Indiana’s reserve funds projected to hit post-pandemic low
INDIANAPOLIS (INDIANA CAPITAL CHRONICLE) — Indiana’s reserves will hit a post-pandemic low after years of above-average returns due largely to a Medicaid forecast miss of nearly $1 billion, according to fiscal statements released Tuesday.
Budget writers typically aim for reserves to be between 10-12.5% of current year expenditures, and the 2024 fiscal year closed out this month with $2.6 billion in reserves — or 11.9% of expenditures. That amount will drop even further next year.
Indiana Comptroller Elise Nieshalla credited the reserves to the state’s “long-standing conservative stewardship,” adding that “a slight increase in income and a solid return on investments further support(ed) our strong financial position.”
“Indiana’s healthy reserves and standing as the 7th lowest debt per capita state showcases our high level of fiscal responsibility, especially during a time when our country is facing a national debt crisis,” Nieshalla said in a release. “As a lead financial officer for our state, I see the national debt at nearly $35 trillion as the greatest looming threat to Indiana’s robust economy.”
However, the 2025 fiscal year is projected to have reserves that are 10.4% of expenditures, or $2.3 billion — the second-lowest reserves percentage in the last six years. Indiana’s reserves dipped to an unprecedented 8.6% of reserves, or $1.4 billion, in 2020 when Indiana delayed tax collections during the COVID-19 pandemic.
COVID-19 relief from the federal government — both to state coffers and to individual Hoosiers — boosted reserves to a high of $6.1 billion in the 2022 fiscal year, or $34.9% of the state’s expenditures. High reserves in both 2021 and 2022 triggered automatic taxpayer refunds and lawmakers made large, one-time payments toward pension liabilities and capital projects.
Prior to 2020, the 2019 fiscal year closeout was 13.9%, or $2.2 billion, and state analysts at the time projected the state would stay near that number for 2020 and 2021.
“Those of you who have been covering this for some time probably find the revenue report and the closeout statement rather boring because we’re sort of landing back into our traditional patterns — unlike what happened during the pandemic,” said Cris Johnston, the director of the Indiana Office of Management and Budget.
Acting State Budget Director Joseph Habig said that “good fiscal stewardship and prudent budgeting” were “culturally ingrained” in Indiana, with “decades … of historic results” demonstrating the state’s dedication to spending less than it collected in revenues.
“That common sense discipline ensured that Indiana was able to maintain a $421.2 million annual surplus and total combined balances in our general fund reserves at $2.5 billion,” Habig said. “Our vision is to ensure that Indiana’s priorities are funded not just today, but also tomorrow.”
More from the fiscal closeout
Indiana’s revenues for the 2024 fiscal year totaled $21.48 billion, slightly below the forecasted $21.5 billion. In terms of major revenue sources, Indiana missed the mark on collecting corporate income taxes — which makes up roughly 5% of revenues — by $182 million but made up the difference in unexpected interest revenues of $179 million plus other smaller income streams, such as surplus lottery revenue.
“Corporate income tax is the most difficult tax type to predict,” Johnston said, noting that every company handles its taxes differently. “Also, it can be influenced by very large taxpayers … but also financial institution taxes. So it is difficult to pinpoint and we’ve seen those variances over the years.”
But future costs remain murky, especially with the ever-increasing Medicaid budget and ongoing tax reform discussions. Legislators are entering the second year of intensive deliberations to determine whether Indiana can afford to further cut — or even eliminate — the state’s income tax, which sits at 3.15%. During the 2022 legislative session, Indiana lawmakers passed a plan to gradually cut the state’s income tax from 3.23% to 2.9% by 2029, which would make it one of the lowest rates in the nation.
Income taxes bring in just over $8 billion each year, equal to roughly one-third of the state’s revenue — behind only sales taxes, which make up about half of the state’s revenue and bring in over $10 billion.
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More on Medicaid
The December 2023 Medicaid forecast — which isn’t prepared by state analysts — revealed that actuaries had missed the mark in predicted Medicaid expenses by roughly $984 million because of unanticipated claims for long-term services and supports over the two-year budget period.
To rebalance the budget for 2024, the state’s budget drafters transferred $255 million from the Medicaid reserve fund, as documented in Tuesday’s closeout statement. But the bulk of the near-$1 billion miss was forecasted for the 2025 fiscal year so another $457.9 million is flagged to come out of the general reserves fund to cover remaining expenses.
However, that $457.9 million estimate is based off of the December 2023 forecast, which won’t be updated again until December 2024. That doesn’t account for the policy changes the Family and Social Services Administration (FSSA) has made to the Medicaid program since that time, including its reformation of the attendant care program.
The decision to curtail parent payments under attendant care combined with pausing Medicaid rate increases and implementing a waitlist would save the state an estimated $300 million over two years, according to FSSA.
“(When the) revised Medicaid forecast came out in December, FSSA immediately went to work looking at how we can improve forecasting… ” Johnston said. “I think FSSA is taking a broad look at all of their (programs).”
Planning for the 2025 budget session
Tuesday’s fiscal closeout will be one of many documents budget writers use to craft the state’s next biennial budget in the 2025 session. Johnston flagged the December 2024 forecast and Medicaid forecast as another important milestone that will shape many spending decisions.
The 2023 budget was the last to be crafted under Gov. Eric Holcomb, who is term limited. The winner of the November gubernatorial election will play a large role in the 2024 budget negotiations.
Still, Sen. Ryan Mishler — the chief budget writer for the Senate Republicans who oversees the powerful Appropriations Committee — continued to voice his ongoing concern about rising Medicaid expenses.
“I remain cautious about state expenditure increases as the state returns to lower and more historic levels of revenue growth, particularly in regard to the Medicaid program, as the current rate of growth in Indiana’s Medicaid spending is not sustainable and could adversely affect other aspects of our state’s budget,” said Mishler, R-Mishawaka, in a statement. “As we look forward to the 2025 legislative session, we should consider using the upcoming budget session to regroup and ensure our state is on a sustainable financial path as we go forward.”
But Democrat Rep. Greg Porter, of Indianapolis, flagged Republican-sponsored increases for vouchers and charter schools, saying they “outstripp(ed) Indiana’s revenue growth.”
“We’ll only have an estimated $844 million for new programs and expansions, which is not enough,” he said. “Our spending in the 2023 budget for new programs and expansions was over $1 billion. I encourage my colleagues across the aisle to consider the growing mismatch between our revenue and spending priorities.”
Porter also said that, “We can’t continue underfunding our social programs,” citing the state’s low ranking on quality of life measures.
“Thankfully, we met our expectations for the 2024 state budget closeout and have a $2.5 billion combined surplus including $102 million in reversions. I look forward to creating the 2025 budget with fiscal responsibility and respect for safety nets like Medicaid and the public schools that educate over 90% of Hoosier kids,” Porter concluded.