Budget questions could easily eat at $2.2B reserve

With $2.2 billion in the bank, improving tax collections and extra tax refunds on their way to Hoosiers, it would be easy to assume Indiana's leaders could coast for a while.

But lawmakers and the next governor will have to make some tough decisions about which way the state heads as they write the budget that will set much of the Indiana's direction for the next two years.

A few decisions have already been made for them. That $2.2 billion cushion will be whittled back to $1.4 billion as a result of Gov. Mitch Daniels' automatic tax refund, which will return more than $100 to each taxpayer next year, and payments to Indiana's teacher pension fund. Lawmakers will also have to make up for cuts already approved to the state's corporate income tax and the phasing out of the inheritance tax (some of which will be offset with the state's sales tax agreement with online retail giant Amazon).

Indiana's next governor will have to decide whether to expand Medicaid under the federal health care law. Lawmakers and the new governor also will have to find roughly $500 million each year to pay for transportation projects as the money from the leasing of the Indiana Toll Road runs out.

"Highway funding is going to be a big issue," said House Ways and Means Chairman Jeff Espich, R-Uniondale, who is not seeking re-election after more than four decades in the General Assembly.

Espich also notes that the economic picture could turn again at any time, causing the state to begin losing money as it did during the Great Recession. He said even a small adjustment of a percentage point in tax collections could throw off the state's books by hundreds of millions of dollars, cutting into the $500 million structural surplus the state has built.

John Ketzenberger, president of the Indiana Fiscal Policy Institute, said the best thing lawmakers and the new governor can do is to take a deep breath before making major decisions about how that money should be spent—either on more services like education, or on tax cuts.

"The first the thing the new governor and the new Legislature should really consider is the Hippocratic oath: First do no harm," Ketzenberger said.

That will be tough for lawmakers bombarded with requests from lobbyists at the Statehouse representing areas cut over the last few years. Building the state's cash reserves consisted of three major factors: deep cuts in spending, improved tax collections and the discovery of $320 million in untouched corporate tax collections.

It will be equally tough on gubernatorial candidates making promises on the campaign trail—from new tax cuts being floated by Republican Mike Pence and Democrat John Gregg to talk of new spending on education.

Indiana Republicans recently attacked Gregg for ending his term as House speaker in 2002 with the state looking for $760 million. However Indiana, like most other states, took an unexpected  and short-term—hit because of economic woes caused by the Sept. 11 terrorist attacks and the popping of the tech bubble.

State leaders at that time also lacked the benefit of a federal economic stimulus. The Obama administration sent Indiana $2 billion over the last few years to abet major losses. Any future stimulus—should the nation suffer through a second, "double-dip" recession—would likely get stuck in the partisan gridlock in Congress, leaving the state to fend for itself.

Espich said his replacement as the House's budget-writer should get used to saying "no." He estimated that of the roughly 80 bills he weighed in his committee earlier this year, 50 were new tax credits of some sort for local economic development, farm aid and many other projects.

Ironically, it's the state's solid footing that makes it that much harder for lawmakers to say "no" after years of pent-up demand caused by budget cuts, Ketzenberger said.

"It's harder for the Legislature to say no when there is revenue available, certainly more than it is when you're in the negative," he said.

Some drains on the state reserve will likely be out of Indiana's hands. Even if the state decides not to expand Medicaid, the expected growth in in the program already underway and increasing reimbursement costs could eat away at the reserves just as easily as any conscious decision from lawmakers, Espich said.

In the end, $2.2 billion might look like a lot, but it could easily disappear depending on myriad factors, some within state leaders' control and some not.