Larry DeBoer

Professor of Agricultural Economics,
Purdue University

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A scary budget story

Halloween--a time for scary stories--is here. We don't need ghosts or goblins for a good fright, just hard numbers from the Indiana state budget agency's July closeout. That's the annual report on the condition of the state budget. You can see the closeout statements on the budget agency's Web site at http://www.in.gov/sba/budget/closeout/. If you dare!

Let's focus on one particular number that the budget agency reported for fiscal year 2002 (July 1, 2001 to June 30, 2002). Here's the number: Indiana collected $8.709 billion in revenue in fiscal 2002, mostly from income, sales and corporate income taxes.

That's scary. It was $343 million less than what was collected in fiscal 2001. And 2001 revenue was $91 million less than what was collected in fiscal 2000. Indiana revenues have fallen two years in a row. That hasn't happened in a long time.

A revenue drop two years in a row is bad enough, but actually the numbers are scarier. The legislature writes a budget to plan spending for the future. It bases this plan on projected revenues.

When the General Assembly planned the budget for the current biennium, revenues for fiscal 2002 were projected to be $9.529 billion. They made the budget based on this amount. But the state collected only $8.709 billion (that number again). That's $820 million less than projected. Revenue fell short of projections in 2000 and 2001, too. When you add up all those shortfalls, you get $1.7 billion.

A revenue drop two years in a row is bad, a $1.7 billion revenue shortfall over three years is worse, but the numbers actually are even scarier than that. There's another year left in the biennium, fiscal 2003, the current fiscal year. The closeout statement says that the state expects to collect $9.25 billion in fiscal 2003. But the state got only $8.709 billion in 2002 (there it is again). To meet the 2003 projection, revenues have to increase 6.2 percent. That's as much as the increases in the flush years of the 1990s. And, lately, revenues haven’t been growing; they’ve been falling.

What about tax restructuring? Taxes on cigarettes and gambling have already increased. The sales tax will rise from 5 percent to 6 percent on Dec. 1 (after the election, but before Christmas). The budget agency expects that this will add just over $1 billion to revenues. The added property tax relief that the state must pay in 2003 will increase spending by about $440 million. That's a net of $560 million.

By the end of the biennium, the budget agency projects a balance of $619 million. That includes money in the general fund, the tuition reserve fund (to meet school aid payments) and the rainy-day fund. We'll meet that target if revenues come in as projected, but that requires 6.2 percent growth in revenues, not counting restructuring.

A balance of $619 million is about 6 percent of the size of the budget. A rule of thumb on balances says the rock-bottom minimum a state needs simply to pay its bills is 5 percent. If 2003 revenues grow much less than 6.2 percent, we'll fall below that minimum. And, that means that the governor and the legislature may have to find more budget cuts or revenue increases. It also means that the 2003-05 budget will have to spend less than it collects in revenue to build the balance back up. With revenues growing slowly, that makes for a really tight budget.

First comes Halloween, then Election Day. We’ll elect all 100 members of the Indiana House, and half the members of the Indiana Senate. The winners will celebrate on election night. Given the scary budget that they'll face in January, celebrating is a really brave thing to do.


Writer: Larry DeBoer
Editor: Olivia Maddox