Editor's note: This is the second of a three-day series looking at major issues in the 2009 Legislature.

With projected state revenues plunging, key lawmakers from both parties agree the major issue facing the 2009 Montana Legislature will be figuring how to balance the state budget over uncertain times the next two years.

The Montana Constitution requires the Legislature to approve a two-year budget that squares with anticipated tax revenues.

Democratic Gov. Brian Schweitzer has already revised his proposed budget downward since mid-November because of falling revenues.

Incoming House Speaker Bob Bergren, D-Havre, said the 2009 session will differ greatly from the contentious 2007 gathering, when the state’s projected surplus topped $1 billion.

“Last session was like a lot of kids fighting over an inheritance,” Bergren said. “This time both sides agree there isn’t much money, with not a lot for new projects and buildings. We definitely need to live within our means.”

The House, deadlocked with 50 Democrats and 50 Republicans, gets first crack at the budget after joint House-Senate budget panels make initial recommendations by late February.

The Senate, where Republicans have a 27-23 edge, gets the final look at the budget before it’s returned to Schweitzer in April.

“Because we’re in this whole state of financial flux, we don’t know how much money we’re going to have to spend,” said Senate President Bob Story, R-Park City. “We’re going to look seriously at the proposals that the governor makes. If they make sense and they’re feasible, they’ll probably be fine.”

The question that no one can answer now is how far Montana’s projected revenue collections will sink in the coming two years. That will determine budget levels, barring any tax hikes, which Schweitzer says are off the table.

“I really think this revenue estimate is a falling knife, and if you try to grab it too quickly, you’re going to get cut,” said incoming House Republican Leader Scott Sales, R-Bozeman.

He predicted it would require at least two special sessions after the Legislature adjourns “to keep this ship afloat.”

But incoming Senate Finance and Claims Chairman Keith Bales, R-Otter, wants to set the budget right once, and avoid having lawmakers return to Helena for special sessions.

“I think it is much better for state government and all the agencies to tighten the belt and get a budget that will last through the biennium,” Bales said. “That is a whole lot better than passing a budget and then having to come back six months later and make deeper cuts.”

In the House, new Appropriations Committee Chairman Jon Sesso, D-Butte, also advocates a guarded approach.

“The revenue estimates are dropping precipitously by the day,” Sesso said. “We’re trying to write a budget for a period that starts six months from today. I think the theme of this session is going to be caution and conservativism.

“There are no sacred cows. We have got to look at all the programs. Those that are working well deserve our support. Those that aren’t are the sources of funds to support the ones that are.”

Both chairmen support Schweitzer’s insistence on maintaining a general fund surplus or reserve of at least $250 million throughout the next two uncertain years.

Incoming Senate Minority Leader Carol Williams, D-Missoula, said she wouldn’t be surprised if the revenue picture worsens before it improves.

“I hope the worst is here, but I’m afraid it’s not,” she said.

Williams and others said the Legislature can’t forget those who need help in these difficult times.

“When we have bad economic times like we do right now, we have to concentrate on the people who are suffering now, the people who need food and shelter and heat and jobs,” she said.

The turnabout in state revenues is a far cry from just three months ago, when Montana appeared to be in a rosy fiscal condition again, even as many other states faced huge deficits.

In early October, the state was even looking at another projected surplus nearing $1 billion by mid-2011, although revenue forecasters warned of uncertain clouds on the horizon.

Legislators, state agencies, interest groups and unions representing state workers all had designs on how to spend this growing pot of money. Their ideas ranged from big spending increases for education and other programs, tax cuts and pay hikes for state employees.

Those ideas now fall in the category of wishful thinking.

Over the last three months, projected state tax collections have plummeted, as Montana has been hit by the national recession and faces rising unemployment rates.

No one knows when anticipated revenues from the state’s three major sources — individual income, corporate income and natural resource taxes — will stop falling.

In an unusual move, the Legislature’s budget analyst will ask the House Taxation Committee to lower the two-year revenue estimates by $135 million over what an interim legislative committee recommended in mid-November.

Asked how optimistic he is about his revised figure, the Legislature’s chief revenue forecaster, Terry Johnson, said, “I’m not confident at all.” He fears fast-sinking oil prices will cause companies to quit drilling for new wells here, further reducing oil tax revenues.

In another rare move, Schweitzer scrapped his initial two-year budget proposal released Nov. 15 and rewrote it a month later. The latter version cuts state general fund spending by $144 million from his first $3.8 billion, two-year budget because of dropping revenues.

Schweitzer has been using nautical references to describe Montana’s budget and revenue situations.

In releasing his Nov. 15 budget, the Democratic governor said, “Now is the time to batten down the hatches.” On Dec. 15, Schweitzer said, “The boat could not carry all the cargo, so we had to throw some overboard.”

So far, no one has predicted the ship of state will start running into icebergs.

The sinking revenues may have caught some by surprise, but even today, Montana has eluded the kinds of deficits confronting many states.

So far, Montana’s declines in projected revenues aren’t as severe as they were here in the mid-1980s, the early 1990s and 2003 when the state faced actual deficits and legislatures and governors were forced to cut existing budgets.

“This budget is still on the edge,” said Legislative Fiscal Analyst Clayton Schenck. “There is nearly no significant reduction in services compared with ’03.”

So far, Schweitzer’s budget adjustments are reductions in proposed spending increases for the next two years, and don’t literally cut existing budgets.

Because of the shaky revenues, Schweitzer’s revised general fund budget proposes keeping a reserve of $295 million through mid-2011, up from his original $266 million.

“We have a balance sheet that shows almost $300 million in fund balance and reserves, but any number of things could happen,” said Schweitzer’s budget director, David Ewer.

State Bureau Chief Chuck Johnson: 447-4066 or chuck.johnson@lee.net