MAY
2010

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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5-27-10

Download the audio of Capital Comments: MP3, WMV

Will We Need More State Budget Cuts?


I'm one of those dismal economists, so good news doesn't come naturally. But there's the smallest, faintest glimmer of hope for Indiana's state budget.

The budget that passed on June 30, 2009, was based on a revenue forecast from May of that year. Appropriations were set for fiscal years 2010 and 2011 so that by the end of the biennium, in 2011, the state would have about $1 billion in balances.

Revenues came up short in subsequent months. In December the revenue forecast was revised, lopping $1.8 billion from expected revenues for the biennium - a huge reduction. The $1 billion positive balance became an $800 million negative balance, which our constitution doesn't allow.

As a result of revenue shortfalls, though, Gov. Mitch Daniels had ordered budget cuts. State agencies were asked to spend less than their legal appropriations, so the spare dollars would revert to general fund balances. In November state agencies were asked to spend $300 to $400 million less than their appropriations, and in early December state universities were asked to cut $150 million. Later in December state aid to local school corporations was reduced by $297 million.

These "reversions" add up to about $800 million, which would bring end-of-biennium balances to zero.

That's not enough balances. In the past 35 years, through four recessions, the state has never let its balances fall much below 5 percent of the budget. That's a figure considered to be the rock-bottom minimum in the public finance trade, and Indiana has stuck to it. Five percent of the 2011 budget is about $650 million. To reach this level of balances, an additional $650 million in budget cuts would be required.

Or maybe not. Here's that good news that I promised. In January and February actual revenues fell $160 million below the terrible December forecast, and we wondered if revenues would ever hit bottom. In March, though, revenues were almost $50 million above forecast, and, in April, they were $120 million above forecast. Perhaps we have hit bottom and are starting to climb out of a very deep hole.

All told, for the first 10 months of the fiscal year revenues are $55 million ahead of the December forecast. That means spending cuts would have to be "only" about $600 million to reach the 5 percent minimum balance by the biennium's end.

There's more. On May 17, the Fort Wayne Journal Gazette reported that the Budget Agency is looking at possible fund transfers. A fund transfer moves money from other funds to the general fund, so that general fund balances are larger. It's a maneuver that Indiana has used often in the past. After the 2001 recession more than a billion dollars was transferred to the general fund.

The total in fund transfers being considered appears to be just over $300 million. If these transfers were made, the required budget cuts would be about $300 million. Of course, most of the money in other funds would have been used for other purposes, so that spending is sacrificed. Transfers reduce general fund budget cuts.

If the fund transfers are accomplished and actual revenues exceed the December forecast by an average of $21 million per month for the next 14 months, no further budget cuts would be required. The Budget Agency isn't counting on added revenue, though. Back on April 22 the Associated Press reported that State Budget Director Chris Ruhl sent a memo to state agencies directing them to plan for more budget reductions in fiscal 2011.

In its commentary on the April revenue report, the Budget Agency took pains to quash any optimism about the budget. They compared actual revenues to the budget forecast, not the December forecast, to show that we're still $950 million short of what's needed to fully fund the budget appropriations for 2010. Perhaps the agency was concerned that people would have expected past budget cuts to be restored, had it reported revenues above forecast.

We're a long way from being able to restore past cuts. But there is the faintest glimmer of hope. Revenues may have bottomed out. Fund transfers may be available. If so, perhaps next year's budget cuts will be smaller than we feared.

 

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,