CHICAGO - The Indiana State Budget Committee yesterday advanced Republican Gov. Mitch Daniels' proposed $28.35 billion fiscal 2010-11 budget in a partisan vote as Democrats pushed to dip into reserves to promote economic development.

Although Daniels outlined his budget proposal in an address before the Rotary Club of Indianapolis on Tuesday and budget officials have met with lawmakers, the spending plan was not formally presented to lawmakers until yesterday. The Budget Committee is made up of one Democratic senator and representative and one Republican senator and representative, with state budget director Christopher Ruhl also serving as a voting member.

The partisan vote sets the stage for what could prove a rough road to a final budget, as the House is controlled by Democrats and the Senate by Republicans. House members will take the first shot at crafting their version of a budget, which must be voted on by Feb. 25, and then the Senate will revise it with the goal of voting on a plan by April 15.

The Legislature faces an April 29 deadline to reach agreement on a final version that will go to Daniels for his signature.

The budget is up 8.5% from the current two-year spending plan and does not rely on any tax increases. It cuts most state agency spending by a permanent 8% while holding steady the funding levels for public safety and public education. Higher education will be cut. State employees will not receive raises for the current calendar year and some initiatives, such as increased funding for full-day kindergarten, will be put off.

"There are programs we will regrettably have to reduce or in some cases eliminate. Every one of us will have to yield for a year or two on things that are important to us," Daniels said in a statement.

The two-year budget includes a $14.1 billion spending plan for fiscal 2010 and a $14.2 billion one for fiscal 2011. The state expects to collect $12.57 billion of revenues in fiscal 2010 and $13 billion in fiscal 2011. The state had originally expected to collect $13.37 billion in the current fiscal year, but last month it revised that figure downward by $760 million. Daniels announced a series of cuts and salary freeze to cover the shortfall

Budget documents warn that if the state does not act to reduce baseline spending, the state will exhaust its reserves and still face a shortfall in the next biennium.

"Indiana's budget problems are more manageable than most, if only we have the will to manage them," Daniels said.

The state will open the new biennium July 1 with a nearly $1.3 billion balance in its various reserve accounts, including a cash balance of $439 million, $370 million in its budget rainy-day fund, $408 million in its tuition reserve, and $57 million in its Medicaid reserve. The latter two are earmarked for potential shortfalls in school funding and Medicaid revenues. The budget anticipates ending the upcoming biennium with a small increase of $10 million in its combined fund balances of $1.3 billion.

While some Democrats are calling for those reserves to be tapped for initiatives to grow the economy and education, Daniels and his budget aides warned that spending down reserves provides just a "one-time gain for long-term pain" and that the funds could be needed in the event of a prolonged recession. "Economic conditions may deteriorate further. It's unclear how long or how hard it will rain," the budget proposal said.

While the budget is likely to dominate the legislative agenda, Daniels is also pushing lawmakers to approve a series of proposals aimed at streamlining and reducing the costs of local governments.

The state last year implemented a massive overhaul of Indiana's property tax system that allows local governments to impose a 1% sales tax increase to replace an expected steep drop in property tax revenues.

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