A Pleasant (Revenue) Forecast

The revenue projections for the next two fiscal years were updated on Wednesday, giving the General Assembly revised numbers to use in finalizing a state budget before the session wraps up next week. The update also readjusted the current Fiscal Year 2017 numbers; the FY17 numbers that were reduced by nearly $300 million dollars in December were now adjusted back upward by $124 million (so FY17 won’t turn out as bad as previously thought).

That FY17 readjustment serves as a foundation for the forecasters’ confidence that the slow but steady economic growth will continue at a moderate pace over the coming biennium. The pleasant result: a modestly higher revenue forecast for FY2018 and FY2019. The forecast increase resulted from projected growth in sales tax collections (2.7% in FY18 and 3.4% in FY19), sales tax being the source that Indiana is most dependent on, and the larger percentage increase but smaller cumulative dollar increase anticipated in income tax collections (3.4% in FY18 and 5.9% in FY19) – the source that represents the next largest contributor to the state coffers.

The bottom line is that the forecast adds $200 million, only about six-tenths of one percent of the roughly $32 billion that the lawmakers now can expect to see collected in tax revenue over the next two years. While it is a small addition, it is still $200 million that they hadn’t planned on when they put together the budget numbers in HB 1001.

Understandably, the fiscal leaders caution against any major changes to what they have formulated to this point, but as the budget negotiations continue into the last days, they are certain to hear this additional money referenced as justification for some new or additional funding requests. Read the details from the forecasters’ presentation.

Mixed Bag With Tech, Entrepreneurship and Innovation Priorities in Senate Budget

The long-awaited announcement of the Senate initial version of the budget came late
last week. In it, there are several technology-related issues that were either included or dropped from the bill, as well as some funding amounts also reduced from the House version:

  • Transferability of the Venture Capital Tax Credit was deleted. The Chamber would like to see it included to increase the flow of venture capital funds for promising qualified businesses.
  • Funding of the 21 Fund (21st Century Research and Development Fund) remains at $20 million a year. The Chamber prefers $30 million a year.
  • Funding to backstop the initiation of direct flights to Europe was reinstated, although it is $4 million rather than $10 million over the two years. A good start.
  • Funding for the Management Performance Hub (MPH) was reduced to $6 million for two years, which is less than what the House reduced from the Governor’s original amount.
  • Keeps $20 million for the two years for the Indiana Biosciences Research Institute
  • Removed the Next Level Trust Fund, which would have provided investment guidelines and supervision to direct a portion of the Major Moves Trust Fund to invest in promising Indiana opportunities.
  • It allocates $1 million for the biennium for the Launch Indiana program.

We will work to keep the things we like in the bill and try to restore other items that were reduced or removed as it advances through the Senate and goes to conference committee. The Chamber will continue to educate legislators on these important economic development priorities currently in the bill.

Senate Puts Its Mark on State Budget Bill

Senate Appropriations Chairman Luke Kenley (R- Noblesville), primary drafter of the Senate version of the budget, has now put his touches on the House-drafted version. After a concise explanation and short discussion in committee, HB 1001 was passed unanimously (although the Democrat leadership expressed mild discomfort with some particulars) and now goes to the full Senate.

A few highlights of the $32.14 billion budget package include:

  • a 1.7% increase each year in K-12 education funding – $348 million over the biennium
  • $4 billion to higher education
  • $5 million to the governor’s office for substance abuse prevention, treatment and enforcement
  • $500,000 for homeless veterans
  • a 24% salary increase for state police officers
  • $6 million to double-track the South Shore Line

The budget will maintain an 11%, or $1.8 billion, reserve. But there is a lot still to be determined about how the final negotiated budget will shape up. Unresolved at this point is the fate of the House’s desire to direct all the sales tax collected on gasoline to road funding and an increase to the cigarette tax – both of which could impact the budget. And finally, it must be recalled that the budget-makers will receive an updated revenue forecast in a couple weeks; that too could change the picture some. So, while the Senate has spoken, the last word is still a few weeks away.

