Gov. Mitch Daniels and state legislative leaders pledge that they will not pass a general tax increase in 2011, so Hoosiers whose personal or business budgets are stretched to the limit may relax a bit. But they’re receiving no similar guarantee that the government services to which they are accustomed will be intact when the General Assembly, which gets under way Jan. 5, adjourns next spring.

Nor is there a guarantee that lawmakers won’t tinker with ways to raise revenue, though they likely would couch the measures in less onerous terms than “tax increase.”

With unprecedented, recession-driven declines in state revenue, such is the prospect for what is roundly anticipated as the most challenging legislative session in years. Lawmakers will be tasked with preparing a two-year budget that will govern state spending from July 1 through June 30, 2013. To do so, they must reconcile an imbalance between expenditures and revenue of at least $1 billion.

Elected leaders also have said K-12 education is sacrosanct (though Daniels recently told a Rotary Club audience that small class size—a costly enterprise—was the “most overrated” contributor to children’s performance). Schools already are receiving $300 million less this

year than the Legislature appropriated for them, part of the Daniels administration’s cost-cutting of $1.9 billion over the past three years.

“If we can walk away in April or May—whenever they get done—with the same dollars that we have right now, we’ll feel pretty good,” said Dennis Costerison, executive director of the Indiana Association of School Business Officials. “Somebody’s got to pull a rabbit out of the hat.”

Budget point man Sen. Luke Kenley, R-Noblesville, said reduced appropriation will be considered the base for future budget-making purposes. That leaves a yawning gap of at least $700 million for Kenley and his cohorts to close.

State reserves will be of no help; they topped $1.3 billion in June 2009 but were subsequently tapped to sustain spending and are expected to be just $188 million—enough to operate state government for six days—when the fiscal year closes next June 30. And federal stimulus funds that shored up Indiana’s budget the past two years are depleted.

With public schools—which consume roughly 54 percent of all state spending—off the table, cuts will have to come from the rest of the state budget. That includes higher education, which already has endured 10 percent of Daniels’ cuts, and general government—state police; prisons; health care for poor, elderly and disabled people; state parks; and the like—which has endured 70 percent of them.

“Taking more out of general government will be difficult without seeing a noticeable difference in the service delivered,” said John Ketzenberger, president of the Indiana Fiscal Policy Institute, a nonpartisan research group.

Kenley said he was not implying what programs might be cut, but he provided examples: “We make some appropriation for public television and public radio. We have appropriations for a program to try to attract health care professionals into rural areas. We have programs like this scattered throughout the budget that are good, but if you have to choose between continuing to fund education, even at a slightly lower level, and keeping these programs alive, a lot of these programs are going to be suspended, if not just terminated.”

Also on the chopping block will be Medicaid, the state-federal program that provides health care for poor, disabled and elderly people, including many in nursing homes. Cutting Medicaid spending can be tough because the federal government, which pays about two-thirds of the tab, requires states to provide services to anyone who meets eligibility guidelines. But optional services may be eliminated, and Indiana’s very participation in the program should be debated, Kenley said.

“That would be a pretty enormous decision,” he said. “I think it’s going to be discussed. I don’t know whether it can go very far because there’s just so much dependence on Medicaid that we may be stuck.”

Opting out of Medicaid and losing the federal dollars are scary notions, said Kim Dodson, associate executive director of The Arc of Indiana. Already, services for people with developmental disabilities, whom she represents, have been cut $255 million, she said, and 22,000 people are waiting to receive services at home instead of an institution.

“We certainly understand and respect the financial constraints that the state of Indiana is in, but we do feel like the state has a duty to provide services to Indiana’s most vulnerable citizens,” she said.

Kenley allowed that finding $700 million in spending cuts will be difficult, especially coming after the governor’s efforts.

“It seems like an awfully large amount to do,” he said. “And that’s our problem. But I don’t know of any other way to deal with this other than to start on page one and give it our best effort and see where we can get to.”

Ketzenberger said he would not be surprised if lawmakers resort to tweaks in the tax code—reducing or eliminating certain income-tax deductions for individuals and businesses, for example—that could generate new revenue.

“I’m not saying they’re going to raise taxes,” he said, “but I am saying that it will be difficult to eliminate the entire deficit without new revenue.”

Indeed, the Fiscal Policy Institute issued a report in September suggesting that a combination of spending cuts and higher taxes was the likely solution to the state’s woes.

Kenley did not rule out such tweaking, but said, “it’s a little too early to predict that.”•