Gov. Sarah Palin begins the 2009 session of the Alaska Legislature on Tuesday faced with a potential state deficit in the billions of dollars and at least some hangover among lawmakers from the "Troopergate" investigation.

It's Palin's first legislative session with the challenge of a plummet in oil prices, and her first since becoming a national figure. How she governs will draw a scrutiny across the nation that no other governor in Alaska history has dealt with.

But Palin is sounding positive going into the 90-day session. She said the state has saved money and, with oil prices in flux, it's too soon to say what the budget will look like. Palin said this session should be about cooperation between her and legislators, especially on proposals like an in-state natural gas pipeline. Business people, legislators and state officials have discussed such a "bullet line" in recent months to bring cheaper energy to Fairbanks and Southcentral. Palin didn't give a specific plan, but said it would be her main effort.

"My focus is going to be on energy and making sure that Alaskans have access to their resources. In-state gas is top priority for me," Palin said in an interview last week.

Hovering over everything is the plunge in state income, which could force the governor and legislators to make unpopular choices about spending and savings. Alaska oil accounts for about 90 percent of the state's general fund income and the price fell from a July high of $144 a barrel to a current price of $32.26.

Budget leaders in the state House and Senate sound more alarmed than Palin.

"We are looking at an unprecedented deficit," said Anchorage Republican Rep. Mike Hawker, who is in charge of the operating budget in the state House.

$70-plus A BARREL?

High prices have masked the decline in Alaska oil production, allowing spending to grow in recent years while shutting down the debates over implementing a state sales tax, income tax, or using Alaska Permanent Fund earnings.

If oil prices average $40 a barrel between now and the end of the budget year in June, the state will fall $2 billion short in covering the current budget, said legislative finance director David Teal. Should prices remain that low over the following year, legislators said the deficit could rise by an additional $3 billion.

Savings could cover such a shortfall -- for a while. The state has more than $7 billion in savings accounts, most deposited last year when oil prices soared. Palin said she has submitted a conservative budget proposal to legislators, but they are skeptical.

Palin's spending plan for next year is based on her revenue department's forecast that oil will rise to average more than $70 a barrel in the year starting in July. The U.S. government's Energy Information Administration is predicting prices more in the $43-$55 barrel range over the next two years. That is a sore point with some legislators, who say the governor is leaving them to deal with a big mess if the state's forecast does not come true.

"The governor introduced a budget based on unrealistically high oil prices. She's asking the Legislature to step in and do the tough work for her," Hawker said.

Palin said that's not so. She said her administration is keeping close tabs on oil and will work with legislators as it becomes clearer what the price will be. Her chief of staff, Mike Nizich, said he's seen analysts predicting a price upswing this spring.

"We're not digging in our heels here, saying that we know... this is what the price is going to be," Palin said. "If the price of a barrel of oil is much less than what our department of revenue has estimated, then we are not so stubborn as to say things can't be adjusted."

Hawker was pushing for Palin to rework her budget before legislators start work this week, saying it's important to get started. Palin won't do that, but she has 30 days once the session starts to submit changes. Her staff members said they can also work with legislators up to the end of the session on what spending should be.

It's not clear just what lawmakers will do about it if Alaska oil prices don't rebound soon. They might try cuts, but no one thinks they'd make enough cuts in a $5 billion operating budget to make up for a shortfall of $2 billion.

"As we get into session we need to dedicate the resources to look at that and try to see where we may be able to pare down if the price of a barrel of oil doesn't go back up," said Nikiski Republican Mike Chenault, the House Speaker.

Legislators said shrinking state income is the biggest concern they face going into session this week. But there are many other issues, including efforts to reinstate the death penalty, stop what some lawmakers say is price gouging at the gas pump, end state investment with companies that do business in Sudan, stop teenagers from driving while talking on their cell phones, and return state employees to a guaranteed pension style retirement plan rather than individual savings accounts. Energy also will be a big issue, with debate over how to power the state with renewable energy to lower costs in rural Alaska, build an in-state gas pipeline and maybe even pursue a Susitna dam.

There are also lingering effects of the "Troopergate" investigation the Legislature conducted of the governor last fall.

'TROOPERGATE ISN'T GOING AWAY'

The Legislature's report found Palin abused her power in allowing her husband and top aides to push for the firing of a state trooper who is her former brother-in-law. But a second report, for the state personnel board, came to the opposite conclusion and found that Palin was not responsible for any wrongdoing. Palin said she considers the matter over and thinks people should move on.

State House Minority Leader Beth Kerttula said she isn't ready to let the issues go.

"Troopergate isn't going away, and it shouldn't go away," the Juneau Democrat said.

There doesn't appear to be sufficient desire in the Legislature to reprimand the governor. But there is bipartisan concern about the resistance the attorney general, Palin appointee Talis Colberg, posed to legislative subpoenas.

"One of the judiciary committees or both of the judiciary committees should maybe bring the AG in front of them and have some frank discussions about what his actions were toward the state employees, why the subpoenas weren't complied with," said Chenault, the Republican house speaker.

Palin didn't object when asked about that, saying only that it's "certainly their right to do so." But Anchorage Republican Rep. Bob Lynn said it's a bad idea to dredge it up.

"I think that's history. We should stop looking in the rear-view mirror," Lynn said. "I've got a news flash, the election is over."

It's too soon to say if the bipartisan majority in state Senate will also want to take on the subpoena issue, said Anchorage Democratic Sen. Hollis French. But he said he's heard of bills dealing with related issues, such as availability of public records and use of private e-mail for state business.

Tackling energy costs

One thing legislators and Palin can agree on is a need for progress on lowering energy costs. Some lawmakers complain a lack of action followed Palin's July announcement of a public-private partnership to pursue an in-state gas pipeline.

House speaker Chenault is trying to push it forward with a bill, HB 44, that would authorize the Permanent Fund to spend up to a billion dollars on in-state energy projects, and allow various state-related agencies to bond hundreds of millions of dollars apiece for such work, including a possible in-state pipeline. He said it doesn't order state spending -- just gives an option to the boards of directors.

Palin wasn't enthusiastic about the state helping foot the bill for a multi-billion dollar pipeline. She said the state could be a "facilitator" to help private industry do it. Joe Balash, her special assistant on oil and gas issues, said options could include using state agencies to help provide tax-exempt financing.

"There are numerous options out there, and we continue to talk with and work with any interested party," Balash said. "The question comes down to feasibility, commerciality and what is it going to take to make a project happen."