A new state study shows that by 2010, the pain of new property tax caps for local government will be tens of millions of dollars lower than expected.

The study says counties, cities, school districts, libraries and other local units of government will lose $403 million, or $121 million less than they had feared. An earlier estimate had pegged the figure at about $524 million in 2010, when the caps will be fully implemented.

While that's welcome news to these governments, it doesn't solve their financial problems.

The situation at the Beech Grove Public Library illustrates the point.

The library is struggling to make ends meet under the new caps, which Gov. Mitch Daniels wants to make permanent by placing them in the state constitution.

Supporters say the answer to the library's money problems lies with another government reform Daniels is pushing: the elimination and consolidation of local units of government, including libraries.

Beech Grove's library is "the yin and yang of reforms," said Louis Mahern, a former state senator who served on Daniels' Local Government Reform Commission.

For him, the solution is obvious: Beech Grove should merge with the larger Indianapolis-Marion County Public Library system.

The problems there, he said, exemplify both the need for property tax reform and government consolidation.

"The people in Beech Grove pay two-and-a-half times as much for library services as the people of Indianapolis. They're clearly not getting two-and-a-half times the services," said Mahern, a former Marion County Library Board member.

Earlier this month, the Beech Grove Library -- along with the city of Gary -- was one of only two government units that went to a new state appeals board for help, saying it can't make ends meet under the caps currently in place, which are 1.5 percent of assessed value for homeowners.

The problem only worsens in 2010, when those caps drop to 1 percent for homeowners, with rental and farm property capped at 2 percent and business at 3 percent.

Under last year's estimates, the library was projected to lose more than $240,000 in 2010. Under the new estimate, it is projected to lose $176,000 next year.

While that's $64,000 less, it is still a big hurdle for a library with an annual budget of about $850,000.

"To tell you the truth, we're waiting to live through '09 to have a better idea of '10," said Diane Burns, the library's director. "It's difficult to get your mind wrapped around that. It just makes it difficult to see how you're going to fulfill your obligations to the public."

The new figures reflect updated property tax assessment and levy data, revised growth rates and other factors.

While the new estimates didn't make Burns feel much better, Daniels is citing the statewide data as evidence that local governments can live within the caps.

"We are finding that much of the alarm was overblown," Daniels said.

That, he said, "absolutely should" convince lawmakers to vote this year to put the tax caps in the state constitution.

The legislature already voted last year to do so, and a second vote would clear the way for voters to have their say on the caps in the November 2010 election.

Daniels attributed the new figures -- provided by the nonpartisan Legislative Services Agency -- primarily to local governments already spending less.

"Local governments and schools, seeing that taxpayers were going to be protected, have begun to slow down their spending. As Gomer Pyle used to say, 'Surprise! Surprise!' " Daniels said.

David Bottorff, executive director of the Association of Indiana Counties, said he thinks the fact the data have changed is evidence the state should wait to put the caps in the state constitution.

Local governments aren't cheering, either, about the new, lower estimate of the impact, because -- like the Beech Grove Library -- they're still trying to figure out how to cope with cuts they'll still have.

For instance, the early estimate showed Columbus losing more than $877,000 under the caps. The new estimate shows it losing $343,305.

The city, though, doesn't buy it.

Oakel Hardy, budget consultant for Columbus, said the city last year paid the accounting firm Crowe Chizek $47,000 to do an analysis of the impact of the property tax caps on the city. Its verdict: a loss of up to $6 million in revenue in 2009.

The city prepared for the worst-case scenario and has cut its budget this year by $6 million, down to about $40 million.

"We froze wages. We had four openings in the Police Department and three openings in the Fire Department that we did not fill. We laid off all of the permanent part-time people," Hardy said. "We cut our operating expenses down to the absolute bone."

When the caps drop to the 1 percent level in 2010, Hardy said the cuts he fears will be necessary will be even tougher to achieve.

"Our greatest fear is we've been to the well in terms of operating expenses and capital improvements. Once you've cut something to zero, there's no lower you can go," he said. "It's pretty much going to be down to (laying off) people."

In Indianapolis, Mayor Greg Ballard said he's in favor of making the caps permanent and also is hoping that among the ways he'll be able to make ends meet is through consolidation with the governor's local government reforms.

Under the new estimates, Indianapolis government is expected to lose about $20 million in property tax revenue in 2010. The earlier estimate had pegged the city's loss at more than $33.7 million. But David Reynolds, city controller, said the city's own data always had showed a loss of about $20 million, so that is what it has been planning for.

Ballard said he wasn't ready to give any specifics but cited such options as charging police for some of the gas they use in take-home cars once the fuel price hits at least $3 per gallon.

Whatever the impact of the caps on revenue, Ballard said low taxes are an important economic development tool.

That's why he wants them placed in the constitution -- and is crossing his fingers that the legislature will help him live under the caps by also passing the local government reforms.