On July 14, after a journey of more than 3 billion miles and almost 10 years, we flew a spacecraft past Pluto and took snapshots. That was exciting.
Two days later, the Indiana State Budget Agency provided excitement closer to home: a snapshot of Indiana state finances after a 365-day journey through the 2015 fiscal year.
I’ll admit “excitement” may overstate our feelings about the annual fiscal year closeout, but it is a great time to look at our state budget. You can see the closeout documents on the Budget Agency’s website, at in.gov/sba/2362.htm.
The focus of the snapshot is on balances, which are the funds that the state keeps in reserve. As of June 30, Indiana had $2.14 billion in balances, up $136 million from the year before. That’s a lot of money, but how much is it, really?
Well, it’s the second-largest total in Indiana history, after the $2.16 billion we had in June 2012. Usually, though, we measure balances as a percentage of the size of the state budget. By that measure 2015 was a pretty average year. In 2015, balances were 14.1 percent of the state’s operating budget, and the average over the past 40 years is 13.6 percent. The Budget Agency calls 10-12 percent the “prudent range.”
In some years balances have been much higher. At the end of 1998 we had balances equal to 24 percent of the budget. But we’ve seen much lower amounts, too. In 2004 we were at 4.9 percent. It was 6 percent as recently as 2010. Balances that low can be a problem. States with balance percentages less than 5 percent can have trouble paying their bills on time.
How do we compare to other states? In the spring the National Association of State Budget Officers found the nationwide average balance percentage to be 8 percent. Alaska, North Dakota, Texas and Wyoming all had more than 30 percent, proving that it helps to have oil.
Arkansas and Wisconsin had zero balances, so you wonder whether their contractors are being paid promptly. Our 14.1 percent ranks 10th in the country, and we’re first among our neighbors. Ohio’s 5.8 percent is next highest. Illinois has only 1.1 percent.
The Pew Charitable Trust tells us that if all tax revenue suddenly disappeared, our balances could fund state services for 51 days. I’m not sure that’s very helpful though. Tax revenue doesn’t just vanish like that.
Here’s something more sensible: At 14.1 percent, we’ve got balances 9.1 percentage points above the percent minimum. In a recession, that’s money we could use to support our planned state services without needing a tax hike. During the worst years in the past two recessions — 2003 and 2009 — revenues fell short of plans by about 10 percent. So we’ve got balances enough to handle one really bad year, almost.
Compared with our recent past, to our measure of “prudence,” to other states and to how bad things can get, the Indiana state budget is in good shape.
Our balances are not too low. Are they too high? Balances |actually are the bottom line of the state’s closeout statement, but they aren’t the reason for a government’s budget. The point of all that taxing and spending is to deliver services such as public safety, medical care and education. Balances are money that’s been collected in taxes but not used for services.
We’ve got a law that distributes balances for tax cuts and pension fund contributions if they get too big. That law didn’t kick in this year, but back in 2013 about $700 million in balances were distributed to taxpayers and pension funds. Indiana has recognized that too much in balances is almost as big a problem as too little.
How much we need depends on how much risk we want to take on. To protect against two years of terrible recession we’d need balances of about 2 percent of the budget. But if we cut balances to 10 percent — still in that prudent range — we’d free up more than $600 million for added spending or lower taxes.
We wanted pictures from that space probe when it was just the right distance from Pluto. We want state balances to be just the right distance between too little and too much.
Larry DeBoer is professor of agricultural economics at Purdue University.