Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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The State Revenue Forecast

On Dec. 15 the state revenue forecast was reduced by $1.8 billion for this biennium. The state's budget was expected to have a billion dollars in balances by the end of the biennium. The loss of $1.8 billion would make balances negative, and the state Constitution doesn't allow deficits. That means the budget passed in June 2009 doesn't work.

Gov. Mitch Daniels has announced three rounds of spending cuts to close the budget gap. State agencies, universities and schools were asked to spend less than their budget appropriations. When spending is less than appropriations the money reverts to balances, which is why they're called reversions. Balances are higher as a result.

On Nov. 6 the governor asked state agencies to make cuts expected to sum to $300-$400 million for the biennium. On Dec. 4, universities were asked to cut $150 million. Then, the afternoon of the new forecast, local schools were asked to cut $300 million. That's $750-$850 million in added reversions.

But it's not enough. In his Dec. 15 press release, the governor said, "The debate over the reserves is over; we are using them." And how. If we revert "only" $850 million more--and we're $800 million in the hole--balances will be reduced to near zero by the end of the biennium.

The state can't really reduce balances to zero. A public finance rule of thumb says that balances should not fall below 5 percent of the size of the budget. Less than that and the state could have trouble paying its bills on time. In fact, over the past 34 years (including four recessions), the lowest that state balances have fallen is 4.9 percent of the budget, in 2004. Indiana has kept to the 5 percent rule, pretty much.

Five percent of projected 2011 revenues would be about $650 million. To maintain balances at 5 percent of the budget, they must be built by $650 million. If we do that by spending less, more reversions are coming.

What happens after that depends on how fast revenue grows. The forecast shows revenues falling 6.4 percent in fiscal 2010, then rising 6.3 percent in fiscal 2011. That's a healthy increase, but from a really low level. Revenues in 2011 would be less than what was collected in 2008.

Suppose we finish this biennium with balances at 5 percent. If revenues keep growing at 6.3 percent a year in the next biennium (2012-13), and we keep balances at 5 percent, spending has to drop in 2012, before it can grow in 2013. In that second year, though, spending will still be less than what was appropriated in 2008.

Revenue growth of 4 percent a year seems more likely, though. That's about how fast it grew during the last expansion, allowing for tax rate changes. If that's what happens in the next biennium, and we keep balances at 5 percent, spending will have to fall more in 2012, before growing in 2013. But we wouldn't reach the 2008 level of appropriations until the biennium after that, in 2014 or 2015.

In other words, state spending will be flat-lined, at the most, for six or seven years.

In 2014 spending would be almost $3 billion less than it would have been, had spending continued to grow at the 3.5 percent average of the past expansion. That's a cut from usual growth by about 16 percent.

What are we to make of this? Perhaps state government has grown too big. If so, this is an opportunity to find efficiencies and narrow the scope of services that the state provides. And, since the state now supports the entire local school general fund, presumably K-12 education will have to become more efficient, or provide less service. Or, perhaps voters will approve property tax referenda to add to school revenues. We can be sure that many school corporations will ask their voters for tax increases.

Or, perhaps the revenue from this post-recession economy is not enough to support the state services that Indiana people expect. In 1983, after the last "Great Recession," Indiana increased sales, income and corporate income taxes. We're unlikely to see tax hikes any time soon. Perhaps this will be an issue for the governor's race of 2012.



Writer: Larry DeBoer
Editor: Cindie Gosnell