Indiana State Government Fund Balances

Updated February 2008

Contents
Introduction
Five Funds
Total Balances by Fund Since 1976
Balances as a Percent of Revenues

Introduction
Back in 2000 we had almost $2 billion in balances.  By mid-2004, we had only $533 million left.  By mid-2009 we expect to have $1.2 billion dollars. What are balances, where do they come from, and where do they go?

Balances are the money in the state's fund accounts. 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.  Balances are usually counted at the end of the fiscal year, which is June 30. Where do they come from? Just like your checking account, if the money coming in is more than the money going out, balances increase. And again like your checking account, if the money going out exceeds the money coming in, balances decline. Between 2000 and 2004, the state spent billions more than it took in. Since then the state has taken in more than it has spent.

Five Funds
The total balance figure is actually the sum of the balances in five funds that the General Assembly allocates during the budget sessions (the long sessions in odd-numbered years). 

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 2007-08 (from July 1, 2007 to June 30, 2008), about $9 billion will be spent from the general fund. General fund balances were $537 million at the end of fiscal 2007 (in June 2007).

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 $344 million in this fund at the end of fiscal 2007. The state drew on this fund during and after the recession. Its balance had been $540 million in June 2000, sank to $242 million in June 2004, and is expected to be rebuit to $379 million by June 2009 (unless there's a recession).

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 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 $222 million in fiscal 2007.   

The Tuition Reserve. This is actually part of the General Fund. It 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 (from quarterly corporate tax payments, for instance). The tuition reserve is kept to handle the cash flow, so there's enough to meet aid payment requirements.  There was $317 million in the tuition reserve fund at the end of fiscal 2007.

A fifth fund, called the Medicaid Reserve, originally appeared on the state's books in fiscal 2001.  An Indiana Supreme Court decision in a case called Humphreys v. Day was expected to increase state Medicaid payments, so the state set aside a part of the general fund to cover this estimated cost. This fund disappeared from 2002 to 2004, but was recreated in 2005. There was $88 million in the Medicaid reserve at the end of fiscal 2007. Like the tuition reserve fund, it is a segregated part of the general fund, available to meet the payments to the Medicaid entitlement program.

Total Balances by Fund Since 1976
The following chart shows the balances in these funds at the end of each fiscal year, meaning how much was in the checking and savings accounts as of June 30 of each year.

The amounts for 2008 and 2009 were originally estimated by the State Budget Agency, based on the budget the General Assembly passed in 2007 and the estimated revenues for the coming biennium.  These figures were revised to account for the revised revenue forecast in December 2007. That forecast reduced expected revenues, which are subtracted from general fund balances here.

Where was that $2 billion surplus?  Check out the biggest mountain on this chart, peaking in 1998.  On June 30, 1998 (the end of fiscal 1998 and the beginning of fiscal 1999), the sum of the general fund, rainy day fund and tuition reserve was $2,055 million, just more than $2 billion.  Total fund balances dropped after that peak, bottoming out at $533 million in June 2004.  The most recently completed fiscal year, 2007, saw balances at $1,286 million. If revenues meet current projections, by June 30, 2009 the surplus should be $1,153 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 2004 was about $1.5 billion.  That means that over these five years, the state spent $1.5 billion more than it received in revenue. Since 2004 balances have increased by about $750 million. During these two years, the state spent $750 million less than it received 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 $450 million balance in 1976 was huge, then, but would be uncomfortably small now.  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 property tax replacement fund, awaiting use for property tax relief.  The late 1990s also saw a large balance percentage--24.2% of revenues.  With the recession, though, the percentage dropped a lot. Since 2002 it has varied between 4.9% and 10% of revenues. Balances were 10.1% of revenues at the end of fiscal 2007, and are expected to be 8.7% of revenues by the end of the biennium in June 2009.

The chart shows a couple of ideas about how big balances should be.  One use of balances is for cash flow. Revenues come in on one schedule, and bills are paid on another. A balance is needed in state's checking account for those months when revenues are low and bills are high. A rule of thumb says that a state needs a minimum of 5% of revenues in balances to cover cash flow.

The state nearly hit 5% during the deep recession of the early 1980s, and actually dipped slightly below 5% (to 4.9%) in 2004, after the prolonged revenue slump that came with the 2001 recession. 

Another use of balances is to insure against unexpected shortfalls of revenue.  The State Budget Agency marks a "prudent balance range" at 10% to 12% of revenues to guard against shortfalls.

Balances were well above the prudent range in the late 1990's, and the legislature responded by cutting taxes and increasing spending, to bring balances down. When the recession hit, balances dropped right through the prudent range, and actually dipped slightly below the cash-flow minimum by the end of fiscal 2004. Balances have recovered since 2004, and the state just met the prudent minimum of 10% at the end of fiscal 2007. Balances are expected to drop slightly in the current biennium, partly due to the December 2007 revenue forecast which reduced projected revenues.