Commentary: How NOT to Make America Great Again

Dan Berglund, president of the State Science & Technology Institute, offers this analysis of the budget proposal offered by the Trump administration:

The Trump Administration’s skinny budget proposal calls itself, “A Budget Blueprint to Make America Great Again.” From the information contained in the document, it is clear the Administration does not view science, technology, innovation and entrepreneurship and the economic development efforts built around those activities as the path forward to making “America great again.” The program eliminations and drastic cuts are not the way to move the country forward economically. So what is behind this proposal? Two things: 1) a fight over the proper role of the federal government in the economy, and 2) a negotiating tactic to attempt to lull advocates into thinking program survival or lesser cuts are a victory. A full community response is needed and all of us must get off the sidelines and on to the playing field.

The budget blueprint proposes drastic cuts for research at NIH, DOE’s Office of Science, NOAA and EPA and would eliminate a score of federal programs that serve as the cornerstone of federal activity in supporting an innovation economy, including the Economic Development Administration, the Manufacturing Extension Partnership, ARPA- E, the Appalachian Regional Commission, SBA’s Regional Innovation Clusters program and CDFI Fund, among others. (The National Science Foundation is not mentioned in the proposal, so details on how much the Administration will propose it be cut will not be available until the full budget is released in April or May. Similarly, the Regional Innovation Strategies program is not mentioned specifically in the budget proposal.) All of these proposals are against the aims of SSTI’s policy platform for federal support of innovation economies.

Motivations behind the budget proposal
There appear to be two primary motivations behind the budget proposal: 1) a fight once again over the role of the federal government in the economy, and 2) a negotiating tactic to attempt to lull advocates into thinking program survival or lesser cuts are a victory.
Throughout the 62-page document there are recycled ideological talking points to justify program elimination. Many comments contained in the document indicate a fundamental lack of understanding of the programs they propose to eliminate or the belief that the federal government has no role in economic development, including:

  • EDA has “limited measurable impacts and duplicates other Federal programs”
  • MEP centers would “transition solely to non-Federal revenue sources, as was originally intended when the program was established”
  • Some SBA programs including Regional Innovation Clusters are targeted because “the private sector provides effective mechanisms to foster local business development and investment”
  • ARPA-E should be eliminated because “the private sector is better positioned to finance disruptive energy research and development and to commercialize innovative technologies”

Never mind that numerous reports have been done about EDA’s economic impact, that Congress reauthorized the MEP program just last year with a funding structure that includes federal funding and without federal funding the remaining centers would drop their focus on small and medium-sized manufacturers, and that the private sector alone does not provide effective mechanisms to encourage economic development or disruptive energy R&D.

Beyond a clear ideological view that the federal government has no role in promoting economic growth — a position rejected since at least the early 1800s when the federal government funded canals and other key infrastructure items, it is hard to view this proposal as anything more than a negotiating tactic. As anyone who has bought a house or bargained for an item at a flea market knows, you start with a low ball offer knowing that you’ll settle higher and that both you and the seller will ultimately be happy with the final price.

But this budget is not a real estate negotiation and settling for reduced cuts and declaring victory should not be an option for any of us.

A concluding thought
There is broad popular support for an economic growth agenda focused on innovation, science, technology, and entrepreneurship. We regret the Administration’s initial proposal would send this country in a different direction. We look forward to doing our part and working with others to make our case to Congress.

Poll Question: It’s Grading Time

We asked a few weeks ago for your opinion about Gov. Pence's income tax cut proposal and where state legislators would end up in their budget. A 5% cut divided between 2015 (3%) and 2017 (additional 2%) was not one of the options.

I guess that would fall under what was choice D (other), which received 3% of the vote. The other choices were:

  • Full 10% cut as proposed by Pence: 43%
  • 3% cut per the bill passed by the Senate: 27%
  • No tax cut, which was part of the House bill: 27%

Lawmakers have termed the overall budget as the largest tax cut ($1 billion) in the state's history. The Indiana Chamber's upcoming legislative analysis will have more details, but that does include an immediate elimination of the state inheritance tax (in fact, it makes the elimination retroactive to January 1, 2013) instead of the nine-year phase-out that was passed in 2012.

