Democrats and Republicans overwhelmingly rejected a proposal to adopt an endowment method for managing the $27.4 billion permanent fund on a 5-15 vote. Seven Republicans and eight Democrats rejected the proposal.

The proposed constitutional amendment requires 14 of 20 votes in the Senate, a two-thirds majority, and approval by the public in the November election.

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The Senate also voted 7-12 to reject a 3 percent income tax that would have raised about $220 million annually.

On Friday, Gov. Frank Murkowski threatened to call a special session of the Legislature if lawmakers don't raise the money through taxes or budget cuts to fill a projected $882 million fiscal gap for 2006.

According to Murkowski's numbers, that would put the state's rainy day account, the Constitutional Budget Reserve, below $1 billion, a level he says is unacceptable.

"I'm putting (the Legislature) on notice that if the long-term deficit is not adequately addressed, we will have to continue our efforts, which, of course, will prolong the session," Murkowski said.

Murkowski also has promised "draconian cuts" to the state budget if lawmakers don't find a fiscal fix this session.

The proposal to use permanent fund earnings for government has been central to Murkowski's plan for filling the fiscal gap this year. But some lawmakers have used record-high oil prices as justification for delaying movement on any significant revenue measures.

The endowment method for managing the permanent fund, also known as the percent of market value approach, would protect the entire fund against inflation and provide 5 percent of its value for annual dividend payouts. Fund trustees have argued that the plan would provide a regular, predictable dividend payout.

The proposal, however, is tied to a bill that would split the available 5 percent between dividend checks and government. That plan, approved last week by the House of Representatives, would send half of the 5 percent to dividends, 45 percent to state government and 5 percent to municipalities.

It would provide about $600 million for state services and $65 million for city government. Dividend checks would increase by a few hundred dollars in the first couple of years under the 50-45-5 split. But in future years they would be hundreds of dollars less than under the current management structure, according to the fund's trustees.

Sen. Gary Wilken, R-Fairbanks, said with the presidential election, ballot initiative proposals, a heated U.S. Senate race and 53 state lawmakers running for office this November, the public would not have enough information on the permanent fund endowment proposal to support it.

"There's not a (public relations) firm in the world that is going to be able to educate the people of Alaska on this," Wilken said.

Senate Democrats offered amendments to the POMV proposal that said for every dollar sent to state government under POMV two dollars would be given to dividends. That amendment failed.

"I think the Hubbard Glacier is advancing faster than we are when it comes to a fiscal package," said Sen. Kim Elton, D-Juneau, referring to the surging glacier in Yakutat that threatens the town's sportfishing industry. Elton voted against the POMV plan and the statewide sales tax proposal.

Murkowski, along with his chief of staff, Jim Clark, and permanent fund Executive Director Bob Storer, sat in the Senate gallery during the debate and failing vote on the POMV plan.

"There's always tomorrow and the day after that and the day after that," Murkowski said following the vote.

The Senate also rejected a proposal to establish a spending limit on state government Friday when the proposal came up for a revote.

Lawmakers Friday night called for a revote, but did not take up the proposal Saturday.

• How senators voted on the permanent fund percent of market value proposal:

5 Yeas: Con Bunde, Ralph Seekins, Gene Therriault, Bert Stedman, Gary Stevens.

15 Nays: John Cowdery, Bettye Davis, Fred Dyson, Johnny Ellis, Kim Elton, Hollis French, Lyda Green, Gretchen Guess, Lyman Hoffman, Georgianna Lincoln, Scott Ogan, Donny Olson, Ben Stevens, Tom Wagoner, Gary Wilken.