Daniels reputation on line with Indiana’s $205M tax error

Gov. Mitch Daniels has built a national image as a persnickety fiscal manager with an eye for detail, but two massive accounting errors that have tilted Indiana's books by more than half-a-billion dollars threaten to tarnish that reputation as the popular Republican prepares to leave office.

State officials announced Thursday that a programming error at the Indiana Department of Revenue led the state to mistakenly withhold $205 million that should have gone to county governments. It was similar to a programming mistake disclosed in December, when budget analysts discovered $320 million the state didn't know it had.

Revenue department commissioner John Eckart weathered the first gaffe but not the second, and tendered his resignation this week, effective at the end of the current tax season, state budget director Adam Horst said at a Thursday news conference in which the most recent oversight was disclosed. Two of Eckart's deputies also left the department.

The state is now searching for an outside auditor to review how the state misplaced $525 million, Horst said. He said he also is looking at new budget controls that would help the state identify problems before they fester for years at a time.

"We feel like it's all you can do at this point, and you hope that over time that confidence is warranted," Horst said when asked how he would win back the public's trust.

Republican leaders in Indiana's General Assembly requested a say in picking the auditor. Democrats, who called for an independent audit of the state's budgeting operation after the first mistake was discovered, responded "we told you so" to Thursday's news.

Daniels may have the most on the line as he winds toward the end of his eight-year run as governor and continues touring the nation as one of the Republicans lead budget experts.

Since Daniels announced last year he would not run for president, he still is mentioned in Republican circles as a possible pick for vice president, although he has adamantly stated the same family concerns that kept him out of the presidential race would keep him from joining a ticket. Daniels left on a private trip to Israel on Tuesday, the same day he found out about the tax problem. He would not be available to take any questions, spokeswoman Jane Jankowski said Thursday.

"We discovered a problem, took responsibility, acted immediately and fixed the problem," Jankowski said Thursday. "The state is projecting a $1.85 billion surplus, largely because of additional cost savings by agencies and stronger than expected revenues. Indiana's fiscal position is stronger than ever."

The governor's critics say he has skated on the national stage, while bungling management of the state. Beyond the two tax errors, they point to the state's legal battles with IBM over the privatization of welfare delivery and problems at the Department of Child Services.

"That's one bad legacy," House Democratic Minority Leader Patrick Bauer said Thursday. "I don't know how he's able to overcome that."

Darrell West, vice president and director of Governance Studies at The Brookings Institution, said the latest gaffe could hurt Daniels' image.

"Mitch Daniels has a reputation for running a tight ship so continuing problems in the administration of state government harm that image. It is hard to understand how millions of dollars weren't distributed properly," West said. "The governor has to deal effectively with these issues and make sure they don't keep happening. Otherwise, people will reassess how they judge his stewardship."

Horst did not give an exact date for when Eckart would leave his post. The two other top revenue officials, Chief Information Officer Roy D. Gabriel and Chief Financial Officer Darrel Anderson, left after the error was discovered, Department of Revenue spokesman Bob Dittmer said. Eckart was not available for questions Thursday, Dittmer said.

The revenue department says the mishandled money will be distributed with interest to the 91 of Indiana's 92 counties that have local income taxes.

Marion County and the city of Indianapolis said it would receive an additional $41 million from the adjustment. Indianapolis Mayor Greg Ballard said the funds would be directed toward future budget shortfalls.

Hamilton County will receive $17.3 million in additional distributions, not counting interest, the state said. Hendricks County will receive nearly $5 million, Boone County will get nearly $4 million; Johnson $3.8 million; Morgan $3.7 million; Madison more than $3 million; Hancock more than $2 million; and Shelby about $1.1 million.