State Revenue Forecasts

Updated January 2011

Contents
Introduction
The Revenue Forecast Process
A Revenue Forecast Table
Forecasts and Results, 1999-2013
Keeping Track Month by Month

Introduction
Three times in every two years, Indiana forecasts revenues for current and future fiscal years. These revenue forecasts are needed for the budget process. The General Assembly must know how much revenue will be available in order to decide how much to spend. Unfortunately, predictions are never perfect. Revenues fell far short of predictions during the 2007-2009 recession.  The same thing happened during and after the 2001 recession.  During the expansions of the 1990s and 2000s, revenues came in above projections.

The Revenue Forecast Process
In odd-numbered years the Indiana General Assembly meets in a "long" session, to write a state budget for the next two fiscal years. A budget is a spending plan, a decision to authorize state agencies, departments and institutions to spend particular dollar amounts. To write a budget legislators must know how much they’ll have to spend. That means estimating future revenues from state taxes.

Revenue predictions are made three times every two years. The first predictions for an upcoming biennium are usually made in December prior to a budget-writing year. In December 2010, for example, the state revised its prediction for the rest of fiscal 2011, and made its first predictions for 2012 and 2013. Predictions are made for fiscal years, which run from July of one year to June of the next.  A revised forecast is made in April of a budget-writing year, just before the budget is passed and the session ends. This allows the legislature to include new information about actual revenue collections in December through March. Such a forecast will be made in April 2011, for the remaining months of fiscal 2011, and revised forecasts for 2012 and 2013.

The third forecast in every two years is made in December, before the “short” sessions of the General Assembly, which take place in even numbered years.  In December 2011 the April 2011 forecasts for fiscal 2012 and 2013 will be revised, based on the first few months of revenue collections for fiscal 2012, and new economic forecasts for the following year-and-a-half.

This was the process that was followed when the 2010-11 biennial budget was written, during the long session of 2009.  In April 2009, however, the Governor and many legislators were dissatisfied with the revised forecast, thinking that it was too optimistic in the face of the deep recession (they were correct, as it turned out). This is one reason why a budget was not passed by the regular session deadline at the end of April. A new more pessimistic forecast was developed in May, for the special session, and this forecast was the basis for the budget that passed in June 2009.

Pessimistic, but not pessimistic enough. Actual revenues fell short of forecasts every month from July through November, and in December 2009 a new even more pessimistic revenue forecast was issued. It revised revenue projections for the remainder of fiscal 2010, and for 2011, subtracting $1.8 billion from the two-year total.  This forecast proved to be more accurate.

Indiana’s method of projecting revenues has one big advantage. Indiana makes a "consensus forecast." Representatives of the Governor’s office, both houses of the General Assembly and both parties all agree on the projections before they are announced. Without a consensus forecast, the Governor’s office might announce one set of projections, and the legislature another. Each political party could have its own, and lobbyists might chime in with projections too. Much of the session’s debate would be about which projections to use, not on the substance of legislation. Getting a consensus on revenues before the session begins lessens this problem (though, as 2009 proved, it does not eliminate argument about forecasts).

The projection process moves forward along two tracks. A private forecasting company, IHS Global Insight, provides detailed projections of indicators for the national and Indiana economies. Meanwhile, a group called the Revenue Forecast Technical Committee works on models of Indiana revenues. This committee is composed of the fiscal aides to the House and Senate party caucuses, an appointee of the governor (currently an economist from Indiana University), the chief revenue forecaster from the State Budget Agency, and some outside consultants with budgeting experience. The revenue models are developed by the Budget Agency and by the Legislative Services Agency, with some help from an economist at Purdue University (who also writes this webpage).

The models relate Indiana revenues to the economic indicators that Global Insight predicts. Data from past years are used to measure the revenue relationships. The sales tax model, for example, is an equation that relates sales tax collections to Indiana personal income and savings. In the December 2009 forecast, each 10% increase in Indiana income (less transfer payments like Social Security and welfare) was predicted to increase sales tax revenue by about 9.2%. Models are developed for the sales tax, individual and corporate income taxes, and the cigarette, alcoholic beverage and riverboat wagering taxes.

The models change a bit every year, to reflect new economic events and changes in Indiana taxes. In December 2009 for example, forecasters recognized that the recession was depressing sales tax revenues.  Households had begun saving more of their income, which meant less spending on sales taxable goods. A savings indicator was inserted into the sales tax equation to capture this change in behavior. In December 2010, forecasters replaced the savings indicator with the state’s unemployment rate, another way to measure how recession reduces sales tax revenues.

Each model is reviewed and approved by the Technical Committee members. This is how a consensus forecast is achieved, since the committee's members represent both parties, both houses of the legislature, and the governor's office. A day or two before the revenue forecasts are announced, the Technical Committee "plugs" the predicted economic indicators into the revenue forecast models. The result is the revenue forecast, which is announced to the legislature and the public and is always well-covered by the news media.