The budget, as always, was a high-profile issue but just one of the topics that garnered attention. Again, more Chamber review is on the way but our new poll question asks for your overall grade of the 2013 General Assembly. Cast your vote at the top right of this page.

Numbers are in for Crafting the Final Budget

State budget watchers have been talking about the April update of the revenue forecast for months. This is because everyone knew that the numbers that came out this week revising the December projections for state tax receipts over the next two-plus years would be the numbers that control the final form of the FY 2014-FY 2015 biennium budget. While the significance of the April update is not to be diminished, the reality is that many of the “down in the weeds” budget crafters are the same people that generate the forecast. The Revenue Forecast Committee includes fiscal analysts from each of the four caucuses and a representative from the state budget agency – and these people are the ones that the fiscal leaders work with to put the budget together. So this means the folks who have been doing the hands-on budget detail work had a pretty good idea of what the April numbers would be earlier than when they were publically presented on Tuesday. But they couldn’t really generate revised numbers until they had enough indication of what the overall economic forecast would be. It is those trends and indicators that serve as the basis for the group’s revenue projections. The economic forecast (or outlook as they call it) is performed by IHS Global Insights (the largest and most renowned
economics organization in the world).

The revenue forecasters apply economic variables to their formula guided by IHS Global Insight’s economic forecast/outlook for Indiana. The group’s presentation this week indicated continuation of a stable but slow recovery, a slight slowing of consumer spending and higher nonwage income. In response to the economic picture, the revenue forecasters made some modifications to their revenue forecasting model and also made an adjustment to the gaming tax projections to account for more out-of state-competition. The resulting bottom line was an upward revision of $290 million over the previous forecast for the balance of FY 2013 (+$33M), FY 2014(+73M) and FY 2015 (+$184M). Nearly all of the increase is attributable to projected individual income tax receipts in the next biennium. The individual income tax projections were increased by 3% and 4% for FY 2014 and FY 2015 respectively. This translates to $70 million and $151 million more than the December forecast.

The forecast’s show of strength in personal income growth could itself become the subject of debate in the budget negotiations since it can be argued two different ways. Those supporting a tax cut will point to it as evidence that the state is collecting too much in this particular category of revenue, while those cautioning against a cut will suggest that this demonstrates the volatility and uncertainty of a steady income stream. Will the forecasts cause the House budget-makers and the Senate budgetmakers to change their thinking and reconsider the tax cuts? Perhaps, but consider that $290 million is only 1% of the total budget and is really nothing more than an adjustment of a prior estimate.

However you want to view it, it is a positive upswing and that fact alone should help the Governor’s cause for the individual income tax rate reduction.

Brinegar Speaks on Indiana Budget, Speedway Upgrades

Indiana Chamber President Kevin Brinegar sat down with Inside INdiana Business recently to discuss the most pressing topics in the state legislature as the end of session nears. See the video on IIB:

A bill that would create a tax district to fund upgrades at the Indianapolis Motor Speedway continues to make its way through the legislature. Some lawmakers want to add guarantees that would protect state funds if the facility would be sold. In this week's INside the Statehouse segment, Indiana Chamber of Commerce President Kevin Brinegar says he's "cautiously optimistic" the legislation will pass.

Our partners at Network Indiana/WIBC report a proposed amendment to the bill calls for the speedway to receive a portion of the money the horse racing industry now receives as a loan, rather than forming a tax district. The chance would also give an additional $5 million to the Indiana Economic Development Corp. for other motorsports industry efforts.

Brinegar says the Indiana House and Senate are not too far apart on a two-year state budget. He believes the final product will look closest to the Senate's proposal, which passed through committee last week. That plan includes a smaller individual income tax cut than the 10 percent proposed by Governor Mike Pence and an increase in K-12 funding by more than $330 million. Pence has called the proposal "a good start."

