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Capital Comments by Larry DeBoer - 2014 Budget

In France, July 14 was Bastille Day. Great fun for the French. In Indiana this year, July 14 was Closeout Day, where the Indiana State Budget Agency summed up the state's revenues, appropriations and balances for the fiscal year that ended on July 1. Great fun for Indiana number crunchers!

And a great opportunity to take a look at the Indiana state budget.

The state's got a bit more than $2 billion in the bank, which is 13.7 percent of the budget, as measured by operating revenues. Those numbers really are on the "bottom line" of the closeout statement, which you can find on the Budget Agency's website at www.in.gov/sba/2627.htm.

That's the third straight year of balances near $2 billion. Things were much worse before that. At the end of 2010, after the Great Recession, balances fell to $831 million, which was just 6.7 percent of revenues. That's not far from the rock-bottom minimum of 5 percent. Go below that and it's tough to pay your bills on time. We're in better shape now.

Still, there were a couple of curiosities about fiscal 2014. For one, revenues went down a little from fiscal 2013, by about 1 percent. Decreases in revenues from one year to the next are pretty rare. This is only the fifth time in the last 38 years that it's happened. The others resulted from recessions.

There was no recession in fiscal 2014, but revenues dropped anyway.

The closeout documents provide some details. The big revenue decreases were in the individual income tax, the inheritance tax and in the riverboat wagering tax. The income tax drop was not due to lower tax rates. We'll be phasing down the 3.4 percent state income tax rate to 3.23 percent, but that doesn't start until next January. There may be a technical reason for the decrease, related to rising local income tax distributions.

The inheritance tax decrease is easier to explain. The tax was eliminated as of 2013. We're still collecting some revenue on estates from before then, but this year's revenue was down by about half from last year. The riverboat tax reduction is easy to explain, too. Cincinnati opened a new casino, and our southeastern riverboats took a hit.

Revenue from the corporate income tax increased, even though the tax rate was reduced. Corporate profits are rising nationwide, and Indiana shared in that increase.

Here's a second curiosity. Revenues were $14.7 billion in fiscal 2014. Appropriations, the planned spending from the budget, were $15.2 billion. Revenues fell short of appropriations by more than $500 million. Yet balances went up. As you know from your checking account, usually if you spend more than you earn, balances go down.

The reasons for the balance increase were reversions and transfers. The state had $300 million in reversions, which means it didn't do some of the spending authorized by the budget. Unspent money "reverts" to balances. Some of the reversions resulted from the December budget cuts. And, the state spent less on Medicaid than it appropriated and transferred $300 million to its Medicaid Reserve. That reserve is part of total balances. Those two amounts were more than enough to erase the revenue shortfall. The spending the state actually did was less than the revenue the state actually received, so balances increased.

Total balances were 13.7 percent of the budget, which was above what the Budget Agency calls the "prudent range" of 10 percent to 12 percent. If the state has prudently kept extra balances and then revenues fall short of projections, it won't have to cut spending or raise taxes right away.

The state has balances equal to 8.7 percent above the 5 percent minimum. How prudent is that? During the three really bad recession years, 2009, 2010 and 2011, revenues fell short of appropriations by about 11 percent per year, on average. So 8.7 percent is enough to cover shortfalls of nine or 10 months, if we have another recession year like those three. Beyond that, spending would have to be cut or taxes increased.

That's not really how we operated in 2014, though. Revenues did fall short of budget projections last year, but the state did not use balances to maintain spending. Instead, we cut spending to maintain balances.