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Fact check: Did Indiana go from having a $2 billion surplus to a $1 billion deficit while John Gregg was Speaker of the House?

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June 24, 2016
By Autumn Lewien

In one of the nation’s most closely watched campaigns for governor, John Gregg (D), a former state House Speaker, is trying to unseat first-term Indiana Gov. Mike Pence (R). It is a rematch from 2012 when [Pence beat Gregg by three percentage points.

In a campaign ad dated June 7, the Republican Governors Association's (RGA) Right Direction PAC claimed that "as Speaker of the Indiana House, Gregg helped turn a $2 billion surplus into a massive deficit."[1] On a website titled "The Real John Gregg," the PAC gave more detail on the phrase "massive deficit": "While John Gregg was Speaker of the House, Indiana went from having a $2 billion budget surplus to a budget deficit of close to $1 billion."[2]

We decided to take a closer look at that claim.

In 1998, about a year-and-a-half after Gregg was elected Speaker of the House, Indiana was sitting on a $2 billion "combined reserves" surplus. Four years later, according to a March 2002 Deficit Management Plan, the state was facing a projected $1.2 billion operating deficit by the end of the 2001-2002 fiscal year—Gregg’s last full fiscal year as Speaker. However, this comparison is misleading. The claim juxtaposes an actual reserve "surplus" with a projected deficit. Instead of ending fiscal year 2002 with a $1.2 billion deficit, the state recorded a $534 million reserve balance.

A $2 billion surplus?

Gregg took office as Speaker of the House in November 1996. His first budget (for the 1997-1999 biennium) took effect on July 1, 1997.[3]

After every budget cycle, the Indiana State Budget Agency publishes the amount of money held in its reserve funds. On June 30, 1998, the state's combined reserves totaled just over $2 billion.[4] Combined reserves, also called "total balances" or "unappropriated 'surplus' balance" in state reports, refer to the sum of the year-end balances in the General Fund, the Tuition Support Reserve, the Medicaid Reserve Account, and the Rainy Day Fund.[4][5]

The RGA PAC’s talk of a $2 billion surplus is, most likely, a reference to the 1998 figure.[6]

See also: Glossary of state budget terms

A $1 billion deficit?

The state’s combined reserve balance fell by roughly $1.5 billion (from $2.01 billion to $534 million) between June 30, 1998 and June 30, 2002—Gregg retired from office in November 2002. (See Figure 1 and the chart below for reserve balances in past years.)[4]

While the decline in combined reserve balances is significant, it is not a $1 billion deficit. So, where does the $1 billion figure cited in the claim come from?[7]

In March 2002, the Indiana State Budget Agency released a Deficit Management Plan in which State Budget Director Betty Cockrum projected that the state would see an "annual operating deficit" of $1.2 billion by June 30, 2002, and a $1 billion deficit by the close of the 2001-2003 biennium.[8]

However, that figure was not an actual deficit. Indiana, like most states, has a constitutional provision requiring a balanced budget "in the sense that appropriations never exceed the sum of projected revenues plus existing balances," said Lawrence DeBoer, a state budget expert at Purdue University.[9][10]

"The state [C]onstitution is interpreted as requiring positive balances at the end of the fiscal year," stated DeBoer. "[A]nd in 2002 and 2003 the state used some 'fiscal gimmicks' to make that happen."[9]

Indeed, in 2002, the state legislature and governor implemented a series of short-term budget solutions, including payment delays, transfers from reserve accounts, and reversions, to balance the fiscal 2002 budget.[8][11] Additionally, in a 2002 special session, the state implemented a series of tax changes to offset the $1 billion deficit projected for the 2003 fiscal year.[12] The result: Indiana ended fiscal years 2002 and 2003 with total combined reserves of $534 million and $720 million, respectively.[4]

See also: Indiana state budget and finances

Is Gregg to blame?

In the June 7 ad, the RGA PAC states that "as Speaker of the Indiana House, Gregg helped turn a $2 billion surplus into a massive deficit."[1]

While Indiana did not run an actual $1.2 billion deficit in fiscal 2002, the state's combined reserve balance did decline by 74 percent—from just over $2 billion to $534 million— during Gregg's tenure as Speaker. So the question becomes: What role did Gregg play in the $1.5 billion decline?

The Speaker of the House forges the state’s fiscal policy in concert with the governor and legislature. And, in the fiscal years 1999-2001, the executive and legislative branches did agree to deliberately spend down reserves, according to DeBoer.