Differences also remain on education issues. The Senate has passed a bill that would halt the implementation of Common Core standards. House Education Committee Chairman Bob Behning (R-91) has refused to hear the bill because he believes the standards should move forward.

Bottom Line: Not a Lot of Extra Money in State Budget Forecasts

The Indiana State Budget Committee listened to three separate forecasts recently regarding Medicaid, the economy and revenue; together these will set the stage for debates in the coming session over the next state biennium budget.

Medicaid Forecast
The day started with the Medicaid presentation by Michael A. Gargano, secretary of the Family and Social Services Administration (FSSA) and Robert M. Damler, an actuary with the firm of Milliman, Inc., a financial and health care consultant on contract to the FSSA. The duo outlined the various projections relative to Medicaid expenditure obligations anticipated over the next two years. While predicting Medicaid expenses is particularly difficult this year due to the unknowns of the Affordable Care Act (ACA), the forecast nevertheless attempts to estimate the potential liabilities of the state by making a series of assumptions regarding: the implementation of programs, reimbursement amounts, the impact of new provisions, additional federal actions, long-term trends, and ultimately, the increase in Medicaid recipients and the state’s financial obligations.

Their forecast projects the general fund monies needed to provide Medicaid assistance will grow by 17.1% in fiscal year (FY) 2014 and 8.7% in FY2015. That translates to almost $450 million over the biennium. Fortunately, however, the appropriations for Medicaid have exceeded the actual expenditures in FY2012 and are expected to do so again in FY2013 (by $264 million and $234 million, respectively). The over appropriation in FY2013 will help offset the FY2014 increase some, but overall dollar obligations will nevertheless grow significantly. If you compare the appropriated amounts in the last budget with the projections of what will be needed for Medicaid in the next two years, you still end up with a difference of $428 million (The math: FY12 appropriation = $1716M, FY13 appropriation = $1882M, projected FY14 = $1929M, FY15 = projected $2097M; 1716 +1882= 3598; 1929 + 2097 = 4026; 4026-3598 = 428) Keep this additional $428 million dollars in mind when we consider the general fund revenue projections below.

Economic Forecast
This presentation was given by James Diffley, chief regional economist for IHS Global Insight. Diffley gave the big picture on the U.S. and Indiana economic outlooks. His overview considered the effects of global and domestic uncertainties on exports and business capital spending, housing and vehicle markets, consumer spending, employment and income levels, potential tax changes and the chance of recession if we go over the “fiscal cliff.” In short, IHS is predicting a continuation of modest/slow growth. Indiana is situated well, but remains vulnerable to all the outside factors.

Revenue Forecast
The main attraction of the day was the general fund revenue forecast for fiscal years 2013-2015. This forecast is based on the underlying economic projections of IHS Global Insight but gets down to the nitty-gritty of how much money the budget-makers will have to work with as they put together and debate the details of the next budget. These projections are arrived at by consensus of a bipartisan and non-partisan committee of fiscal analysts who look very closely at all state revenue sources. They meet regularly, apply sophisticated models, track a multitude of factors, receive counsel from numerous advisors, academics and other sources, and have in recent years proven very accurate.

The report took into account recent legislative changes and such things as how alterations to the gaming laws in surrounding states will likely lead to even further reduction in Indiana’s gaming revenues. The bottom line of the revenue forecast committee: Total general revenues are projected to increase by a very modest 2.2% for FY2014 and then another 2.9% in FY2015. In dollar terms, that is $14.65 billion in FY2014 and $15.08 billion in FY2015. The collections for FY2013 were $14.33 billion. The projections represent a slight increase of $320 million for the first year of the new budget and another $430 million in the second year – a mere $750 million over the biennium.

Now let’s go back to the additional $428 million needed simply to meet the projected increase in Medicaid: $750 million minus $428 million leaves only $322 million (a little over 2% of the annual budget) to pay for all other desired budget and fiscal priorities that have been put forth. These include restoring over $350 million in K-12 education cuts, an approximately $100 million pre-school program, several hundred million in stymied university capital projects, billions in long-term road maintenance and other infrastructure needs, as well as the incoming Governor’s proposal to cut individual income taxes by well over $500 million. Clearly, there’s not enough money to go around – let’s see what gets done!

