Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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State Budget Pain Now or Later

We'd been waiting for months, and on Friday, April 17, it came: the updated forecast of Indiana state revenues for fiscal years 2009, 2010 and 2011. It was terrible news. Revenues would fall short of the pessimistic December forecast by an additional $831 million for the three years.

Fiscal year 2009 runs from July 2008 to June 2009. It will be a dismal year for state revenues. Back in April 2007, when the 2009 budget was passed, the state expected to collect $13.4 billion for the general fund and some related funds. The legislature planned to spend a little less than that. It was a balanced budget.

The March 2008 property tax reform made changes, adding an extra point to the sales tax and adding school general fund and county welfare fund spending to the budget. That meant the state needed about $14.5 billion to pay for its planned spending in 2009.

The April forecast says we'll collect only $13.4 billion, a $1.1 billion shortfall. That's really bad, but when the forecast was announced, several people in the room were skeptical. They hoped the forecast was right (but they thought it would be even worse).

In March, the Budget Agency pointed out that 2009 revenues had fallen short of the December forecast by 15 percent so far, and, at that rate, the added shortfall for the year would be $550 million. Yet the updated forecast projected an added shortfall for 2009 of only $140 million.

Could the last three months of fiscal 2009 be that much better than the first nine? The state's own economic forecast says that the economic free fall has ended, and that the numbers show "hints of improvement." And in six of the past seven years, the April-to-June revenues were better than the January-to-March numbers, compared to the December forecast. There is reason to hope that revenues won't be worse than the forecast.

The General Assembly will use the forecast beyond 2009 to write the budgets for fiscal years 2010 and probably 2011. We usually budget for two years at a time.

What can the budget-makers do with the forecast revenue? Let's look at some scenarios. Suppose we tried to pay for "business as usual," meaning 2010 and 2011 spending would rise by the average increase over the last 10 years—about 3.5 percent per year—with the effects of the March 2008 property tax reforms added in.

We couldn't do it. It's not even close. Revenues fall short of spending by about $2.2 billion for the two years. Since we'll start fiscal 2010 with balances of $1.4 billion at best, we haven't got the funds to operate state government as we normally would.

But what about the federal stimulus money? Some of it could be dropped into the budget to shore up revenues. In particular, the federal government will increase the share it pays of the Medicaid program, which will reduce Indiana's share by about $1.4 billion. And, there is another one billion dollars for "fiscal stabilization," meant to help state governments avoid spending cuts and tax increases.

Suppose we add this $2.4 billion stimulus to the 2009-2011 budgets. Then we could support business as usual. Revenues would fall short of spending by about $300 million in 2010 and 2011, but we'll probably have enough balances to cover that.

As the governor has pointed out, however, if we spend that much, what happens in 2012 and 2013, when the federal money disappears? It looks like state revenues would have to grow by more than 6 percent a year in the 2012-2013 biennium to continue business as usual. Sometimes in the past, revenue has grown that fast, but that seems pretty far-fetched coming out of this deep recession. If revenues grow a modest 3 percent for those two years, we'd fall short of business-as-usual spending growth by more than a billion dollars a year. We couldn't do it.

We can take the pain now and restrict spending for 2010-11. Or, we can take the pain later and restrict spending for 2012-13. Perhaps the General Assembly will decide to spread it over four years, taking a little pain now and a little pain later.



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Writer: Larry DeBoer
Editor: Cindie Gosnell