Gov. Frank Murkowski released his proposed fiscal year 2007 state budget Dec. 15, as he is required to do by law. The Legislature begins work on the governor's proposal when it convenes in Juneau Jan. 9 for the 2006 legislative session. The Legislature actually writes the budget, and the governor, through his line-item veto authority, will give final approval to the spending plan after the Legislature adjourns.

Here are excerpts from the governor's Dec. 15 address to Commonwealth North, in which he outlined his main budget proposals:

The budget surplus

Our Department of Revenue officially puts the current year (FY 2006) surplus at around $1.2 billion.

Here is our plan for using the surplus:

• Save half of the surplus ($565 million) to advance fund our K-12 educational system (last year the Legislature forward-funded education by $400 million);

• Save $400 million for investment in the gas line;

• And spend about $130 million to meet other state needs such as corrections, public safety and pre-planning for the gas pipeline.

The FY 2007 budget

Medicaid

Medicaid is the largest expenditure in the state's budget, nearly $1.1 billion this year. When I came into office, I proposed that the federal government pick up more of the costs. We were successful. Instead of millions in increases during our first two years, we actually saved $45 million by refinancing and program changes implemented by then-Commissioner Joel Gilbertson and his team.

Retirement systems underfunding

On day one of this administration we had to face up to a $4.2 billion liability in the state's public employee retirement systems. This resulted from a series of decisions throughout the 1990s to not increase - even to reduce - the (public) employer's contribution rate, coupled with ever increasing health care costs, has meant that governments and school districts have had to pay tens of millions in increased dollars these past three years.

This year, the state's bill for its retirement system contribution is $165 million. For school districts and local governments it's $209 million.

This obligation will grow by $117 million next year, which means it will cost nearly a half billion dollars ($491 million) to meet the public employee retirement system's obligation.

That's why we supported passage of Senate Bill 141 that modernized Alaska's retirement system.

The bill created a defined-contribution plan similar to the 401(k) retirement systems now common in the business world.

Under this new plan, employees will have more control over their retirement and the peace of mind in knowing that they will get back what they put into the system regardless of whether they make government service a career.

While change was controversial, it was the right thing to do. We've learned important lessons from the pension crisis faced by United Airlines, U.S. Steel and General Motors and nearly every other state that still has a defined-benefit plan.

Local government retirement costs

In terms of local government retirement system obligations, last November when I addressed the Alaska Municipal League, I indicated I would again support the state paying local government's increased retirement system costs, just as we did this past year.

At that time, I cautioned the AML about my concern that this relief was temporary because it rested on the state's projected high revenues.

I challenged AML to come up with a solution of how these costs could be covered on a recurring basis. This is a recurring obligation; we need a recurring, dependable way to pay for it ... other than the state's general fund.

I continue to believe the percentage of market value proposal, as way to distribute (Alaska) Permanent Fund income, is a good alternative. Had it been put in place two years ago, about $65 million would since have been distributed to communities this year.

To remain focused on a sustainable solution, the budget I have proposed does not include funds for the state to pay this obligation for local governments. When consensus is reached regarding a recurring fund source, I will amend my budget accordingly.

Public safety

On a positive note, we've added 25 troopers over the years to make sure you have the best safety we can provide, and it's working. Alaska state troopers have resolved 17 out of 17 homicides in FY 2005 (the last state budget year) and so far for FY06 (the current year) the troopers are 5 for 5.

That's a 100 percent success rate for resolving murders by the state troopers. Much of this success is traced to work of the scientists at the crime lab ... referred to as "CSI Alaska." This year alone DNA profiles obtained from over 90 crime scenes across the state were matched to known offenders.

The FY 2007 capital budget proposes funding to expand the crime lab and add professional staff.

Economic development

Alaska's Statehood Act contemplates that the citizens of this state would fund public services through revenue generated by natural resource development, not taxes. With that in mind, I committed this administration to placing our emphasis on resource development.

We identified where the roadblocks were in state government that were causing disincentives to development - and we made the necessary changes.

We also identified where the state should invest in roads and infrastructure to attract private sector investment in exploration and development.

Today we're beginning to see the results. Mining, fishing, petroleum, tourism, timber, all are picking up.

Jobs are being created, local communities are beginning to see the benefit of a new revenue stream from these industries.

