Bohanon: Making the Hard Call on Indiana’s Reserves

July 20, 2015

For immediate release (612 words).

by Cecil Bohanon, Ph.D.

It is almost becoming a summer ritual. The state of Indiana closes its books on June 30th. It reports a healthy reserve fund. Spending constituencies pop out of the woodwork clamoring for more funds, insisting the reserves are excessive and that their cause du jour is the most pressing problem the state will ever face.

A couple of facts about the state’s reserve funds. The close-out statement for this year shows that state reserves are $2.141 billion. This is the second-highest dollar amount on record. As a percentage of operating revenue, however, they are at 14.1 percent, which is the 11th highest on record since 1980.

Many of us are old enough to recall the late 90s. Indiana state reserves as a percentage of operating revenue were consistently above 20 percent. Tax cuts and spending increases became the order of the day, and, by 2004, the reserves were all gone. We don’t want to go there again.

In the old days, Savings and Loans encouraged their customers to have six-month spending as a prudent reserve. If the state government were to follow that advice, Indiana’s reserves would be three-and-a-half-times larger. Reserves of 50 percent probably are excessive for a state government; however, Indiana’s current level does not seem that out of line.

One of the causes du jour is the ACLU lawsuit against the Department of Child Services alleging that a social worker has a caseload of 40 children, whereas state law makes the maximum 17 children. But wait, didn’t the Supreme Court just tell us in King vs. Burwell that pesky little things like what the law actually says doesn’t matter as much as what administers want to do? But I digress.

I am sure that reducing the current caseload of child-services workers is a noble and worthy cause. In fact, the Legislature appropriated additional funds to that end last session. It will be interesting to see how the lawsuit shakes out, but it seems to me that is not the issue.

A recent PBS report indicated that a Greek hospital had its budget cut from $375 million last year to $50 million this year. It was duly noted that this is placing tremendous stress on the hospital’s ability to meet basic services. Now consider the following conceptual exercise. Suppose the Greek hospital had “put back” $50 million of its 2014 appropriation for a rainy day. The hospital’s level of service provision would have been less in 2014. That would have been bad. However, if they had squirreled away the $50 million in 2014, $50 million in additional services could be provided in 2015. That would be good. You make the call: would the $50 million be better spent in 2014 or 2015?

Sure it’s good to reduce child-service caseloads and fill in additional potholes in the second half of 2015. But is it better to give up benefits today to ensure that if there is a major downturn in 2017, child-service caseloads won’t go to 80 per worker, or that the worst monster potholes don’t get filled?

Again, you make the call. For my money, I say let’s hang on to the reserves. Things can always get worse.

Cecil Bohanon, Ph.D., is a professor of economics at Ball State University.

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