Alaska sees $1.25 bln budget gap on oil price drop

* State officials slash oil price, production forecast

* Alaska had expected surplus just two months ago

* Budget gap poses challenge to Gov. Sarah Palin

ANCHORAGE, Alaska, Feb 19 (Reuters) - Sliding oil prices and production have prompted Alaska officials to forecast a state budget shortfall of $1.25 billion in the next fiscal year instead of the surplus they predicted just two months ago.

The dramatic change in state fortunes poses a stiff challenge for Gov. Sarah Palin, whose record during the oil price boom helped propel her to the Republican vice presidential nomination in 2008.

Alaska’s Department of Revenue said late on Wednesday it expects prices for Alaska North Slope crude to average $57.78 a barrel during fiscal 2010, down from $74.41 predicted in December. The department forecast that Alaska’s oil production will average 659,000 barrels per day, down 6,000 barrels a day from the December forecast.

North Slope crude was priced at $37.47 on West Coast spot markets on Wednesday, down dramatically from $144 a barrel at its peak in July.

Cherie Nienhuis, acting chief economist for the Department of Revenue, said on Thursday the department plans to issue revised projections in March and April.

“It is a moving target,” she said, citing volatile oil prices.

According to the latest calculations, Alaska will have to pull $1.25 billion from a special reserve fund in the coming fiscal year, which starts July 1. When Palin proposed her fiscal 2010 budget two months ago, she predicted a surplus of $388.7 million.

Alaska’s Constitutional Budget Reserve -- a special fund established nearly two decades ago as a buffer against swings in oil prices and revenues -- currently holds $6.8 billion, according to the Department of Revenue.

The revised 2010 forecast anticipates that oil taxes, royalties and fees will provide 82 percent of the state’s anticipated $3.18 billion in unrestricted revenues. Alaska has no personal income tax and no statewide sales tax.

Soaring oil prices of the recent past, coupled with an oil-tax change that takes advantage of high prices, allowed the state to sock away surplus revenues. Lawmakers last spring set aside $5 billion in various savings accounts, and later approved an initiative championed by Palin that sent one-time $1,200 payments to nearly every resident to help offset high energy costs.

“We’re in far better condition than most of the other states, partly because of our good fortune of having lots and lots of oil,” state Sen. Kim Elton, a Juneau Democrat, said Thursday. “We’re not operating on thin margins like other states are. Having said that, we can’t assume that there’s going to be another boom in the price of oil that’s going to bail us out in two or three years.”

State Sen. Con Bunde, an Anchorage Republican, said money from the federal stimulus package is needed to soften the state’s fiscal blows.

“I think in three to four years this state is going to be in very difficult financial times. And we need to stretch our savings just as far as we can, hoping for some, I suppose. . . miracle,” Bunde said at a Thursday news conference. “If we can supplant some of those state dollars with federal dollars now, they’ll be available when our budget situation is far more precarious than it is now.”

The revised fiscal 2010 calculations include $445 million in new spending reductions proposed Wednesday by Palin, mostly in the form of deferred payments.

“Given current market conditions and oil prices, we have made reductions in the proposed spending plan for next year,” Palin said in a statement Wednesday. “We are continuing our efforts to provide important public services, while cutting back on areas that can certainly wait until we see improvement in our revenue stream.” (Reporting by Yereth Rosen; Editing by David Gregorio)