CHICAGO — Indiana legislators last week passed a $28 billion two-year general fund budget and several bond-related bills but failed to pass a controversial measure allowing fiscally distressed municipalities to file for bankruptcy.

The House and Senate both passed versions of HB 105, which would have carved a path for a state-controlled emergency financial takeover of fiscally strained local governments, including school districts.

But the House stripped the bill of the provision allowing governments to file for Chapter 9 bankruptcy — a provision that supporters said was crucial to giving the bill teeth. The two sides were unable to resolve their differences and the measure died in conference committee.

Sponsoring Sen. Ed Charbonneau, R-Valparaiso, said he plans to re-introduce the measure in January, when lawmakers reconvene for a new session. “I’m just going to take a step back now and see how we can do a better job of educating 150 legislators,” he said. “Some folks don’t like the concept of bankruptcy in any ­setting.”

Legislators from Gary — considered one of the top candidate cities for takeover under the legislation — voted against the measure because they said it would give an emergency manager too much power. Supporters like Charbonneau, however, noted that unlike in states like Michigan, Indiana could only step in after a request from local leaders

“Now we’re in a situation where this optional tool isn’t available to folks who might have wanted it,” he said.

Lawmakers passed a measure that restricts the conditions under which the Indiana Bond Bank — one of the state’s top issuers — can attach the state’s moral obligation to debt issuances.

Legislators also passed a bill that will tax Indiana investors for interest earned on out-of-state bonds to generate money to offset lowered corporate tax rates. Currently, interest income generated by all municipal bonds, including those sold by out-of-state issuers, is exempt from taxation. If approved, as expected, by Gov. Mitch Daniels, the new law means that starting in 2012 bond investors will be required to pay tax on interest from out-of-state bonds.

The provision is expected to generate about $66 million annually, which will be used to offset the expected $78 million loss from cutting the state’s corporate tax rate to 6.5% from 8.5%.

The General Assembly also passed a $633 million capital budget. That includes $67 million from the general fund and $25 million for the highway fund.

If revenue projections remain on course, reserves will total more than $1 billion at the end of the two-year period. The reserves are down from $1.3 billion of recent years, but are still considered one of the triple-A rated state’s top credit strengths. 

Leaders of the Republican-controlled General Assembly touted the final $28 billion 2012-2013 budget as closely following Daniel’s proposals and said it would was a victory for the possible presidential candidate. 

“This is an agenda for Indiana’s future,” the Republican governor said in a statement issued after the end of the legislative session. “There have been other sessions where we’ve done huge things, but long-term this may be the most meaningful set of changes of all.”

Indiana does not issue traditional general obligation bonds. It carries triple-A issuer credit ratings from Moody’s Investors Service and Standard & Poor’s and AA-plus from Fitch Ratings. The state has about $3 billion of tax-supported debt.

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