"By fiscal [year] 1999 revenues had come in above forecasts for several years, balances were accumulating, and the governor and legislature were looking for tax cuts and added spending in order to reduce [the surplus]," said DeBoer. "Part of the reduction in balances was intentional, and the Republican controlled Senate went along."[9]

Indeed, during the 1999 general session, then-Governor Frank O'Brannon (D), the Democrat-controlled House, led by Gregg, and the GOP-run Senate adopted a budget that, through a series of tax cuts and one-time, targeted spending, reduced the state's combined reserves from $2 billion to a projected $1.2 billion at the end of fiscal 2001. (The actual combined reserve balance on June 30, 2001, was just under $910 million.)[13][14]

The actions were taken, however, "based on the assumption that the state would continue to experience normal revenue growth."[14] And just the opposite occurred. The 1990s technology boom was followed by a bust. Stocks started to fall in March 2000, and a recession ensued a year later.[15] During this time, Indiana failed to bring in as much money as it had planned—at the end of fiscal 2001, the state collected $721 million less in revenues than forecast in April 1999, and actual revenues reported at the end of the 2001-2002 fiscal year (June 30, 2002) were nearly $297 million short of November 2001 projections.[14][16] This drop in revenues, coupled with the tax cuts and one-time, targeted spending enacted during the 1999 legislative session, left Indiana to implement the fiscal gimmicks and tax reforms discussed in the section above to fill the projected $1.2 billion budget hole.[11]

Conclusion

The RGA Right Direction PAC claimed that "While John Gregg was Speaker of the House, Indiana went from having a $2 billion budget surplus to a budget deficit of close to $1 billion."[2]

In 1998, about a year-and-a-half after Gregg was elected Speaker of the House, Indiana was sitting on a $2 billion "combined reserves" surplus. Four years later, according to a March 2002 report, the state was facing a projected $1.2 billion operating deficit for the fiscal year ending June 2002—Gregg’s last full fiscal year as Speaker.

However, this comparison leaves out important information. The $1.2 billion figure was not an actual deficit. Indeed, in 2002, the state implemented a series of short-term budget solutions and tax changes to balance the fiscal 2002 budget. The result: Indiana ended the 2001-2002 fiscal year with a $534 million combined reserve balance—a $1.5 billion (74 percent) decline from 1998, but still a surplus.

See also

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Sources and Notes

  1. ↑ 1.0 1.1 YouTube, "RGA Indiana Ad: 'Facts,'" June 6, 2016
  2. ↑ 2.0 2.1 The Real John Gregg, "From a Surplus to a Deficit," accessed June 12, 2016
  3. ↑ Autumn Lewien "Email conversation with Jeff Harris," June 22, 2016
  4. ↑ 4.0 4.1 4.2 4.3 Indiana State Budget Agency, "A History of State Operating Revenue and Reserve Fund Balances Compared to the Operating Revenue Stream," accessed June 13, 2016
  5. ↑ Indiana Office of the Auditor of State, Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2002," accessed June 20, 2016
  6. ↑ Jon Thompson, Republican Governors Association's communication director, in an email conversation with Autumn Lewien dated June 14, 2016, provided us with the following quote: "The $2 Billion general fund surplus that existed one and one-half years ago is decreasing." Thompson cited the source of the quote as a December 31, 2001, Auditor's Report issued by Connie N. Nass. However, we were unable to find the original source. We reached out to the campaign to confirm this $1.2 billion combined reserves figure but have not yet received a response. If we do, we will update the article accordingly.
  7. ↑ Jon Thompson, Republican Governors Association’s communications director, pointed Ballotpedia to two Indianapolis Star articles, both of which cite the $1 billion figure. The two articles cited by the RGA are: Indianapolis Star, "Gov. O’Bannon Defends Indiana’s credit rating," December 5, 2001, and Indianapolis Star, "Legislative Perk is a crying Shame," April 1, 2003. Both articles are located behind a paywall.
  8. ↑ 8.0 8.1 Indiana State Budget Agency, "Deficit Management Plan: A Plan for Managing the State Budget through June 30, 2003 and Beyond," March 28, 2002
  9. ↑ 9.0 9.1 9.2 Autumn Lewien, "Email conversation with Lawrence DeBoer," June 17, 2016
  10. ↑ National Conference of State Legislatures, "State Constitutional and Statutory Requirements for Balanced Budgets," accessed June 18, 2016
  11. ↑ 11.0 11.1 National Association of State Budget Officers, "The Fiscal Survey of States," November 2002
  12. ↑ Indiana Legislative Services Agency, "Fiscal Impact Statement: HB 1001 (SS)," June 21, 2002
  13. ↑ The one-time, targeted spending included: $290M to reduce future teachers’ retirement fund liabilities; $200M for local road construction; $155M in state infrastructure investments; $80M for new university buildings; and $82M for university technology investment.
  14. ↑ 14.0 14.1 14.2 Indiana State Budget Agency "The O’Bannon-Kernan Balanced Budget Plan," November 15, 2001
  15. ↑ The National Bureau of Economic Research, "The Business-Cycle Peak of March 2001," November 26, 2001
  16. ↑ Indiana State Budget Agency, "General Fund and Property Tax Replacement Fund: FY 2002 Report of Monthly Revenue Collections, Targets per November 14, 2001 Forecast," accessed June 20, 2016

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