Indiana State Government Fund Balances

Updated January 2011

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

Introduction
Back in 2000 Indiana had almost $2 billion in balances. By mid-2004, we had only $533 million left. By mid-2008 we were back up to $1.4 billion. But the latest Budget Agency accounting had balances down to $678 million by the end of this biennium. 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. From 2004 to 2008 the state took in more than it spent. In 2009 revenues (including Federal stimulus money) approximately equalled expenditures. Revenues will fall way short of spending in 2010 and 2011, however, so balances will decline.

Four Funds
The total balance figure is actually the sum of the balances in four funds that the General Assembly allocates during the budget sessions (the long sessions in odd-numbered years). A fifth fund was eliminated by the 2008 property tax reform. 

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. School aid comes from the general fund, as does aid to universities, spending on the state police and prisons, Medicaid spending, money to run the governor's office, legislature and courts, and many other functions. General fund balances were $831 million at the end of fiscal 2010 (in June 2010).

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, spending cuts or tax hikes might be avoided when recessions hit and state revenues turn down. There was $365 million in this fund at the end of fiscal 2009--and nothing at the end of fiscal 2010. The rainy day came (and how!), and the state drew upon the rainy day fund balances to pay for appropriations and support general fund balances. The state also drew on this fund during and after the 2001 recession. Its balance had been $540 million in June 2000, sank to $242 million in June 2004, and was rebuilt from there.

The Education Fund. The full name of this fund is now the "State Education Rainy Day Fund." It is designed to back up 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 education fund is kept partly to handle the cash flow, so there's enough to meet aid payment requirements.

Historically this was a segregated part of the General Fund, known as the Tuition Reserve Fund. In the tax reform of 2008 the state took over the share of local school general funds that had been paid by property taxes. This required an increase in the size of the tuition reserve, because state payments would be larger, and because supporting school spending with sales and income taxes provides less stability than using property taxes. In 2009 the state shifted more than $500 million from the general fund to the tuition reserve fund for this reason, and the tuition reserve was $942 million at the end of that fiscal year. At the end of fiscal 2010, however, the fund balance was zero. It was drawn down to support school spending.

The Medicaid Reserve originally appeared on the state's books in fiscal 2001. It disappeared from 2002 to 2004, but was recreated in 2005. There was $58 million in the Medicaid reserve at the end of fiscal 2009, but zero in 2010. It is a segregated part of the general fund, available to meet the payments to the Medicaid entitlement program.

A fifth fund, the Property Tax Replacement Fund, existed from 1973 through 2008. This fund was created 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 (PTRC). Local taxpayers would get credits on their property tax bills, and this sales tax revenue would be used to replace what the local governments did not collect. 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. From 1983 to 2008 revenue was transferred from the general fund to the property tax replacement fund, enough to cover the PTRC payments. This made the property tax replacement fund balance zero at the end of every fiscal year. The last transfer from the general fund was $462 million in fiscal 2008. The tax reform of 2008 changed the way tax relief is delivered in Indiana, and the property tax replacement fund was eliminated for calendar year 2009. It disappeared from the state’s books after fiscal 2010.

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 biggest number shown on this graph was on June 30, 1998 (the end of fiscal 1998 and the beginning of fiscal 1999). On that day 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, 2010, saw balances at $831 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. From 2004 to 2009 balances increased by about $900 million. During these years the state spent $900 million less than it received in revenue. At the end of 2011 balances are expected to be $678 million, a drop of $742 million from its 2009 peak.

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 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 fund was created. Sales tax revenue was flowing into the fund, awaiting use for property tax relief. The late 1990s also saw a large balance percentage--24.2% of revenues. The booming economy brought in more revenues than forecast for several years in a row, and balances accumulated. With the 2001 recession, though, the percentage dropped a lot. bottoming out near 5% in 2004. Balances were rebuilt through 2009, to almost 11% of revenues. They dropped again with the 2007-2009 recession, and are expected to be at 5.2% of revenues by the end of the fiscal year 2011.

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. Balances are likely to spend several years in the vicinity of 5% starting in 2011. It is important to note, though, that Indiana appears to adhere to the 5% rule. Over 35 years and four recessions, balances have never dipped appreciably below 5% of revenues. The state may have $678 million in balances at the end of fiscal 2011, but this amount is near the 5% minimum, so it is unlikely to be drawn down further.

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 recovered after 2004, and the state regained the prudent range temporarily 2007-2009. The new recession reduced balances again.

How prudent is this "prudent balance range"? Pretty clearly, balances were not big enough to cover the revenue shortfalls of the 2001 recession, even though the state started with balances at almost 18% of revenues. Revenues fell short of forecasts by about $2.8 billion. The state ran balances down to the 5% minimum, and used payment delays, reversions and fund transfers--and tax increases--to balance the budget. Growth in appropriations was limited as well, to rebuild balances in recent years.

Apparently, balances needed to be bigger even than the record amounts of the late 1990s to protect against a severe revenue downturn such as that of the early 2000s. Fiscal year 2008 saw the start of another recession, and fiscal years 2009 and 2010 saw substantial revenue shortfalls. Balances were lower at the start of this recession than they were in 2001 (or in 1990 or in 1980, the beginnings of earlier recessions). The state had a smaller cushion against budget cuts and tax hikes. This helps explain why appropriations did not increase in the 2010-11 biennium budget. It also explains why the Governor had to order spending cuts almost as soon as revenues began to fall short in 2010.