CHICAGO - Indiana will collect nearly $1 billion less revenue than originally expected during its upcoming 2009-2011 biennium, fiscal analysts warned yesterday.

The projected revenue decline means the state faces a $763 million gap in its current budget - a gap that Republican Gov. Mitch Daniels said he would close through a number of spending cuts, including a salary freeze across state government.

Daniels announced the cuts yesterday after the State Budget Committee released its annual revenue forecast. Legislators will use the figures to help craft the 2009-2011 budget beginning in January.

"If accurate, the state will have less money available to spend in 2011, the second year of the budget we're about to write, than it believed it would have for 2009 when the last budget was written," Daniels said.

The fiscal forecast does not take into account a massive overhaul of the state's property tax system that was implemented earlier this year. The new law features a 1% sales tax increase that is dedicated to replacing an expected steep drop in property tax revenues slated for local governments.

Indiana officials were prepared for a gloomy revenue forecast, Daniels said, as states across the country- and especially in the Midwest - are struggling with falling revenues and growing deficits. But he stressed that Indiana, which has $1.4 billion in reserves, is in better fiscal shape than many of its neighbors.

"This is serious and we have to take serious action, but we are in vastly better shape than other states," the governor said.

The State Budget Committee predicted last year that the state would have $13.3 billion to spend in 2009, but yesterday cut that figure down to $12.4 billion. So far this year, the state has collected roughly $70 million less in tax revenue than expected, according to reports. Sales tax revenue, gaming revenue, and corporate tax revenue were all down. Individual income taxes were up slightly.

Separately, state transportation officials this week said the state could lose up to $420 million due to losses from investment income from the $3.8 billion Indiana Toll Road lease coupled with declining gas tax revenues.

Despite the losses, officials said most infrastructure projects, including Indiana's 10-year, $12 billion Major Moves road construction program, would remain on track. Infrastructure projects that are not funded through the state's general fund would not be cut, Daniels said yesterday.

To close the current $763 million budget gap, Daniels said he would implement a series of spending cuts while avoiding tax increases or dipping into state reserves. Chief among the cuts is a salary and hiring freeze across state government, which includes the executive, judicial, and legislative branches.

Agencies will be required to cut their budgets by 3% in addition to a 3% cut already ordered earlier this year, and the state will cut its grants and subsidies by another 3%. All non-essential capital spending will be put on hold. Government-funded out-of-state travel will be largely banned in 2009.

"This is only the first and hardly the last of hard decisions that will have to be made," Daniels said. "There is not going to be new money for anything in this forecast, and things might get worse than this."

He said he is anticipating getting federal aid coming to the states, but has not yet made any decisions on how to spend it. "We'll deal with that opportunity if and when it comes," Daniels said.

Indiana's fiscal year ends June 30. State revenue forecasts are made annually in December prior to the legislative sessions and again in April, prior to the final budget approval. The state is currently operating under a $26 billion, two-year budget passed in 2007.

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