GOP budget leaders Rep. Jeff Thompson, left, and Sen. Ryan Mishler recap the revenue and economic forecasts in advance of the 2023 legislative session. (Whitney Downard/Indiana Capital Chronicle)
Indiana’s days of exponential economic growth and revenues exceeding forecasts may soon be over, according to newly updated forecasts presented before the State Budget Committee Thursday.
The good news from the presentation is that lawmakers will have roughly an additional $1.6 billion to spend when they draft a new two-year state budget
But GOP leaders warn that the amount won’t cover requested agency projects and capital needs. And an economic forecast predicted a mild recession will begin in the first quarter.
“I think we need to be very cautious as we move forward,” said Bremen Republican Sen. Ryan Mishler, the chairman of the Senate Appropriations Committee.
Enhanced federal funding in 2021 and 2022 designed to plug pandemic-related budget holes enabled states like Indiana to invest elsewhere, which legislators chose to partly spend on economic development grants and capital improvement projects. But 2022’s inflation rates caused those project budgets to soar, increasing the building of a northwestern prison in Westville from $400 million to $1.2 billion, for example.
Inflation also pushed state revenues higher as consumers continued buying goods and services, which padded the state’s tax collections.
Mishler said these cost overruns meant budget writers will start the process $1 billion behind even before considering special agency requests and an increase to the K-12 tuition support formula, higher education and Medicaid.
Agency asks over two weeks totaled more than $700 million, Mishler said, including state employee compensation increases. In December 2020, a 1% increase in the tuition support formula – which doesn’t guarantee a 1% increase to each school district due to enrollment declines – would cost the state roughly $75 million per year.
Forecasts show Medicaid costs going up
Under the nationwide public health emergency, states couldn’t cease any Medicaid coverage for individuals but the federal government would send an additional 6.2% in return, covering 71.2% of Medicare costs rather than the typical 65%. The Family and Social Services Administration, which oversees Medicaid, drafted its forecast under the belief that the public health emergency would end in April.
The 6.2% enhancement expires in June, but officials say they’ll need a full year to assess the Medicaid rolls and redetermine whether someone still qualifies, so the number covered will decrease by roughly 25%.
Assuming a peak in coverage in May 2023, nearly 2.3 million Hoosiers will be covered under Medicaid compared to the pre-pandemic 1.5 million, according to the forecast. After one year spent cutting between 300,000-400,000 Hoosiers off of the program, the number is expected to be just shy of 1.9 million, for an overall increase of 409,000 Hoosiers.
“That number will start to decrease as soon as we hit go but it will take time to go through that volume of people,” said Allison Taylor, FSSA’s Medicaid director.
During the presentation, the agency noted that the federal enhancement saved the state $550 million in the 2022 fiscal year, but expenditures are expected to increase in 2023 and beyond, though most of it will still be covered by federal dollars.
The agency also said that, due to the state’s near-total abortion ban, it anticipates an additional 2,300 children born under Medicaid annually. Roughly 40% of the state’s births are covered by Medicaid but the agency assumed some women would still be able to leave the state to obtain reproductive healthcare.
This is only true if the ban goes into effect. It is currently halted by a court injunction.
The state is also phasing out another program in favor of managed care for long-term supports and services, transitioning elderly and disabled Hoosiers from institutional care into home- and community-based services.
The initial start-up cost will mean Medicaid expenditures will grow in the first quarter of 2024, when the managed care program launches. Previously, officials emphasized the need to pivot service availability in recognition of Indiana’s aging population, especially once the entire Baby Boomer generation hits retirement age in 2030 and starts needing extra care.
Forecasts show (some) optimism
Rep. Gregory Porter, D-Indianapolis, decried the General Assembly’s decision to eliminate utility taxes in the last session, a move that cut $220 million out of the annual revenues but that he said primarily benefited corporations over everyday Hoosiers.
“I am confident the reserves we have and positive growth augured by today’s forecast will help us weather any storms. But in the long run, high-wage employers have signaled they will leave Indiana for greener pastures if we don’t invest in our people through public health and education,” Porter said in a statement. “It would be a real shame if we are not able to fully fund the recommendations made by the Governor’s Public Health Commission, which annually come to nearly the same amount as the utility receipts tax revenue, because of a corporate giveaway. I will always put Hoosiers’ health ahead of corporate profits.”
Others remained more optimistic about Indiana’s short-term economic future.
Cris Johnston, the director of the office of management and budget, said that revenues were reaching a plateau after nearly two years of high growth, returning to the more modest, pre-pandemic annual increases of 2.5-3%.
“I think this gives us the opportunity to consider (the governor’s) policy items and funding all of those,” Johnston said.
Policy items for the Gov. Eric Holcomb administration include education, workforce, public health and economic development, according to Johnston.
Phased-in income tax cuts passed in the 2022 legislative session are tied to Indiana’s economy, meaning the second cut in 2025 from 3.15% to 3.11% could be delayed if the state’s growth doesn’t hit 2%.
“When you cut taxes, you reduce revenue. So it depends on what you want to spend,” Mishler said, when asked about whether the General Assembly would consider other tax cuts. “We just have to put our priorities out there to see what we’re going to be at and balance it out.”
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