An Overview of the Indiana State Budget

Updated August 2008

Contents
Introduction
Revenues, Expenditures and Balances
Where Does It Come From, Where Does It Go?

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
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, medicaid reserve and rainy day fund accounts at the start of each fiscal year (on July 1). 

Revenues show how much was collected from four major tax sources. These are the big two, sales and individual income taxes, plus corporate income taxes and gaming taxes. Gaming taxes are the riverboat casino wagering and admissions taxes. Indiana has collected taxes from riverboats since their inception in the mid-1990s, but only in 2003 did these taxes become general fund revenues. 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.  In fiscal year 2008 (July 2007 to June 2008) the state received $13.2 billion from all these revenue sources. The state revenue forecast of December 2007 revised estimates of how much revenue would be available during the 2009 fiscal year. The 2008 tax reform (House Enrolled Act 1001) increased the sales tax from 6% to 7% as of April 1, 2008.

Appropriations is the spending authorized by the biennial budget passed by the the General Assembly. Budgets are written in odd-numbered years, during "long sessions" of the General Assembly.  The budgets for the current biennium, fiscal years 2008-2009, were written during the long session in Spring 2007. Total appropriations in fiscal 2008 were about $13.2 billion. The big tax reform bill in 2008 (HEA 1001) made big changes in appropriations for 2008, and especially 2009. In 2009, appropriations for K-12 education and Health and Social Services will increase as the state takes over the school general fund and county welfare fund property tax levies. Property tax relief will fall, since the old property tax replacement and homestead credit payments to local governments will be diverted to pay for these levy takeovers.

The current year surplus/deficit simply subtracts expenditures from revenues.  In each year from 2000 to 2005 there were current year deficits, because expenditures exceeded revenues. The shortfall was especially large during and after the last recession, in fiscal years 2001, 2002 and 2003. The state had current year surpluses in 2006, 2007 and 2008. Another deficit is expected in 2009, partly because of the downward revision in expected revenues since the budget was passed. When state officials say the budget is balanced, they may be referring to a calculation like this one, but there are other ways to measure the budget balance, too.

The next three lines of the table show adjustments to revenues and appropriations.  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 (positive numbers).  All the transfers since 2000 have been positive, meaning revenue was shifted from other funds to the general fund. Revenue from the "Build Indiana Fund"--which receives lottery money and is ordinarily used for local building projects--has been shifted to the general fund frequently in recent years. Fund transfers were especially large from 2001 to 2005. Transfers are often used during recessions to help fund spending when tax revenues fall short.

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.  Reversions are also a method that the governor can use to reduce spending during revenue shortfalls, by requiring some state agencies to spend less than the budget authorizes. That's why reversions were especially large in 2003 and 2005. Reversions are likely to rise in fiscal 2008, too. When the December 2007 revenue forecast reduced expected revenues for the 2008-09 biennium, the Governor ordered state agencies to reduce their spending by 5%. That's why reversions were a little larger than usual in 2008.

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 state fiscal year.  The state has saved one payment, and thus reduced its fiscal year appropriations.  This "fiscal gimmick" was used in the recessions of the early 1990s and early 2000s to hold appropriations down. During the mid-1990's a payment was accelerated, so that the state made 13 monthly payments in a fiscal year. This reversed the payment delay, which could then be used in 2002 and 2003. The payment delay is again being reversed. Negative numbers for Payment Delays in 2006 through 2009 indicate that payments are being accelerated. The 2007 budget bill for the 2008-09 biennium allocates enough revenue to fully reverse the delays by the end of fiscal 2009, and the state accelerated these reversals in 2008. The Payment Delay Liability on the last line is scheduled to be reduced to zero by June 2009.

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, and the rainy day fund (the state's savings account).   Balances dropped from nearly $2 billion in June 1999 (the start of fiscal 2000) to $533 million in June 2004 (the start of fiscal '05). Balances have recovered since then. The state Constitution effectively requires that this balance be positive on June 30 (or, at least, that the state not borrow to cover a deficit). The state can spend more than it takes in during the year, as long as there are enough balances and adjustments to cover the excess. This is why the term "balanced budget" is a bit murky for the state government. June 30 balances have never been negative. But sometimes this is achieved by running down balances, or by fiscal gimmicks, even when current year spending exceeds current year revenues.

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 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.

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. Of course, if a recession has a big effect on revenues--as in 2001 and 2002--even much bigger balances won't protect the state from tax hikes and cuts in spending growth.

Balances actually fell to 4.9% of revenues in 2004, slightly below the cash flow rule of thumb. Balances just made the 10% prudent minimum in fiscal 2007, and were a little higher than that in 2008. They're expected to drop below 10% again by the end of fiscal 2009, partly due to the downward revision in expected revenues.

Payment delay liability is the amount of extra spending required to reverse the payment delay fiscal gimmick. As of 2005, the state would have had to make a 13th payment to local governments of more than $700 million in order to return payments to their normal schedule. The state began moving payments forward in 2006. This liability figure fell to $31 million by June 2007 (and it's actually owed to universities, not local governments). The state has budgeted money to fully reverse the payment delays by the end of the 2009 biennium.

Where Does It Come From, Where Does It Go?
Revenue for the fiscal 2009 general fund (and closely related funds) 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 7% 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, $11.4 billion of the $14.4 billion collected.

Tax reforms since 2002 have changed the slices of the pie substantially.  The sales tax slice is bigger, because the sales tax rate increased in 2002 to 6%, and in 2008 to 7%.  Cigarette tax revenue tripled with big increases in its tax rate.  The cigarette tax is included in the All Other slice. The Gaming tax slice appeared for the first time in 2003, since the 2002 reform put riverboat 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 in 2002 of the gross corporate income tax for most corporations.

The individual income tax rate remains at 3.4%. As recently as 2002 the income and sales taxes raised about the same amount of revenue, but Indiana has moved its state revenue collections decidedly towards the sales tax in recent years.

Appropriations are the legal authorizations for state spending, included in the budget bill that the General Assembly passes every other year. The 2008 tax reform made big changes in these appropriations, however. More than half of appropriations are for education.  K through 12 education and higher education together make up 55% of the budget in fiscal 2009.  Add to this Medicaid and property tax relief, and you've got almost 80% of total appropriations.

As a result of the 2008 tax reform, in 2009 the state will take on responsibility for the school general fund, the county welfare funds, and several smaller funds, that were formerly funded with property taxes. These new expenditures will be partially funded by the added sales tax revenue, and partially by diverting the property tax relief expenditures. Thus, the K-12 education and Health and Social Services slices of the budget pie are increasing, and the property tax relief slice is decreasing. When these changes are fully phased in by 2011, the property tax relief slice will disappear.

The budget pie points out the difficulty the legislature faces when revenues fall short.  Education, Medicaid and property tax relief are 80% of the budget, so when revenues are lacking, these appropriations must be limited.

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.  Restraining Medicaid spending growth is difficult, though the state has succeeded in restraining growth during the past two biennia.

Property tax relief is determined by formula.  It tends to increase with the annual rise in the local property tax levy.  In recent years it has been the second largest category in the state's budget. The 2008 tax reform will phase out these property tax relief appropriations within a few years.

If revenues fall short, if property tax relief can't be cut (or no longer exists), and if Medicaid entitlements can't be cut, 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 reduced. But these spending categories make up only 20% of the budget.  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.

The state faced revenue shortfalls through the first half of this decade, so education saw limited increases in appropriations. Growth in K-12 appropriations was especially small in the 2006-07 biennium. Appropriations grew more rapidly with the 2008-09 budget, but the big increase in K-12 education is due to the state takeover of the school general fund.