Two weeks ago, state officials released Indiana’s close-out report for Fiscal Year 2021 with a surprise for Hoosier taxpayers: Revenues soared above projections to push the state’s reserves to $3.9 billion, triggering an automatic income tax refund (around $170 for individual filers). How did we get here, and how confident should we be about the durability of this historic surplus?

Last July, the good news would have been tough to imagine. The COVID crisis had crushed FY2020 revenues by more than a billion dollars, state government had cut or cancelled nearly $700 million in planned spending, and although we were taking steps towards reopening, the fiscal outlook was cloudy.

It turned Indiana was already turning the financial corner. Nearly $890 million in income tax payments delayed from 2020 started flowing into state coffers in July and August. Employment continued to recover, with higher-paying jobs rebounding at a faster pace to stabilize income taxes. Pandemic unemployment benefits also boosted personal income, and consumer spending remained solid.

The revenue forecast leading into the legislative session was better than expected. Then vaccine deployment delivered a shot of economic optimism for January, and the American Rescue Plan Act (ARPA) added another round of stimulus and federal aid. By mid-April, updated forecasts added another $463 million to FY2021 (and raised earlier projections for FY2022-2023 by nearly $2 billion).

Eventually, FY2021 revenues reached $19.4 billion ($18.5 billion plus income taxes delayed from 2020). This means general fund revenues for the FY2020-2021 biennium actually beat pre-pandemic forecasts. For context, many experts believed early on that state revenues wouldn’t resume a ‘normal’ trajectory until 2024 or later.

According to data from the National Association of State Budget Officers (NASBO), most states’ fiscal recovery from COVID has been faster than expected. But Indiana’s growth is especially strong, with double-digit revenue gains over FY2020, even after adjusting for income tax delays (50-state average growth barely broke 3%). Indiana joins 33 other states with higher reserves today than at the end of FY2019, but our 21% of current expenditures is higher than most of these peers.

Even after the automatic tax refunds, more than a billion dollars directed to teacher pension funds and bond repayments, and nearly $250 million spent on new projects from the FY2021 general fund (instead of the new budget that started July 1st), the size of the remaining surplus is stirring debate.

Should Indiana try to play catch-up with the nineteen states that cut taxes in 2021? Or revisit priorities like public health, preschool, or making post-secondary education more affordable?

The General Assembly will reconvene in September to tackle redistricting and then return for its regular short session in January. Until then, do tax collections continue exceeding monthly estimates? How long does the delta variant prolong the pandemic? Is household spending steady, shifting between goods and services (which Indiana doesn’t tax) or slowing with inflation fears? How fast is payroll employment expanding, and what’s the fate of enhanced unemployment benefits?

We’ll have five months of data on these and other questions to update our revenue outlook.

It’s also a window to learn more about the public investments that are already in progress: For example, the new state budget includes a $50 million ‘public health challenge grant’ – do the responses reveal new insights on the state of Hoosier health? READI regional development plans will be in the hands of the Indiana Economic Development Corporation by September – are there innovative strategies that should be elevated or shared statewide? What’s the pace of participation in workforce programs like the newly-created Career Accelerator, and what does it tell us about the recovery job market?

The General Assembly will have reports on how K-12 learning loss prevention grants were used over the summer, and an interim study report on reducing educational achievement gaps. September also brings the Average Daily Membership (ADM) count that determines state funding for local schools.

Last September, 15,000 fewer students were enrolled in public schools, a combination of delayed kindergarten starts, increased homeschooling and other alternatives in reaction to the pandemic. Lower enrollments meant less per-student tuition support paid out by the state. COVID also disrupted early high school graduations and college entry, affecting programs like the Mitch Daniels Graduation Scholarships. The total impact was nearly $200 million in unspent education funding.

The upcoming ADM will give us a better idea whether enrollment has stabilized, along with more information on how schools are spending state and federal aid before reevaluating K-12 funding commitments in the current budget cycle.

The last few paragraphs pose a lot of questions and only scratches the surface. Two things are certain: Indiana is in an enviable fiscal position at the end of FY2021, but the historic revenue surge of the last few months isn’t sustainable over time. For now, caution isn’t a cop-out: We should protect a healthy surplus as we enter a post-COVID future that could put unexpected demands on rainy day resources.

For more details on Indiana’s FY2021 Close-Out from the Indiana Fiscal Policy Institute, click here.

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