Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Indiana's Four-Year Budget Problem

It was June 30, less than 24 hours before the end of the fiscal year, and the state of Indiana still didn't have a budget. The legislative staff had dusted off and expanded a 16-year-old memo on what might happen if the state started a fiscal year without a budget. The state constitution seems to say that almost no money can be spent without an appropriation. That's the legal authority to spend, which is what a budget is.

Apparently, Indiana started a fiscal year without a budget a couple of times in the last third of the 19th century (1873 and 1887). Back then, they muddled through by tapping state balances and by borrowing, then the State Supreme Court approved what was done after the fact. But the state budget was much, much smaller in those days.

We were not alone in our budget-passing difficulties in 2009. The National Conference of State Legislatures reports that eight states started their fiscal years on July 1 without a budget, including our neighbors Illinois and Ohio. Not Indiana, though. In the end, the special session of the General Assembly passed a budget with hours to spare.

The problem was revenues. It looks like revenues fell short of original projections by about $1.4 billion in fiscal year 2009. We started the year with just about $1.4 billion of balances in the bank. And despite revenue shortfalls, we ended the fiscal year with that same $1.4 billion. How? There were about $400 million in reversions and fund transfers. The governor ordered state agencies to spend less than their legal authorization, and the difference reverted to balances. There were a few tens of millions of transfers from other funds to the general fund, too.

Then there was the stimulus money, almost $1 billion dollars of American Reinvestment and Recovery Act revenue from the federal government. The federal government increased its funding share of the federal-state Medicaid program, and contributed fiscal stabilization funds, mostly for education. Federal dollars plus reversions plus transfers covered the 2009 shortfall, and left us with money in the bank.

Revenues are projected to grow slowly through 2011, starting from that reduced 2009 level. That meant the budget for the new biennium had to be tight. One accounting of appropriations shows growth of only 0.3 percent a year in 2010 and 2011. That's much slower than usual.

Stimulus money will be used to support even this very small spending growth. The state will get about $1.3 billion over the next two years. But even with all that extra stimulus money, revenue will grow so slowly that we'll have to use $400 million in balances to cover the budget. Balances are projected to drop to a billion dollars by June 30, 2011.

And then Indiana--and all the state--will face a problem: no more federal stimulus money. The ARRA money is scheduled to run out in 2011. That leaves a big hole in the budget.

We can figure out how big by asking how fast state revenue would have to grow to cover a "typical" increase in state appropriations. That's about 3.5 percent a year, based on averages from the past 10 years.

To cover such a spending increase in the 2012-13 biennium, revenues would have to grow by about 7.5 percent per year for two years. That seems unlikely, unless the economy booms. Or the state increases taxes. Or the federal government extends the stimulus program for a couple more years (you can bet the states will lobby for that).

Four percent a year is a more likely pace for revenue growth. That would result from a typical economic expansion, with no tax increases, and no more stimulus money. If that happens in 2012-13, the budget would have to be flat-lined to maintain positive balances. That means no spending increases, again.

Indiana is faced with a four-year budget problem. Not much added spending in this biennium and not much in the next. That may mean another difficult budget-writing session for the General Assembly in 2011.

So, can we stuff that fiscal-year-without-a-budget memo back in the archives, or retire it to a backup hard drive? Sure we can--but let's remember where we put it.



Writer: Larry DeBoer,
Editor: Olivia Maddox,