While gubernatorial candidates Mike Pence and John Gregg begin discussing what they want to do with the state’s healthy budget surplus, Gregg doubtless remembers what happened back in 1999, when he was speaker of the Indiana House.

Then, the surplus was heading toward $2 billion, and Republicans were demanding that some of that money be returned to Hoosiers as tax cuts. Such cuts were passed late in the session. But a financial miscalculation and recession devastated the state’s budget, which was $1 billion in the red by the end of 2001.

Now, officials expect the state to have a $1.7 billion budget surplus by end of the fiscal year in July 2013, and Pence is discussing spending part of it.

“Once we have balanced the budget and ensured adequate reserves, I believe the next dollar of budget surplus should be used to provide tax relief to grow the economy, not the government,” Pence said. He said a reserve of 10 percent of the budget – or about $1.4 million – is the minimum.

Gregg, who has also called for tax cuts, said he wants to wait for an audit of state finances to determine the true surplus. “I’m real familiar how that surplus can disappear in a pretty quick hurry when the economy gets a sniffle, a cold or pneumonia,” he said.

What both candidates need to remember is that state law already has a mechanism to refund surplus money to Hoosier taxpayers. Under a previous law, Hoosiers will get an estimated $50 each next year. Going forward, whenever the surplus exceeds 12.5 percent of the two-year budget, it will be split between refunds and state teacher pension obligations.

Granted, the governor and lawmakers face a perplexing problem. How much of a reserve is “adequate” is a moving target. Conservatives such as Pence agree there needs to be a surplus; even liberals agree that it shouldn’t be too much.

But lawmakers seem to have reached a good plan by putting in place a refund when a surplus exceeds 12.5 percent. If Pence or Gregg want to change that formula, they need to detail what’s wrong with it.