DECEMBER
2006

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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12-18-06

Download the audio of Capital Comments: MP3, WMV

One-Billion, Six-Hundred-Million Dollars


One-billion, six-hundred-million dollars is a lot of money. Unless that's all there is to pay for everything that we want from our state government for the next two years. Then it's not so much.

This coming year, 2007, is a budget year for the General Assembly. Our legislators will write a budget for fiscal years 2008 and 2009. To do that, they need an idea about how much revenue they'll have. On Dec. 14, the fiscal technicians offered a revenue forecast. In 2008, we'll have $515 million more than in 2007. In 2009 we'll have $1.1 billion more than in 2007. That's $1.6 billion in new money. You can see the revenue forecast on the State Budget Agency's Web site, at http://www.in.gov/sba/budget.

Why isn't that very much? Let's consider what we might want to do in the next two years.

The state's budget is dominated by four big categories: K-12 education, higher education, Medicaid and property tax relief. Those four make up 80 percent of what the legislature budgets during a biennium. Our current budget is pretty tight. Total appropriations increased only 2.8 percent per year. During the last expansion, increases were often 5 percent or 6 percent a year.

K-12 education got only a 1.4 percent average increase for 2006 and 2007. The Department of Education would like a 4 percent increase in the next two fiscal years. According to a model of the state budget that I keep on my desk (everyone needs a hobby), that 4 percent would cost about $550 million.  

That desk that I mentioned belongs to Purdue University, and higher education would like a budget increase, too. Higher ed saw only a 2 percent increase during this biennium. Purdue's budget request is for a 3 percent annual increase for operating costs, plus added money for new investments. Suppose we give all of higher education 3 percent. That's an added $150 million.

Medicaid is an entitlement. Its costs depend mainly on the number of eligible recipients and the costs of medical care. Medicaid costs usually grow fast, and they're projected to do so again, by 8 percent a year. The administration thinks it can find enough efficiencies to reduce growth to 5 percent a year. Assuming they succeed, 5 percent growth is about $225 million added dollars in '08 and '09.

What about property tax relief? That part of the budget was growing so fast that the legislature capped relief payments for our current budget. The cap means that the state will pay a smaller share of tax bills in 2007, so property taxpayers will pay more, by about 4 percent for the average homeowner. Legislators will be looking for ways to cut property taxes. How about lifting the cap? I'd guess it would cost $450 million over two years to do that.

Add up the big four, and you get $1,375 million. We've got it covered, with $225 million to spare!

But what about the other 20 percent of the budget? State police, parks, prisons, health programs and all the rest? Give them that $225 million and their increase will be about 3 percent a year. Enough to cover inflation—depending on what happens to fuel prices.

But there's more. It would be prudent to have balances equal to at least 10 percent of the budget by the end of fiscal 2009. That would help us maintain programs when the next recession rolls around. We've got about 9 percent now. The extra will cost about $225 million.

Back during the last recession, we delayed some payments to schools and other local governments, to help balance the state budget. We'd like to bring those payments forward. The budget agency's most recent accounting put that cost at about $450 million.

And then there's the governor's plan for full-day kindergarten. Looks like getting it started during 2008-09 would cost $169 million. It's expected to cost $255 million each year once it's fully phased-in.

Add it up. To do all this we need $2.4 billion in new money. According to the revenue forecast, we're about $800 million short. That's why one-billion, six-hundred million dollars was a disappointment. And that's why the General Assembly faces another year of tough budget decisions.

 

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox