JULY
2011

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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7-28-11

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The State Budget Closeout and the New Biennium


July 14 was Bastille Day in France, but it was also a big day for Indiana finance aficionados (you know, state budget geeks). It was closeout day, when the state reviews revenues, spending and balances for the fiscal year just ended. The story of the day was one of congratulations, and a little amazement at how much better the budget looked than what was expected the year before. You can see the closeout documents on the Indiana State Budget Agency's website, http://www.in.gov/sba. Check out "budget information."

Think back to 2010. The closeout that July predicted balances would be $188 million by the end of 2011, just 1.5 percent of operating revenue. That could have been disastrous. The rule-of-thumb for state budgets is that 5 percent is a low as you should go. Lower than that and the state might have trouble paying its bills on time. Balances at 1.5 percent threatened the state's ability to operate.

Instead, in July 2011 the state reported balances of almost $1.2 billion, 8.9 percent of operating revenue. That was an amazing one billion dollars better than had been predicted just one year before.

How did that happen? Partly, the Indiana economy did better than expected. Not that the economy did well - we know that it didn't. But the revenue projections used in the 2010 closeout were made in December 2009, just after the low point of the recession. The economy's mediocre performance in 2010-11 was still better than the gloomy prediction made at the end of 2009. Revenues were predicted to grow 5 percent in 2011, but they actually grew 9 percent. Revenues were almost $500 million more than predicted.

Partly the state spent less than expected. Back in mid 2010 the state budget agency already figured that "reversions" would be almost $600 million. Reversions are budget-speak for spending less than budgeted appropriations. When a state agency spends less than was planned in the budget, the money reverts to balances. The state found $500 million in additional reversions in fiscal 2011, bringing the total to a record $1.1 billion.

About a third of the extra reversions were made possible by additional aid from the federal government to help pay Medicaid expenses. In summer 2010 Congress passed an extension of that part of the 2009 stimulus package. Mostly, though, reversions increased because the governor ordered additional spending cuts.

In April the General Assembly passed a budget for the 2012 and 2013 fiscal years. The July closeout reviewed 2011, but also projected the results for the new biennium. By the end of fiscal 2013 the state is expected to have $1.4 billion in balances, 9.9 percent of operating revenues.

Balances grow when the state collects more revenue than it spends. Yet revenue growth is expected to be pretty slow. Revenue grew 9 percent in 2011 but is predicted to grow less than 4 percent per year over the next two years.

Balances get bigger even with slow revenue growth because appropriations are so low. For the first time in memory, appropriations for the new biennium are less than appropriations for the previous biennium. In 2012 and 2013 the state plans to spend about $28.3 billion on its general fund. In 2010 and 2011 the state had planned $28.9 billion in spending.

Of course, in the last biennium budget plans were not carried out. Reversions totaled about $1.6 billion in those two years. The state actually spent much less than its planned appropriations. What's been done, then, is to incorporate the last biennium's reversions into this biennium's budget. The spending cuts are permanent. They're now part of the plan.

Aid to local schools makes up about half the state's general fund budget, and almost all school operating revenue comes from the state. Appropriations for schools are lower this biennium than last. The spending cuts from the last two years are now included in the budget. That's one reason why so many school districts are having budget troubles.

A smaller state budget could diminish the services we receive from our state and local governments. Still, budget disaster was averted in 2011, and balances are expected to grow in the new biennium. So soon after the depths of the Great Recession, "amazing" may be the right word.

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,