ANCHORAGE - Gov. Sarah Palin's first two years in office have been called a time of milk and honey, when the resource-rich state was flush with wealth from record oil prices.
The second half of her term isn't looking so rosy as Palin faces her first major financial challenge as governor.
The rapid decline of oil prices has left the state in a looming budget crisis and a late-entrant in the national recession. And that could have political repercussions for the former Republican vice presidential hopeful, who has signaled an interest in a 2012 presidential run but must stay visible in the Lower 48 to be successful.
"Given these bad times, she's going to have a much more difficult time traveling outside Alaska," said Larry Sabato, director of the University of Virginia's Center for Politics. "When times are good, people will let their governor roam. In bad times, citizens expect their governor to stay home and work on solving the problems."
Oil accounts for as much as 90 percent of state revenues. So the plunge of North Slope crude from an all-time high of $144.59 per barrel last July threatens to give the state an estimated budget shortfall of up to $1.5 billion in the fiscal year that ends June 30.
Palin bills herself as a fiscal conservative, and has called for reducing state spending by $268 million in this budget year, but lawmakers and others say these aren't reductions at all and do nothing to curtail spending. For example, the bulk of that sum - $200 million - is unspent tax credits for companies investing in oil and gas development that are being returned to the treasury.
Palin also is seeking approval from lawmakers to tap budget reserves to fill the deficit. She also has implemented a state hiring freeze that exempts public safety employees, but other departments are lining up to ask for waivers.
It's a long way from Palin's early tenure - particularly last year when the state's treasury was bloated with surplus money from the skyrocketing oil prices.
From that bounty the hugely popular governor got the state to give $1,200 to most Alaskans in a one-time fuel relief payout that totaled about $740 million. That payout was on top of a record $2,069 dividend from the state's oil royalty investment program, which distributes checks annually.
"The first two years of her term, upon reflection and looking over your shoulder, are going to be looked back at fondly," said Sen. Kim Elton, a Juneau Democrat who is rumored to be up for a post in President Barack Obama's Interior department.
"The coming two years for Sarah Palin I think will be difficult. You test the mettle of people in hard times. That applies to all elected officials," he added.
Palin, who has not said if she will run for re-election as governor in 2010, said that dealing with the oil wealth was actually her first significant challenge. It meant reining in government spending sprees and making "sure that we were living within our means and putting money aside for a rainier day."
The state has socked away $1 billion in an education fund for the next school year and education officials say another $1 billion is expected go into the fund this year for future use. More billions went into state savings as well, Palin said.
"We're more prepared than other states because of the prudence there," Palin said recently. "We crossed that first hurdle."
The state currently has $6.6 billion in its constitutional budget reserve fund that it could tap into. A few billion dollars more also is available from other pockets, said Juneau economist Gregg Erickson, a longtime Alaska budget watcher.
Given Alaska's robust reserves, the state is well-prepared to weather the next two years, Erickson said. As to how long reserves will last after that, there are too many factors involved to say for sure.
"It depends on how much you draw from other places, how fast the budget increases and declines, the earnings rates on reserves that you have," Erickson said. "And of course, it depends on how high or low oil prices are."
Bear Ketzler, an Interior Alaska resident, has a hard time envisioning Palin running for a second term as governor.
"She's kind of been moved up a couple notches and I could see her leaving the state and getting her profile up even higher on the national political level," said Ketzler, city manager of the Yukon River village of Tanana. "But I think for her to be electable in four years, Obama would really have to screw up."
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