Lawmakers think ‘gloomy’ in spite of rosy forecast

Sometimes the news is just so good you can’t believe it, and that is just what happened with the state revenue forecast this
month.

The April forecast serves as the foundation from which lawmakers build the budget. Particularly in times of fiscal uncertainty,
the release of the forecast, typically about two or three weeks before the legislative session concludes, kicks off real work
on the budget.

For decades, Indiana’s biennial budget process, characterized by its non-partisan economic outlook and bipartisan revenue
forecast, has served up numbers faithfully followed as gospel in assembling two-year budgets.

Using the projections from the forecast, lawmakers argue between chambers and parties (with some input from the executive
branch) over how much money to plug in for what programs, using the forecast to determine the bottom line.

This year was different. I can’t recall an in-session revenue forecast so closely anticipated, so deeply feared and so universally
unheeded.

Conventional wisdom was that the forecast would show the state taking in more than $1 billion below the last set of projections,
in December. But revenue for the biennium ending June 30, 2011, is now expected to be "only" some $830 million lower than
the same panel projected four months ago. This actually constitutes "good" news, because Senate Republicans built in the assumption
that revenue would deteriorate by $1 billion over the two-year period.

However, this is where the good news stops, because no one appears willing to believe the numbers.

The accuracy of the forecast for the budget in the biennium is important, but it also may prove to be a crossroads of sorts
for the state budget process. If the forecast is off by as much as many lawmakers and officials contend, you may see a significant
revision in the process or overhaul of its principals.

Rep. Jeff Espich, R-Uniondale, chairman of the State Budget Committee and a veteran of 18 legislative budget cycles, sharply
questioned the April forecast in a manner we’ve not heard from Budget Committee members in at least two decades, and he was
not alone in suggesting that the projections seem to defy credulity.

"I sure hope you’re right, but it doesn’t make any sense to me unless God is going to smile on us," Espich told stoic members
of the forecast panel, asking why certain indicators and unknowns didn’t portend the fiscal abyss lawmakers expected.

"Even though $830 million down sounds bleak, I think it’s worse than that," he lamented.

State Budget Director Chris Ruhl also expects the numbers to be worse than projected, labeling the ultimate veracity of the
projections "highly doubtful."

The state lost its star contract economist last year to retirement after some two decades of forging the economic assumptions
from which the bipartisan Revenue Forecast Technical Committee extrapolated its projections.

His replacement has had a tough time relating to lawmakers, and his December forecast widely missed the mark, but no one was
willing to blame him for an aberrational (relatively) optimistic forecast in a time of uncertainty.

Much of the disagreement lawmakers have with the forecast revolves around the short term.

The State Budget Agency, looking at the deterioration of revenue and gap between revenue and the forecast over the past three
months, had effectively concluded that we will see another $300 million shortfall in tax collections through the final quarter
of the current fiscal year. The forecast, however, is far less gloomy, expecting only a $43 million further falloff-less than
half the amount for the coming quarter than March’s $83 million plunge alone.

"The prediction of a sudden, near-term improvement in the revenue trend seems way too good to be true," Ruhl observed in what
some lawmakers quietly agree was an understatement.

Compounding the concern is the understanding that revenue projections for the coming biennium are also directly dependent
upon the results for the fourth quarter of fiscal 2009 (the base for the coming biennium), and lawmakers and the governor
do not want to find themselves boxed in on July 1.

So the process itself is potentially a matter of debate in coming months. Lawmakers may decide to review practices in other
states, considering such options as a permanent forecast office or officer, more frequent economic and revenue forecasts,
and even more structural changes, such as the length of the budget cycle and the targeted timing of budget approval.

In the interim, however, all attention is turned to shaping the budget and how revenue performs in the final quarter of the
current fiscal year. Rest assured that neither lawmakers nor the governor will sign on to additional spending, preferring
instead to use their own more pessimistic assumptions, and looking to be pleasantly surprised down the road if fiscal conditions
improve to the degree laid down by forecasters.

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Feigenbaum publishes Indiana Legislative Insight. His column appears weekly while the Indiana General Assembly is in session.
He can be reached at edf@ingrouponline.com.