JULY
2012

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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7-26-12

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Why Are Indiana State Balances So Large?


July is state budget closeout month in Indiana, and the Indiana State Budget Agency gave us the news. The state has a lot of money in the bank.

Back in July 2011, the budget agency projected that the state would have balances of $1,220 million by the end of fiscal 2012 (this July). One year later, they reported balances of $2,155 million. That's a $936 million, or 77 percent, increase in balances over expectations, in just one year. You can see these budget reports on the budget agency's website, at http://www.in.gov/sba/2362.htm.

How did this happen?

Balances are money in the bank. Like you or me, the state accumulates balances by spending less than it gets in income. In fiscal 2012, the state received more revenue and spent less money than expected.

Let's start with revenue. The economy grew faster than expected. Forecast revenue for fiscal 2012 was $13,831 million, including taxes and other revenue sources. Actual revenue turned out to be $14,167 million, $336 million more.

The corporate income tax added the most - $272 million more than projected. Corporations earned more profits and paid more taxes. Then there was the corporate income tax accounting error, reported in December. For a few years, some corporate taxes weren't counted in the general fund. In 2012 they were counted, so actual revenues exceeded the projections made before the error was discovered.

The error, reported in April, worked in the opposite direction. Local income taxes had been undercounted, and state income taxes overcounted in 2011 and 2012. After the correction, state individual income tax collections come in a bit lower than had been projected in 2011.

The two corrections also caused some fund transfers. The uncounted corporate taxes had been kept in a collections fund. They were transferred to the general fund. Income tax revenues owed to local governments for fiscal 2011 were transferred out of the general fund. Those two transfers netted out to a $217 million gain for the state general fund in 2012.

Indiana has established a new hospital assessment fee, which added about $106 million to state revenues. Indiana collects the fee, and then pays it back to hospitals in higher Medicaid payments. That sounds like a wash, except the added payments draw more federal matching dollars. It's a net revenue gain for everyone (except the federal government).

What about spending? Appropriations for fiscal 2012 were set in the budget passed in 2011. Appropriations are the legal authorization to spend money, and they were almost unchanged between the closeouts in 2011 and 2012. But "reversions" increased. These are appropriations that are not spent, so they revert to general fund balances. In 2011, the budget agency projected reversions to be $30 million. They turned out to be $316 million. That's $286 million in expected spending that didn't happen.

The budget agency provides a list of reversions by agency. The biggest spending reductions were $64 million from the Family and Social Services Administration and Child Welfare Services, $35 million in gaming tax distributions, $26 million from the Department of Corrections, $23 million from the Department of Environmental Management and $67 million in reconciliations, which appear to be mostly accounting changes.

Appropriations minus reversions is a rough measure of total general fund spending. Larger reversions meant that spending growth in 2012 was less than expected, 0.3 percent instead of 2.3 percent. Does this mean that the state found ways to provide services more efficiently, so less money was needed? Or does it mean that some services were not provided? You can't tell from budget numbers.

In fiscal 2012, balances were 15 percent of the budget. A 2011 state law required balances over 10 percent to be used half for underfunded pensions and half for taxpayer rebates. So the budget agency projects that $361 million will be used for pensions and the same amount for tax rebates in 2013.

Apart from a few miscellaneous changes, it all adds up to $936 million in balances that we didn't think we'd have. Total balances are expected to remain above $2 billion through the end of the biennium in 2013. And that means, for the first time in a long time, the General Assembly will have money to work with in the 2013 budget session.

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox