Return to: 2001: A Year of Change

STATE GOVERNMENT

Tapped-out surplus leaves state scrambling for funds

BY MICHELE MCNEIL SOLIDA

Published: Dec. 29, 2001

The year began with a tough assignment for state leaders: craft a two-year spending plan for Indiana in uncertain economic times.

The assignment grew even more challenging when the nationwide recession hit the state.

Like many other states, Indiana ends 2001 in a fiscal crisis. The state has a $1 billion shortfall in its nearly $21 billion budget, which has forced deep cuts in Medicaid, halted raises for more than 30,000 government employees and put funding for public schools at risk.

As lawmakers and the governor look for more money, taxpayers look for answers: What happened to the surplus?

Joe Gundersen is one of those taxpayers left wondering -- and hurting. He works for the Indiana Department of Transportation, so he won't be getting a raise under one of Gov. Frank O'Bannon's recent cost-cutting measures.

But Gundersen's expenses are increasing. His rent is going up $30 a month -- to $480 -- and his apartment complex is now making tenants pay their own water bills. That's another $10 or $15 a month.

"I understand the need to be fiscally responsible, but personally, I'm disappointed that my costs are going up, but not my salary," he said.

When taxpayers like Gundersen ask about what happened to the now-legendary $2 billion surplus, the governor is ready with an explanation.

The governor tells them the money paid for local road improvements and more university technology. The surplus helped erect new buildings on college campuses -- $30 million for the Indiana University School of Medicine and $1.5 million to Ball State University for its music building. Nearly $300 million went to underfunded teacher pensions.

And don't forget, the governor says, about the tax cuts for people with children and Hoosiers who rent.

"It wasn't just piddled away," O'Bannon said. "These were all good investments that moved Indiana forward."

Though most of the surplus -- about $1.2 billion -- was saved for a "rainy day," it wasn't enough.

Rep. Jeff Espich, the GOP's fiscal leader in the House, says the only thing saving Indiana from a budget crisis before this year was a booming economy that left the state treasury flush with cash.

But now that the cash has run out, times are tight, the Uniondale Republican says.

"We have a budget that spends more than we're taking in, and there's nothing to save us now."

The year began with lawmakers trying to create a realistic spending plan for the next two years. When they finished in late April, lawmakers in both political parties knew the budget was overly optimistic.

Then the recession hit, and Indiana headed for a financial nose dive.

These are tough economic times not experienced since the early 1990s. During that recession, then-Gov. Evan Bayh used nearly every penny of the state's surplus, ordered a round of budget cuts and, for the first time ever, relied on gambling revenue to avoid a tax increase.

This year's slowdown could turn out to be more like the recession of the early 1980s, when then-Gov. Robert Orr raised sales and income taxes to get Indiana through that crisis. O'Bannon says tax hikes are needed this time, too, or he'll be forced to cut funding to Indiana's public schools.

The governor first sounded the alarm in July when he called the budget problem a crisis. That's when, for the first time in two decades, Indiana reported a drop in the amount of money collected over an entire year.

Indiana's money problems steadily deteriorated through October as the state continued to collect fewer tax dollars than expected. That's a bad sign, because the state's spending plan through mid-2003 was built on revenue forecasts.

Rep. B. Patrick Bauer, the South Bend Democrat who chairs the money-controlling House Ways and Means Committee, said the September terrorist attacks brought Indiana to its fiscal knees. And people -- especially lawmakers -- need to realize that, he said.

"Were they asleep on September 11th?" Bauer asked this month. "Our economy shut down. We were recovering, heading back to where we were supposed to be -- but no one predicted that."

November brought a small financial shot in the arm -- more tax dollars than expected were collected that month. But that was only after fiscal experts revised the state's long-term forecast, and sales tax revenue jumped -- thanks to Hoosiers flocking to car dealerships to take advantage of zero-percent-interest loans.

One month of good economic news, though, doesn't balance the state's checkbook -- especially with Indiana's expenses still rising.

As the economic downturn continues to drag down Indiana's tax collections, programs that serve the most vulnerable Hoosiers are getting more expensive. With more people out of work, welfare costs will go up.

So will Medicaid -- the program that provides health care to more than 700,000 disabled, low-income and elderly Hoosiers. The Indiana Supreme Court made the program even more costly when it agreed in June with a lower court, which had ruled that the Medicaid program should be expanded to include more disabled Hoosiers.

"The next round of cuts will be devastating," said John Dickerson, executive director of ARC of Indiana, which represents the disabled. He expects longer waiting lists for those who have autism and those who need home health care.

The effects of 2001 will last long into 2002 as lawmakers and the governor argue about what to do about the state's deficit.

Republicans don't like O'Bannon's budget plan, which calls for increasing riverboat and cigarette taxes, eliminating some tax breaks for homeowners and businesses, and tapping some of the tobacco settlement money.

Republicans want to see the governor cut state spending. O'Bannon already has ordered state agencies to cut their budgets by 7 percent. And he's calling for an increase in basic fees -- the money Hoosiers pay for such things as accident reports, criminal history background checks, auctioneers' licenses and copies of the state's pharmacy laws.

GOP lawmakers have offered few specifics about how to solve Indiana's fiscal woes.

Many Hoosiers can relate to the state's financial problems because they're grappling with the same issues.

As lawmakers bicker over money, Dick Beuoy, a retired AT&T worker who lives in Noblesville, knows that he can't ask for an increase in his pension when times get tough.

So he cuts back. And he wants Indiana to do the same.

"We don't buy things -- or we buy cheap beer instead of expensive beer. We do what we have to do."

Return to: 2001: A Year of Change