Bohanon: Spend the Surplus? Been There, Done That

July 21, 2014

by Cecil Bohanon, Ph.D.

Back in 1998, the state of Indiana had more than $1.3 billion in surplus funds in its general account. This was about 57 days of state spending. The state had total surplus funds of more than $2 billion that was over 24 percent of its annual operating revenues. I remember the cries of the time: The state should not be a bank, social spending has been cut to the bone and must be increased, taxes should be cut in the presence of such a “structural” surplus, and, of course, education spending should be increased at all levels. Oh yes, I remember it well: I was cranking out spreadsheets to make a case for property-tax cuts.

Fast forward six years. The state of Indiana’s fiscal year-end report of June 30, 2004, was frightfully different. The surplus in the general account was a mere $200,000. This would cover about 10 minutes of state spending. Although the report showed that the state had total surplus funds of more than $500 million (about 5 percent of its annual operating revenues), this was all based on an accounting “trick” of payment delays. State payments originally scheduled in fiscal year 2004 were deferred to fiscal-year 2005. The close-out statement for 2004 included funds the state owed to schools and universities but had not yet distributed. Absent this accounting gimmick, the state was technically bankrupt to the tune of nearly $180 million.

Over the last 10 years, Indiana has slowly crawled out of its fiscal hole. This is truly remarkable because the economic downturn of 2008-09 was much more severe than the downturn of 2001-02. The state now has just over $1 billion in surplus funds in its general account that would cover about 26 days of state spending. The state has total surplus funds of just over $2 billion, which is just under 14 percent of its annual operating revenues.

We now hear the cries we heard 16 years ago. Every spending constituency insists it has been shortchanged and treated unfairly. Newspapers and blogs are full of stories of schools not repaired and social services not provided. My local newspaper’s editorial page chided the state for its “vast cash reserves.” I am reminded of the immortal words of the great Yogi Berra: “It’s déjà vu all over again.”

Indiana’s near-brush with bankruptcy in 2004 was not a pretty site. Yet its seeds were sown by the overly rosy assessment of the state’s financial standing in the late 1990s as much as the economic downturn of 2001-02.

Legislators are good at directing spending and tax breaks to specific constituencies. They are not so good at restraining these tendencies even though such restraint is in the long-run interests of all their constituents.

Reserve cushions are necessary to avoid draconian cuts or debilitating tax increases in times of crisis. And make no mistake, we never know when or how a crisis will ensue. No one saw the 9/11/2001 attack coming; few forecast the magnitude of the 2008 meltdown — yet both wreaked havoc with our state’s finances.

Next year’s current budget estimates project a small increase in dollar reserves in the state’s general account. These reserves would cover about 25 days of state spending. The estimates also project total reserves of just over 14 percent of operating revenue for 2014-15. This is not excessive hoarding. A spending spree now risks a future state financial crisis; let’s not do that one again.

Cecil Bohanon, Ph.D., an adjunct scholar with the Indiana Policy Review Foundation, is a professor of economics at Ball State University.



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