Gov. Mitch Daniels says the state will face fiscal challenges requiring hard decisions and unwelcome choices.
The warning came in Daniels' State of the State speech Tuesday night before a pack ed House chamber.
The governor says spending restraints and other actions taken during his first term have put Indiana in better shape than many states to make progress during hard economic times -- if there's cooperation between Republicans and Democrats.
Democrats control the House while Republicans rule the Senate.
But Daniels says his framework includes a budget that spends less than the state is projected to take in, no bookkeeping tricks to balance it, and stopping spending on programs that have not worked or are non-essential.
He also says the state must maintain its budget surplus, money in its main checking account and reserve funds projected to be $1.3 billion by the end of the current budget that ends on June 30.