CHICAGO — Ohio and Indiana are heading into fiscal 2013 with fattened reserves and a brighter outlook tied to better-than-expected revenues from an improving economy.

Budget officials in Ohio said an uptick in revenues and spending cuts means the state will end 2012 with a small surplus, despite the loss of a $500 million payment that was expected from Gov. John Kasich's plan to lease the state liquor distribution system to a private company. A lawsuit that held up the privatization deal was not resolved until days before the end of the fiscal year.

Ohio ended fiscal 2012 with a $235 million surplus, which will go into its rainy-day fund, Kasich said. The deposit will boost the fund to $482 million, from $247 million in fiscal 2011 and a mere 89 cents in fiscal 2010.

"It's pretty good news," Kasich said Tuesday in a conference call with reporters. "We've got a long way to go and we still face significant headwinds, but this is a very good news day."

Budget director Tim Keen said 2012 tax collections exceeded estimates by $400 million, or 2.1%. At the same time, spending came in $800 million below estimates.

"We built this budget on a conservative economic forecast," Keen said. "Those tax receipts overages, along with some lower spending, have enabled us to overcome the lack of the $500 million and allowed us to end the year in the black."

The bulk of lower-than-expected spending came from Medicaid and from lower debt service costs, Keen said.

Debt service in 2012 came in 11.4% under original projections, falling to $368.5 million from an expected $416 million, according to year-end budget documents. The year's debt service payments were 22.6% lower than 2011 payments.

"Interest rates were less than expected and successful refinancings allowed us to pay less than we expected," Keen said. Medicaid spending was down because there were fewer caseloads than expected, among other reasons, he said.

Kasich said that the new federal health care law, upheld by the Supreme Court last week, will cost the state $950 million in the upcoming budget biennium starting in 2014, according to an early analysis.

Kasich is one of a handful of Republican governors who have warned that they might not undertake the Medicaid expansion that is a key part of the new law.

Kasich said he might push for big cuts in Ohio's Medicaid program — taking out provisions such as dental benefits or reducing provider reimbursements — as well as cuts in other state programs to offset the expected costs without raising taxes.

"I have a $950 million problem," Kasich said. "I have no choice but to look at everything. I'm afraid this hurts K-12. I'm afraid this hurts higher ed."

In Indiana, outgoing Gov. Mitch Daniels delivered his last fiscal year roundup, which was replete with good news. Daniels said preliminary figures show the state will end fiscal 2012 with more than $2 billion in reserves, 14% of the state budget. A relatively new state law dictates that reserves of more than 10% of the budget triggers an automatic taxpayer refund.

"Thanks to this amount, there will be a major infusion of money into Indiana's pension funds, which are already the strongest in the country, and the first taxpayer refund in state history," Daniels said in a statement.

Indiana's 2012 surplus is $400 million, budget officials said.

The popular two-term Republican governor announced last week that he will take a job as president of Purdue University in January.

The administration touted a series of achievements during Daniels' eight-year term, including winning the state's first triple-A rating.

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