Indiana ends fiscal year with $2.9B in reserves

Indiana Statehouse

Consumer spending that boosted state revenues has cooled after two years of above-average financial performance, bringing the state’s reserves back within a typical range.

Indiana ended the 2023 fiscal year with $2.9 billion in reserve accounts, far short of the $6.1 billion it reported in 2022, according to a Thursday announcement from Tera Klutz. Klutz’s office title changed from state auditor to state comptroller earlier this year.

“This means that we are, once again, well within our healthy (reserves) range of 10-15% of fiscal year ’24 budgeted appropriations,” she said.

Reserves account for 16.3% of the current year’s expenditures, above the 12.5% watermark for triggering an automatic taxpayer refund. However, a change in the most recent budget cycle omits the state’s tuition reserve account from consideration this biennium, meaning payments wouldn’t be triggered unless the state had closer to $3.5 billion in savings.

Lawmakers included the language to avoid another round of refunds and spent $3.1 billion in one-time spending, primarily on capital construction project overruns, bringing down the surplus.

The excess cash in Indiana’s accounts in the prior year meant state leaders had to return millions of dollars to taxpayers via refunds in two separate waves in 2021 and 2022, for a maximum $325 per Hoosier—though not all Hoosiers qualified for both payments.

Rep. Greg Porter, D-Indianapolis, bemoaned the “missed opportunity” to meaningfully spend state funds in ways that benefit Hoosiers, he said in a release.

“… Indiana is flush with cash, yet Statehouse Republicans squandered this year’s opportunity to make transformative investments in traditional K-12 public education, mental health and public health. Instead, they chose to give a handout to the state’s very top earners in the form of private school vouchers for the wealthy,” said Porter, the ranking minority member of the House Ways and Means Committee.

What’s coming in?

Revenues hewed closely to earlier forecasts, coming in $25 million over estimates—a 0.1% difference.

“I do think we are returning to historical trends and patterns as far as revenue,” said Cris Johnston, the director of the Office of Management and Budget. “(But) we’re still feeling the effects of the pandemic on spending. There is a lot of money, federal funds, that are still yet to be spent because they have to be obligated by 2024 and spent by 2026.”

Contractors who benefited from excess contracts with state government could see those dry up once federal funds run out.

“There’s going to be a needed, honest assessment of how this money has been used and what we should continue to do,” Johnston said.

Sales taxes, which account for over half of the state’s income, exploded during the pandemic as consumers spent their federal stimulus checks. The mild recession predicted earlier this year didn’t come and instead the nation has so far experienced a “soft landing,” as coined by economists.

But as talk of recession picked up, Hoosier spending appears to have slowed, coming $66 million, or 0.6%, short of an estimated $10.5 billion.

Individual tax returns remained steady, coming in 0.2%, or $14 million, higher than expected for a total of $7.6 billion.

Legislators voted to adopt income tax cuts in 2022, choosing to accelerate those cuts earlier this year in conjunction with increased payments for a pre-1996 teacher retirement pension fund—the state’s only unfunded debt obligation.

Lawmakers will meet over the next two years to study the state’s tax system, including whether to eliminate the state’s income tax. Johnston previously said an analysis needed to be conducted because a more diverse set of revenue streams, rather than relying solely on sales taxes, stabilized the state’s budget.

“I think it’s something to keep an eye on,” Johnston said Thursday.

What’s going out?

On the expense side, Medicaid continues to be one of the fast-growing portions of the state’s budget, a concern for key budget writers. During the pandemic, the federal government paid a greater portion of Medicaid expenses—72%, rather than the traditional 66%—and prohibited state governments from removing any beneficiaries.

The move inflated the country’s Medicaid rolls and by the end of the public health emergency, Indiana had roughly one-third of its population covered by the government insurance program.

The state began reviewing beneficiaries earlier this year and over 100,000 Hoosiers have lost coverage so far.

However, due to the enhanced federal match lasting longer than expected, Indiana spent fewer state dollars on Medicaid than originally anticipated to the tune of at least $525 million—all of which returned to the general fund. But moving forward, spending for the program is expected to increase as health care costs rise.

The Indiana Hospital Association decried the move, noting that the annual Hospital Assessment Fee—a health care provider tax designed to cover a portion of the state’s Medicaid costs—went up to $344 million, higher than the previously estimated $270 million.

Brian Tabor, the president of the association, said it was “disappointing” that the state prioritized that reversion of Medicaid dollars “at a time of great financial strain on hospitals.”

“Operating on cumulative negative margins, Indiana hospitals are facing difficult decisions about which services they can continue to provide, and many across the state have announced cuts and closures,” he said in a statement. “The increasing gap between rising expenses and reduced reimbursement rates from government Medicare and Medicaid payments has proven unsustainable.”

Medicaid reimbursement rates increased unevenly for health care providers and didn’t directly include hospitals, which repeatedly argued during the session that providers had to shift costs to private insurers to overcome the government insurance payment gap.

“Indiana hospitals urge the state to provide Medicaid relief before the next budget cycle. Without immediate assistance, the growing Medicaid shortfall will only exacerbate the closure of health care facilities and services across the state,” Tabor said.