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The Journal Gazette

Sunday, January 27, 2019 1:00 am

State GOP's plan: Raise spending

To accept lower surplus to fund 1-time projects

NIKI KELLY | The Journal Gazette

INDIANAPOLIS – Buried in the weeds of the state budget discussions is a move by Republicans to save less money and spend more.

It's all about what is considered a safe surplus amount – aka the state's savings account – should another recession hit and blunt tax collections. And a downturn could come soon as economists say the U.S. is years overdue for another recession.

Gov. Eric Holcomb's administration is pushing a two-year budget plan that would end with an 11 percent reserve, or about $1.8 billion. That means a reserve that would cover 11 percent of annual operating costs.

In household terms, if a family spends about $100,000 a year on expenses from mortgages to food that would equate to a savings account of $11,000.

“The target has always been 10 to 12 percent. Yes it has fluctuated up. More than 12 percent is not, I don't think, responsible. I think that's holding taxpayer money that should be expended,” said GOP House Speaker Brian Bosma. “Less than 10 percent clearly places our AAA bond rating and our excellent economic outlook at risk.

“It doesn't have to be 11 percent on the nose but I support right in that area of 11ish.”

A small shift means hundreds of millions available for services. 

But the reserve level used to be higher.

The state closed the books in June 2015 with 14.1 percent or $2.1 billion on hand. And former Gov. Mike Pence said in August of that year that 12.5 percent was his bottom line on the surplus.

A few months later, though, the Pence administration presented a plan to move some surplus dollars to roads. Micah Vincent, head of the Indiana Office of Management and Budget, said after discussions with rating agencies and consultants in the financial industry, he became comfortable dropping that number to 11.5 percent.

Now Vincent says 11 percent is prudent.

“The prudent range is 10 to 12 and we are comfortably in that zone,” Vincent said.

He said the level itself isn't the only thing to consider. He noted, for instance, that Indiana has reduced its debt load by almost 70 percent since 2005 by paying off bonds on several facilities.

Reducing the reserve percentage comes at the same time the state budget would spend more. But Vincent said you also have to consider the nature of the spending before getting too concerned.

For instance, creating a large, new and ongoing program rather than strategic one-time investments.

It's the latter for Holcomb. The administration could have put forth a budget with $2.1 billion in reserves, or more than 12.5 percent. Instead it is choosing to spend $150 million for major repair and renovation work on state-owned facilities and $150 million to reduce pension obligations for local school districts. Both represent one-time spending that ultimately puts the state in a better fiscal position, he said.

“It's not an ongoing operating liability that would create tougher choices later,” Vincent said.

Michael Hicks, a distinguished professor of economics and the director of the Center for Business and Economic Research at Ball State University, isn't concerned about an 11 percent reserve. In fact, he is more concerned that state leaders haven't spent enough in recent years.

“We are good compared to other states,” he said. “Our Rainy Day Fund looks pretty good. Our fiscal system is fairly healthy in terms of revenue and savings.”

He said the nation is in the longest economic expansion in history and the bigger issue is that lawmakers didn't invest and make progress when the state was flush.

For instance, he said the state is spending less per student in inflation-adjusted terms than in 2010. And the state lost ground in terms of educational attainment of workforce.

“The problem is an unfunded liability in people. We have plenty of money saved but with a growing share of adults not prepared for the workforce our future is limited,” Hicks said.

The history of the surplus is all over the place – from virtually none in the early 2000s to upwards of 15 percent in other years.

And Vincent acknowledged that when the number climbs over $2 billion the public outcry to spend it – or reduce taxes – is significant.

In June 2012 the state surplus hit 15.1 percent, or about $2.1 billion, before $720 million was sent to pensions and taxpayers via a one-time automatic refund under then-Gov. Mitch Daniels. That brought the level down to 10 percent.

A similar mechanism was used five years later for a roads infusion.

“There was a day that we got by with 5 or 6 percent reserves and those are scary days,” Bosma said. “A significant downturn in the economy, even an insignificant one, and suddenly you're scrambling and entering into some of the inappropriate bookkeeping tricks of the past.

“We aren't there anymore. We are fiscally sound and will remain so with about an 11 percent reserve.”

nkelly@jg.net