The fifth time was the charm for supporters of gaming in Ohio. Voters had rejected the approval of casinos in Ohio four times over the last couple decades, but apparently the Buckeye State’s fiscal concerns trumped the opposition as the referendum to allow land-based gambling operations in Cincinnati, Cleveland, Columbus and Toledo was approved with 53% of the vote in November’s election. Gaming in Ohio will certainly help that state with its revenue problems, but will just as certainly make Indiana’s fiscal picture worse by cutting into our gaming tax revenues.

Indiana currently receives about $250 million dollars a year from three riverboats that are within a short drive of Cincinnati. It is estimated that up to 38% of the riverboat patrons come from out of state. The Hollywood Casino in Lawrenceburg and Grand Victoria Casino & Resort in Rising Sun are just minutes from Cincinnati and could both be seriously impacted by a casino there. The Belterra Casino Resort & Spa in Vevay is a little further down the Ohio River, but likely would also feel the effects.

Additionally, the other casinos could draw away some of the traffic at the already greatly suffering Hoosier Park Racing & Casino in Anderson. All told, Indiana gaming tax revenues could drop by as much as $100 million. These likely future losses to Indiana follow the losses now being experienced at the Blue Chip Casino in Michigan City due to the opening of a new tribal casino last year just across the border in Michigan. In addition, Kentucky could well be the next state to siphon off revenues as the pressure mounts to allow slots at its horse tracks.

Bottom line: As more players enter the game, Indiana’s share of the winnings is sure to diminish.

Looking for ways to deal with greatly reduced tax collections, states are focusing on their unclaimed property statutes as a potential source of revenue. States are discovering that by changing their laws they can increase what escheats to the state coffers. Changes like expanding the definition of what constitutes "unclaimed property," shortening the period for owners to claim it and limiting recovery options result in more of the property going to the state (and less to the owners).

It is estimated that states collectively hold $33 billion in unclaimed property. Delaware expects to collect $380 million in 2009. So it is no wonder that struggling states are tempted to grab what they can in these disconcerting developments.

How much of the stimulus money had been injected into the economy through the first 4½ months of the year? As of mid-May, about 6% of the money — $45.6 billion - had been paid out. Much of that went to Medicaid costs, unemployment benefits and the $250 checks to Social Security recipients. Highway projects had received $11 million. The Transportation Department had committed an equivalent amount, but the money has not gone out yet.

In all, some $88 billion had been committed to various types of projects and programs. The administration points out that it is a two-year program, but many state officials and others remain anxious. The administration has committed to spending 70% of the money, or $550.9 billion, within the first two years.

Vice President Joe Biden said in an interview recently, "I think that what you’re going to see happen here is the velocity of this will increase not just arithmetically, but geometrically here. At least, we’ve got to make that happen."

The budget discussion yesterday in the House Ways and Means Committee proved just how far apart the House Democrats and Republicans are in their views of how the state’s fiscal picture should play out.

Republicans voiced concerns that the numerous (25 passed) amendments to the House Democrats’ proposal collectively spend another $100 million on top of an initial $500 million (beyond projected revenues) in the one-year spending plan – severely draining the state’s $1 billion surplus.  They also suggested that the spending levels established, particularly the way the stimulus money is used, will put the state in such dismal shape that taxpayers will be hit hard down the road.

The House Democrats, on the other hand, feel the amended bill simply reflects a different set of priorities than that of their Republican counterparts.  They say much of the state’s reserve will remain intact and that, given our economic climate, it is prudent to hold off on the fiscal year 2011 budget until next session, after revenue revisions are made at the December forecast.

The two parties remain at such odds that the chance of the session going into July was (gasp!) openly suggested.

Of course, it’s only the beginning of a game we’ve seen before with the Senate stripping what the House passes and inserting its own priorities. Thus, we seem to be inevitably headed down the all too familiar path – one that failed two months ago – to conference committee negotiations. 

Before the full House meets today on the budget at approximately 4 p.m., the Ways and Means Committee will hear two other measures, SS 1002 (on the Capital Improvement Board) and SS 1003 (involving public assistance).

Everyone on every side of the state budget debate is framing their remarks around a metaphoric “cliff” that the state may find itself standing at the edge of in two years. Three inter-related matters make up the primary elements of this fiscal cliff:

1) the availability of reserve accounts (surplus balances) come 2011
2) the extent that the federal American Recovery and Reinvestment Act (ARRA) of 2009 monies are used for ongoing programs or services for anything other than one-time expenditures
3) the rate at which the economy recovers and accuracy of the revenue projections/forecasts

Taking all of this into consideration, Gov. Daniels’ budget proposal is sound. The uncertainty of the economic recovery makes his line in the sand – maintaining no less than a $1 billion reserve balance – a prudent standard and an important step in avoiding a cliff. (See historic reserve balance data going back to 1976.)

