Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Happy (But Not Ecstatic) About the Budget

The Indiana Statehouse is quiet during the summer. Too quiet. It's a relief when the second week of July rolls around, time for the annual budget closeout. This is when the Budget Agency reports on the condition of the state budget at the end of the fiscal year. Fiscal 2006 ended on June 30, so we're a few weeks into fiscal 2007. Happy New Year!

And happy it is, compared to any fiscal new year in this decade. Revenues came in at $348 million above projections. This is the second year in a row that revenues have exceeded expectations, after six straight years of falling short. Revenue was more than spending for the first time in years. Fund balances are building. You can see the closeout statement on the Budget Agency's Web site at http://www.in.gov/sba/budget/closeout.

So will the legislature have an easy budget session in 2007, with plenty of money to use for schools and tax relief?

We're happy, not ecstatic. Here's why.

There are two things we'd like to do before the next recession, whenever that may be. First, we want balances to be at least 10 percent of the budget's size. By the end of the next biennium in 2009, this will be about $1.35 billion. We're expecting to have $1.1 billion in the bank by the end of this fiscal year, so we'll need about $250 million more to reach the target.

Second, we'd like to "re-set" the payment delays. During the bad times at the beginning of the decade, the state delayed about $700 million in payments to schools, universities and local governments from one fiscal year to the next. Everybody still received their money, just a little late. It's a fiscal gimmick that helped balance the state budget. Now, we need to move those payments forward, so the gimmick will be ready the next time we need it. We've started to do that, but, by the end of fiscal '07, we'll still have about $450 million to go.

Add it up, and, in the next biennium, we'll have to collect about $700 million more than we spend to get the budget in shape for the next downturn.

Happy to say, it's doable. Suppose that in the next biennium revenues keep growing like we think they'll grow in this one. And suppose we adopt a budget for 2008-09 that lets spending grow like it did in 2006-07. If this happens, we can re-set the payment delays and have balances of almost $1.6 billion. That's the target level with about $200 million to spare.

This is why we're happy. Here's why we're not ecstatic.

Our current budget is the tightest in memory. We're not increasing spending much, and we've put a limit on property tax relief. Property taxes are likely to rise a lot in 2007. Citizens, taxpayers, local officials and interest groups-and, therefore, legislators-will want more spending and more tax relief in 2008 and 2009. Under this scenario, there's only $200 million to play with for the two-year biennium. The governor's all-day-kindergarten idea by itself would cost $200 to $300 million.

There's reason to be a little more optimistic, though. That $200 million figure is based on revenue projections from last December. In 2006, we collected $348 million more than projected. Perhaps 2007 revenues will exceed forecasts, too. In particular, corporate income tax revenues came in so high in 2006 that the forecast figure for 2007 would mean a drop in corporate taxes. This probably won't happen if the economy keeps expanding. If corporate tax revenues stay where they are through 2009, balances will be about $600 million above the 10 percent target. We can pay for all-day kindergarten, if we like, and still have money for property tax relief or other priorities.

We're happy. The budget looks better than it has in years, and better than we thought it would when we looked ahead last year. But ecstasy eludes us. Even $600 million in extra balances can be used up by just a couple of big policy ideas. And underneath that $600 million is another very tight budget.




Writer: Larry DeBoer
Editor: Olivia Maddox