CHICAGO Spending cuts and an improved economy enabled Indiana to eliminate a potential $410 million budget deficit in fiscal 1994 and end the year with an operating surplus, according to state officials.

Mark Moore, Indiana's special liaison for public finance, said the state ended the year on June 30 in the black as a result of "significant" budget cuts ordered by Gov. Evan Bayh, higher-than-expected revenues, and increased federal reimbursements for Medicaid.

Indiana ended fiscal 1994 with an operating surplus of about $28 million, according to state financial documents. The state had an overall combined surplus of $650.3 million in its general. tuition reserve, and rainy-day funds.

Moore said the governor ordered the spending cuts in the wake of the state legislature's passage last year of a budget "that really was badly out of balance."

In June 1993, Bayh vetoed the two-year budget, calling the $13.4 billion general fund spending plan for the fiscal 1994-95 biennium, "a bankruptcy budget." Lawmakers had rejected a cigarette tax increase proposed by Bayh, while providing more funds for Medicaid and education than the governor proposed in his original budget.

Shortly after the budget was vetoed, lawmakers overrode the veto, forcing Bayh to order emergency spending cuts in every state department.

In a press release, Bayh said the cuts will enable the state to also balance its fiscal 1995 budget and provide "reserve funds that will be available in the event of financial emergency."

The state had projected a $144.4 million deficit in its current budget. New. projections show an operating surplus of $105 million by June 30, 1995, and a total surplus in the general, tuition reserve, and rainy-day funds of $776 million.

Moore said an upturn in the economy during fiscal 1994 produced a 7.6% growth in state revenues over fiscal 1993 versus 4.6% growth forecast made by the state last December. A revenue increase of 4.3% over fiscal 1994 revenue collections is projected for the current fiscal year, he said.

Diane Swonk, a regional economist at the First National Bank of Chicago, said manufacturing is the key to Indiana's improved economic performance.

"Indiana is the most manufacturing-concentrated state in the country," Swonk said. "And, manufacturing is hitting through the roof."

She said that Indiana's unemployment rate was lower than the national average during the last recession, indicating that the state has a "tight labor market." Preliminary numbers for May show Indiana's jobless rate at 4.8%. well below the 6% national average.

Rating agency officials have noted Indiana's improvement.

"It's good news out of the Hoosier State." said Robert Durante, an associate director at Standard & Poor's Corp., noting that Indiana had been expected to end fiscal 1994 with a "modest deficit."

The $650.3 million surplus .should give the state a cushion against future budget problems, Durante said. However, the rating agency has no plans to modify the A-plus rating on the unenhanced debt of the Indiana State Office Building. Commission or the A rating on Indiana Bond Bank debt, which carried the state's moral obligation pledge. Indiana does not issue general obligation debt.

Durante said the existing Standard & Poor's ratings reflect the state's manufacturing-based economy and the volatility of the state'S revenues.

Steve Hochman, a vice president and assistant director of state ratings at Moody's InVestors Service, said Indiana took "appropriate action to shore up its budget and is now tiding a crest of economic improvement."

Indiana's unenhanced highway revenue, State Office Building Commission, and correction facilities debt is rated A1 by Moody's, while bond bank debt is rated A.

The, governor appears to want to take action to keep the budget balanced.

"While our revenues have been above the forecast level, individual and corporate income tax revenues have been below forecast both of the last two months," Bayh said. "That underlines the fact that revenues go up and down," but spending cuts are real and to remain in the black, we must maintain our fiscal responsibility."

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