Understanding Indiana’s reserves

Many smart people have been spending time thinking about how state leaders might invest Indiana’s growing revenue and robust reserves. This is especially of interest as monthly revenue collections continue to outperform forecast estimates (revenues have exceeded estimates for the last ten consecutive months). 

We mentioned in our recent Fiscal Year 2026 Close-Out Report (ending June 30) that Indiana closed the books with nearly $4 billion in reserves. At that same time, the state estimated reserve levels for fiscal year 2027 — this projection assumes flat revenue growth and projects $5.3 billion in reserves by June 30, 2027, or 22% of revenues. 

Already in the first two months of the current fiscal year, revenue collections have exceeded forecast projections. A positive (growth) revenue forecast in December 2026 could push the state’s structural surplus past even the existing FY 2027 reserve projections. 

Before anyone starts considering how to invest this windfall, there are a few realities that all of us need to contend with: 

Not all reserves are available to spend

A surplus is the amount of General Fund revenue that exceeds expenditures each year. In fiscal year 2026, that surplus was $1.855 billion. What is known as combined balances includes the general fund surplus plus three other funds that we lump in the larger $3.99 billion reserves. Here are their balances as of June 30: Medicaid Contingency & Reserve Fund: $274.7 million State Tuition Reserve: $739.6 million Rainy Day Fund: $1.12 billion. 

Because each of these funds that are included in the larger “reserves” have dedicated uses, we will have far less than the total amount available if we want to make state investments with reserves. 

Automatic taxpayer refunds are a real possibility

Current state law requires that in odd numbered years (budget crafting years like 2027) if the state determines that there are “excess reserves” of more than $50 million, then state law requires an automatic taxpayer refund. Excess reserves are defined as reserves that exceed 12.5% of the general revenue appropriation for the current state fiscal year. For comparison, in FY 2026, combined balances were 17.2% of the following year’s appropriations. 

That means that without a change to the Automatic Taxpayer Refund law or spending down reserves, Indiana might realize another refund, such as those in 2021 and 2022. 

Gas tax holiday impacts

Despite strong reserves, it is anticipated that over $1.1 billion may be needed to pay back the state highway fund for this summer’s suspension on state gasoline taxes. The Indiana State Board of Finance has been using cash from that fund to reimburse municipalities and counties for their lost revenue during the holiday. It is absolutely critical that the state pay back the fund to ensure that Indiana has the necessary funds to maintain our roads and streets. 

Re-Visiting 2025 budget and programming cuts

The actual impact of the current state budget (passed in Spring 2025 and covering FY 2026-2027) is that Indiana state government realized an overall 7% reduction in real spending (accounting for cuts, holdbacks, and inflation) as compared to the previous budget. Our analysis of these reductions showed that the cuts differed by program and agency — for example, that the agencies under the purview of the Secretary of Commerce (including the Indiana Economic Development Corporation and Indiana Department of Workforce Development) realized reductions of 40%. 

It is very possible, given the scale of these reductions and the fact that whole programs were eliminated, that state leaders may want to revisit some of these decisions and reverse them while revenues are available. 

A lot can change from December 2026 and April 2027

Budget leaders went into the 2025 budget expecting status quo revenues (based on the December 2024 revenue forecast), when they received an updated revenue forecast in April 2025 that substantially reduced expected revenues. As a result, budget leaders significantly cut spending and added a cigarette tax increase to balance the budget. Even though revenue trends look promising now, any downturn in the economy could severely hamper Indiana’s ability to target expected increased revenues and available reserves on spending that will benefit Hoosiers.