Indiana federal aid target in national debt deal

The last-minute debt deal approved by Congress and President Barack Obama keeps federal aid flowing to states. But Indiana won't emerge unscathed from the battle despite its own efforts to get its fiscal house in order.

The federal deal calls for lawmakers to cut $917 billion. It spares the largest chunk of federal spending — entitlement programs like Medicaid and Social Security — but targets "discretionary funding," which is where a good chunk of the roughly $9 billion the state collects from the federal government each year falls.

Transportation and education could be sitting ducks. So could labor, child welfare and environmental aid. And Indiana, which has already weathered millions in state-ordered cuts, will have to make some tough choices.

"A question for states is what are their priorities going ahead?" said Michael Bird, senior federal counsel for the National Conference of State Legislatures. "What are the things you need to invest in to, one, turn the economy around, and two, fortify. You can't move forward with everything."

Though Indiana has rebuilt its reserves to nearly $1.2 billion, the state leans heavily on federal money. Close to $1 billion of the state's $1.7 billion in transportation money comes from the federal government. Indiana relied on stimulus dollars to help patch the budget through the Great Recession. The state also borrowed $2 billion from the Obama administration to pay for unemployment insurance — a loan for which state lawmakers approved a repayment plan earlier this year.

"It's been a very popular talking point to be critical of Washington and be critical of federal spending, but I don't think people know what an integral role that federal funding plays in our state budget and in terms of our local budgets," said Sen. John Broden, D-South Bend, a member of the Senate Appropriations Committee.

According to a comprehensive federal report that tracks federal aid to the states, Indiana collected $10 billion in the 2009 fiscal year, the most recent data available.

The U.S. Department of Education sent Hoosiers more than $300 million for special education programs and another $1 billion for secondary education that year.

The Department of Homeland Security sent Indiana $300 million that year — most of it to pay for anti-terrorism programs and disaster relief. The Department of Housing and Urban Development sent the state another $613 million — most of it housing aid for low-income Hoosiers.

"I don't see the state stepping in to replace those funding streams unless we have some specific crisis that we need to deal with," said Senate Appropriations Committee Chairman Luke Kenley, R-Noblesville.

The cuts will not come en masse until Obama introduces his next budget. And still to be decided is at least $1.8 trillion in potential budget cuts or tax increases. A committee of a dozen lawmakers is scheduled to make its recommendation to Congress by the end of the year.

The so-called "super committee" could easily approve cuts in the other half of Indiana's federal purse: $4.3 billion for Medicaid.

State budget director Adam Horst won't speculate on what would happen if the state loses any portion of its federal aid. When faced with the prospect of the U.S. default two weeks ago, Horst said the state would be able to subsist on the state's $1.2 billion cash reserves and lean on money gained from the 75-year lease of the Indiana Toll Road for a short period.

For now, Indiana can only wait to see how federal lawmakers tackle what Daniels calls the "red menace" of federal spending.

"Nobody knows the answer to how much and when or what," Kenley said.

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