As Auditor of State, my office keeps the official financial records for Indiana State government. On July 18, 2003, we released our official “Surplus Statement” for the fiscal year ended June 30, 2003. On July 17, 2003, the Governor also released a “Surplus Statement” for fiscal 2003. The Governor’s numbers differed from my office’s numbers and I think it is important to tell you why.

The Governor’s $720.1 million Surplus was significantly more than the $689.7 million reported by my office. That $30 million discrepancy notwithstanding, there is a lot to say about this Surplus. How does it differ from the nearly $2 billion surplus Indiana government had just 4 years ago? Just how are we able to say that Indiana government has anything even resembling a surplus today? How much money does Indiana government really have in its checking account?

Let’s talk about that $30 million difference. Indiana’s Surplus Statement is reported on a cash basis. But the Governor included $30 million in outstanding loans to Beech Grove, East Chicago, Duneland Schools, the Town of Burns Harbor, Westchester Public Library, and Porter County. Those loans are not due to be repaid in full before July 2009 at the earliest, with some not due until July 2013. The idea that this $30 million is in the bank and serving as a cash reserve for Indiana government is just not accurate. It should not be counted as part of the Surplus.

Although we had a Surplus number of $689.7 million on June 30, 2003 – or $720.1 million using the Governor’s total – $661.9 million of the Surplus was out the door before the Governor even announced the numbers on July 17. That $661.9 million was sent to schools and local governments in the form of tuition support ($96.4 million in higher education; $289.9 million for K-12), and property tax replacement credits and homestead credits ($275.6 million). Those were obligations delayed from the 2003 fiscal year. It’s like going to your mailbox, opening your bank statement, looking at the balance on the statement, and thinking that’s how much money you have, ignoring the fact that you wrote additional checks.

Without these payment delays the Surplus would have been only $27.8 million. But this amount was only possible through a $43 million transfer of accumulated balances from non-reverting accounts that were part of the deficit management plan, which I voted for, approved by the State Board of Finance in April 2002.

Finally, we need to discuss the Budget Agency’s end of June transfer of $65 million from a County Option Income Tax (COIT) earnings account to the General Fund. COIT is a purely local tax. It is levied by the counties but collected by the state. It is considered a pass-through tax. By statute COIT payments are to be held in a special account in the county’s name and, according to the Attorney General, “the funds never become part of the State general fund.”

Many of you may remember last March when several counties questioned the Budget Agency’s claim that it had miscalculated the disbursement of COIT revenues. At least one county, Hamilton, has submitted a written request for information to my office, to the Budget Agency, and to the Department of Revenue in an attempt to get to the bottom of the COIT mess. The State must satisfy the legitimate concerns individual counties have of how this purely local tax revenue may have been mishandled. Counties are entitled to a full accounting before any money is transferred out of a COIT account to assure the counties that the State is not taking their money.

When we subtract the outstanding loans, payment delays, and these transfers, the Governor’s $720.1 million “Surplus” becomes a deficit of $80.2 million. That is an $800 million difference. So you can take your pick. We have $720 million, or we are at least $80 million in the hole. But one thing is clear: the present Surplus numbers are more a matter of interpretation than an economic fact.

The 2003 Surplus is altogether different from the 1999 Surplus. On June 30, 1999, Indiana closed the books on that fiscal year with a Surplus of $1,990,785,908. That was cash in the bank. There were no payment delays. The Rainy Day Fund was fully funded. State government had money in the bank. Too much money. Too much of your hard-earned money.

At that time, our budget was based on original revenue projections that underestimated revenues by a total of $1.24 billion for the fiscal years 1997, 1998 and 1999. Over that period, the state averaged more than $400 million in unanticipated revenues each year. But for the past three fiscal years, from July 1, 2000 through June 30, 2003, the original revenue forecasts have overestimated state revenues by a total of $2.241 billion dollars. That’s an average of $747 million each year in predicted revenue that never arrived.

Forecasters have a difficult job. It is not always easy to predict the weather from day to day, let alone the economic consequences that the actions of people, governments, and industries have on state revenues. It is painfully obvious that our forecasters underestimate revenues during boom times, and overestimate them during down times.

Like the weather, it is difficult to know when good or bad times may be on the horizon. But living within one’s means is the first step toward fiscal responsibility. Our forecasters must adapt their thinking to ensure, first and foremost, that they do not over-estimate potential revenues. Those numbers are relied upon too heavily by the legislature and the Governor when creating Indiana’s biennial budget to be overestimating revenues. Responsible budgeting requires reliable revenue projections.

The Governor has stated that his creation of a $720.1 million Surplus, which I have just explained doesn’t really exist, is the result of “prudent fiscal management”. I think that characterization is suspect. The Governor has shown some prudence in his recent vetoes of legislation that would cost additional tax dollars. While I may not agree with all of his veto decisions, I respect and appreciate his efforts.

Responsibility for the fiscal health of Indiana state government lies at the feet of those who lead state government. It will take true leadership, restraint, and a willingness to work together to put Indiana back on the right track. It will also take a well-informed public. I hope this brief explanation of the State Surplus helps educate Hoosiers as to the true state of Indiana government’s finances.

Sincerely,

Connie Nass
Auditor of State

"From the Indianapolis Star, August 1, 2003"