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Addressing budget, Walker lays out 'deep cuts' he acknowledges 'will hurt'

JUNEAU -- In a solemn address Thursday evening, Gov. Bill Walker described how he would cut state operating budgets an average of 5 percent from last year, offering legislators and the public their first view of how he plans to chip away at a $3.5 billion deficit.

With the state's revenues less than half of planned spending for this fiscal year, Walker said his proposed budget cuts for next year include education, with a 2.5 percent cut for K-12 schools -- though he added that his proposal will leave the state's baseline education funding formula intact.

And in a frank admission, Walker said that unless there's a rebound in the rock-bottom price of North Slope oil, discussions about new taxes could be necessary as soon as next year. If the state's deficit stays at the same level and prices don't rise, Alaska's savings will be gone by 2018. Taxes and royalties on North Slope oil production account for about 90 percent of the state's unrestricted revenue.

Walker's speech was his second in two nights, following the annual State of the State address. It was the first time a governor had delivered a "State of the Budget" address in nearly a decade. Walker said the second speech was necessary given the state's dire fiscal circumstances.

In contrast to Wednesday's speech, an optimistic mix of campaign themes and big ideas that drew frequent cheers, Thursday's address was serious and policy centric.

Even Walker's choice of clothing was subdued, with a blue shirt and dark tie. Legislators held their applause until the very end of the speech.

"I am talking about deep cuts," Walker said, after describing how his administration was contemplating 25 percent reductions over the course of four years. "And they will hurt."

Walker had already telegraphed his reductions late last year when he asked his commissioners to examine 5 percent and 8 percent cuts to their budgets. He said Thursday he was cutting state agency operating budgets by 6.5 percent, though Walker's overall spending reductions are slightly less due to smaller cuts in certain types of funding based on formulas.

The budget, however, still makes room for expansion of the Medicaid insurance program for the poor and disabled -- a step Walker had promised during his campaign.

His proposal includes $450 million in federal money that will be available to the state if it accepts the Obamacare provision rejected by Walker's predecessor, Sean Parnell.

Walker pointed out that the program was fully federally funded until 2016, with the state gradually scaling up its own contribution to 10 percent four years after that. He called the expansion part of a sound, prudent fiscal policy.

"We all want Alaskans to be as productive as possible, but people cannot work, hunt or fish unless they are healthy," he said.

Sen. Berta Gardner, D-Anchorage, praised Walker's focus on Medicaid. She said she thought his decision to accept the federally funded expansion would eventually win legislative support.

"It feels to me that the temperature in the room is warming toward Medicaid expansion," she said.

Legislators had been anxious to see Walker's proposal and his staff members handed them printed copies as soon as his speech was over. The Legislature will now begin to examine Walker's numbers and will propose their own changes.

Leaders in the House and Senate, some of whom criticized Walker's vagueness in his speech Wednesday, mostly praised his focus on cuts a day later.

Sen. Anna MacKinnon, R-Eagle River,and a key player in drafting the state's budget as a co-chair of the Senate Finance Committee, said Walker had taken a "courageous first step."

She praised him for "putting things on the table that are going to be hard to talk about."

But among those things are the rollbacks of hard-fought increases to school funding in 2014 that were intended to carry over for two years.

Senate President Kevin Meyer, R-Anchorage, described feeling "a little disappointment" when hearing Walker describe the budget cuts.

But other members of his Republican led majority caucus wanted to see further reductions.

Sen. Mike Dunleavy, R-Wasilla, called Walker's full proposal "a good start" and said he'd like to see more.

Among the departments facing the deepest cuts, of 10 percent or more, were the Department of Labor and Workforce Development, and the Department of Commerce, Community and Economic Development.

Rep. Steve Thompson, R-Fairbanks, said Alaska would have to look at new taxes sooner than Walker wanted.

"I think were going to have to start that discussion," he said.

Waiting for a rise in oil prices may not leave the state with enough time to find new revenue sources if there's no rebound, and the state could run out of money, Thompson said.

Walker's budget also proposed eliminating a program called municipal revenue sharing, which distributes money to communities across the state -- but payments would continue out of savings until a fund built up in past years is exhausted.

That means communities this year will receive $57 million divided among them, down $3 million from the current year.

But by not putting any new money into the fund -- a process called capitalization -- the fund, and the municipal revenue sharing program, will eventually go away.

"He isn't capitalizing it this year; forward funding is very hard in this environment," said Pat Pitney, Walker's budget director.

Next year, communities will get $38 million, unless more money is put in the fund, and the program will completely disappear the following year.

Pitney said Walker supports municipal revenue sharing, and hopes oil prices rebound so that it can be funded in the future.

Walker said his budget would include a few capital projects that had initially been removed from the stripped-down initial capital budget he'd submitted earlier.

But he also said he won't do something that Parnell had proposed: borrowing money for a required $262 million payment to cover pension costs.

"Borrowing against the future does not help our State's credit ratings," Walker said. "I said I would not pass the buck to future generations, and I will not."

In an interview after Walker's speech, Gunnar Knapp, an economist who heads the Institute for Social and Economic Research at University of Alaska Anchorage, said he still needed to see more detailed numbers from the governor's budget proposal before he could make a full assessment.

But based on the contours Walker drew in his address, Knapp said he expected that the cuts wouldn't be large "compared to the magnitude of the challenge we face."

"I empathize with the situation, but I imagine people are going to be asking, 'What's next?'" Knapp said, sitting in the House gallery after Walker's address. "I don't know what's politically possible. But if this is what's politically possible, it suggests an economic challenge we have. And the economic challenge will be to fix the budget before we run out of money."

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