Mark Thiessen, Associated Press
Gov. Sean Parnell speaks during a news conference in Anchorage, Alaska, on Thursday, Dec. 15, 2011. Parnell has proposed a $12.1 billion spending package for the next fiscal year, $800 million less than this year.

JUNEAU, Alaska — Gov. Sean Parnell on Thursday proposed a $12.1 billion spending package for the next fiscal year, more than $800 million less than this year's budget.

Parnell said his plan shows restraint and should send a message that state spending will not spike just because Alaska has surplus funds. In his budget address in Anchorage, Parnell said he wants a public conversation with the Legislature on wants versus needs.

He said he expects that the budget, in the end, will not exceed what he accepted this year.

Excluding permanent fund appropriations, this year's budget totals $11.4 billion. Parnell cited that figure earlier this year when he vetoed a record of more than $400 million in spending.

With permanent fund appropriations, this year's budget totals about $13 billion, and Parnell's spending proposal for next year is $12.1 billion. He said his budget will leave a surplus of $3.7 billion.

Given factors like U.S. financial problems, the European debt crisis and declining North Slope production, he said it's prudent to keep spending at "reasonable levels."

The majority of the state's unrestricted revenue comes from oil. On Thursday, the revenue department forecast production would decline 4.7 percent this year and another 3.3 percent in fiscal year 2013. Revenue Commissioner Bryan Butcher credited a "strong and relatively stable" revenue outlook to continued high oil prices.

The proposed capital budget totals $1.8 billion, about $1 billion less than the current plan. The proposed operating budget was $8.8 billion, up from $8.5 billion this year.

Parnell cited reasons for the rise, including increased costs for the opening of a new prison, more than $11 billion in unfunded pension liabilities and formula-driven programs like Medicaid. Labor contract costs also were expected to increase by $66 million, about half of that, general fund cost. Medicaid and pension liability costs are projected to be $131 million more than this year.

He said it's a fair characterization to say the budget is maintaining existing services.

The budget eliminates 284 vacant positions, which Parnell's office said is intended to help the state better absorb the new positions for the Goose Creek Correctional Center. Some lawmakers have raised concerns about the project's cost.

Parnell also proposed a $350 million bond package for port projects in Anchorage, Seward, the Mat-Su Borough, Emmonak, Bristol Bay Borough and Ketchikan Gateway Borough. He told reporters he normally would favor paying cash over taking on debt, but that the state is making greater returns on its savings —5 percent, 6 percent or more — compared to the financing rate.

He said it would make sense to use "cheaper" money and continue to grow the state's savings, adding that he was open to discussion on that issue.

The spending plan includes items that fit with the Republican administration's priorities and a legislative agenda focused on family and pocketbook issues. Some of those items include $4.9 million for emergency food stashes in case of a disaster; $1.3 million for housing aid for victims of domestic violence; and $28.5 million for so-called "roads to resources," to improve access for energy development.

It is the third year that Parnell has proposed at least $100 million for deferred maintenance projects. He wants $8 million for one of his pet projects, merit scholarships.

His budget also allocated $23.9 million for school maintenance projects and more than $60 million for new schools in Emmonak and Koliganek. The latter was in keeping with an agreement to settle a lawsuit alleging inequities in funding for rural public schools.

Parnell told the Anchorage Chamber of Commerce, where he delivered his address, that he remains committed to efforts to commercialize the state's natural gas resources. His proposal includes $60 million to meet the state's contractual obligations in pursuing a major line, and $21 million to advance a smaller in-state pipeline.

He said he expects the major players to get behind on project or the state will move in another direction. He told reporters that the producers are now talking, something he considers progress.