State budget has big ongoing, one-time obligations

When drafting the state's next budget, lawmakers will need to consider the state's ongoing commitments and one-time obligations under the cloud of a potential recession.

This comes after more than a year of revenues out-performing projections and two years of cash infusions from the federal government, boosting the state's reserves.

Indiana operates under a two-year budget, meeting in odd-numbered years over four months to hammer out line items and debate spending priorities.

In the previous budget session, in 2021, the budget passed in a near-unanimous vote – losing just five Democrats in both chambers combined – and included record investments in education, which Gov. Eric Holcomb plans to continue.

For just the second time in the state's history, Indiana's high reserves triggered an automatic taxpayer refund: coming in over 12.5 percent of the state's revenues at the close of the fiscal year in 2021. The additional $1.1 billion was split evenly between an outstanding debt obligation and $125 payment to each 2020 tax payer.

But reserves still came in at $6 billion at the end of the 2022 fiscal year, or 28.6 percent of revenues. Holcomb urged the General Assembly to send out another refund, this time for $200, to a wider eligibility pool for a total of $1 billion.

By the end of the 2023 fiscal year, reserves are estimated to clock in at more than $4 billion, 19 percent of that year's revenues. In closeout statements,both 2024 and 2025 end with more than 12.5 percent in combined reserves.

But budget writers and the Holcomb administration seem to have differences when it comes to the ideal level of reserves as a percentage of the budget. Cris Johnston, the director of the Office of Management and Budget, said 10-12 percent would be "prudent" while Mishawaka Republican Sen. Ryan Mishler pushed for combined reserves as high as 15 percent.

Mishler has also argued that three of the four reserve accounts – tuition support, Medicaid and the rainy day fund – shouldn't be included in overall calculations because those are for emergency use.

Without those three accounts, reserves are projected to fall under $1 billion by 2024.

This safety net means that anything outside of that reserve amount gives Indiana flexibility to increase ongoing costs and invest in one-time expenditures. But the possibility of a mild recession in early 2023 has dampened spirits, signaling a cooling economy that will no longer produce record-breaking collections.

Unlike one-time obligations, these ongoing costs will inflate this budget cycle and every other one following.Outside of education, which composes just over half of the state's budget, the next biggest spending category is Medicaid – and it's growing.

State Budget Director Zac Jackson, who started with the agency around 2006, said that since he joined the Medicaid Assistance fund had more than doubled from $1.4 billion to $3.9 billion, a 179 percent increase.

"This is one of our fastest growing appropriations," Jackson said.

Medicaid provides health insurance coverage for impoverished Hoosier adults and children – an industry with increasingly high costs already under scrutiny from the General Assembly.

Last month, Medicaid Director Allison Taylor told the budget committee that enrollment had grown during the pandemic, due to some federal changes in insurance coverage, but was expected to begin falling after the expiration of the public health emergency, anticipated in spring 2023.

But while that partially inflated the budget request, another big transition will cost hundreds of millions of dollars: pivoting from a fee-for-service model to a managed care model for Medicaid, specifically for home- and community-based services.

Stakeholders assure lawmakers this move will save the state money in the long run, but some members seemed skeptical due to the state's weak caregiving infrastructure.

At the same time, the Family and Social Services Administration (FSSA) and other agencies – including the Department of Child Services – need to increase their rates to providers, pushing up overall costs. The state's technology costs will increase by 5 percent partially due to higher licensing fees from Microsoft.

Additionally, the Governor's Public Health Commission has urged an infusion of funding for public health – recommending a minimum of $243 million annually before reducing their ask.

The last major pillar of cost increases will be salary bumps across the board – an attempt to reverse the state's loss of hundreds of employees during the pandemic, for an overall turnover rate of 25 percent.

Existing funding will cover the 5 percent average increase to the end of Fiscal Year 2023, with the General Fund covering $160 million of the $253 million annual cost.

Raising salaries for the Indiana State Police from $53,690 to $70,000 will cost another $36 million per year and has been identified as one of Holcomb's priorities for the 2023 session.

The Senate's lead budget writer, Misher, has maintained that the next budget will be hampered by the more than $1 billion in cost overruns, mostly due to inflation.

To cover those costs, Holcomb proposed dedicating $1.25 million. That amount will cover costs for the Westville Correctional Facility construction and the combining of the Indiana Schools for the Deaf with the Indiana School for the Blind and Visually Impaired, among other projects.

In terms of economic development, the Indiana Economic Development Corporation will be getting several one-time investments designed to encourage business in the Hoosier State. Specifically, another $500 million for Regional Economic Acceleration and Development Initiative (READI) grants to improve quality of life, $300 million in a "deal closing" fund and $150 million for a site acquisition fund.

The Holcomb administration said that the site acquisition would operate similar to the state's involvement in the Boone County LEAP Innovation Project, which purchased land to then re-sell to companies such as Eli Lilly. However, this fund can be used for projects across the state.