Not every recent forecast has been stormy. On April 15, a bipartisan committee of state fiscal experts released an updated revenue forecast suggesting Indiana's financial outlook for the next two years is improving.
Through the end of June 2013, Indiana is expected to take in $762 million more than the total predicted by the previous forecast, which came out in December. The new forecast comes at a critical time. The legislature must adjourn by Friday, and the budget is still being finalized. The proposed budget would spend about $28 billion over two years.
Just because we expect to have more money, however, doesn't mean we will, and we must resist the temptation to spend the additional projected revenue. Things can change quickly. They've changed for the better since December, but it's important we exercise restraint. That having been said, the good economic news will allow us to increase funding in at least one important area.
K-12 education has been a top priority all session. In the House-passed version of the budget, other than Medicaid and corrections, K-12 education was the only significant budget item that wasn't cut. The new forecast will allow us to increase K-12 funding by more than $150 million.
The improvement in the revenue forecast is primarily attributable to the expectation of strong growth in the state's two largest revenue sources - sales tax and individual income tax. Sales tax collections are expected to grow about 5 percent in the first year of the budget and another 4 percent in the second year.
Of course, Hoosiers are only able to start spending again because they're working. The forecast predicts it will take three more years to return to peak employment in Indiana, but there are definite signs of improvement. Indiana's preliminary seasonally-adjusted unemployment rate dropped 0.3 percent, to 8.5 percent, in March - putting us below the national average of 8.8 percent and below that of all neighboring states for the second month in a row. Indiana added 9,700 jobs in March.
The improvement in employment will translate into higher individual income tax receipts. Growth is expected to be almost 9 percent in the first year of the budget and nearly 6 percent more in the second year. Downward pressures on the revenue projections include slow corporate income tax growth and anticipated declines in gaming revenues due to new competition from casinos in neighboring states.
Under a proposal announced last week, the total increase in K-12 funding would be $153 million over the two-year budget cycle. Of that, $47 million would be dedicated to expanding full-day kindergarten. Another $78 million would be distributed to schools according to the state funding formula, and $15 million would fund performance awards for teachers.
Here's how funding for full-day kindergarten works. Through the funding formula, schools receive half of their per-student funding amount for each kindergartner. A state grant program helps bridge the gap. The total available statewide has been $58.5 million for the last three school years, including this year. The pot of money is divided by the actual number of full-day kindergartners statewide. This year, 56,826 out of 76,786 total kindergartners statewide are enrolled in full-day kindergarten. The other 19,960 kindergartners are half-day students.
Based on the numbers, schools that chose to offer full-day kindergarten this school year received a grant of $1,029 for each full-day student. The additional grant money is enough to maintain that funding level if all schools and students were to participate. Kindergarten is not required, and participation in the state grant program is optional. Since participation isn't likely to be 100 percent, the per-student grant is likely to increase, as the larger pot of money - $82 million a year under the proposal - would still be divided equally among students.
Improving early childhood education is critical for Indiana's future, and it appears we are about to take a significant step in the right direction. More steps are needed.
Based on projections from the December revenue forecast, the House-passed version of the budget would have been structurally balanced (meaning revenue exceeds spending) by its second year and would have left $587 million, or about 4 percent of projected annual revenues, in reserve at the end of the budget cycle. Under the new forecast, the House-passed budget would be structurally balanced in the first year and would build the reserve to $1.35 billion, or about 10 percent of projected revenues, by the end of the two-year budget cycle. Most experts agree that a 5 percent reserve is the bare minimum and that state governments should strive for balances equal to at least 10 percent of annual revenue.
The Hoosier economy and our state tax revenues are expected to show significant improvement in the coming years, and Indiana has weathered the recession without enacting destructive and counterproductive tax increases or jeopardizing essential government services.
The latest revenue forecast should be a cause for optimism, but we must remain vigilant in maintaining the fiscal discipline that brought us through the recession. Indiana has lived under an austere budget for the last several years, and with the prospect of increased revenues, the temptation will be great to spend money on all of the programs and projects that have seen their funding reduced out of necessity. But projections are just that - projections. The current budget was based on revenue estimates from the May 2009 forecast. Those estimates turned out to be more than $1.4 too high, and Gov. Mitch Daniels had to make cuts to keep the state operating in the black.
The rain is ending, and the sun is coming out. Maintaining a responsible reserve is like carrying an umbrella. If it rains again, we'll be prepared.