Mid-July is number-cruncher nirvana if you follow the Indiana state budget. That’s when the Indiana State Budget Agency releases its closeout for the previous fiscal year. This year the glorious day fell on Friday, July 15, and we learned one astounding fact: At the end of June, the end of fiscal year 2022, Indiana balances were $6.1 billion. Our state has six billion dollars in the bank.
Perhaps a billion dollars isn’t as impressive as it once was. It’s pocket change for our richest billionaires. It’s rounding error for the federal government. For the Indiana budget, though, it’s a very large number.
Until now the largest end-of-year balance we’ve ever had was $3.9 billion a year ago, at the end of fiscal 2021. Before that, the highest was $2.3 billion at the end of 2019. Current balances are 2.5 times that 2019 number. The State Budget Agency has said that it’s prudent to keep balances of up to 12 percent of the budget, to cover possible revenue shortfalls. Current balances are more than double that, at 29 percent.
How did this happen? We can gather some clues by comparing what we thought would happen when the budget was written to what actually happened between then and now. When the 2022 budget was passed in April 2021, we expected balances to wind up at $2.8 billion. Actual balances are $3.3 billion higher.
Revenues were almost a billion dollars above forecast in May and June 2021, so balances were large at the start of fiscal 2022. Revenue kept growing from there. The forecast predicted 2022 revenues at $18.1 billion. The closeout showed $21.2 billion, $3.1 billion more.
Budgets are spending plans for the future, so they are written based on forecasts of revenues. We budgeted appropriations of $17.7 billion for the general fund in 2022. That budget plan didn’t change, but there’s a law that says if balances get very high, money is automatically transferred to a pension stabilization fund, and money is refunded back to taxpayers. Together that added almost $1.1 billion to appropriations.
So for fiscal 2022, beginning balances were $1.3 billion higher than expected, revenues were $3.1 billion more, and total expenditures were $1.2 billion more. Add in $100 million in smaller adjustments and we’ve accounted for the extra $3.3 billion in balances.
We haven’t explained it, though. Why were revenues $4.4 billion higher than expected from May 2021 through June 2022? Mainly it was individual income, corporate income and sales taxes. Individual income tax revenue was $1.9 billion higher, corporate income tax revenue was $1.1 billion higher, and sales tax revenue was $1.3 billion higher.
The Indiana job market has been better than predicted. The April 2021 forecast predicted that the Indiana unemployment rate would be 3.6 percent in 2022. As of May it’s 2.2 percent. The forecast predicted that payroll employment would rise by 2 percent. As of May it’s increased 3.8 percent. More people earning paychecks means more income tax revenue for the state. National corporate profits were up 25% in 2021, and Indiana got a slice of that in corporate income taxes. The forecast predicted inflation at 1.5 percent in 2022. It’s closer to 9 percent now. Sales taxes are a percentage of retail prices, so some of the added sales tax revenue must be coming from higher inflation.
If a private company sees revenue grow rapidly above costs, its stock price would rise, and the CEO would get a bonus. Indiana is not a private company. Balances are tax revenue that hasn’t been used to pay for public services. It’s prudent to have some balances, but just about everyone would agree that $6 billion is too much.
We’ve already scheduled $2.5 billion in fiscal 2023 to bring down Indiana’s unfunded pension liability. Despite that large transfer, the State Budget Agency thinks that balances will be $5.1 billion by this time next year. Those high balances might trigger another automatic taxpayer refund. The governor wants to schedule another billion-dollar taxpayer payout in the upcoming special session.
Even with those added expenditures, though, balances are likely to remain unusually high. In the budget session next year, the General Assembly will have some money to work with.
Larry DeBoer is a Purdue University economist.
He wrote this for Indiana newspapers.
