Anticipating best, not-too-bad and worst-case scenarios, a charitable organization to which I belong adopted three different budget plans to get it through the recession. Plan A was the first to take effect; Plans B and C were to be used only if certain income and expenditure thresholds were breached. At this writing, Plan B has been implemented. Board members remain hopeful they won't have to resort to Plan C, which would require severe staff and program reductions.
The approach brings to mind the counsel of motivational speaker Denis Waitley, who advises businesses to “expect the best, plan for the worst and prepare to be surprised.”
That is exactly what the 2009 Indiana General Assembly should have done in crafting a biennial budget: Write three different versions contingent on possibilities.
Plan A would be based on the April revenue forecast, flawed though it may prove to be. That forecast projected that between now and July 1, 2011, Indiana will take in $830 million less than was expected four short months ago. The problem is that this report may also understate our shortfall and could lead to an out-of-balance budget early in the 2009-2011 biennium.
Plan B would be based on dire estimates and could be triggered as soon as the next forecast comes out. This would protect us from the billions in red ink that some states are facing.
Plan C would be the rosy view. Should the economy bounce back this year, which would improve income- and sales-tax collections, lawmakers could restore cuts and increase budgets of agencies that had been flat-lined.
Senate Republicans would probably be satisfied with Plan A, the governor would root for Plan B and House Democrats would put their hope in Plan C. Now that's compromise. Instead, Hoosiers are holding their breath as lawmakers and the governor wrangle up to the last minute on whether to put federal stimulus money in the budget, whether to dip into reserves and whether it should be a one- or two-year budget.
Indiana is not alone in its budget-planning woes. Considering our 10 percent unemployment rate, we're in relatively good shape compared to some peers. According to the National Conference of State Legislatures (NCSL), states will face a cumulative budget gap exceeding $281 billion through fiscal year 2011.
“The fiscal situation facing states is like a bad horror movie,” said Corina Eckl, director of NCSL fiscal programs. “The details get more gruesome, and the story never seems to end.”
Nearly two-thirds of the states already project a budget gap in FY 2011. Texas says it could have a budget hole of $12 billion by its next legislative session.
“During this legislative session, legislators were left with only tough and unpopular options to balance state budgets,” said William Pound, executive director of the NCSL. “The situation will be even more difficult in the next two years, given the serious cuts that have already been made. The easy adjustments have already been taken.”
One easy adjustment Indiana has avoided so far is raiding its $1.3 billion in reserves, including the rainy day fund. Gov. Mitch Daniels has adamantly opposed the idea despite some lawmakers' insistence rainy days are here.
Because they have balanced budget requirements, most states have rainy day funds that allow them to carry money over from good to lean years. The tricky part of the calculation is timing. Should Indiana tap the fund prematurely and the economic slowdown worsen, the need for revenue would become more desperate and the potential for pain more likely.
As one blogger said, using savings at the first sign of a crisis is like “wiping out your personal savings to pay for groceries instead of turning off your cell phone and cable TV when you lose your job.” Until we know for sure the economy has hit bottom, we ought not.