AUGUST
2008<

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

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08-28-08

Download the audio of Capital Comments: MP3, WMV

Is Indiana's Budget Ready for Recession?


Indiana's state budget is balanced, and there's money in the bank. But is it enough if we have a recession? To know that we have to look at the numbers.

That's harder this year. (And by "this year," we mean fiscal 2009, which began on July 1. (Happy New Year.) This spring's big tax reform changed the budget numbers a lot. The state will take over the calendar year 2009 school general fund property tax levy, the county welfare levies and several smaller levies. That will add to state spending. The sales tax will be 7 percent for the whole fiscal year. That will add to state revenues. That changes the 2009 budget that the General Assembly passed back in April 2007.

Fortunately, the numbers gurus at the State Budget Agency have done the math, which they released at the July 17 closeout. That's when they announce their final calculations about what happened in the fiscal year just ended and look ahead to the fiscal year just started. You can see the closeout statements on the Budget Agency's Web site at http://www.in.gov/sba. Click on "Budget Information."

I like to take the Budget Agency's numbers and run them through my desktop model of the state budget. Everyone needs a hobby.

State budgets have been balanced for the past three years. Each year's revenues have exceeded each year's spending. That has helped balances—the money in the bank—grow from 6.5 percent of the budget, at the start of fiscal 2006, to 10.7 percent of the budget, at the start of this fiscal year.

Things don't look quite as rosy for 2009. The state is expected to take in $14.4 billion but spend $14.5 billion. Appropriations will exceed revenues by $140 million. This is because revenues are projected to be $265 million less in 2009 than was forecast when the budget was written. The revenue forecasters are expecting the slowing economy to have an effect. By the end of fiscal 2009, next June 30, balances are expected to be about $1.3 billion, which is 9.4 percent of the budget.

How big do balances need to be? The rock-bottom-minimum is about 5 percent of the budget, which would be $718 million. Any less and the state would have trouble paying its bills on time.

Beyond that, the appropriate size for balances depends on what we want them to do. It would be nice to have enough so that, if there's a recession and revenues fall short of projections, we can still maintain spending without raising taxes.

Balances are expected to be $630 million more than the 5 percent minimum after fiscal 2009. Whether that's enough depends on how bad a recession gets. The 2001 recession had a huge effect on revenues, partly because the stock market crash erased a lot of income tax revenue from capital gains. In 2001, revenues fell short of projections by $721 million.

We've already absorbed $265 million in projected shortfalls; so $630 million in balances is more than enough to handle that kind of shortfall.

Unfortunately, revenues fell short of projections in 2002 by another $820 million. They were short in 2003 by $1.1 billion. All together, revenues fell short of projections by $2.8 billion in the first half of this decade.

We had almost $2 billion in the bank at the start of the decade, 18 percent of the budget. It wasn't nearly enough. We resorted to fiscal gimmicks, like transfers of money from other funds and payment delays to local governments. We cut spending. We raised taxes.

If we used those gimmicks again, the budget could handle revenue shortfalls of perhaps $1.8 billion, before we'd have to cut appropriations or raise taxes. That's about two-and-a-half years of shortfalls like we saw during and after the last recession. No one likes those gimmicks—unless the alternative is a tax hike.

So far, though, there's no sign of a revenue shortfall anything like those bad old days. Revenues came in above projections in fiscal 2008, and this July's revenue collections were above projections, too. Unemployment is up and income growth has slowed, but state tax revenue hasn't been affected.

And that's the best way for the budget to handle recession: not to have one at all.

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox