State could see $3B-$4B revenue shortfall in two-year budget—about 10% of what it planned to spend

State revenue will be $3 billion to $4 billion less than expected in the current two-year budget cycle that ends in June 2021, according to estimates shared during the State Budget Committee meeting Wednesday.

Tax receipts for fiscal year 2020 were already off by $1.2 billion by the end of May, and that number is expected to grow to $1.7 billion to $1.8 billion before the fiscal year ends June 30.

In fiscal year 2021, State Budget Director Zac Jackson said, some of the revenue that otherwise would have been collected in this fiscal year—about $800 million—is expected to be paid in the next one, due to the deadline for income tax payments moving from April to July 15.

Still, even with that boost, the state expects to miss revenue projections by $2 billion next year.

The total shortfall over the biennium—possibly $3.7 billion to $3.8 billion—would be about 10% of the state’s $34.6 billion budget and would far exceed the state’s $2.3 billion in cash reserves.

“In order to make things work we will need to spend down those reserves,” Jackson said. “We will need to cut spending.”

Jackson said the estimates are based on internal projections, but he expects to have an updated revenue forecast by September to have a more accurate outlook.

Still, Gov. Eric Holcomb’s administration is taking steps to prepare for the budgetary problems.

State agencies have already been asked to cut spending by 15% for fiscal year 2021, which could save the state some $900 million. And state colleges and universities are taking a 7% hit, which will save about $103 million.

Holcomb announced Wednesday afternoon that K-12 schools will not see a drop in funding next year though. In fact, he said, K-12 education will still receive the $183 million increase in funding that was allocated in the budget for 2021.

“Our K-12 schools have been spared the knife or cut in their budgets even while a global pandemic has truly washed upon our shores,” Holcomb said. “This just illustrates or underscores the priority.”

As for this fiscal year, state agencies were told to identify any cost savings measures possible and have been under a hiring freeze.

Capital projects totaling $466 million also have been sidelined for now.

“We’re going to have to be very disciplined with what we’ve already imposed,” said Cris Johnston, director of the Office of Management and Budget.

The state is also keeping $13.5 million in gas tax revenue in the general fund, as opposed to transferring it to a fund within the Indiana Department of Transportation. Within the general fund, the money can be used for health care, K-12 education or child services.

Jackson said the money will likely help fill a $20 million budget gap the Department of Child Services has in its fiscal year 2020 budget.

Jackson said the state is also creatively using any federal assistance it receives to help the budget situation this year and next.

Indiana received $2.4 billion through the Coronavirus Aid, Relief, and Economic Security Act, but the law does not allow the money to replace lost tax revenue or cover expenses already outlined in the state budget. The funding must be used for COVID-19 related expenses incurred from March 1 to Dec. 30.

Johnston said the state is using the $2.4 billion in three categories so far: $500 million for direct expenses related to the public health emergency, $500 million for state government recovery costs and $500 million for relief programs.

The public health crisis expenses include costs such as testing, contact tracing and expanding the unemployment insurance call center.

Some of the state government recovery costs include public health and safety payroll, other staff overtime, reopening state offices and remote work expenses.

Holcomb’s administration has already announced how it would like to spend $430 million of the $500 million set aside for relief programs, including $300 million for local governments, $50 million for workforce development programs, $50 million for developmental disability and aging support programs and $30 million for small businesses.

Johnston said the state is holding back allocating the rest of the CARES Act funding because officials are waiting for more guidance from the federal government about how exactly it can be used and out of precaution in case COVID-19 cases spike in the fall.

Johnston said he’s not counting on additional federal assistance, but the administration would like Congress to give states more flexibility in the way the existing funding can be spent.

The state also received additional $1 billion in federal aid for specific state agencies:

• $378 million to the Department of Education,
• $238 million to the Department of Transportation,
• $232 million to the Indiana State Department of Health,
• $103 million to Family and Social Services Administration,
• $61 million to the Governor’s Office,
• $64 million  to the Indiana Housing and Community Development Authority,
• $38 million to the Office of Community and Rural Affairs, and
• $31 million to the Department of Workforce Development.

Of the $378 million the education department received, $164 million was for the child nutrition program, $192 million was allocated to K-12 schools based on Title I funding and $22 million was for grants for targeting groups and state services related to virtual teaching.

Another $1.6 billion in federal support never passed through state government and instead went directly to the recipients—hospitals, community health centers, higher education institutions, airports, farmers and local public housing authorities.