by tax restructuring, and Medicaid.  Medicaid is the joint Federal-state program health insurance plan for low income people.  Its costs have been rising rapidly for many years.  Medicaid is an entitlement program, so the state spends what it must to meet the medical costs of those who are eligible.  Most of the rest of state government sees decreases or small increases in appropriations, under the Governor's plan. 

Despite these small spending increases, the budget shows a deficit for each year.  These deficits are covered by fund transfers in 2004 (from the Rainy Day and Build Indiana funds), and with reversions in 2005.  Balances drop to 2.6% and 2.8% of revenues in 2004 and 2005, respectively.  These are very small percentages. 

The legislature will not pass this budget.  It is useful anyway, as an illustration of what would happen if:

• the budget is balanced;
• Medicaid and property tax relief spending requirements are met; and
• no new taxes are imposed.

So what happens?  Medicaid and property tax relief spending goes up, everything else goes down, and balances are run down to record lows.  It's not a pretty picture.

On April 10, 2003, the Budget Agency released revised forecasts of revenues for the rest of fiscal 2003 and the coming biennium.  Revenues for 2003 were down by $50 million; for the biennium, down $99 million.  These figures have not been incorporated into the Governor's budget analyzed above, because the General Assembly has moved beyond this budget, and it will not be revised in light of the new revenue projections.