Gov. Bill Walker submitted a proposed $106 million capital budget to the Legislature on Monday, a spending plan designed to help the state weather a $3.5 billion deficit and one that's a fraction of what the state has spent on capital projects in recent years.

Walker also submitted the $5.3 billion operating budget given to him by his predecessor, Gov. Sean Parnell.

Both budgets may see revisions before Feb. 18, though significant increases seem unlikely, with the collapsing price of oil already squeezing a state budget that relies almost entirely on petroleum production.

Walker also announced Monday he would undertake an inclusive process for ideas on where to cut without doing lasting harm to the economy. In the coming weeks, that process would involve public forums as well as an Internet-based site to allow submissions from a broad array of Alaskans. The dialogs will include meetings with lawmakers, community leaders and constituent groups.

Walker said a balanced budget won't be possible and the state will have to draw from savings piled up for shortfalls. Alaska has more than $12 billion in savings for that purpose.

"We cannot cover a $3.5 billion deficit and not hurt our economy," Walker said, speaking before the Anchorage Chamber of Commerce on Monday. "So we don't want to turn our economy into a tailspin but we want to be honest and forthright about where we are."

Parnell had submitted a $220 million capital budget to Walker when he left office on Dec. 1. Walker's capital-spending plan is $114 million less.

Almost all that now remains of Parnell's proposal is state money that draws matching funds, primarily from the federal government and mostly for transportation projects. Those matched funds will total $1.2 billion based on the submitted projects, most of which comes from the federal government, according to the Office of Management and Budget.

The only non-matching projects involve $7.1 million in planning funds for a new Kivalina school and access road that are legally required, said Pat Pitney, Walker's budget director.

The items stricken from Parnell's proposal, according to OMB, include $20 million for the Susitna-Watana dam and $8 million for the Ambler road, two long-simmering projects that have already seen the state spend millions in the preliminary stages.

Also missing from Walker's proposed capital budget is funding for the Knik Arm and Bridge Toll Authority. Parnell's capital proposal had included $45 million in federal funding for the effort, though no state funding. Walker's budget makes no mention of the project that would span Cook Inlet's Knik Arm with a 1.74-mile bridge.

Gone too are some tens of millions for Alaska Housing Finance Corp. housing programs and homeless assistance programs, as well as $23 million for nine high-priority projects under the Education Major Maintenance Grant program.

Lawmakers have been working to bring the capital budget down since the state spent more than $1.5 billion three years ago. But the need for deep cuts has become much more urgent since oil prices collapsed in recent months.

The state's petroleum-addicted budget is currently $6.1 billion but revenues this year are expected to total only $2.6 billion, creating the massive shortfall. A similarly sized hole is projected for the following fiscal year as well, assuming oil prices remain low. The state expects oil prices to nose upward then, providing some relief.

Any additions to Walker's capital budget will be done with the "utmost scrutiny," Pitney said. Items that reduce future spending obligations will have a greater priority.

Walker took audience questions at the Anchorage Chamber of Commerce after giving a short speech.

"Two words: Medicaid expansion," a man said for the first question.

Walker said matter-of-factly he is still moving forward on that campaign commitment, and said he has been surprised to learn it will come with unexpected savings. After the meeting, he told a reporter that one area of potential savings with Medicaid expansion is costs associated with paying for prisoners. The state fully pays for those expenses but would receive federal support if Medicaid is expanded, he said.

Medicaid expansion has been criticized by some because it is expected to cost the state some tens of millions of dollars in coming years. Studies have shown, however, it would bring more than $1 billion in federal spending to the state during the same time.

Walker replied to another audience member to say his priority for education has not changed.

"We will figure out how to have the absolute best education to our students at a cost we can afford," he said.

"Don't think we are going to devastate ... " he said, then completed his sentence: "You know, education is very, very important to us."