Call it Mitch Daniels' gift to the next governor. While 31 states are still struggling to close budget shortfalls blamed on the recession, Indiana is touting the largest surplus in its history: $2.15 billion.
Some will be put aside for a rainy day. $360 million will be applied to our unfunded pension liability. Another $360 million will be given back to taxpayers under terms of a 2011 automatic refund law.
More than any other issue, the state's fiscal health is shaping the debate in the 2012 governor's race. Instead of arguing over what services to trim or which taxes to raise, as in some states, John Gregg and Mike Pence will be debating which tax cuts to make and whether some programs deserve more money.
Pence credits the surplus to “good stewardship” by fellow Republican Daniels. He calls Indiana the “fiscal envy of the country.”
Democrat Gregg is in a thornier position of attacking the Daniels administration's fiscal policies as the state sits on a hefty reserve.
After Auditor Tim Berry's July 12 surplus announcement, Gregg responded, “I don't think anybody can believe those numbers.”
Gregg pointed to two recent accounting mistakes that he says raise questions about the reliability of Berry's balance sheet. In April, the state found a computer programming error that shortchanged local governments $206 million. That followed an earlier discovery that the state had lost track of $320 million in corporate tax collections. The money should have been placed in the general fund but wasn't.
Gregg said he has no problem giving taxpayers their money back, but he's skeptical. “Hoosiers don't write checks when we don't know how much money is in the bank. And we don't know how much money is in the bank.”
An independent audit of the Indiana Department of Revenue is under way to determine if the errors are signs of deeper problems. Gregg and Pence both support the audit.
Both have made tax cuts a major campaign promise while insisting there will be enough money to increase spending on things like education and child services.
Gregg has proposed an end to the state's gasoline sales tax, which would save the average family from $261 to $522 a year. He's also suggested eliminating some corporate income taxes.
Pence said he'll soon announce a plan to give “tax relief for every Hoosier,” noting he wants to “grow the economy not the government.”
Although Gregg will try to argue otherwise, this much is clear: The next governor will inherit a state in far better position than most to cut taxes and at the same time tackle deep financial issues on the horizon. Economists say unfunded state pensions and rising health care costs pose the biggest threat long-term to states' fiscal stability.
On the former, Daniels again leaves a positive legacy. During his two terms in office, the Pension Stabilization Fund has accumulated over $2 billion in assets and the state has stopped raiding pension funds to pay bills. The Taxpayer Protection Act, which established the automatic rebate language, also guaranteed that half of the state's “excess” reserves would go to pension debt. According to Moody's, Indiana has the second lowest long-term debt and pension liability “as percentage of GDP” in the country. That makes it a manageable challenge for the next governor.
One thing Daniels can't give his successor is a remedy to rising health care costs, which are responsible for the biggest increases in state spending over the past two decades.
When the Supreme Court upheld the individual mandate in the federal health care law, it struck down a requirement that states cover more citizens through Medicaid.
It's now up to states to decide whether to expand their programs after federal funding phases out. Daniels has not taken a position on the matter.
The expansion would cost Indiana $2 billion to $3 billion a year, which notably is about the amount of this year's surplus. The next governor will not get a moment to rest on Daniels' financial laurels.