First Thoughts about the Indiana State Budget for 2008-09

May 2, 2007

 

The new state budget is balanced in both fiscal years, 2008 and 2009. It increases appropriations for K-12 and higher education by a lot more than during the 2006 and 2007 fiscal years. It re-sets the local government payment delays, so they’ll be ready to use in the next recession (whenever that is). But it falls well short of the prudent range for balances as a percentage of appropriations, by more than $450 million. If the next recession happens before 2010, Indiana will have trouble coping.

Here’s a preliminary state budget table, showing actual revenues, appropriations and balances for 2000-2006, the budgeted numbers for the current fiscal year, 2007, and revenue forecasts, preliminary appropriation and balance numbers for 2008 and 2009.

Some guesswork is involved in preparing this table. It appears that more of the payment delays will be reversed in 2007 than had been estimated at the beginning of the fiscal year. The rainy day fund balances are guessed at here as well. We may not see a complete balance statement until the closeout in July. Balance totals are from the budget agency, and are likely to change some with the July closeout. The revenue figures are from the April forecast. The 2007 revenues will change slightly at the July closeout. The 2008 and 2009 figures are good until the December revenue forecast. The appropriations figures are the Budget Agency’s estimates made shortly after the session ended. The budget bill and its fiscal note may contain some adjustments, when they are available.

Sales, individual income tax and gaming revenue are expected to grow faster in 2008 and 2009 than they did in the current biennium. Corporate income tax revenue is expected to grow more slowly. All Other revenue is expected to drop slightly. Added earnings from higher interest rates, and the tax amnesty program, increased other revenues in 2006 and 2007. These will not add to other revenues in 2008 and 2009. There also is a projected drop in the category “other-other”, meaning the “other” category under “other” revenues. Details on this revenue drop are unavailable at the moment.

The two big revenue changes during this past session don’t show up in this table, because they aren’t included in the general fund. The cigarette tax increase from 55.5 cents per pack to 99.5 cents per pack will raise an additional $200 million a year. This revenue will go mostly for health insurance for low income people, which is not a general fund appropriation. The two “racinos” (that’s the State House name for the horse tracks with slot machines) are expected to pay $500 million in fees this calendar year. That revenue will be devoted to property tax relief, in a program not included in the general fund or property tax replacement funds shown here.

Overall, revenue is expected to continue to grow in the next two years as it has during the current biennium. This was a disappointment, because the December forecast had predicted more rapid sales and income tax growth. The April revision reduced the revenue forecast by about $150 million over the three forecast years, 2007, 2008 and 2009.

Appropriations for K-12 and higher education grow faster in the 2008-09 budget. Increases are 4.3% annually for K-12 education in 2008 and 2009, and 5.7% for higher education. This compares to 1.4% and 2%, respectively, in 2006 and 2007. Other increases were in line with the current budget, except the residual category All Other. This reflects mostly a drop in “outside acts” appropriations, and a lack of information about budget adjustments that await the closeout in July. It probably does not represent substantive budget cutting.

Again, expenditures for the new insurance program for low income people, and the property tax relief for homeowners, aren’t included in the general fund budget shown here.

Total appropriations are scheduled to increase 3.5% per year during the coming biennium. This is more than in the current biennium, but still slower than during the previous three budget cycles. Part of the reason, though, is that this time property tax relief is being delivered outside the general fund-property tax replacement fund budget. In the past it has been within this budget. All-in-all, the coming fiscal years are more like past than the 2006-07 budgets.

The budget is balanced in both 2008 and 2009. This is shown by the positive numbers on the “current year surplus/deficit” line. This table sums the numbers somewhat differently than the Budget Agency does, but the claims of a balanced budget get no argument here. If these projections come true, Indiana will have had a balanced budget four years in a row, after many years of deficits before that.

By the end of fiscal 2009 (in June of that year), the payment delays will be re-set. This is the fiscal gimmick that proves so useful in meeting the balanced budget requirement, when revenues fall short. This is one part of the prescription for “fiscal health,” to be ready for the next recession. Unfortunately, the other part of the fiscal health prescription is not met.

By the end of fiscal 2009 Indiana is expected to have balances of $865 million, only 6.4% of appropriations. The prudent range defined by the Budget Agency is 10% to 12%. Balances in 2009 will be more than $450 million short of 10% if these figures pan out.

This means that, should a recession occur before 2010, Indiana will not be ready. At the start of the last recession the state had balances of almost two billion dollars. This reduced the need for tax hikes and budget cuts. If a recession occurs before 2010, tax hikes and budget cuts will have to be considered right away.

The small balances mean that achieving fiscal health will still be a task in the next long session of the legislature, in 2009. In the 2010-2011 budget, revenues will have to exceed appropriations by $450 million to get there.

In a sense, the General Assembly has made a gamble. The risk is being unprepared for the next recession. The payoff is higher education spending. For the sake of education, we’re gambling that our current expansion will last at least nine years, through 2010. That would make it the second longest expansion in U.S. history, after the expansion of the 1990’s.

 

Links to More Information

To Find: Go To:
An Overview of the Indiana State Budget (not yet updated for the results of the 2007 session of the General Assembly) This website: An Overview of the Indiana State Budget
First Thoughts on Property Tax Relief and the 2007 General Assembly This website: First Thoughts on Property Tax Relief
The 2008-09 budget bill General Assembly website (type 1001 into the "Go To Bill" box, to see the bill and its history once it is posted.)
The 2007-09 Revenue Forecast, from April, 2007 Budget Agency website