Daniels, lawmakers face session with tight budget

INDIANAPOLIS - Republican Gov. Mitch Daniels spent a few hours basking in his victory on Election Night, but it was back to business the next day.

He called members of his cabinet into his office and let reporters in to ask a few questions. Then they went to work in private.

"I'll just say our principal subject today will be the state's fiscal situation, which is on one hand much stronger than most other states, but on the other hand there is a lot of hard work to preserve," Daniels said.

Drafting a two-year, balanced budget during the session that begins in earnest in January is likely to be a tough task, especially amid some predictions that the nation is headed for a protracted recession that could be the worst in decades.
Daniels said state revenues for the first four months of this fiscal year - the second year of the current state budget - are flat compared with the same period a year ago.

And the economy is "likely to get worse rather than better, so we're going to have to be even more frugal and careful than we have been already to maintain the state's very strong, current position," Daniels said.

The state finished the fiscal year that ended June 30 taking in about $321 million more in revenue than it spent. That figure would have been lower had spending restraints ordered by Daniels not resulted in $133 million in savings.

State government ended the year with nearly $600 million in its main checking account. That combined with savings accounts left the state with a budget surplus of about $1.4 billion. Still, agencies have been told to spend 7 percent less this year than was allocated by lawmakers.

Even with those cuts, state Auditor Tim Berry said in July that the state is expected to spend nearly all of the revenue it takes in through June 30, 2009 - the end of this two-year budget cycle.

The state lost 20,000 jobs from January through September, and a team of Indiana University economists recently predicted 15,000 additional job losses in 2009.

Unlike many states, Indiana's budget is balanced and its reserves are at a level generally considered to be prudent for weathering an economic downturn. Daniels wants to keep it that way.

Leaders of the Republican-controlled Indiana Senate said last week that two of their top priorities for the upcoming session were passing a balanced budget - one that doesn't spend more than the state takes in - and "protecting" education funding.

Senate Appropriations Chairman Luke Kenley, R-Noblesville, acknowledged that protecting education funding meant avoiding any cuts from current levels. But it's possible that education - an area near and dear to most lawmakers - won't get any new money either, he said.

"Given today's position, there is a chance that that will be the situation and we need to be honest about what the economic environment is," Kenley said.

Flat funding for schools could force some districts, which are committed to contractual salary increases, to make cuts or lay off teachers, said Dennis Costerison, executive director of the Indiana Association of School Business Officials.

Lawmakers could always raise taxes, but Kenley said that would send a terrible message at a time when so many taxpayers are struggling to make ends meet.

House Speaker Patrick Bauer, D-South Bend, said he and his caucus would do their best to at least increase spending on education, and perhaps health care. But he said putting any decent budget together was going to be difficult and would take a major, bipartisan effort.

Daniels has laid down some ground rules going in.

"The governor's top priority is a truly balanced budget," said Ryan Kitchell, director of the Office of Management and Budget. "This means no tax increases, no debt, no pension fund raids, and no payment delays to schools. We will do it the old-fashioned way and live within our means by restraining spending as much as necessary to match revenue."

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Mike Smith of The Associated Press has covered Indiana's Statehouse and political scene since 1993.