The governor’s use of stimulus money only for things that would not add to the base operating budget is also essential to avoiding a freefall. His plan includes a significant amount to be directed to capital projects; although new construction adds to operating costs over time, the projects still fundamentally constitute one-time expenditures. And much is directed to immediately funding needed repair and rehabilitation of higher education facilities – a good way to apply one-time federal monies without adding costs down the road.

What the governor’s plan is being criticized for is building state K-12 education funding around the federal stimulus money specifically designated for schools with a high population of disadvantaged students (Title 1 monies). The proposed school funding formula results in a 2% overall increase. But critics point out that it is only 2% if you count the extra Title 1 – money that would flow to mostly urban schools, regardless of the level of state support.  It is suggested that this funding approach actually creates a cliff for those schools by making them dependent on that additional money.

This debate requires consideration of the big picture. First, these schools generally have declining enrollments, so their funding can’t be expected to rise steadily. By operation, the Title 1 money goes to schools that have more special needs, so the money will go to cover those needs. Even though state revenues are plummeting, the state portion of the school funding is still increasing, albeit by a very modest 0.5%. It is worth noting that most states are having to reduce education spending. So a 2% increase (0.5% state money; 1.5% federal stimulus money) is reasonable in these tough times. The final item below plays into this discussion too.

According to the projections, state revenues are expected reach a level by 2012 that will be sufficient to bridge the funding gap that will exist when the Title 1 money goes away that year. (See links to May forecast and Gov. Daniels’ budget presentation.)

Unfortunately, yes, schools are probably going to have to make do with smaller increases than anyone prefers.  Only “probably” because of another component of the governor’s budget proposal: if the economy recovers faster than the revenue forecasters projected and the revenues end up exceeding the projections, 50 cents of every unanticipated $1 will go directly to education funding; the other 50 cents goes to build back up the reserve balances.

While the governor’s plan may not be perfect, it is thoughtful and fair, and is well designed to prevent the state from heading toward - or off of - that financial cliff.

The state’s Unemployment Insurance (UI) Trust Fund is not just broke and in debt to the federal government to the tune of over $300 million through January; it’s going further in the hole by a magnitude that few have come to grips with. Conservative estimates suggest that Indiana is going to have to borrow somewhere in the neighborhood of $1.5 billion to meet its obligations.

The system needs a major overall. It suffers from a structural deficit that is getting exponentially worse as the economy continues to eliminate jobs. The problem actually began well before the economy tanked. A deceivingly large balance from several years ago has steadily disappeared. Last year the fund took in only $579 million, while paying out $986 million in benefits - a rounded off annual structural deficit of $400 million. Clearly there is a problem with the system.

Assuming the revenues paid in by employers in 2009 are equal to 2008 (which is questionable) and the monthly benefit demand remains $150 million (also questionable), the structural deficit for 2009 will be a whopping $1.2 billion. Unless something is done, by this time next year the negative balance will total approximately $1.8 billion. Federal stimulus money is anticipated, but it also increases and extends the mandatory benefits, exacerbating the problem rather than ameliorating it. Keep an eye on this issue because even though it is currently being overshadowed by other topics (budget, stimulus plan, etc.) it looks to become a major part of the legislative puzzle before the session ends.

Late last summer, the Indiana Chamber tax policy committee revisited the issue that is currently being debated again by the newly elected General Assembly. Should the 1%-2%-3% (of assessed value) tax caps be enshrined in our Indiana Constitution? Based on a policy position that has been in place for many years, the Chamber opposed SJR 1 last year, and the committee concluded that there is no reason to change that well-founded position.

So, what’s so bad about tax caps? Nothing if they were the same for all taxpayers. But the fundamental problem here is that the caps are different for different taxpayers. The resolution to change our Constitution (SJR 1) proposes replacing the language that says that all taxpayers will be guaranteed assessments and tax bills that are “uniform and equal” with language that says properties with equal market values will be taxed differently based on how the property is used. The 1%-2%-3% caps establish a “classified” property tax system. This is what our longstanding position opposes. A review of other states’ property tax structures reveals that classified systems serve as a means to tax business property at a higher rate, and therefore higher burden, than other property types.

This is the root of our opposition.

We believe that the founding fathers of our state got it right when they worded our Constitution to say that property of equal value will be assessed and taxed the same regardless of how the owner chooses to use it. In the simplest terms, what the proposed constitutional amendment would do is to sanction, endorse and make permanent a system that says owners of business commercial and industrial real property, and business personal property (machinery and equipment) can and will be taxed up to three times greater – merely because it is used for business purposes – than what some other property owners will be taxed on equally valued property. Is this something the Legislature and the citizenry should be supporting? Is this the message we want to send in difficult economic times to those considering whether to expand their operations in Indiana? Read the rest of this entry »