INDIANAPOLIS – A battle between the power of the legislative branch and the bully pulpit of the governor’s office highlights the final days of the 2009 legislative session.

The budget brawl is one of three key issues lawmakers must tackle before adjourning Wednesday at midnight. The two other issues are an unemployment fund fix and a capital improvement bailout.

In the past, session scuffles have largely been partisan – with the Republican Senate and Democratic House at odds. In his four years, Gov. Mitch Daniels has vetoed only a handful of smaller bills.

But now it’s the legislative branch versus the executive branch, with the state budget hanging in the balance.

“We have to face reality. It’s no one’s fault upstairs that revenues are far short. We have a gap to close unless we want to force Hoosiers into tax increases and that’s the one thing we will not agree with,” Daniels said. “The only budget I can accept is one that guards against catastrophic service cuts and tax increases of the kind that have happened in other states.”

He said repeatedly he was not threatening a veto but also noted that neither the House nor Senate versions of a new state spending plan meet his parameters.

And legislators get his drift.

“I think the governor does have leverage and I would suspect – although he hasn’t said it outright – that he’s willing to veto a budget that is going to put our state in a bad position in the next two years,” said House Republican Leader Brian Bosma, of Indianapolis.

“In fact, I’m quite confident if he was convinced a budget did place us in that kind of position he would veto it. I think it’s judicious of him not to waive that as a mallet as negotiations are taking place.”

Rep. Win Moses, D-Fort Wayne, even predicted a veto and a special session.

He said lawmakers would reach some agreement on the budget after some shouting.

“The governor will not be happy with any of this and will call us back to cut a significant amount of money out of the budget,” Moses said.

The bottom line of the debate is that Daniels believes both proposed versions of a new state budget spend more money than anticipated revenues and leave Indiana vulnerable in the future.

He estimates the gap at about $740 million and encouraged lawmakers to find cuts, saying he will be flexible on the details. And he conceded they don’t have to close the gap all the way as long as it’s manageable in 2011.

Democratic House Speaker Pat Bauer of South Bend said it takes 26 votes in the Senate and 51 votes in the House to pass a budget.

“The executive branch only has to get one vote. Our job is much more complicated,” he said, noting the two majority caucuses aren’t that far apart. “We’d like the governor to join with us and not be an outside critic. Constructive criticism is welcome but not destructive. Encouragement is welcome but not discouragement.”

Amazingly, the budget might not even be the most difficult issue legislators have left to tackle. That honor belongs to the effort to fix Indiana’s deficit-ridden unemployment insurance trust fund, which has been leaking money for eight years and finally ran out of cash late last year.

The state has now borrowed almost $750 million from the federal government to cover unemployment claims. And legislators have to find a way to make the fund solvent in the future.

Public comments this week were positive but vague – with no evidence of progress.

“I think it is possible we can come to an agreement,” said Sen. Dennis Kruse, R-Auburn – a conferee on the bill.

He said a few of the major stumbling points are a declining benefit schedule that Republicans want to institute, as well as changes to seasonal worker status.

Daniels prefers a Senate Republican plan that increased taxes on businesses, cut benefits and tweaked eligibility.

He conceded businesses will have to pay higher premiums but said benefits have to be adjusted as well.

“If you try to do this in a totally one-sided way you will kill jobs in this state,” Daniels said.

But Bauer and other Democrats continue to oppose any cuts to unemployed Hoosiers during a recession.

“We don’t have Rolls-Royce benefits. We have just average benefits so I don’t think that’s where you should go,” he said. “When people are down and out you don’t kick them.”

The last of the big three issues is a bailout of the Indianapolis Capital Improvement Board – something that popped up in the last weeks that has brought tension to the process.

Lawmakers are considering authorizing a bevy of tax increases for Marion County to deal with its $47 million shortfall in operating its convention and sports facilities.

But the wording of the bill would create an Allen County-Fort Wayne Capital Improvement Board and provide a revenue stream for it to prioritize construction projects that would attract jobs and develop the area.

The Fort Wayne provision has been hammered out, but now is figuratively being held hostage while lawmakers work on the Indianapolis problem.

Rep. Randy Borror, R-Fort Wayne – an adviser on the conference committee for the bill – said he was not happy that the Indianapolis language was inserted in the Fort Wayne bill but recognizes the need to have a vibrant capital city.

“Yet, we need to find a way to help Indianapolis that won’t punish or take advantage of the rest of the state,” he said. “Why should people in Fort Wayne, for example, pay for Indianapolis’ poor planning? It’s unacceptable, and I think we’re all focused on making sure that doesn’t happen.”

One part of the Fort Wayne bill that could get caught up in the fracas relates to an expansion of the Allen County Professional Sports and Convention Development Area. This special taxing district allows the county to capture state sales and income tax dollars for local uses.

The bill aims to add the IPFW campus, meaning the county could collect as much as $3 million in revenue as opposed to the current $1.6 million.

That money would go to the Memorial Coliseum for ongoing maintenance and repairs, while excess food and beverage tax revenue not needed to pay off debt would go to the new CIB.

Indianapolis officials also are pushing to expand their professional sports development zone to address their shortfall – a move that ultimately affects state coffers and is grabbing the attention of key lawmakers.

Some argue there is a connection between hotels near the sports and convention centers and shopping done at the downtown mall. But it is less clear what IPFW has to do with a Fort Wayne sports and convention zone.

“I don’t favor that particularly,” Daniels said of expanding these districts. “I think under very carefully controlled circumstances … if it can really be said that it creates revenue that under no circumstances would have been there before then a case can be made.

“But the case for these is way too loosely made and in general I don’t favor really adding any to what we have.”

nkelly@jg.net