Full-day kindergarten! Franchise the lottery! The Indiana Commerce Connector! These headlines and other issues n the most important being the enactment of the state's next two-year budget n are being debated by legislators, educators, commentators and others as the 2007 legislative session gets under way.
For the first time in several years, Indiana entered a legislative session with a structurally balanced budget and a forecast of more than $1 billion of additional revenue for the next two years.
The state's next budget is the means by which state government will define its priorities. There is indeed much that needs to be done. Yet, in spite of the calls for new programs and the exhortation to "do what is right," our elected leaders must adhere to three standards for the next budget. First, the budget must be structurally balanced. Second, the remaining payment delays must be reversed. And finally, reserve balances must reach 10 percent of operating revenue, or $1.35 billion. The job of recovering completely from the 2001 recession must be finished before any other spending is considered.
One need not retreat very far into the past to remember the budget surpluses of the 1990s. When surpluses begin to develop, it is tempting to label aggressive spending as "investments" and "one-time" in nature, as was the case in the late 1990s. Those spending increases contributed to huge budget deficits once the recession arrived in 2001. In addition, cutting taxes with little or no fiscal policy rationale led to serious revenue shortfalls as the recession began.
Enacting a balanced budget will help ensure the history of the late 1990s is not repeated. The remaining payment delays must be reversed. While delaying payments to local governments, schools and colleges and universities creates some hardships, it is a budget management tool that has been used effectively in each of the past three recessions to avoid more onerous actions, such as tax increases.
Reversing the remaining payment delays now makes this tool available when the next recession arrives.
Historically low reserve balances need to be increased n to at least 10 percent of annual revenue. While nobody knows when the business cycle will reverse, prudent fiscal management requires that we prepare for it. About 10 percent to 12 percent of revenue will not insulate us from a recession, but it will provide the governor and the General Assembly time to respond effectively, when the recession comes.
Proposals for more spending abound. Included is full-day kindergarten, which has been debated for nearly a decade in Indiana. The governor also has proposed an increase in the cigarette tax to fund health insurance for Hoosiers who cannot afford it.
Another of the governor's proposals is to create scholarships for students of the state's colleges and universities that remain in Indiana three years after graduation. The Indiana Fiscal Policy Institute (IFPI) analyzed and documented the state's "Brain Drain" in "The Human Capital Retention Project," a series of reports issued between 1998 and 2000 (http://www.indianafiscal.org/docs/HCRP_Report2.pdf).
Many legislators are proposing property tax relief again this year. Property tax relief impacts the budget not because it is a tax cut; rather, it is a state subsidy of property tax payers. Yet, the underlying property tax assessment system remains defective.
The IFPI's Tax Equalization Study found property tax assessments to be inconsistent and inequitable across the state (http://www.indianafiscal.org/REPORT.pdf).
The General Assembly needs to complete the transition to the market value assessment standard and eliminate township level assessment before any more tax relief is considered. Without consistent, equitable, and accurate assessments, any policies enacted will inevitably result in unintended consequences and may not accomplish their intended purpose.
All of these proposals, and many others, deserve a rational and civil debate. Not all of them will be included in the next budget, but progress in many areas can be made. Indiana's responsibilities to its Hoosier citizens transcend a two year budget. Indiana's education and economic challenges are long term in the making and will require more than one budget session to solve. Adherence to the benchmarks of maintaining a balanced budget, reversing payment delays, and building reserve balances will help ensure the State's ability to address these issues with vision and consistency now and into the future.