A Revenue Forecast Table
The following table compares revenue forecasts in each year with the actual revenues collected.  Each row shows the successive revenue forecasts and the final revenue for a fiscal year.  The first set of columns shows the budget forecast, the last forecast made just before the budget is passed.  This forecast is usually made in April, though in May 2009 a second budget forecast was made.  This is the revenue that was expected for that fiscal year, at the time that the year's spending decisions were made.  The second set of columns shows the subsequent December forecast, showing how revenue forecasts were revised after eight months.  The third set of columns show the actual revenues received in that fiscal year, and the difference between this actual figure and the original April predictions.  The last column shows the percentage change in actual revenues from one year to the next. The years listed under the budget and December forecasts are the years the forecast was announced.

Consider the first row, fiscal year 1996 (July 1995 to June 1996).  In April 1995, just before the biennial budget for fiscal years 1996 and 1997 was finished, the revenue forecast committee set expected revenues at $7,099.1 million (just over $7 billion).  The legislature budgeted appropriations for fiscal years 1996 and 1997 with this figure in mind.  In December of 1995, almost half-way through fiscal 1996, the forecast was revised upward by $370 million to $7,469.1 million.  The Indiana economy performed better in the first half of fiscal 1996 than had been expected in April.  It did even better than that in the last half of fiscal 1996, and actual revenues turned out to be $7,513 million.  That was $413.9 million more than was forecast when the 1996 budget was written.  And it was 6.3% higher than revenues in fiscal 1995 (not shown). 

Twice during this period major changes were made in tax rates, so the April forecasts and the actual revenues are not comparable.  The sales tax increased from 5% to 6% in December 2002, which was five months into fiscal year 2003.  The sales tax increased again, to 7%, in April 2008, which was nine months into fiscal 2008. For these years a forecast of the added revenues from the higher tax rate is added to the April forecast, so that they are comparable to actual revenues. A shortfall would represent revenues less than the original forecast at the lower tax rate, and revenues less than what was forecast from the added rate.

Forecasts and Results, 1996-2013
We can use this table to tell the story of Indiana's revenues during the expansion of the 1990s, the recession of 2001 and after, the expansion in the middle of the 2000s, and the recession of 2007-2009.

The economy grew rapidly in the United States and in Indiana during the second half of the 1990s.  For four straight fiscal years, 1996-1999, revenues came in substantially above the budget forecasts.  Since spending was budgeted based on revenue forecasts that were too low, the state accumulated balances, topping $2 billion at the end of fiscal 1998.  The General Assembly scrambled to find ways to hold balances down, with additional spending (for highways and to fund teacher pension commitments, for example) and tax cuts (property tax breaks for personal property, an income tax deduction for property taxes on homes).  There was talk of a "structural surplus", which implied that existing tax rates would always provide more revenue than were required to support state government services.

This trend came to a stop, suddenly, in fiscal 2000.  Actual revenue in 1999 was $8,883 million.  The economy seemed to be doing fine in April 1999, so revenues for 2000 were predicted to be $9,302 million, and for 2001, $9,773 million, growth rates of 4.7% and 5.1% respectively.  It didn't happen.  By December 1999 the revenue forecasters realized that something was wrong, and revised downward their forecasts for both 2000 and 2001.  When the revenues for fiscal 2000 were added up at the July budget closeout, actual revenues were found to have been $9,143 million, $159 million less than the 1999 budget forecast.  Revenues increased only 2.9% from 1999 to 2000, not the projected 4.7%. 

This was just the beginning of the state’s revenue troubles.  In fiscal 2001, only $9,052 million was collected, over $600 million less than the revised December forecast from the year before.  All together, revenues for 2001 were $721 million less than the original forecast on which the budget was based.  Revenues had actually fallen from the year before, by one percent. 

The budget forecast made in 2001 for fiscal years 2002 and 2003 assumed the worst was over.  Growth of around 5% a year was expected--$9,545 million in 2002 and $9,987 million in 2003.  (This 2003 amount is not shown in the table.  The higher number reflects the sales tax increase in December 2002.)  The budget was written based on the expectation of this normal revenue growth. But again, 2002 was a revenue disaster.  Actual revenues fell $837 million short of the budget forecast.  Revenues had fallen for a second straight year, this time by 3.8%.  No one could remember a time when actual revenues had fallen two years in a row. 

The budget difficulties and the approaching property tax reassessment spurred the General Assembly to restructure taxes. Tax restructuring was completed in a special session in June 2002.  Sales, cigarette and riverboat gaming taxes were increased.

Forecasts of revenues from existing taxes and from the new higher sales tax again proved optimistic. Fiscal 2003 proved to be the worst year yet, with revenues falling short by $1.1 billion. Actual revenues increased 13.4% over the previous year, because of the tax rate increases, but this was well short of the growth that had been expected.

Projections for the fiscal years 2004 and 2005 were made in April 2003. Again, significant increases in revenues were expected. The big 7.5% increase expected between 2003 and 2004 was due partly to tax restructuring. The tax increases would be in place for the full fiscal year in 2004. But a substantial increase was expected in 2005 as well.

This time, the shortfall was small. Actual revenues fell short of the prediction by only $73 million in 2004. Despite this small shortfall, the revenue prediction for 2005 was revised downward by $190 million in the December forecast.

