State Strategies to Manage Budget Shortfalls

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Case Study: Indiana's Counter-Cyclical Revenue and Economic Stabilization Fund

Indiana's Counter-Cyclical Revenue and Economic Stabilization Fund, now commonly known as the rainy day fund, was established in 1982. Deposits to and withdrawals from the fund are based on a statutory formula. The basic concept of the formula is as follows: (1) For deposits, the fund receives any general fund revenue resulting from real (inflation-adjusted) growth in state personal income (minus transfer payments) of more than 2 percent a year and (2) for withdrawals, there must be a decline in personal income of more than 2 percent in a year. The legislature can override the formula with a majority vote.

The deposit mechanism was first triggered in 1985 and resulted in a $145.1 million deposit. Since that time, growth in real personal income has resulted in four additional deposits. Although economic conditions in Indiana have not triggered a withdrawal, the legislature overrode the trigger mechanism to access the fund in the early 1990s. In FY 1991, most of the fund's interest earnings were transferred to the general fund, in part to address budget problems but also to keep the rainy day fund balance from exceeding its 7 percent cap. In FY 1992 and FY 1993, transfers were made from the fund to help balance the general fund budget.

Although there is a limited amount of evaluative information and analysis available on Indiana's rainy day fund, state observers report that the fund has worked effectively: the deposit trigger works well and ample funds have been available to address short-term budget problems. On the downside, the withdrawal trigger is viewed as being too stringent. For the trigger to take effect, the state would have to be in such serious fiscal trouble that the fund's balance would be insufficient to make a significant difference.

As previously noted, the fund balance is capped at 7 percent (of a portion of state general fund revenues). There is some concern that this cap may be too low; some argue a 10 percent cap may be preferable if the objective of the fund is to avoid tax increases when state finances take a downturn. In Indiana's case, the current 7 percent cap is not based on total general fund revenues: In addition to general fund revenues of about $5.9 billion in FY 1995, approximately $1.5 billion of state revenues is allocated to the Property Tax Replacement Fund and the Property Tax Relief Fund. If the cap was based on total state operating revenues, the balance could be much higher.

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Written December 1996, posted January 2003, reviewed December 2003
Email statebudget-info@ncsl.org for more information.
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