New Woodward Book Chronicles Obama/Boehner Budget Battle

Bob Woodward, set to speak with Carl Bernstein at our Nov. 1 Annual Dinner, has a new book coming out next week that seems to document the cantankerous relationship between President Obama and House Majority Leader Boehner — at least as it pertains to the budget negotiations of 2011. ABC News reports (read the full article as it also includes excerpts about Mitt Romney’s VP choice Paul Ryan):

An explosive mix of dysfunction, miscommunication, and misunderstandings inside and outside the White House led to the collapse of a historic spending and debt deal that President Obama and House Speaker John Boehner were on the verge of reaching last summer, according to revelations in author Bob Woodward’s latest book. The book, "The Price of Politics," on sale Sept. 11, 2012, shows how close the president and the House speaker were to defying Washington odds and establishing a spending framework that included both new revenues and major changes to long-sacred entitlement programs. But at a critical juncture, with an agreement tantalizingly close, Obama pressed Boehner for additional taxes as part of a final deal — a miscalculation, in retrospect, given how far the House speaker felt he’d already gone. The president called three times to speak with Boehner about his latest offer, according to Woodward. But the speaker didn’t return the president’s phone call for most of an agonizing day, in what Woodward calls a "monumental communications lapse" between two of the most powerful men in the country. When Boehner finally did call back, he jettisoned the entire deal. Obama lost his famous cool, according to Woodward, with a "flash of pure fury" coming from the president; one staffer in the room said Obama gripped the phone so tightly he thought he would break it.

Spending in America: The Unfunny Story of Where Some of it is Going

In the recent debt deal, there was plenty of debate from pundits and voters about the need — or lack of need — for more taxation. But one thing almost everyone seemed to agree on — politicians included — was that the U.S. simply must start cutting its spending. The Heritage Foundation has an interesting post showing some places we could likely start:

Late-night comedian Conan O’Brien’s blog has a new post parodying Washington’s excessive spending. “Team Coco has found out why our government is so broke,” the blog explains, “They’ve been spending all our hard earned tax dollars on some pretty ridiculous programs.” The post contains a list of humorous fake programs and encourages readers submit their own.

But sadly, there’s no need to turn to a crack team of comedy writers to gin up examples of ridiculous government spending. Instead, one need only look to the shenanigans on Capitol Hill to find a list of absurd expenditures of taxpayer dollars. As Heritage has reported, in addition to long-term, substantive reforms, $343 billion of wasteful government spending could be cut immediately. And while Conan’s list is populated by a number of outlandish (but fake) programs, there are plenty of REAL government programs that are just as ridiculous. Conan, try these on for size:

  • Washington will spend $2.6 million training Chinese prostitutes to drink more responsibly on the job.
  • Because of overstaffing, the U.S. Postal Service selects 1,125 employees per day to sit in empty rooms. They are not allowed to work, read, play cards, watch television, or do anything. This costs $50 million annually.
  • Stimulus dollars have been spent on mascot costumes, electric golf carts, and a university study examining how much alcohol college freshmen women require before agreeing to casual sex.
  • Washington will spend $615,175 on an archive honoring the Grateful Dead.
  • The Securities and Exchange Commission spent $3.9 million rearranging desks and offices at its Washington, D.C., headquarters.
  • Congress recently gave Alaska Airlines $500,000 to paint a Chinook salmon on a Boeing 737.
  • Washington spends $25 billion annually maintaining unused or vacant federal properties.
  • The Federal Communications Commission spent $350,000 to sponsor NASCAR driver David Gilliland.
  • Washington has spent $3 billion re-sanding beaches—even as this new sand washes back into the ocean.
  • Taxpayers are funding paintings of high-ranking government officials at a cost of up to $50,000 apiece.
  • The Conservation Reserve program pays farmers $2 billion annually not to farm their land.

And the list goes on and on. When it comes to government spending, the truth is often stranger than fiction.