Revenue and Medicaid Forecasts Squeeze the State Budget

Every two years the Indiana General Assembly writes a new state budget. This year the legislature set spending for fiscal year 2020, which starts in a couple of months on July 1, and for fiscal year 2021, which starts in mid-2020. Of course, to budget for the future legislators need a reasonable guess about how much money they’ll have to spend. That requires a revenue forecast.

So the Budget Agency hires a consultant to make predictions about the Indiana and U.S. economies over the next two years. Then the revenue forecast technical committee calculates how these economic numbers affect revenues. For example, if income is growing, people will pay more income taxes. Higher income means they’ll spend more, so sales and excise taxes will rise. If corporate profits are predicted to increase, corporate income taxes will rise.

The first forecast is announced in December, so legislators can get started on the budget. But the forecast that really counts is the revision in April, right before the final negotiations. The April forecast takes account of recent economic trends and revenue collections. The forecast revision was announced on April 17.

The State Budget Committee heard first from the economic consultant, who predicted that growth for the U.S. and Indiana economies would be slower in the next two years. That means revenue growth was expected to be slower too, down from 3.6 percent this year, to 2.6 percent in 2020 and 2.5 percent in 2021. Revenues are expected to rise from $16.1 billion in 2019, to $16.6 billion in 2020, and to $17 billion in 2021.

The economic forecast said that inflation would run a little more than 2 percent per year, which means that added revenue covered inflation, but not much more. That’s one reason why it was hard for the legislature to find money for things like added teacher pay and child welfare programs.

Here’s another reason. Spending on Medicaid is expected to increase a lot. Medicaid is a collection of entitlement programs for health care. The Healthy Indiana Plan is the biggest one.  The state must pay benefits that people are entitled to receive under the eligibility rules.

The General Assembly needs to know how much Medicaid will cost in the coming biennium. So after the revenue forecast, the Family and Social Services Administration (FSSA) presented a Medicaid forecast. Medicaid costs about $14 billion per year. The federal government pays about 80 percent of that total.

Indiana’s share comes out of the budget. At the April forecast the FSSA said that the state would need $2.2 billion in fiscal 2019, then $2.5 billion in 2020 and $2.6 billion in 2021. Those are increases of 16 percent and 5 percent for the next two fiscal years.

The April revenue and Medicaid forecasts were revisions from the forecasts in December. In total for the rest of fiscal 2019, and for the coming biennium, the revision subtracted $33 million from revenues. Sales and individual income taxes were revised downward the most, while corporate income taxes and interest earnings were revised upward.

The Medicaid forecast revised 2019 costs downward by $40 million, but increased the forecast for the coming biennium by $105 million, for a net increase of $65 million. So, the combined revisions in the revenue and Medicaid forecasts meant that the General Assembly had about $98 million less for the budget. That made negotiations a little tougher.

Here’s the really tough part, though. Slow growth in the economy over the next two years means there will be a bit more than $400 million in new revenue each year. Rapid growth of Medicaid costs means an added $270 million will be needed in 2020, and $120 million will be needed in 2021. So Medicaid will require about 66 percent of all the new revenue in 2020, and 30 percent in 2021. Remaining revenues grow 0.9 percent in 2020 and 1.8 percent in 2021. That’s not enough to cover inflation.

Lots of people see their household budgets squeezed between small wage increases and rising health care costs. The General Assembly faces the same problem. The economy is growing slowly while health care costs are growing rapidly. The state’s budget is squeezed in between.