As Anchorage Assembly members worked through a $430 million spending plan and long-term labor contracts covering most city employees last fall, the nation's economy was crashing.

But things looked much better here, Mayor Mark Begich told them. Although Anchorage was sure to be affected by a credit and stock market crisis that was rapidly going global, the city was well prepared to weather the storm, the mayor said. He cited optimistic outlooks for Anchorage in Business Week and The Wall Street Journal.

"I'm very proud of the fact that we're one of a few cities in the country that have been recognized by outside forces, that we are one of the few that will be able to weather this economic crisis," Begich said at a Dec. 16 Assembly meeting, three months into the nation's financial meltdown.

But while Begich was offering a rosy picture to the Assembly, his top finance executive was worried. The stock market collapse had chopped millions from city investments and money available to finance the just-passed 2009 budget, Sharon Weddleton told the mayor in an e-mail the week before.

"Our November investment returns were horrible," Weddleton told the mayor on Dec. 9. She underlined "horrible."

Also, some departments were overspending their calendar-year budgets weeks earlier than usual, the finance officer said.

She wanted to immediately freeze city hiring. She wanted to immediately stop all discretionary spending.

She attached a spreadsheet the mayor had requested with potential revenue and expense fluctuations that could affect the next year's budget that the Assembly had adopted just three weeks earlier. A "low estimate" of a potential shortfall, Weddleton said, would be around $10.6 million. On the high end, almost $107 million.

Her "best guess estimate": $33 million.

Weddleton's report never was disclosed to the Assembly members.

Her best guess turned out to be a little high, but city officials have wrestled with budget deficits all year, slicing more than $20 million and dozens of city jobs, most of them unfilled at the time. Mayor Dan Sullivan says the city's financial problems will extend into 2010 and probably several years more.

In an interview Friday, Begich, now one of Alaska's U.S. senators, defended his decision not to disclose Weddleton's concerns last year. The information hadn't been discussed by his senior staff, he said, and the Assembly itself was already talking about a hiring freeze. And Begich said he doesn't make decisions based on snapshots in time.

"If you take the worst two months in the American economy since the Great Depression and say, 'That's how we're going to budget,' you're setting yourself up for failure," he said.

ASSEMBLY ON EDGE

Several Assembly members were worried about how Anchorage was faring as the U.S. financial system tottered.

Three -- Debbie Ossiander, Sheila Selkregg and Harriet Drummond -- had resolutions on the table at the Dec. 16 meeting to require the finance and budget departments to provide them with monthly financial updates.

Without knowing of Weddleton's identical suggestion, they also wanted to freeze city hiring until April, when the first quarterly update on 2009 revenue and expenses would become available.

At that meeting, Selkregg noted that several large city funds are invested in stocks and bonds, and it would be good to get regular reports on how they were doing. Anchorage invests hundreds of millions of dollars annually in both longer-term, higher-risk investments and short-term, safer securities. But another member suggested postponing both issues until January.

Begich said the delay was a good idea.

"We just saw these (resolutions) for the first time tonight," he said, adding that Weddleton and budget director Wanda Phillips should have a chance to review them.

Ossiander didn't quarrel with postponing the hiring freeze, but she saw no reason to delay the legislation calling for monthly finance updates.

It's "just asking for general financial information that has come up in every discussion of major financial expenditures ... for the last few months," Ossiander said.

Separately, but at about the same time, Assemblyman Bill Starr was pressing Weddleton for reassurances that the city would have enough money to cover the new pay raises required by the labor contracts.

In an e-mail to her the day before the Dec. 16 meeting, Starr noted that major stock markets were showing "negative returns" and that some tourism operators, including cruise-ship companies, were reporting that bookings for 2009 were down 40 percent. That could carry over to car and hotel rental taxes the city counted on, Starr said, and falling oil prices might cause the state to cut revenue sharing -- the Assembly had budgeted that the state grant would total $15 million.

Could Weddleton "certify" that the city's revenues would cover the expenses planned in the 2009 budget? he asked.

The next day, Weddleton responded by e-mail. She suggested that Starr take up his questions at an Assembly or budget committee meeting.

"I am not trying to be non-responsive," Weddleton said, "however, I am uncomfortable making an assertion like this within an email."

COST OF UNION CONTRACTS

That night, at the Assembly meeting, two items were on the agenda that could affect the city's 2009 spending.

Both were new labor contracts, one for the police union and the other for firefighters.

The police contract, with its pay raises, would lift the department's spending $380,000 above the total the Assembly had approved the month before in the 2009 budget.

During discussion of the contract, Police Chief Rob Heun reassured the Assembly that he would be able to absorb the $380,000 -- a small part of his $80 million overall budget -- by adjusting expenses.

A long public hearing and debate on the police contract took the Assembly to its closing hour. The Assembly OK'd the contract on a 6-4 vote. The fire union contract was delayed until the following night.

At the Dec. 17 meeting, Starr brought up the questions Weddleton had deferred in her e-mail to him.

