Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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The Road to Fiscal Health

Indiana's budget turned a corner in 2005. We're on the road to fiscal health. From the back seat, Indiana residents are asking, "Are we there yet?"

We've got some new information about the road ahead. On July 15, the State Budget Agency did its annual "closeout." It released an accounting of revenues and spending during the 2005 fiscal year, which ended June 30. You can see the closeout results on the agency's Web site, at http://www.in.gov/sba/budget/closeout/Close_Out_2005.

Back in 2003, the state predicted revenues at $11,192 million for 2005. Things worked out better than that. At the closeout, the Budget Agency reported 2005 revenues at $11,436 million -- $244 million more than predicted when the 2004-05 budgets were passed.

This is the first time since the good old days in 1999 that actual collections surpassed the original revenue forecast. In 2000 through 2004, revenues fell short of predictions by a total of nearly $3 billion. That's the main reason for Indiana's fiscal troubles.

The closeout had more favorable news. Adding 2006 and 2007 together, revenue collections are expected to exceed appropriations. The biennial budget is balanced. If that comes true, it will be the first balanced biennial budget since 1996-97.

Revenues exceeded predictions, and the 2006-07 budget is balanced. These are two signs that Indiana's finances have turned the corner and started down the road to fiscal health. But how will we know when we get there? How long is the journey?

Here's a two-part definition of fiscal health. First, the state should have balances equal to at least 10 percent of its budget. This helps the state pay its bills on time. Plus, it's saving for a rainy day, in case revenues fall short of predictions again. By the end of this biennium, in mid-2007, 10 percent of the budget will be about $1.2 billion.

Second, the state needs to "re-set" its local government payments. In 2002 and 2003, the state delayed property tax relief and school aid payments to local governments, from one state fiscal year to the next. The locals received what they expected, just a little late. But the delay reduced state spending in the current fiscal year. It's a useful fiscal gimmick that helps keep balances positive, as required by the state Constitution.

If we want to use that gimmick again in the next recession -- whenever it occurs -- we need to bring those delayed payments forward, back to the old payment schedule. This will cost a bit more than $700 million.

According to the closeout, by the end of the biennium the state will have balances of $921 million, 7.4 percent of the budget. That's about $300 million short of the 10 percent goal. The closeout also shows that by mid-2007 the payment delays will not have been re-set. That's $700 million short of health.

To reach our destination, by the end of fiscal 2007 we'll still need about a billion dollars. In the 2008-2009 biennium we'll have to raise about a billion dollars more than we spend, if we want to call the budget "healthy" at the July 2009 closeout.

A bit of number crunching gives some perspective. In the biennium after this one, there are a few things we might like to do. We might like to have state spending keep up with inflation, growing at least 2 percent a year. We might like to end the freeze on property tax relief payments, and let them grow with tax levies at about 4 percent a year. And we'll need to fund Medicaid spending, which has been growing about 7 percent a year.

To reach fiscal health, we'll have to give up one of these three, if revenues arrive as predicted. We'll have to restrain state spending growth even more than in 2006-07. Or we'll have to reform local government finances, to hold down property tax growth without increasing state tax relief spending. Or we'll have to find a way to reform Medicaid, to control the growth in its costs.

These are hard choices. We've turned the corner, but the road ahead is long.




Writer: Larry DeBoer
Editor: Olivia Maddox