Regulators requiring state agencies to hold back ‘management reserve’
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Despite recent optimism about Indiana’s financial footing, budget regulators want all state agencies to hold back a “management reserve” of 2% in their next annual spending plans, according to a memo obtained by the Indiana Capital Chronicle.
The memo issued by the State Budget Agency last week says — despite “our strong financial position” — the state needs “to be mindful of unknown factors” that could impact “operations or financial success.”
The new memo applies to fiscal year 2024, which begins July 1.
The notice seems to run contrary to the latest, rosier economic forecast released in mid-April. A new revenue report for May showed the state on target for the 2023 fiscal year with one month left.
Office of Management and Budget Director Cris Johnston told the Indiana Capital Chronicle that the management reserve “has been a long running practice.” Its purpose, he continued, “is to be able to fund unanticipated expenses that appear from time to time no matter how well the state agency plans.”
Johnston added that spending plans are reviewed, monitored and adjusted throughout the fiscal year in response to “economic conditions” and “shifts in programming priorities,” among other factors.
He said in an interview with Indy Politics last week that Indiana is “in pretty good shape.”
“We have adequate reserves, we have a budget that spends less than we anticipate taking in. We have low debt, and we’re able to fund our critical services,” Johnston said, although he expressed some concern about “speed bumps down the road.”
“We always have the uncertainty about whether there’s going to be a recession or not,” he continued. “I’m also concerned about the level of federal funds that we’re able to use right now — what happens in the next budget cycle when some of those federal funds expire?”
Indiana’s economic forecast
State fiscal analysts had earlier predicted a mild recession for the first quarter of 2023.
But during the April forecast announcement, Indiana’s economic leaders said the state was performing better than expected this year as inflation slowed, consumer spending remained high and home sales rebounded slightly.
State general fund revenue in fiscal year 2023 was expected to be 1.9% higher than December estimates, 2.7% higher in 2024 and 2.5% higher in 2025.
Better-than-expected tax collections, specifically corporate tax returns, gave budget writers an extra $1.5 billion to incorporate into the next two-year state budget. Lawmakers approved the $44 billion spending plan at the end of the 2023 legislative session in April.
Much of the revenue boost was earmarked for a nearly universal expansion of Indiana’s private school voucher program — a priority for the Republican supermajority.
Even so, Sen. Ryan Mishler, R-Mishawaka, urged caution about state spending – noting continued increases projected under Medicaid as the rate of economic growth slows from the record-breaking pace of recent years.
Other GOP state leaders have continued to express hesitation, too, about the ongoing possibility of a recession — even if just a mild one.
Gov. Eric Holcomb maintained last month that Indiana has “a healthy cash reserve,” and has “proven by our past record that if we get in a pinch, we start by tightening the belt, first.”
“We’re very mindful of what’s in the pipeline,” Holcomb told reporters. “We’ve got to be mindful of living within our means and prepare for any kind of stagflation or recession.”
He pointed to the 2010s, when unemployment was high and inflation was “very low.”
“Now, it’s just the opposite, and so how are we, as a state, trying to address that and to control the things that we can?” Holcomb continued.
One way is to make Hoosiers “who want to skill up and earn more for the jobs that are coming here” can do so. The governor also said Indiana “needs to continue to grow the economic pie and the opportunity for businesses to continue to expand here or move here.”
The Indiana Capital Chronicle is an independent, not-for-profit news organization that covers state government, policy and elections.