DECEMBER
2004

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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12-22-04

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A Good News Forecast, A Bad News Budget


First, some good news. On Dec. 14, 2004, Indiana's state revenue forecasters predicted that the state will receive $311 million more in revenue this fiscal year than they predicted last January. Taxes on individual and corporate income, sales, riverboats, cigarettes, and other things should bring in more than we thought they would a year ago.

This looks like a turning point in the state's revenue outlook. It's the first revenue forecast since December 1999 that increased predicted revenue. Every forecast between then and now showed a decrease. That's five years of falling short. Over five years, that's about $3 billion, which we thought would arrive and wrote into state budgets, that didn't show up. You don't have to look much further than that to see the reason for Indiana's state budget problem.

But on Dec. 14, forecasters increased the revenue prediction for fiscal year 2005, the current fiscal year, which ends June 30, 2005. It's not just a guess, either. In the first five months of the fiscal year -- July through November -- the state received $188 million more than expected. The $311 million prediction is pretty conservative compared to how we've been doing. There will be a forecast update in April, right before the end of the legislative session. Don't be surprised if fiscal 2005 revenue is increased again. (You can see these numbers at the Budget Agency's Web site, http://www.in.gov/sba/budget.)

The budget is the reason for the forecasts, of course. Starting in January, the General Assembly will write a spending plan for the 2006 and 2007 fiscal years. That's looking forward all the way to June 2007. Legislators need to know how much revenue the state will have in order to figure out how much to spend. So, the revenue forecast not only revised the prediction for fiscal 2005, but made new predictions for 2006 and 2007.

There was good news in those predictions, too. We should get $400 million more in 2006 than in 2005 and a billion dollars more in 2007 than in 2005. That's $1.4 billion in new revenue.

Unfortunately, the good news stops right there.

Indiana would like to have balances equal to 10 percent of the budget, in time for the next recession. It helps to have money in the bank in case revenues fall short. By June 2005, we'll have balances equal to only about 5.7 percent of the budget. The shortfall is about $500 million. That leaves $900 million of our $1.4 billion.

Indiana owes local governments, school and universities about $700 million in delayed aid payments. Delaying payments is a really useful gimmick that helps balance the state budget during tough times. We'd like to advance those payments before the next recession to reset the gimmick, so we can use it again if we have to. Reset the payment delays, at $700 million, and there's only $200 million left of our $1.4 billion.

Medicaid is a health care program for low-income people. It's an entitlement program, which means that the state must pay whatever people are entitled to receive under the rules. Medicaid spending has been growing about 6 percent a year. That's more than $200 million over the next two years.

Even if we find a way to avoid paying so much Medicaid, we'll have to contend with property tax relief. Under the current rules, state spending for property tax relief will rise by more than $200 million over the next two years.

We've just spent our last $200 million twice. And we haven't yet asked whether local schools should get more aid -- even to cover inflation -- or whether universities should get more, or the state parks or state prisons or anything else the state government does.

What are our choices? We could decide to cut spending like never before. We could decide to raise taxes. We could decide to try to solve the problem over more than one biennium, postpone building balances or resetting payment delays, and hope (really hope!) that the next recession holds off.

And that's the bad news.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox