State Budget Agency directs new five percent spending holdbacks

As U.S. House Republicans were figuring out how to respond to the White House rescissions package this week, seeking to maintain the spending prerogative of the legislative branch in the face of presidential clawbacks of already-appropriated funding and balancing the need to cut expenditures while wary of the precedent that impoundment on steroids might establish . . . state agency heads in Indiana were confronted with a budget memo in advance of the new fiscal year that will require additional budget cuts beyond those imposed by the General Assembly not even two months ago.

Concerns continue to mount, inside and outside state government, about growing costs for mandatory programs, decreased revenue collections, and potential major federal budget cuts that would slash the federal share for Medicaid, SNAP, and other major shared initiatives, devolving responsibility for additional costs to state and local governments.

With that in mind – albeit leaving federal spending cuts unmentioned – the State Budget Agency issues end of fiscal year budget guidance to state agency chiefs . . . and it ain’t pretty.

After legislative fiscal leaders cobbled together a budget riddled with spending cuts in the week that followed a dismal mid-April revenue collection forecast, state agencies generally took a five percent haircut from what had earlier been a tight  – effectively flat – preliminary budget bill. I.C. 4-13-2-30, as added by P.L.213-2025, SEC. 53, requires the budget director to withhold at least 5.0% from each appropriation made to a state agency that is predominantly used, as determined by the budget director, for salaries and other wages or agencies’ general operating expenses.

Unfortunately, that will simply be a start, agency leaders learned this month.

A June 2 memo from State Budget Director Chad Ranney under the direction of Secretary of Management and Budget Lisa Hershman – who faced down high-spending generals in her last government role, managing finances for the Pentagon – directs agencies (and “all taxpayer funded agencies across state government” as well) “to develop and submit an FY26 spending plan that accounts for the 5% mandatory reserve and changes to agencies’ State Personnel Department (SPD) and Indiana Office of Technology (IOT) charges,” top the State Budget Agency.

Budget chief Ranney warns colleagues that “it is imperative that agencies account for this 5% mandatory reserve in their FY26 spending plans, as the amounts withheld are unlikely to be released” (emphasis in original).

“As a result of the average 5% budget cuts from FY25 appropriations and a 5% reserve on operating funds, agencies will need to implement a strategic reduction in expenditures for FY26, aimed at optimizing resources without compromising essential public services” to cope with what is, in essence, a 10% budget cut (or slightly less for some entities singled out for minimal appropriation increases due to special needs or circumstances, including the Department of Correction and the Department of Child Services.

Almost $13 million from the Department of Correction budget will begin flowing back next month to counties as reimbursement for fees to lock up state inmates that were left unpaid when IDOC ran out of cash for that purpose last year.

The State Personnel Department Human Resources “seat charge” rate will remain unchanged from FY 2025, set at $567.28 for full-time employees and $106.82 for part-timers in FY 2026 and FY 2027.” There will be fewer employees overall, however, as assorted media reports indicate that state agencies and entities have recently trimmed dozens of employees – and will be leaving many more positions unfilled – in response to the Governor’s budget cut requests.

The budget memo adds that “The Indiana Office of Technology seat charge will remain flat over the biennium at $80.75. This is a slight increase from FY 2025. IOT charges for all listed products will see a 2.0% statewide average increase in FY 2026, representing a reduction from 8.0% prior-year estimates.”

An empathetic Ranney observes that “For the first time in recent memory, nearly every agency across all 3 branches of government finds itself entering the first year of a new biennium with fewer resources than it had the year before. At

the same time, the costs of the state’s major programs continue to increase at unsustainable rates.” He reminds agency leaders that “Overcoming these challenges will require each of us to place a renewed focus on fiscal responsibility as well as a collective commitment to budget discipline.”

Ranney adds that “Agencies should evaluate and identify areas where cost savings can be achieved through operational changes or efficiencies as these are ideal targets for maximizing reversions.”

Agencies are required to submit a strategic plan to SBA no later than June 30 “that demonstrates their ability to meet the reserve target and spending plan for FY26. The Secretary, Agency Head, and Chief Financial Officer must approve the strategic plan prior to submission.”

Components of the strategic plan should look familiar to readers who remember our exclusive look last fall at the then-Braun transition team demand of each agency leader to assemble and submit a detailed agency overview. The new budget review components that the State Budget Agency wants each state entity to address largely resemble a broad swath of the transition documents:

  1. How the spending plan will achieve the reserve target.
  2. The agency’s plan to comply with the policies in the FMC.
  3. Any cost savings identified by the agency.
  4. Any opportunities to prioritize federal spending rather than state funding.
  5. Anticipated federal grant opportunities or renewals through June 30, 2026, which include a state match component.
  6. The agency’s staffing plan.
  7. An analysis of open contracts.
  8. The agency’s anticipated procurement and technology needs through June 30, 2026, including any anticipated new procurements or contract renewals.
  9. An analysis of the agency’s capital plans, if applicable.
  10. Any anticipated exceptions to FMCs or state policies, along with the justification for the requested exception.

Note as well that initial public reaction to and the success of the shift of the Dolly Parton Imagination Library from a state budget line item to a privately funded initiative seems to have planted a seed in the minds of the executive branch bean counters that – with some, uh, “imagination” – the concept may be transferable to some other programs traditionally funded by appropriations.

As the summer progresses and revenue collection details come into focus, budget officials will have a better idea about the fiscal trajectory, and are also likely to commission an interim revenue forecast to aid in planning. Legislative leaders have been loath to discuss the need for a special session, but you only need to look back to the federal tax cuts in the first Trump Administration for precedent. State lawmakers returned for a special session in 2018 in large part to address issues related to federal tax compliance, working to ensure that the state tax code comported with the new federal tax changes.

If the “One Big Beautiful Bill Act” – or significant elements of its tax provisions – is enacted this summer, state solons may choose to return this summer, assigning responsibility to Congress for the need to fix state tax laws. At the same time as they might be in special session, they could also tackle unresolved budget issues precipitated by economic conditions instead of waiting until Organization Day or even early January (note that changing the state tax code just a few week before the season opens for accepting tax returns for 2025 is largely untenable due to the need for taxpayer certainty and changes needed in state forms and guidance). So . . . voilà! Don’t say we didn’t warn you.