By Eric Bradner, Evansville Courier & Press
INDIANAPOLIS - Here's a problem that matters: Indiana's economists aren't pessimistic enough.
A state panel tasked with predicting how much tax money the state will collect historically has been remarkably accurate. But in this beleaguered economy, the panel's estimates have been wildly off the mark.
The most recent revenue forecast, offered in May, is the foundation of the budget that passed in June. It is the document on which lawmakers relied as they decided how much the state could spend over the next two years.
So, the fact that Indiana has taken in $254 million less over the first three months of this fiscal year than the forecast suggested is causing problems.
Economists are scratching their heads. Lawmakers are looking for solutions. And Gov. Mitch Daniels is standing with a scalpel in one hand and a hatchet in another, ready to do as much trimming or perhaps chopping as necessary to keep the state out of the red.
"The job of keeping Indiana above water, solvent, while other states are not, is not getting any easier," Daniels said last week as he announced the 8 percent shortfall.
In the past, Indiana's current system has been reliable, often coming within 1 percent of nailing final tax revenue numbers.
The state adopted its current method decades ago, when Indiana couldn't agree on how much money the state should spend in each budget cycle. Democrats in the General Assembly had one idea; Republicans believed something else; and the governor at the time had a number of his own in mind.
In an effort to skip the conversation about how much money there is to spend and get right to talks about how best to spend it, Indiana created the Revenue Forecast Technical Committee. The panel is made up of staffers from each of the four legislative caucuses - House and Senate Democrats; House and Senate Republicans - as well as a representative of the governor's office and an economist.
Producing the forecasts is a two-step process.
That committee used to rely on a network of state economists to predict Indiana's economic performance over the coming years. But as most of those economists retired, the panel in 2008 hired IHS Global Insights to provide its economic performance projection. That projection is based on factors such as gross domestic product, inflation, Indiana income and more.
Receiving IHS Global Insights' economic outlook is Step 1. Then, the state uses its own model to meld the company's projections with Indiana factors, such as the state's tax structure. That's Step 2.
The numbers spit out then become the updated revenue forecast.
One was issued in December 2008, but that proved to be much too optimistic. Another was offered in April, as the 2009 legislative session drew near its close. But that one, too, was met with immediate skepticism and discarded.
A third and final forecast was offered in May. That's the one lawmakers used to write the budget passed in June, and that's the one that was $254 million too high from July 1 to Sept. 30.
"It makes it very difficult to prepare a budget," said Rep. Dennis Avery, D-Evansville, a member of the budget-writing House Ways and Means Committee.
Sen. Luke Kenley, the Noblesville Republican who chairs the State Budget Committee, said cuts might be on the horizon.
"If this continues at all, even just one more month I think, we'll have to think about how we're going to trim back state government some more," he said.
After Daniels announced the grim news Thursday, the Revenue Forecast Technical Committee met at the Statehouse.
John Mikesell, an Indiana University economist who has been on the committee for more than three decades, said there was a lot of frustration in that room.
"We're not happy. The people on that committee - every time we get another jolt, it makes us sick to our stomachs. We talked about things we can do. We've changed the model so many times the past year, it's hard to keep your head from spinning."
Larry DeBoer, a Purdue University professor of economics who works with Indiana's nonpartisan Legislative Services Agency and assists in producing the revenue forecasts, said the recession has led to some fundamental shifts in the economy.
He said the models being used now tend to err on the low side during periods of economic growth, while proving too optimistic during downturns.
"It's certainly going to be further off than it is during an expansion, that's for sure," he said of forecasts. "These models never predict very well during a recession, and this is a big one, so that's to be expected."
So how will Indiana get it right?
Economists have long known that when income levels drop, sales tax revenue drops, too. But Mikesell and DeBoer said producing more accurate forecasts will have to mean assuming even lower sales tax collection than historical trends suggest.
Bob Clark, dean of the Schroeder School of Business Administration at the University of Evansville, said that in addition to predicting when unemployment rates will begin to drop, forecasting is made difficult by uncertainty over whether Hoosiers will eventually return to historical patterns of consumption.
"Right now, people just aren't buying," he said.
That's one change. Economists are still trying to pin down others.
"I will guarantee you that we have used many, many, many different models through the past year trying to figure out which one from the many options is going to be the most successful," Mikesell said. "And every time after we do it, we say, 'Well, we've finally got our handle on it.' And lo and behold, things are worse than we thought."