The Journal Gazette
Sunday, December 27, 2020 1:00 am

State to craft $35 billion budget

Education, health care pressuring slight gain in revenue

NIKI KELLY | The Journal Gazette

INDIANAPOLIS – New money is coming to the state for lawmakers planning the next budget, but $360 million goes fast in a nearly $35 billion, two-year spending plan.

That is what state fiscal officials have to deal with when crafting a new budget starting Jan. 4.

“I think we stopped the bleeding so I think a flatline (budget) at this point is good when other states are still on the downturn,” said Sen. Ryan Mishler, R-Bremen.

Last week's budget forecast – a bipartisan projection of tax revenues for the next two years – was better than expected after state collections plummeted at the beginning of the coronavirus pandemic. But there still isn't much to work with when considering the needs of the state.

“There is nice-to-have and have-to-have,” said House Speaker Todd Huston. “And we're in a have-to-have budget.”

The forecast showed an additional $360 million coming to the state over the biennium when compared with the current budget appropriations. Some agencies have cut spending in recent months as a result of an order from the Indiana Office of Management and Budget. It is up to lawmakers whether those cuts become permanent or get restored.

But some areas of the budget automatically grow – such as Medicaid expenses for poor Hoosiers or teacher retirement obligations. With that in mind, here are the top three budget issues to track in 2021:

School funding

Indiana's K-12 schools make up the largest portion of the state budget – spending more than $7.5 billion each year. That is about 45% of the budget.

Just a 1% increase in the tuition support formula – base dollars routed to each district – costs $75 million. And that doesn't guarantee 1% to all school districts. Those with declining enrollment would see cuts.

Indiana lawmakers note they have given record amounts in recent years to public education. But a recent teacher compensation report has shown the appropriations aren't keeping pace with inflation. That is partly why Indiana ranks low in teacher pay.

Another reason, according to Ways and Means Chairman Tim Brown, is that local districts haven't passed on the money to salaries – “It's leadership at the local level.”

Teacher pay was supposed to be the biggest budget priority this year. Gov. Eric Holcomb has promised for two years that it would be addressed. But then a pandemic happened, and Republican leaders say it will be a multi-year effort to make headway on teacher compensation.

Mishler said if there is anything to spend “we would want to put it into K-12.” He added that a worst-case scenario would be to flatline K-12. He and others suggested growth in the second year.

Sen. Tim Lanane, D-Anderson, said everyone agrees Indiana's low teacher pay is a problem. But no one wants to make the hard decisions to improve it. One recommendation in the new report is that the state raise taxes.

“God forbid we would ever actually talk about raising revenue in the state to raise teacher pay. The state needs to adequately step up to the plate,” he said.

Cris Johnston, head of the Indiana Office of Management and Budget, said a tax increase “is the one thing we should not be doing at this time coming out of this pandemic.”

Medicaid and DCS

Alongside the revenue forecast released last week was also a Medicaid projection that predicts how much the state will pay for health care for Indiana's poor. This spending is not optional.

It shows an increase of about $108 million in the first year and $126 million in the second year when compared with current year appropriations. That is about $234 million of the original $360 million in new revenue.

Overall, the state's portion of Medicaid would be about $2.72 billion in fiscal year 2022 and $2.85 billion in fiscal year 2023.

But there are some components built into the projection that are in flux. The first is that the federal government is currently paying a higher share of Medicaid due to the national health emergency, said State Budget Director Zac Jackson.

Under current law, the enhanced funding to states ends at the end of the quarter during which the emergency is shut down. The outside consultant assumed the emergency expiring in January, which would mean additional dollars would stop in late March. But if President-elect Joe Biden extends the emergency then additional dollars will come to the state.

That extension would work in the state's favor. But if the health emergency continues that also means the state still can't remove people from the program. State guidelines include a provision that anyone enrolled in Medicaid when the pandemic began must be allowed to continue as a recipient. That means the program has grown without the natural ebb and flow of people getting new jobs and access to other health insurance.

Another large state expense is caring for abused and neglected children at the Department of Child Services. Its current appropriation is about $900 million a year. The agency made a presentation to the State Budget Committee estimating a 6% cut in funding to $870 million a year, both years.

That comes after exploding growth in recent years.

Jackson said DCS has more federal funding available in the next biennium and also plans some efficiencies, including converting some overtime to comp time. He also noted the child services agency has a special release valve that allows the governor to dip into a contingency fund if more money is needed. Other agencies don't have that.

Wild-card funding

A few things could provide more revenue to the state – more federal pandemic aid and a cigarette tax increase.

Congress is set to pass a nearly $1 trillion new aid package. Initial reports showed no new support for state governments but details were still coming out. The interplay between this aid and the state's expected $2.3 billion surplus could allow some one-time spending on projects.

Mishler said the state reserves are in good shape and the legislature could dip into it during the tight, first year of the budget while growth in the economy picks up for the second year. 

Legislators also might increase the state's cigarette tax. It hasn't been raised since 2007 and is the 37th lowest in the nation. A coalition of health care groups has been pushing the measure for years as a way to drop the state's smoking rate, which is 4th highest in the nation.

The Indiana House backed a $1-per-pack increase as recently as 2016 and 2017, only to see the move fail in the state Senate. A $2 cigarette tax increase could add $500 million a year to state revenue, according to an analysis of the bill by the nonpartisan Legislative Services Agency. The current tax is $1.

Huston said if the tax is hiked it will be for policy reasons – not to find revenue to aid the budget.

He noted cigarette taxes are a regressive tax and “we would want to make sure whatever we did with those dollars was to help those people” – especially in the public health arena.

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