Alaska budget hole is $1.65 billion

Sean Cockerham | Tribune Media Services

JUNEAU -- The state is facing a budget shortfall approaching $1.65 billion this year, the Palin administration said Tuesday. It's a far bigger problem than state officials predicted two months ago in their last forecast.

Gov. Sarah Palin responded to the shortfall with a proposal that taps state savings. Palin said she was also reducing spending by $268.6 million. But a closer look shows most of that is just accounting -- not cuts from how much the state would otherwise spend on programs.

"They're claiming a $268 million cut. The reality is it's pretty much just a net zero proposition," said Anchorage Republican Rep. Mike Hawker, a budget leader in the state House.

Palin budget director Karen Rehfeld defended the proposal. She said the bottom line is indeed $268 million less in anticipated spending -- while acknowledging most of that is because the state lowered its estimate of much it would have to pay in oil tax credits.

Rehfeld said slashing the budget would not be responsible.

"We were really trying very hard to minimize the impact on public services, those types of things. Because I think that with the current economic conditions there's sensitivity. If there were some massive reductions, or massive layoffs, that would have an unintended consequence of putting Alaska further into a recession," she said.

Rehfeld said that -- along with the $268 million less in anticipated spending -- the administration proposes to draw $1.36 billion from reserves this year to make up for the shortfall.

The state has over $7 billion in savings it can use to absorb deficits. Most was deposited last year when the state had a surplus. But those savings could go away quickly.

On top of the $1.36 billion draw that Palin wants for this budget year, which ends at the end of June, legislators expect an additional shortfall of up to $3 billion in the coming year.

It's all because of the collapse in oil prices. Oil taxes and royalties give the state the vast majority of its revenue.

The Alaska Department of Revenue predicted in December that Alaska oil prices would rebound and average $62 a barrel through the end of the budget year in June.

So far, that hasn't happened.

So the state changed its forecast and now expects an average price of $41.17 through June. The difference translates to a budget hole over three times as deep.

Like Palin, budget leaders in the state Senate have no stomach for major cuts and expect to rely on savings.

"We can't overreact and slash and burn the operating account or we'll push the state into a recession," said Sitka Republican Sen. Bert Stedman, co-chair of the Senate finance committee.

Palin only targets a few specific programs for reductions, including $1.1 million less for Village Public Safety Officer contracts. That's due to an inability to get people to take VPSO jobs, Rehfeld said, and money can be found in the next budget if recruiting improves.

Palin also proposes roughly $17 million in reductions to departments without saying exactly where they would come from. Her budget director, Rehfeld, said state departments have been developing savings plans for where they can find the money. But legislators objected to such vague cuts, saying they can't decide whether to approve them without specifics.

Palin's "supplemental budget" released Tuesday also includes spending increases in several areas. Those increases cover things like higher utility costs, enlarged criminal caseload, inmate health care, and lawsuits.

Contact reporter Sean Cockerham in Juneau: or 1-907-486-1531.