At the July 2005 closeout the Budget Agency reported actual revenues for 2005 at $11,437 million, $244 million more than originally predicted in the budget forecast of April 2003. For the first time since 1999 actual revenues exceeded predictions. Revenues had grown 7.7% over 2004. During the budget session of 2005, revenues for 2006 and 2007 were predicted to grow by 2.8% and 5.3%, respectively. The state did better than that in both years. At the closeout in July 2006, the budget agency reported that revenues were $303 million above projections. In 2007, revenues exceeded projections by $248 million.

Indiana state revenues turned the corner in 2005. But the years 2000 through 2004 were a revenue disaster. In two of the years, 2001 and 2002, revenues had actually fallen from one year to the next. More important for budgeting, revenues had fallen $2.9 billion below projections during this time. The General Assembly uses these predictions to set appropriations for school aid, universities, Medicaid, corrections and all the other functions of state government. When they fall short, the state must use its balances, or spend less than appropriations. With a revenue shortfall this big, though, legislators and the Governor felt that they had no choice but to cut appropriation growth, and raise taxes.

The opposite is true when revenues exceed projections, as they did during fiscal years, 2005-08. The state can pay for its planned spending. rebuild its fund balances, and sometimes, appropriate more money for added services in non-budget years.

Fiscal 2008 saw revenues exceed projections by $113 million. That year also saw a sales tax hike which increased revenues at the end of the year. Revenues were 3.6% higher in 2008 than in 2007. Without the tax rate hike the increase would have been about 2.4%. Actual revenues exceeded projections, but revenues had been projected to grow more slowly than they had in the middle part of the decade. The forecasts recognized the slowing economy.

A recession began in December 2007.  In the fall of 2008 the world financial crisis caused a severe economic downturn.  The December 2008 forecast revision responded by cutting predicted revenues for the 2009 fiscal year by $265 million. This gloomy forecast proved optimistic, and the results of the financial collapse rolled through the economy, and began to affect state revenues early in calendar year 2009.   By the end of the fiscal year, 2009 had been the worst year for state revenue in memory, falling short of projections by $1.4 billion. Revenues had fallen from 2008 to 2009 by 1.1%, despite the increase in the sales tax.  Without the sales tax hike, the revenue drop would have been about 8%, a truly enormous drop.

The budget forecast for 2010 (revised in May 2009) predicted slower-than-usual growth in revenues, at 1.4%, from a depressed starting point after the 2009 shortfalls. The forecast for 2011 showed a return to nearly normal growth, 3.9% over predicted 2010 revenues.  By December it was clear that this pessimistic forecast was not pessimistic enough.  The forecast was revised downward by more than $1 billion for fiscal 2010, and by almost $800 million for fiscal 2011. That $1.8 billion total reduction made headlines. It seemed as if ever-more-pessimistic forecasts might never catch up with the true decline in the state’s economy.

But that last ultra-pessimistic forecast of December 2009 proved accurate.  Fiscal 2010 revenues came in $928 million below the budget forecast, but $110 million above the revised December number.  Still, actual 2010 revenues were 5.8% lower than revenues in 2009, the second straight year of huge declines.  The 2007-09 recession had the most severe effects on revenues since the early 1980s, at least.

Indiana’s economy has turned the corner, fortunately.  Revenues are ahead of the dire December 2009 forecast for fiscal 2011, and the December 2010 forecast saw a slight upward revision of $115 million.  If this proves accurate, it will represent 6.3% growth from fiscal 2010, the biggest gain since 2005.  Of course, revenues will still be $681 million short of what had been expected when the budget was written.  Despite the beginnings of recovery, the state’s budget is in tough shape.

December 2010 also saw the first forecasts for fiscal years 2012 and 2013.  These numbers will be revised in April, before the budget is passed.  The forecasts call for growth of 3.5% and 4.1% over reduced collections in 2011.  These forecasts are both optimistic and pessimistic.  Optimistic, because they assume a continued expansion of the state’s economy.  Pessimistic, because the growth rates are low for a recovery.  Revenues rose faster than that during the 2000s recovery (over 7% per year), and are expected to rise faster in fiscal 2011 (over 6%).

Keeping Track Month By Month
Indiana's State Budget Agency publishes a report each month that compares actual revenue collections to projected collections. Monthly projections are derived from the annual projections based on historic monthly patterns of revenue collection. The reports show the difference between actual collections and projections each month. A total shows how collections compare to projections so far during the fiscal year.

When a new forecast is released, the Budget Agency usually recalculates the monthly shortfalls and surpluses based on the new forecast. Readers can keep track by noting the date of the forecast at the top of the table.

In the November 2010 monthly report, for example, November revenues were shown to be $48.9 million above the December 2009 forecast amount.  In December 2010 a revised forecast was issued, which increased projections for 2011 by about $116 million.  The December monthly report showed November collections to be $42.5 million above the December 2010 forecast.  In past years the Budget Agency sometimes would show forecast errors to be zero for months before a forecast revision.

The report also shows monthly comparisons to the same month from the previous year, and shows a year-to-date total.  And, in recent years the report shows a comparison to the budget forecast.  This is useful to show how much less the state is collecting compared to what would be needed to fund the budget as it was passed.