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Posted on September 2nd, 2021 in Local Government Education

~by Dr. Larry DeBoer
July 22, 2021

 

 

Happy belated New Year, everyone! I mean the Indiana Fiscal New Year 2022, which started on July 1. The State Budget Agency celebrates the event every summer with a budget closeout, looking back at the year just ended and ahead to the next biennium. This time, “celebrate” is the right word.

This was a budget year for the Indiana General Assembly, and legislators passed a spending plan for the next two years based on a revenue forecast. The April revenue forecast seemed very optimistic, increasing predicted revenues for the remainder of fiscal 2021 by $463 million.  That’s a very big number. The same forecast increased predicted revenues for fiscal years 2022 and 2023 by $1.967 billion. That’s almost $2 billion. I don’t have an adjective to truly describe how big that number is. It’s a very, very big number.

Can the economy possibly generate that much growth while we try to recover from recession?  Yes, it can, and more. In April, May and June, revenues were $1.2 billion above that very, very big April forecast.

The forecast came about two weeks before the end of the General Assembly’s budget session.  The legislature found uses for about $1 billion of that added $2.4 billion. We wondered, where is that extra $1.4 billion, and where is the extra $1.2 billion from April, May and June?

The Budget Agency’s closeout gives the answer. It’s in the bank. The Budget Agency says that state balances are $3.9 billion as of July 1. That’s 20.8% of total revenues, which is the biggest percentage since 1999.

Balances are useful to guard against shortfalls in revenue, like in 2020. They’re also useful for cash flow, to pay the state’s bills, even in months when revenue collections are low. The Budget Agency has always liked balances to be between 10% and 12% of revenues, to serve these purposes. Balances were in that neighborhood during most of the last decade.

It’s great to have money in the bank, but balances are taxes that were paid to support state services. Instead they’re in the bank, earning interest, but not much of that. Some level of balances are needed, but 20.8% is way too much.

The General Assembly thought big balances might be a problem. (We should all have such problems!) Therefore, they put a section in the budget bill saying that, if balances were greater than $2.5 billion by the end of fiscal 2022, the extra amount would be dropped into the pre-1996 Teachers Retirement Fund. That needs some explanation.

Indiana established a pay-as-you-go pension system for teachers in 1921. The state would make an appropriation to spend out of current revenues each year, to meet the promised benefit payments. Then came the baby boom, and lots more teachers were hired. By the 1990s, it was clear that when all those teachers retired, the future pension payments would grow to a very large share of the budget.

The state started a new teachers pension system in 1996, funded with contributions from employers and employees. The pre-1996 pension promises remain, however, so future pay-as-you-go appropriations will still be needed. Depositing money into the pre-1996 fund means that those appropriations will be lower. Future taxpayers will be on the hook for less. The Budget Agency expects that $695 million will go to the pre-1996 fund in fiscal 2023.

Another law passed in 2011 tells the Budget Agency what else to do with big balances. If balances are more than 12.5% of the budget at the end of an odd-numbered fiscal year, half of the excess amount goes to the pre-1996 Teachers Retirement Fund. That’s an additional $545 million to reduce the future cost of pension benefits.

The other half of excess balances will be refunded to taxpayers in fiscal 2022. The calculation is pretty simple: divide the refunded amount by the number of state income taxpayers. Since there are about 3.1 million taxpayers, a total refund of $545 million means about $175 per taxpayer. It will be credited against your tax payment, or added to your refund.

So celebrate the Indiana Fiscal New Year! This time, we’ll even get presents.

 

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