Weddleton expanded on Begich's comments of the previous evening, but again the main message was reassuring: Anchorage is well-situated.

"We are in unprecedented times," the financial officer told Starr at the meeting. "However, this municipality is more fortunate than most."

Because of the way Anchorage taxes property, those revenues shouldn't fall very much, she said. And unlike most other cities, Anchorage doesn't depend on sales or income taxes, both of which were causing shortfalls in many cities.

"That does not mean that we're immune to what's going on in the world today," she said.

But all in all, including Gov. Sarah Palin's promise to support revenue sharing at the same level in 2009, "compared to most communities we're more fortunate," Weddleton said.

Starr pressed: Are the city's investment funds hurting?

Weddleton got more specific. One big investment fund set up years ago with proceeds from the sale of the old Anchorage Telephone Utility, the MOA Trust Fund, "has incurred a market decline," she said.

The 2009 budget included spending a $7 million dividend from this trust fund, Weddleton said. But the Assembly might want to spend less of it in future years to allow the fund to recover its losses.

Weddleton wasn't asked for and didn't volunteer any details about the amount of investment loss the trust fund had incurred.

Days later, in response to a reporter's questions, she said the trust fund had started the year at $141 million.

Projections showed the fund would end the year, less than two weeks later, at about $97 million, she said -- a loss of more than 30 percent. The city counted on spending about 5 percent of the fund each year so that the fund would last, ideally forever. The $7 million the Assembly had budgeted actually represented more than 7 percent of the fund's value at that moment.

On Friday, Begich said the Assembly is regularly updated on the performance of the trust fund, on either a monthly or quarterly basis. And Weddleton's proposal to reduce the size of the fund's contribution to city government -- later adopted -- was prudent in any case, he said.

SLASHING JOBS, SPENDING

Begich resigned as mayor on Jan. 3 to become one of Alaska's two U.S. senators. Ten days later, Acting Mayor Matt Claman announced the city had a $17 million revenue shortfall, mostly caused by the faltering national economy, and he quickly began slashing jobs and services. To help, the police, fire and most other city unions agreed to defer promised 2009 wage increases in return for contract extensions. On July 22, the new mayor, Dan Sullivan, said the city budget was still $9 million short, and he soon laid off more employees. More recently, Sullivan has said the recovering economy has made up the last $2.5 million he was looking to cut from this year's budget.

Last month, Starr obtained Weddleton's Dec. 9 e-mail to Begich urging the hiring freeze because of "horrible" investment returns, as well as other internal city e-mails he got with a public records request.

Since Starr released them, Begich has downplayed the significance of Weddleton's warnings and recommendations, and said the Assembly was aware of financial risks.

"You cannot just go off one e-mail ... especially when you deal with city finances," Begich said. "Because the thing you do not want to send is a negative message ... if not necessary, because you will have a ripple effect on the economy that will be very dangerous."

Begich said he had asked for the spreadsheet attached to Weddleton's e-mail because he needed to keep track of the possibilities. The Assembly might not have gotten that "cheat sheet," but it was regularly apprised of financial developments, he said.

The Assembly had, in fact, been getting troubling hints of the growing predicament.

On Oct. 28, for example, a legally required annual report on the city's investment portfolio was accepted by the panel without discussion.

BEGICH DISCLOSURES

The three-page memo explains how the city's short-term investments are made and which companies are paid to help make decisions. On page two, it notes that this portfolio is invested in fixed-income products, bonds, government securities and the like.

"From June 2007 through August 2008," the mayor's memo says, the portfolio "earned a return of 4.13 percent." That trailed an industry benchmark the city uses to assess how well its investments are doing. The benchmark's return was 4.51 percent.

The memo attributes that shortcoming to the types of fixed-income issues the city was invested in. More than 40 percent of the city's portfolio is invested in "commercial paper, corporate bonds, asset-backed securities and mortgage-backed securities," the memo says, while the benchmark funds are invested in mostly U.S. Treasury notes.

City officials expected the portfolio's performance to improve "as the overall market conditions improve," the memo says.

But the last paragraph, about capital market conditions, warns that "the bottom may be yet to come. It is reasonable to expect the current market condition to persist into 2009."

Begich also points to the transition report he handed to Claman in January. In the budget section, about three-fourths of the way through the 93-page document, the report notes that, "Due to the impact of the financial crisis upon the MOA's investment portfolio," budget reductions might be necessary after the first quarter.

In interviews, Begich has pointed out that he faced a $33 million deficit when he became mayor in 2003, and that he dealt with it without complaining. He also insists that Assembly members had ample opportunities to be fully informed about what was happening with city finances and how that might affect the next year's spending.

The Assembly has "work sessions galore on the budget, as well as other elements of the financial issues of the city," he said during the news conference.

"And I think we did a darned good job in delivering that information."

On Friday, Begich suggested both Claman and Sullivan overreacted, although he said he doesn't want to second-guess his successors at City Hall. He predicted that the city's bottom line at the end of this year will show that things didn't turn out as badly for city investments as others have feared.

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