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Capital Comments: Trouble for Indiana’s State Budget


We got trouble, my friends, with a capital T. The Indiana state budget closeout for fiscal 2020 was held in mid-July, so we have a good idea of how bad things are.

Revenues fell 8 percent below forecast for the year, 23 percent from March through June. We used $850 million in balances to cover that shortfall, so our state savings account now has $1.4 billion, less than 10 percent of revenues. It hasn’t been that low since 2011. Spending cuts created more than $800 million in reversions, or appropriations that were not spent. Reversions haven’t been this high since 2011, either.

Now that we know the numbers, we can take a look ahead. Let’s do some “supposing” about what could happen during this fiscal year 2021, and during the next biennium.

Start by setting some boundaries for our supposing. Suppose we don’t let balances fall below 5 percent of revenues, which is about $800 million. In the past 45 years Indiana has never crossed that threshold.

Let’s suppose reversions in future budgets are no more than they were in 2020. The governor has pledged not to cut state aid to schools. That’s a big part of the budget that can’t be cut. Reversions in 2020 were 5 percent of total appropriations, but 8 percent of the non-school aid budget.

The federal government extended the income tax deadline to July 15, and Indiana did too. Indiana’s fiscal year ended in June, so the delay meant a lot of state income taxes that would have been paid in fiscal 2020 are being paid in fiscal 2021. The state says that “up to” $828 million has been delayed. Keep a good thought — let’s suppose we recover the full $828 million in delayed income tax payments.

So, with 5 percent balances, no rise in reversions and full collection of delayed income taxes, what’s the worst that can happen to revenues and still allow us to muddle through fiscal 2021? How far can revenues fall below the current 2021 forecast?

I get 8.6 percent. That’s an interesting number, because that’s also the percentage the sales tax fell short of forecast during the recession months, March through June. Since the 2021 forecast predicted revenue growth, an 8.6 percent shortfall represents some recovery from these last four terrible months.

The state will do a special revenue forecast in September.  They’ll announce the shortfall of the revised numbers below the previous forecast. If the shortfall is much more than 8.6 percent, we may have trouble muddling through 2021.

Next year we’ll pass a budget for a new biennium. Let’s be optimistic about revenues. After the Great Recession, revenues grew 6.3 percent per year from 2010 to 2013. Suppose revenues grow that fast in the coming biennium. How much could we increase appropriations over what we’re planning to spend this year?

Unfortunately, the answer is: not at all. We’d be climbing fast, but the hole is deep. Even at 6.3 percent growth we wouldn’t have enough revenue to cover current spending in 2022. Appropriations would have to be cut below this year’s budget, by about 3 percent.

How about a hopeful suppose? During the Great Recession the federal government sent Indiana $2.2 billion in revenue aid over three years, which helped a lot. Suppose we want to raise appropriations by 2 percent per year, with normal reversions of about $400 million and balances still held at 5 percent. How much federal aid would we need for the years 2021 through 2023?

I get $2.6 billion. Pretty similar to last time, allowing for 10-plus years of budget growth. Once again, that would help a lot.

Any scenario is iffy. Things could be worse. What if we don’t collect the full $828 million in income taxes? What if revenues fall short by more than 8.6 percent this year, or grow more slowly than 6.3 percent after that? But things could be better. Maybe the economy will recover faster. Maybe the U.S. Congress will be generous.

We got trouble, and it rhymes with C, which stands for — well, the disease. Indiana’s state budget is going to be tight, maybe really tight. But perhaps Uncle Sam will march to our rescue.

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