DECEMBER
2008

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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12-23-08

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The Recession Arrives at the State House


The National Bureau of Economic Research says the recession started in December 2007. In the Indiana State House, though, the recession started on Dec. 11, 2008. That afternoon the State Budget Committee heard the state's revenue forecast for the rest of fiscal 2009 and for 2010 and 2011. The news was bad.

When the 2009 budget was written in 2007, revenues were expected to be $13,377 million. In December 2007, the forecast was cut by $265 million. On Dec. 11, the forecast (not counting the sales tax increase) was cut another $670 million. All together, that means the state will have $935 million less than the budgeted amount.

Total revenues are higher than originally budgeted, because the sales tax increased from 6 percent to 7 percent on April 1. But so did state spending responsibilities. As a result of the big property tax reform, next year, the state will pay the full general funds of school corporations and the county welfare funds, replacing local property taxes. Revenues will rise, but not enough to cover the budget plus these new expenditures.

We started fiscal 2009 with $1.4 billion in the bank. This is more than the state has had since the start of fiscal 2001, just before the last recession. But it's less as a percentage of the budget. In fact, measured against the budget, we've got less in balances going into this recession than in any of the recessions since 1979. If no actions are taken, the revenue shortfall will wipe these balances out, knocking them down under 5 percent of the budget, which is the rule-of-thumb minimum that the state can live with. 

They won't sink that low, because Gov. Mitch Daniels has ordered state agencies to spend less than was appropriated in the budget. We don't know how big these "reversions" will be, but they should keep balances at acceptable levels, at least until the end of fiscal 2009.

How about the fiscal gimmicks that helped get us through the last recession? Then, the state shifted money from other funds (like the Build Indiana Fund) to the general fund. And it delayed property tax relief payments and school tuition aid to local governments. This delay didn't hurt local budgets too much, because the state is on a July-through-June fiscal year, while the locals use the calendar year. Postponing payments from June to July cuts the state budget by hundreds of millions, while costing local governments just a little in interest earnings.

Sounds like the governor and legislature would like to avoid the gimmicks this time. And, the big property tax reform may mean that payment delays are out. Property tax relief payments will almost disappear in 2009. The tax reform will also put schools on a July-to-June fiscal year soon, meaning a payment delay would cost them real money.

What budget will the General Assembly write during the 2009 session, for the 2010 and 2011 fiscal years? With balances relatively low and tax hikes and fiscal gimmicks off the table, all that's left is spending restraint. I wouldn't predict, and certainly wouldn't dare recommend, the levels of appropriations for the next two years.

As a yardstick to measure the revenue forecast, though, imagine a couple of scenarios. Suppose appropriations rise at the average rate of the past decade, plus the changes made by the property tax reform. Put these figures into a handy state budget computer model, compare the spending to the revenue forecast, and you get annual deficits of more than $700 million in both years. That runs balances into negative territory, and that's not allowed.

Business as usual won't cut it.

Suppose instead that appropriations flat-line, meaning they don't increase from 2009 levels, except for the additions from the property tax reform. Suppose as well that reversions are set at $250 million for 2009, 2010 and 2011. That's near the levels they reached during the last recession. Flat-lining, plus reversions, makes the budget very tight. But balances stay positive, falling to near 5 percent in 2010, and then rising in 2011. 

So, the revenue forecast probably implies a budget with fewer services for everyone. The recession has arrived in the State House.

 

 

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Writer: Larry DeBoer
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