Our FY 2007 budget proposes additional investments in roads and infrastructure, and setting aside a good portion of this year's anticipated revenue surplus - $400 million - to invest in the state's equity position in the gas pipeline.

Education

During our first three years we substantially increased state funding for education -- 22 percent. In this new budget, I propose another $90 million increase for K-12 (kindergarten through 12th grade) education.

Last session we funded every school maintenance project that's been on the Department of Education's waiting list for years.

There are 141 projects now being undertaken to protect the investment in schools.

Education Commissioner Roger Sampson and I recognize that more funding isn't the only answer. We are holding school districts accountable for getting results.

Over the last three years, this state has gone from 42 percent of schools making adequate yearly progress to 59 percent this past year. That's a 17 percent improvement.

We started a statewide mentioning project for beginning teachers and principals. Based on one year of data, we're seeing impressive results: Of the rural teachers mentored, three of four returned. In several rural school districts, turnover rate was cut from 35 percent to 20 percent.

We modernized the teacher certification system to make certain qualified teachers are in our classrooms.

Starting next year, new teachers will have to pass a test to demonstrate they have mastered their subject matter and demonstrate they can effectively teach to students.

The bottom line is that while we have provided schools with additional resources, we are holding every school district accountable for the success of each student.

Boarding schools

We have expanded Mt. Edgecumbe (the state boarding school at Sitka), and we are getting great results. Ninety percent of students have passed the exit exam.

Eighty six percent are going on to college.

We had a waiting list, and we were able to provide for 62 more students through a new dorm and arranging for temporary housing at the Pioneers' Home. We have other boarding schools in Galena, Nenana, Nome and Bethel that are meeting the needs of Alaska's rural students and my proposed budget will help expand these options. I would also like to find a way to assist Sheldon Jackson, a fine old Alaska institution, in Sitka.

University of Alaska

Each year that I've been in this office, we promised to increase funding for the university system by 5 percent for programs. Next year we're proposing an increase of 17 percent.

And we propose investing in the first phase of building university research as an industry, which will focus on biomedical, behavioral health and Arctic-related research.

Enrollment is up for the university system ... 17 percent since 2000, and for health and engineering courses it's doubled.

We need to make sure we answer the demand for miners, through our own school of mines. Currently mine employees are in great demand.

In the capital budget we propose to fund completion of UAA's integrated science building in Anchorage, and last year we funded the UAF virology lab.

Attending college can be financially difficult. I commend the university for its Alaska Scholars program by which the top 10 percent of graduating high school seniors have tuition covered during their four years. It has been a success, and 98 percent of UA scholars that graduated in the last five years have stayed in Alaska.

Starting in FY 2007, I propose expanding the Alaska Scholars program to the top 15 percent of high school graduates, bringing the opportunity of higher education to more of our young Alaskans.

Job training

For those who don't want to go to college ... there needs to be top-notch job training available, and that's why I'm expanding AVTEC, our vocational training center in Seward.

I'm also launching the "prepare Alaska's youth for Alaska's jobs" initiative ... which will show kids the options of vocational professions ... and help prepare the natural gas pipeline work force.

Transportation

Over the last three years we invested a great deal in the state's infrastructure from addressing the congestion along Anchorage streets to providing access to the state's natural resources. The FY 2007 budget continues to build on that investment.

Certainly the two projects that attracted much of the nation's attention are the Knik Arm crossing and the Gravina Island bridge. Our state rules limit the amount of federal funds that we can now allocate toward these projects in any one year. But within this budget, I am proposing we spend the maximum allowed.

This means our capital budget will include $94 million for Knik Arm Crossing and $91 million for the Gravina bridge. We can blame it on Katrina, but these projects will move more slowly as a result of Congressional action. I will move them along as fast as I am able. I continue to support both projects.

I am proposing to start a feasibility study with the Yukon and U.S. federal governments to extend rail service.

There are 1,000 miles to build. It is possible to complete this project before gas pipeline construction begins. If we do, it will reduce the cost of the gasline and the savings will reduce the gasline tariff and increase the value of our gas. If we do not, it still will be very helpful in bringing in supplies for gas and oil field development after the gas line is built.

For more on the governor's budget proposal, go to his Web site at http://www.gov.state.ak.us.