The Journal Gazette
Sunday, March 28, 2021 1:00 am

Federal cash alters state's budget plans

$3 billion to Indiana, but rules exist

NIKI KELLY | The Journal Gazette

INDIANAPOLIS – As state lawmakers ready the third version of the next state spending plan, Congress threw a curveball in more than $3 billion of federal stimulus coming to the state.

Some things that were nixed in earlier versions crafted by the governor and the House might be back on the table in the Senate's version. Others still won't happen, such as significant teacher raises, regardless of the influx of cash.

“I feel pretty good,” said Sen. Ryan Mishler, R-Bremen. “I'm a little worried about the structural balance in the first year of the budget. People see we have all this money to spend, but we can't use it for ongoing expenditures. That could get us in trouble.”

The ball is in Mishler's court as chairman of Senate Appropriations. His budget proposal has to be out of committee by April 8. After that a final negotiation between the two chambers will send a bill to the governor.

Mishler said it is confusing to tell people the state can't afford to give larger teacher pay increases but can pay down teacher pension debt or build a new swine barn at the Indiana State Fairgrounds.

That's because there are essentially two parts of the budget. The first is what most Hoosiers are familiar with – ongoing revenue coming in from your paycheck versus ongoing bills going out such as your phone, rent and food.

Lawmakers receive a fiscal forecast from a bipartisan committee of expected tax revenue and must pass a two-year structurally balanced budget that doesn't spend more than it takes in.

That part of the budget is pretty tight the first year as the economy continues a slow rebound from pandemic shutdowns – with room for modest improvements in K-12 education. More growth in tax revenue is expected in the second year.

The second part is what negotiators will be focusing most on in the final few weeks of the session – how to spend one-time money.

Former Senate budgeteer Luke Kenley said if lawmakers use one-time money for an ongoing program or cost it creates a cliff and no way to sustain the spending.

“This is quite a challenge,” he said.

Even before Congress passed a new stimulus package, the governor and House Republican budgets proposed to spend about $1 billion in one-time programs each – though with differing priorities.

If they don't spend it, it would otherwise mean a state surplus of more than $3 billion. The pot of excess money was created because of cash from the first COVID-19 relief package paying some state payroll as well as spending cuts Gov. Eric Holcomb made in 2020 from state agencies and higher education.

He and others thought the pandemic economy would suffer much longer, but Indiana unexpectedly rebounded. And they don't want too much in reserve.

So, the governor proposed the following one-time spending:

• $100 million for broadband expansion.

• $300 million to pay down state bonds on roads and buildings.

• $400 million to pay down outstanding pension obligations.

• $50 million for a new swine barn.

• $20 million for continued modernization at the Indiana Department of Revenue.

• $280 million in a capital reserve account.

House Republicans took a different approach for their one-time spending:

• $150 million in grants to combat learning loss.

• $30 million to help small businesses.

• $150 million in regional recovery grants.

• $70 million law enforcement training academy renovation.

• $10 million in grants for police body cameras.

• $50 million in grants to improve health outcomes.

• $250 million to expand broadband.

• $20 million Department of Revenue.

• $110 million state debt reduction.

Most of those items can now be covered by the $3 billion in federal money.

“It's always nice to have money but it does create more choices,” said Cris Johnston, head of the Indiana Office of Management and Budget.

He said the federal money comes in three buckets – the first is a continuation of earlier packages to cover costs of the public health emergency. But verbiage was also added to cover “negative economic impacts” of the pandemic.

The second bucket is about budget management, where states can cover lost tax revenue due to COVID-19 and use the money for general government services.

And the third bucket allows for making investments in specific items such as water, sewer, broadband and more.

Guidance on exact regulations hasn't yet been issued by the federal government.

Johnston said if the one-time items of spending already proposed for the state budget can be moved over to the federal pots of money, that frees up $1 billion in state money again.

So what should Indiana spend it on?

Kenley has some ideas. He spent months on an advisory group of financial experts helping Holcomb decide how to use the first rounds of money. He said it was hard to stand up a new program and get the money out helping Hoosiers quickly.

So, he suggests focusing on expanding existing programs – like small business aid and broadband programs.

But Kenley also said the state should think about long-term impacts. He said local governments all around the state need new water systems because much of the infrastructure is 100 years old. The state could put a chunk of money toward matching grants for that purpose.

Or Kenley suggested spending some of the money to improve state park amenities. He noted parks usually don't make the priority list, but quality of place is what people are looking for now, and could set Indiana apart.

Neither budget so far has included higher education capital projects, so that is also a possibility, Mishler said.

But it seems like state fiscal experts see the most promise in paying off debt and reducing pension obligations. That's because it has both a short-term impact and long-term because it frees up money in the future.

It is similar to when homeowners pay off their cars early and now have that money each month for other items.

Mishler said, for example, that Holcomb's original proposal to put $400 million to pension obligations would free up $65 million a year in annual spending. And that money could go to ongoing government costs.

He has been busy adding language to various bills that says federal money must be spent first before state funds.

House Speaker Todd Huston said nothing is off the table – including Indiana's automatic taxpayer refund.

In 2012, when the state had more money on hand than needed, then-Gov. Mitch Daniels put $360 million to pension relief and $360 million to an automatic taxpayer refund. That refund resulted in about $111 per filer.

Johnston said the federal legislation specifically says the money can't be used for a tax cut, deduction or credit, but he thinks the state should seek clarification since Indiana's rebate was already in existing code.

But Huston is clear what he thinks is best – “It's extraordinarily important to use one-time dollars and get long-term investments.”

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