CHICAGO - The Indianapolis-Marion County City-County Council Monday night narrowly approved a $1.1 billion 2009 budget - the first under freshman Republican Mayor Greg Ballard and his new finance team - that cuts spending and holds the line on new taxes despite declining revenues.

Crafted by an anti-tax, anti-borrowing mayor, the spending plan includes only $45 million of long-term debt, though the city expects to enter the market twice over the next several months with a pair of property tax anticipation note issues to smooth out cash-flow problems caused by delayed tax payments.

The new budget also eliminates an ongoing structural deficit that reached about $26 million in early 2008, according to city Controller David Reynolds.

The Republican-led City-County Council approved the budget Monday night by a vote of 17 to 12 despite strong Democratic opposition and attempts to delay the vote until after the November election. In voting against the plan, Democrats said the budget failed to follow through with a promise to hire 100 new police officers based on an income tax hike implemented late last year under former Mayor Bart Peterson.

Ballard said the income tax increase did not generate enough revenue to cover the new hires once raises and other existing expenses were taken into account.

The new budget comes as Indianapolis - like cities and counties across Indiana - braces for declines in property tax revenue stemming from the state's sweeping property tax overhaul implemented earlier this year. While preparing for revenue decline in 2009, the new mayoral administration warned that 2010 would shape up to be a tougher year.

"The thing we're the most proud of is it's a balanced budget, and it's a good starting point as we move forward," Reynolds said in an interview yesterday.

Previously the state deputy budget director, Reynolds was brought in as controller in January 2008 as Ballard took office after defeating Peterson.

"It was important to us that we get a good base number and that we drive the stake down in 2009, as 2010 is going to be a tough year for us as the [property tax caps] kick in and the slowing-down economy has an impact on income tax."

While the city's 2009 debt plans remain minimal, officials expect to enter the market within the next few weeks to convert up to $450 million of variable-rate debt that's insured by MBIA Insurance Corp., according to Kevin Taylor, executive director of the Indianapolis Local Public Improvement Bond Bank, the city's borrowing entity.

Of that $450 million of water works debt, about $50 million is auction rate and the city plans to convert all the debt into variable rate while shedding the troubled bond insurer, Taylor said. Morgan Stanley is underwriter on the issue.

The restructuring comes as the bond bank reviews its hiring policies for underwriters and financial advisers under the recommendation of Taylor, who took the job in January as part of the Ballard administration.

At the same time, Indianapolis is likely to begin hiring more regional firms in light of the current reshaping of the broker-dealer market, Taylor said, adding that regional firms may be "the future" of the municipal bond market for some issuers.

Under Ballard's $1.1 billion budget, the city expects to spend about $800,000 less than it will collect in revenue. The biggest cut is $3 million from parks and arts spending. Officials expect to end the year with an unreserved cash fund balance, though they are uncertain of how much at this point, Reynolds said. As of June 30, Indianapolis had a general fund balance of $189.5 million, while Marion County's totaled $43 million.

Unlike previous years' budgets, the 2009 budget does not rely on short-term borrowing to cover operational expenses, according to Reynolds. The city expects to sell $150 million of property tax anticipation notes this fall for cash-flow purposes until the first half of the year's tax payments begin to flow in, and in early 2009 sell another $250 million in notes to cover delayed payments from the second half of 2008.

"That's just for cash flow, until we get our reserves up to a larger percentage of operations," Reynolds said. "But borrowing to balance the budget - that will stop."

The city's revenue picture is mixed. While property tax revenue is expected to decline, income tax revenue - which is based on previous fiscal year's collections - is expected to grow 3.2% in 2009. The city does not collect sales taxes, and most other fees and revenues are expected to remain flat, Reynolds said.

It's still uncertain how the state's new property tax law - which caps residential tax bills at 1% of assessed value and commercial bills at 3% of assessed value - will affect taxing districts across the state. While many local mayors, county commissioners, and school district officials warned state lawmakers that it could have dire consequences for struggling municipalities, Ballard emerged as one of the few public officials to endorse the plan.

As part of the law, the state agreed to take over funding for pre-1977 public safety pensions, as well as local welfare funds. The move meant the city was able to abandon a plan to issue $450 million of pension obligation bonds, which was considered one of Ballard's early victories.

In keeping with Ballard's support of property tax caps, city officials estimate the new law will have less of an impact on Indianapolis-Marion County than the state estimates, Reynolds said. City officials expect to lose $5.5 million in property tax revenue in 2009 and around $25 million in 2010, while the state estimated the city would lose $11 million in 2009 and $40 million in 2010.

"The mayor has said he's supportive of trying to provide property tax relief, and while it may be difficult based on the original impact, he was willing to work and find ways to make due," Reynolds said.

On the debt side, the city remains relatively insulated from the financial market turbulence, according to the bond bank's Taylor. But at the same time, the bank's board is currently reviewing its hiring policies to consider issuing requests for proposals for all underwriting and financial advisory services in the future, he said.

As the traditional Wall Street firms the issuer has done business with in the past have disappeared in recent weeks, the bond bank expects to rely more on regional firms in the future, Taylor said. Some regional firms he named were Loop Capital Markets LLC, KeyBank Capital Markets, Indianapolis-based City Securities Corp., and Chicago-based Cabrera Capital Markets Inc.

"I think regional firms are the future," Taylor said. "The larger underwriting desks are going to remain very important, but the regional firms are going to have a greater role in a lot of the smaller, less visible issuance."

"But it's going to take time, and they're going to have to step up in terms of creative and innovative financial ideas," he said.

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