A month of state budget hearings concluded last week with a revenue forecast that suggested Indiana is emerging from the recession but still has a long way to go to recover from two years of steep losses. The next two years will be difficult, but they will be manageable.
After a sharp decline that started in 2008 and continued through 2009, state revenues have been rising this year. The next budget will be based on revenue levels approximately equal to those of five years ago. It's a big step backward, but at least we're starting to move forward again.
Indiana's revenue forecast is developed through a bipartisan, consensus process. There may be disagreement over spending priorities, but it's helpful to start with agreement over how much money we are likely to have available to spend.
In summary, the forecast projects modest revenue growth over the next two and a half years, but the expected growth rates are significantly lower than in the periods following most prior recessions.
The revenue forecast and related documents are available at www.in.gov/sba/2563.htm. If you wish to receive a hard copy, call my legislative assistant, Clinton Bohm, at 1-800-382-9841.
The state's fiscal year starts in July. For the next fiscal year, the forecast projects revenues of $13.4 billion (3.5 percent growth over the current fiscal year), and $13.95 billion in fiscal 2013 (4.1 percent growth over fiscal 2012).
The projected increases are primarily the result of rising individual income tax withholdings, which may be a sign that Hoosiers are working more hours and earning more income, despite the persistence of a high unemployment rate. The expectation of modest increases in sales tax revenue is another positive factor. Downward pressures on revenues include slow corporate income tax growth and anticipated declines in gaming revenues due to new competition from casinos in neighboring states.
The revenue forecast was based in part on an economic forecast that suggests both the national and Hoosier economies are in recovery mode, but that economic growth will be much more gradual than following previous recessions. The primary obstacle to a rapid recovery is continued caution among businesses and consumers. Because of both uncertainty and increased efficiencies, businesses have been slow to hire, and consumers have been saving instead of spending. Unless these trends are reversed, unemployment rates will remain high in Indiana and across the nation, and the economy will continue to sputter. Long-term risks to recovery include growing federal budget deficits and looming federal tax hikes.
The revenue forecast projects that total new revenue over the upcoming two-year budget cycle will be about $1.4 billion. Although this is certainly the best revenue news we've had in months, we're not out of the woods yet. The latest projections simply predict revenues that are near the levels we thought we would have in the current budget cycle.
Had Gov. Mitch Daniels allowed the state to spend at the levels appropriated in the 2009 budget, we would have been in the red by now. Instead, the governor reduced spending by more than $1.1 billion, and we now expect to end the current budget cycle with a cash reserve of approximately $680 million. That's equal to about 5 percent of current-year revenue - enough to keep the state running for about two weeks. Most experts agree that state government should maintain a reserve equal to at least 10 percent of annual revenue.
Despite the reductions made by the governor and the infusion of more than $1 billion of federal stimulus money, Indiana overspent its available income by nearly $560 million last fiscal year and is expected to overspend by another $150 million in the current fiscal year. Even with the overspending, we're still in the black because we started with a strong cash reserve.
There won't be any stimulus money to cushion the next budget, and the state will be required to fund additional Medicaid and pension obligations. Because of the additional obligations and the lack of stimulus money, a budget based on a spending freeze at current levels would still leave us broke in two and a half years. To avoid going into the red, additional cuts will have to be made. Of course, we must do more than just break even. If nothing else, the last two years have demonstrated the importance of maintaining a responsible level of cash reserve.
Additional reductions will not be easy, especially given the large reductions made to date, but they will be necessary if we wish to stabilize Indiana's finances without resorting to tax increases.
Although it is clear that our fiscal challenges will not disappear in the near future, there are still plenty of reasons to be optimistic. The economy and our state tax revenues are improving, albeit slowly, and the governor has already done the heavy lifting when it comes to right-sizing state spending. Most state agencies are now operating at funding levels 25 percent below their appropriation for fiscal year 2009, yet performance measures suggest they are maintaining high levels of service.
K-12 education makes up approximately 54 percent of the state budget. A year ago, the governor reduced K-12 spending by about 3 percent, and there appears to be widespread, bipartisan desire to avoid further cuts.
The next two years will be difficult, but if we avoid tax increases and spend what we have wisely, Indiana's economic recovery will be strong and lasting.