Two weeks ago, Indiana closed the books on fiscal year 2019.  The biggest news is that surging revenues left Indiana with a historic budget surplus – the state collected nearly $267 million more than anticipated for FY2019, pushing budget reserves to $2.27 billion.

That’s a surplus approaching 14% of annual spending (compared to a 50-state average around 8%), with only modest unfunded liabilities.  We’re left with a bigger umbrella against the ‘rainy day’ of recession, but we also having to keep preparing for stormy weather beyond the current horizon. 

The central challenge to Indiana’s fiscal climate is a different kind of deficit – in human capital.  Population, educational attainment and personal income combine for a cloudy longer-term forecast. 

85 cents of every dollar Indiana collects comes from sales and individual income taxes; a sustainable revenue base depends on a growing labor force earning (and spending) growing wages. 

But over the last decade, Indiana’s population growth has lagged the national average.  Looking ahead, all but 14 of Indiana’s 92 counties are predicted to lose working-age residents through 2040.

Incomes haven’t kept pace, either.  Indiana’s per capita income has been roughly 90% of the nation since the 1980s, and we’ve lost ground since the last recession: According to a Pew Charitable Trust analysis, annual personal income growth across the U.S. has been 1.9% since 2007 versus 1.8% in Indiana – the average Hoosier now makes 87 cents for each dollar to the typical American.

Earning power is tied to educational attainment, and Indiana continues to perennially rank among the bottom tier in percentage of adults with any education beyond high school.  Fewer Hoosiers are qualified for higher-skill, higher-paying jobs, which also becomes a barrier to new business opportunities across the state.

All this raises a reasonable question: If the trends are so gloomy, why are we marking a decade of budget surpluses?  Why did 2019 bring the best revenue growth since 2012? Unemployment is low, and more Hoosiers are working than ever before.  Part of the recent answer comes from national context.

Data from the National Association of State Budget Officers (NASBO) shows that most states are experiencing robust revenue gains, buoyed by the economy and federal tax reform. Indiana’s performance is strong, but not unique:  We’re running slightly ahead of average state revenue growth for FY2019 (after lagging in 2018).

Indiana’s success is shaped more by disciplined spending than dynamic growth. Average budget increases for FY2018 and 2019 were 3.2% and 5.8% respectively, while Indiana’s were 1.8% and 3.8%.  Overall, Indiana spends about 80 cents for every per capita dollar spent by other state governments.

Fiscal discipline is admirable.  But we won’t always be able to cut our way out of an ongoing erosion of population and personal income (especially if a recession hits).

State policymakers are well-aware of Indiana’s human capital challenges.  Governor Holcomb has called workforce development the “defining issue of this decade,” working with the General Assembly to enact an array of retraining and ‘upskilling’ programs aimed at adult workers.  The 2020-21 budget includes a significant increase in K-12 funding and continues to (gradually) expand state-supported pre-K programs. 

Ball State economist Michael Hicks makes the case for educational attainment as the competitive priority for Indiana; he notes that appropriations for K-12 and post-secondary education have declined as a percentage of gross state product and argues for greater investments from elementary through college.

Hicks is adding to a crucial debate over how to strengthen our educational pipeline.  We need more Hoosiers pursuing higher education.  But we also need more Hoosiers, period.  Before an uptick last year, our rate of in-migration (new residents moving to Indiana) had steadily declined since the 1990s.

To build our population and broaden our tax base, Indiana must attract and retain talent (college-educated workers are more mobile, raising the stakes for workforce competitiveness).  Indiana offers a solid job market and low cost of living, but we have to strengthen – and showcase – our quality of life.

Again, Indiana is already working to change our talent trajectory. From urban redevelopment to building livability assets like parks and trails, a growing number of state grant and incentive programs are helping local communities with livability appeal.  Lawmakers are debating various ways to allow local governments to work together to identify and invest in quality of life projects.

The private sector, where the need for skilled workers is felt most urgently, has stepped up with new enterprises like TMap, a start-up focused on recruiting tech talent, and Indyfluence, an employer-led initiative aimed at encouraging new college graduates to start their careers in Indianapolis by connecting with them as interns.  Such innovative solutions could be the basis for broader public-private partnerships.

But the issue may demand a higher state budget priority.  When Governor Holcomb announced a proposal to use $300 million of the surplus for capital projects, it was hard not to note that this level of funding would have continued (and doubled) the Regional Cities initiative, a $126 million effort launched in 2015 to stoke population growth in metro regions with competitive funding for ‘transformative’ plans.

FY2019 brought plenty of good news about Indiana’s finances.  But fiscal stability is built by policy choices about people – families ‘voting with their feet’ and deciding where to live and work, taxpayers earning a regular paycheck and aspiring to do better, and employers choosing to invest in Indiana.  Today’s historic surplus can easily dwindle if we don’t make smart investments in education, population and income growth. 

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