Complex accounts made it easy for state to miss $320M

It's apparently not hard to lose $320 million in Indiana. But how it was lost — and what to do with it — are questions certain to linger following Gov. Mitch Daniels' announcement last week that a programming glitch had deprived the state of the much-needed dough for more than four years.

The discovery that millions in corporate tax collections had been sitting in a holding account — even as the state slashed funding for education and other departments — led Daniels to spin the finding as a moderate bit of good fortune. He even waved a yellow Monopoly card that read "Bank Error in Your Favor" and showed Mr. Monopoly falling backward in shock as a banker thrust $200 through the teller window.

But this "bank error" was for quite a bit more than $200.

Verenda Smith, deputy director of the Washington, D.C.-based Federation of Tax Administrators, says state financial and tax collection operations are complex beasts. It's fairly routine for state bureaucrats to misplace a payment here and there. But Indiana's mistake is unique, she said.

"I have seen any number of programming errors, but that one is eye-catching just for the size of it," said Smith, whose agency represents state tax collectors, like Indiana's Department of Revenue.

House and Senate Democrats say they want an investigation into how the money went missing for so long. They submitted a letter to the state's budget forecasting committee requesting an independent audit of the state's finances.

"We need to have a fresh set of eyes looking at all these issues," said Rep. Scott Pelath, D-Michigan City.

Indiana has safeguards in place to prevent the state from losing money. But those failed to catch the mistake for more than four years.

Budget Director Adam Horst said the State Board of Accounts conducts annual audits of the Department of Revenue but would never have found the programming glitch. A separate internal audit division monitors the revenue department and ultimately caught the mistake, but it can't check every cog and sprocket of the tax machine routinely, he said.

The evolution of the mistake shows a fairly large gap in how the state accounts for its many millions of dollars. At first, during the 2007 budget year, the state only misplaced $5 million, a fairly easy amount to miss when put in context of a $14 billion budget. But by the close of the latest budget year, the state had missed nearly $140 million, or roughly 10 percent of its corporate tax collections. Daniels said by that point he had noticed something seemed to be off, but he couldn't quite nail it down.

"During the difficult times (during the recession), I was puzzled. We were frustrated, of course, because we were wrestling with very difficult decisions as revenues in general were falling," Daniels said. "It did seem from what we were reading that maybe those payments were light."

Even so, the money didn't reappear until a state worker accidentally stumbled on the $320 million in late November while tracking a $25,000 check through the tax collection system.

While the found money is certainly welcome, it rankles those who've seen budgets slashed and watched jobs disappear. Ironically, the board of accounts cut $1 million from its budget last year as part of government-wide cuts Daniels mandated in order to pad the state's savings accounts. The auditing agency also laid off 23 workers in the process, according to a report by WRTV.

It's still unclear what will happen to the money Daniels equated to an early Christmas gift. Lawmakers passed their biennial budget earlier this year under assumptions that the state had significantly less to work with than what was actually available. On top of the $320 million, one-time cash infusion, the state is also expected to gain more than $120 million annually since discovering the mistake.

Senate Appropriations Committee Chairman Luke Kenley, R-Noblesville, said that $120 million would be roughly equivalent to approving construction of two new "racinos."

What to do with the money is sure to spark battles. Lawmakers could opt to amend the budget during the 2012 session, but Kenley said it is too soon to know whether they should spend the money — be it on restoring education cuts, paying down the outstanding debt on teachers' pensions or returning the $2 billion borrowed from the federal government to shore up the state's bankrupt unemployment insurance fund.

Of course, the money could also be added to the state's $1.2 billion in the bank, triggering Daniels' much-vaunted automatic tax return. Assuming the state achieves a $1.5 billion balance, each Hoosier would get something truly akin to forgotten money found in an old coat or between sofa cushions: $8.50.