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Big budget cuts will make for bitter state politics

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Thanks to $1.3 billion in reserves, an infusion of federal stimulus money, and a penny-pinching approach to expenses, Indiana has managed to maintain a budget balanced during the recession.

Credit political leaders willing to cooperate across party lines.

But as the reserves dwindle toward zero and the stimulus money disappears, keeping the political debate friendly and the budget in the black will be another challenge entirely.

Half a year before they must craft the next state budget, Democrats and Republicans already are squabbling. Expect next year’s budget-writing session of the General Assembly to be the toughest in decades, as legislators wrestle with even tighter spending.

“It’s going to be a mess,” said IUPUI political science professor Brian Vargus. “There’s no way they can come out of that situation in a legislative session without major fights, an incredible amount of bickering, and probably some outspoken nastiness.”

IBJ.COM EXTRA
For a breakdown of the largest government spending cuts, click here.

State Auditor Tim Berry reported July 16 that Indiana collected $957 million less than budgeted in the 2010 fiscal year, which ended June 30. Berry, a Republican, said revenue was lower than the state’s collections in 2005. To remain solvent, Indiana had to spend nearly $500 million of its surplus and cut state spending by $785 million.

Things would have been far worse had the recession-battered state not already tightened its belt months before the fiscal year began July 1, 2009.

Berry forecasts Indiana’s reserves will dwindle to $188 million one year from now. And that’s assuming state tax revenue grows 5.3 percent—a prediction not everyone is confident will materialize.

Responding to Berry’s announcement, House Speaker Pat Bauer, a Democrat, returned to a common theme—his questioning of whether Republican Gov. Mitch Daniels really has delivered the thousands of jobs he’s touted. Bauer likened the Indiana Economic Development Corp.’s accounting to “dandelion wine.”

Bauer also noted that Daniels’ balanced budgets took a heavy toll on the state’s schools and universities, which have endured $300 million in cuts since the recession began.

And he suggested Daniels was hypocritical for criticizing the federal stimulus package while simultaneously using the deluge of funds to make ends meet. Berry’s report shows $992 million from the American Recovery and Reinvestment Act helped the state balance its books in fiscal 2009. The report doesn’t list an ARRA infusion for fiscal 2010.

“It has become increasingly apparent that any kind of fair and objective analysis of the fiscal condition of our state has to be filtered through the lens of an administration that simply cannot be trusted anymore to tell the complete story on issues like the state budget,” Bauer said in a statement.

Daniels’ budget director, Ryan Kitchell, scoffed at the attack. In a statement, he said, “Bauer’s constant attacks lack any credibility.

“His House voted to spend $2 billion the state didn’t have. Had we done this, we’d be bankrupt. Last time he controlled state spending, the state went totally broke. And if we listen to him again, the same result will occur.”

High-stakes election

The heated rhetoric from both sides—unusual so far ahead of an election—reflects the huge stakes this November and beyond. Republicans seek to control the lower chamber for the first time since 2006. Democrats now hold a 51-49 edge.

Indiana Legislative Insight Publisher Ed Feigenbaum said that, so far, Hoosier political leaders have cooperated across party lines to weather the recession.

But as money gets tighter, they’ll increasingly be tempted to point fingers and assign blame. Problems lawmakers have postponed facing up to, such as the projected $3 billion Indiana will owe the federal government for its insolvent Unemployment Insurance Trust Fund at year’s end, will increase both the financial and political pressure.

The stress won’t necessarily abate if the Republicans gain control of the House of Representatives, and thus the whole Statehouse. They already hold the Indiana Senate with 33 seats, compared with the Democrats’ 17.

In theory, Daniels would be able to push through a Republican agenda without any Democratic support. In practice, Feigenbaum said, GOP lawmakers would be getting stuck with the sole responsibility for the unpopular job of making even steeper cuts.

Further complicating the discussions would be divisions within the GOP. Conservative Republicans might not agree with the priorities of their more centrist GOP colleagues, making any majority tenuous.

Meanwhile, the Democrats would be able to play games with meeting quorums, making it tough to advance bills.

“If Democrats are in the minority in both [Statehouse] chambers, they won’t feel any responsibility to be responsible,” Feigenbaum said.

“They’ll fight tooth and nail to make Republicans and the governor the bad guys, and make them responsible for every kind of cut.”

Cutting expenses

Up until now, most of the state spending cuts have been steepest in areas where the public is least likely to notice, or where creative restructuring can preserve most of a mission.

For example, the Indiana Innovation Alliance, a partnership between Indiana University and Purdue University, saw its entire $10 million budget eliminated last year. The venture is designed to increase biotech research collaboration that leads to increased corporate and federal grants and more life sciences commercialization.

IU spokesman Larry MacIntyre said the schools hope to revive their alliance in a better economy.

“We still think that’s a good idea,” he said. “Both Purdue and IU, we’re trying to dramatically expand the amount of research and research-related activity that goes on in Indiana. That often leads to new businesses. It does have an economic impact, in that we don’t have quite as much horsepower to compete.”

Some agencies attempted to preserve their activities, even with dramatically reduced revenue. The Indiana Office of Tourism Development, for example, lost $2.6 million of a $4.4 million budget, or nearly 60 percent.

Director Amy Vaughan said she reacted by polling 1,100 tourism industry leaders about which of her office’s efforts were most critical. The agency focused on its website and travel guide, publicizing festivals, trip ideas and events with a heavy emphasis on bargains and discounts.

Vaughan said the Tourism Department had to cut back on staffers manning Indiana’s welcome centers, and renegotiated some contracts, including one to operate a toll-free tourism hot line.

If the state orders more cuts, Vaughan said, she’ll adjust accordingly.

The Indiana State Fair Commission lost $1.5 million of its $2.1 million state appropriation, but fortunately derives the bulk of its $23 million budget from other sources, including ticket and food sales and gambling revenue from Indiana’s racinos and riverboats.

But Fair Executive Director Cynthia Hoye still had to find ways to absorb the lost revenue. Her moves included cutting staff, delaying curb repairs and other maintenance, and decreasing freebies like commemorative pens. The fair also has hiked various fees, including those for parking and horse stall rental.

“Our customers won’t see any difference in quality of entertainment or fair experience,” Hoye said. “We’ll keep pulling up our sleeves and get the job done as best we can.”

She’ll have to. The economy is starting to improve, and a double-dip recession may be avoided. But political observers say we’re still a long way from the end of state spending cuts.

“It’s going to be a very unpleasant budget session. There’s only so much creativity you can squeeze out of a situation,” Vargus said.

“The notion this state is in really good shape and ready for whatever budget stuff is thrown at it, I don’t think it’s true. We’re in a tough state and the prospects are not bright.”•

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