Larry DeBoer is a professor of agricultural economics at Purdue University. His column appears in Indiana newspapers.
The most wonderful time of the year has come and gone for those who follow the Indiana state budget. On July 19, the State Budget Agency presented its accounting of what happened to revenues, spending and balances in fiscal 2017. The state ran an annual surplus of $42 million, and ended with balances of $1.78 billion, down from $2.24 billion in 2016.
Wait a minute, says anyone who's ever kept a checkbook. If I earn more than I spend, the balance in my checkbook goes up. What kind of arithmetic causes an annual surplus to produce a decline in balances?
Calculating surpluses and deficits can be tricky. When you calculate the surplus, what counts as revenue? What counts as spending?
To get that $42 million surplus, the state counts all the general fund revenues received from sales, income and other taxes, and from charges and fees. That was a little less than $15.5 billion in fiscal 2017. It then calculates the amount of spending, as appropriations plus some adjustments, less "reversions." Reversions are money authorized in the budget but never spent. Revenues actually received, less money actually spent, gave that $42 million.
As the late-night advertisers say, "But wait, there's more!" There is spending not yet counted. In particular, three big amounts: Major Moves 2020 distributions, excess reserves to the state highway fund, and excess reserves to the local road and bridge matching grant fund. Those three add up to $528 million.
This was spending on roads, related to the state's efforts to provide road funding prior to the motor fuel tax increases passed this year. Counting these three, spending was about $16 billion. By that arithmetic, the state spent more than it collected in 2017. Balances dropped by $467 million. You can find these numbers on the Budget Agency's website, at www.in.gov/sba/2714.htm.
An annual deficit sounds bad, but what really counts is how much money the state has in balances at the end of the year. Our $1.78 billion is 11.5 percent of general fund spending. Is that too little? Too much? Let's make a couple of comparisons.
The Pew Charitable Trusts provide data about the balances kept by each state. You can find it by searching "Pew reserves and balances." It shows 2016 figures, since there hasn't been time to analyze 2017 balances yet, but that's the best we can do. Indiana's balances at 11.5 percent would have ranked 13th highest among the states on the 2016 list. That would be the most among our neighbors. Ohio had balances at 9.5 percent of spending, Michigan at 7.3 percent, and Kentucky at 5.3 percent.
A budgeting rule of thumb says that balances need to be at least 5 percent of spending to cover cash flow. Less than that and states may have trouble paying their bills on time. Illinois' balances were 2.1 percent of spending in 2016 — and they are having trouble paying their bills. Indiana's balances rank near the top quarter of all states, and at the top of our near neighbors.
Here's another comparison. Aside from cash flow, the state needs balances to cover unexpected shortfalls in revenues. Budgets are made with predicted revenues, and sometimes actual revenues fall short. That's been the rule in Indiana lately. Our revenues have fallen short of budget-year predictions for the last four years straight, by an average of about $220 million per year. This has not been a problem, because Indiana has enough balances to cover small shortfalls.
During 2009 to 2011, the three fiscal years affected by the Great Recession, revenues fell short of predictions by about $900 million a year. We hope that never happens again. If it were to happen this year, though, and we made no tax or spending changes, balances would be cut in half to about $900 million. That would be 5.7 percent of spending, just above that rule of thumb minimum for cash flow. We have enough balances to handle one year of severe recession, and still pay our bills on time.
We reduced balances in 2017 because we wanted to use the money to deliver state services. That's what taxes are for, after all. But we didn't go overboard. Indiana's balances show a state in good fiscal health.