DELTA JUNCTION (AP) -- Gov. Tony Knowles' veto of a $1 million interest-free loan to the city of Delta Junction caught city officials off guard.
The loan would have allowed the city to finish paying its $1.1 million breach-of-contract settlement with Allvest Inc. and Delta Corrections Corp. stemming from a failed effort to build a private prison at Fort Greely. The money was due July 1.
Gov. Tony Knowles signed into law last week a $2.4 billion budget that did not include a legislative request for the $1 million loan.
''I don't understand how we've been such an evil community we can't even get a loan,'' said Councilman Lou Heinbockel.
Councilman Mark Weller said some of the council members joked about a possible veto as they waited nearly a month for the governor to take action. But they didn't come up with contingency plans.
''We could not fathom a loan would be cut from a budget,'' Weller said.
Knowles' spokeswoman Julie Penn said a provision in the loan bill would have converted the loan to a grant if the city became part of an organized borough. A state bailout of a city's lawsuit could set a bad precedent, she said.
''The state was not a party to the litigation,'' Penn said.
But Delta officials say the state did have a role in what transpired.
Allvest had brokered a deal with the Delta Community Coalition organized to look for alternative uses for Fort Greely Army Post, which was slated for closure. Because the coalition was not a government entity, the state told the city it would have to sign any agreements.
After the deal went sour, some legislators pushed the city to settle out of court, Heinbockel said.
''Certain key legislators convinced the city to settle with Allvest with the veiled promise, ''We'll bail you out,''' he said.
Heinbockel and Weller said they don't know what the city will do now.
The city council discussed the issue briefly at its meeting Tuesday. Weller suggested a special meeting may be called.
Heinbockel said one thing is clear: The city is in default.
''I don't know what's going to happen from here,'' Heinbockel said. ''I know one thing. We don't have the $1 million.''
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