No one has been spared the impact of the COVID-19 pandemic. For millions, slowing the spread of the voracious coronavirus is a matter of life-and-death. Even the most fortunate of us are dealing with drastic changes to our daily routines, worrying about family and friends as we nervously eye our retirement accounts. And a growing number of Hoosiers will soon be economic casualties. 

As employers struggle to adapt and survive, unemployment claims are starting to skyrocket and recession seems inevitable. That means state and local public finances will also be under siege by this public health crisis, at the same more Americans will be turning to government for help.

How will Indiana’s bottom line stand up to the challenge?

We start in better fiscal shape than many states: Indiana began 2020 with a surplus swelling above $2.3 billion (roughly 14% of annual expenditures) and low levels of debt and pension liabilities. This sparked legislative debate on whether more ‘rainy day’ funds should be shifted to priorities like teacher pay. 

We’ve been here before. In the mid-to-late 1990s, budget reserves ballooned even higher, triggering a spate of tax cuts and new spending commitments just in time for the ‘dot com bubble’ to burst, followed by the 9/11 attacks. A special session was needed in 2002 to plug a sudden revenue gap; surpluses disappeared as state government limped along by deferring payments.

A few years later, the Great Recession coincided with sweeping reforms of state and local revenues (including property tax caps) and responsibilities (the state shouldering most K-12 and county welfare costs).  General fund revenues finished nearly 4% below forecasts in 2009 and 7.5% in 2010. 

This year, the General Assembly resisted the impulse to dip further into rainy day funds after passing a plan to advance nearly $300 million for higher education construction (to forgo longer-term debt). Governor Holcomb reversed this decision on Thursday to safeguard a bigger surplus. 

That’s the good news: Prudent spending policies have left us with some insulation against the crisis. But we also have broad economic vulnerability and volatility in our tax system.

Coronavirus hit global manufacturing early, wreaking havoc on supply chains as the U.S. economy struggled with a slump in factory orders.  Manufacturing generates one of every five dollars in total Hoosier wages.  As Indiana’s auto plants stand idle, our largest industry has shifted into neutral.

In terms of employment, more of us work in retail, food service and hospitality than in factories, and the threat is more glaringly obvious: Bars and restaurants closed, joined by a growing number of retailers and hotels.

Applying national estimates of job loss to Indiana (adding a conservative economic multiplier), disruptions in manufacturing, food service and accommodations and retail trade could erase 10% of all private sector earnings projected for Indiana by the end of 2020. And the crisis will hit employment across every sector of the economy (with the exception of healthcare). Nearly 54,000 Hoosiers applied for unemployment benefits last week, and it’s not hard to envision devastating fiscal consequences. 

Indiana depends more on sales and individual income taxes and less on property taxes than most other states, tied to the ups-and-downs of the economy (versus the relative stability of real estate values).

Roughly 85 cents of every dollar of general fund revenue comes from sales and income taxes, more sensitive to lost jobs, payroll cutbacks and sluggish consumer spending. Corporate taxes account for five percent, and another three percent is generated by riverboats and racinos (closed by executive order).

Projections from Michael Hicks and Dagney Faulk at Ball State suggest state revenue losses of a billion dollars or more (versus the 2020 budget plan) by the end of the calendar year. Lawmakers could convene in January with rainy day funds cut in half and tax collections still dropping.

This scenario doesn’t even address local government struggles. Local revenues haven’t fully rebounded from the last recession, and budgets are already lean: Our cities, counties and towns are spending about 75 cents (per capita) for every dollar in local expenditures nationally.

Indiana’s urban areas – with greater population density and potential threat from COVID-19 – are already straining to keep up with infrastructure, public safety and other basics. (Rural communities may fare better: Service costs are lower and farmland property tax assessments more predictable.)

Back in January, reports of a new coronavirus starting to spread beyond China were troubling but seemed remote from our fiscal outlook.  Two months later, we face the prospect of a belt-tightening and budget austerity. The next few days could change the landscape again, depending on how intergovernmental aid factors into the federal stimulus package.

In the midst of so much uncertainty, a new kind of surplus is growing – the number of tough choices ahead for state and local policymakers.   

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