Gov. Frank Murkowski submitted a proposed budget for FY 2005 on Dec. 15, as required by law. It's now up to lawmakers to make changes in the governor's spending plan. Murkowski has a final shot at the budget after legislators go home, through his authority to disapprove funding for programs or projects, using his line-item veto.

The governor can only decrease funding, not make increases.

In submitting his budget proposal, the administration was guided by two principles, Murkowski Chief of Staff Jim Clark said in a budget briefing. One was to keep the deficit to no more than $400 million, limiting the draw on the state Constitutional Budget Reserve to that amount; the second was to reduce spending from the current year's budget.

Frasca said $34 million of the $145 million increase is related to personnel costs, including $28 million in a required 5 percent increase in contributions to the public employees' retirement fund, and $7 million needed to cover increased costs in workers' compensation, unemployment insurance and other expenses. The state will also pay another $6 million in merit pay increases for employees, Frasca said.

Another $42 million of the $145 million increase is to pay for new debt service obligations. These include payment on new state general obligation bonds sold after voters approved the bonds in the November 2002 statewide elections. They will also pay the state's 70 percent share of new school bonds sold by municipalities. The added cost for state support for local school bonds will add $13 million to the budget in the upcoming fiscal year, Frasca said.

The remaining $69 million in increases comes through the rising costs of formula programs, such as in Medicaid, where state costs are driven by population growth or other factors in formulas set in state laws or regulations.

The operating budget in the governor's proposal totals $2.143 billion, $4 million less than the current year, Frasca said. Included in the operating budget is $3.3 million in additional funds for the court system and $1.6 million in funding for the Legislature, mainly to pay required increased contributions to the retirement fund for the Legislature's full-time professional staff, she said.

The proposed capital budget is $91 million, up from $84.6 million in current year capital spending, Frasca said. An additional $5 million is budgeted for the cost of implementing new laws passed by the Legislature in 2004.

Under the Murkowski budget the total general fund budget, or the portion of the budget financed by state revenues only, would be $2.252 billion, or $49 million below the total general fund spending in the current year.

However, the general fund budget is still $475 million less than the $1.777 billion in FY 2005 state revenues that Revenue Commissioner Bill Corbus cited in the latest state revenue forecast Dec. 12. Revenues are expected to be less mainly because petroleum economists in the revenue department expect that crude oil prices will decline over the next year and a half from current high levels.

To keep the deficit at the governor's target of $400 million, the state will therefore have to raise an additional $75 million in new revenues, Clark and Frasca said in the budget briefing. Several new taxes, mainly on the tourism industry, are proposed to meet that requirement, but Frasca said the administration was "flexible" on the proposals, meaning that changes are expected.

Clark said the Murkowski budget proposal was six months in the making. The governor did not assign specific revenue goals, or "caps" to the departments, he said. "We asked the commissioners to look internally for savings in their initial submissions," Clark said. "We got those and looked at them and then went back to the commissioners. There was never a target," he said.

Clark singled out Health and Social Services Commissioner Joel Gilbertson for finding efficiencies and containing costs within his department, which has one of biggest budgets of any state agency.

Costs for some DHHS programs like Medicaid, welfare programs like Adult Public Assistance, subsidized adoptions and guardianship programs will increase $64 million in FY 2005.

However, these increases were offset by securing $19 million in federal funds to replace state money in some programs, finding $23 million in administrative efficiencies and $24 million in other cost containment initiatives, Frasca said.

Overall, the budget for the Department of Health and Social Services is less in 2005 than in 2004, which is a significant accomplishment because big parts of the agency's budget, such as Medicare, are driven by formula programs linked to federal funds. The state's share of Medicaid in FY 2005 will be $285 million, Frasca said.

The administration is also cracking down on agencies for leaving positions vacant and unfilled for extended periods. "We're working toward a policy where a position vacant for more than a year is deleted from the budget," Clark said. Murkowski's budget proposes to eliminate 402 positions from the state payroll, but many of these job cuts come from a more stringent review of positions that are now vacant, he said.

Other efficiencies the administration proposes to implement include concentrating all human resources functions within the Department of Administration, rather than having each state agency have human resources staff, Frasca said.

Another change is a directive to agencies to charge administrative costs against all federal grants that are received. There have been cases found where administrative costs have not been charged on grants, so that the state is carrying those expenses, Frasca said.

The administration also proposes to "sell" $40 million in state public building assets to the Alaska Housing Finance Corp., the state housing corporation, which will then charge rent to state agencies to occupy the state buildings. AHFC would finance the acquisition with bonds.

This shows up as a revenue item in the FY 2005 budget, but will be recorded as an operating cost in future budgets, since the agencies will pay rent for buildings the state now owns. While it appears to be a paper transfer, the future cost will likely be higher because AHFC will require set-asides for maintenance. "No one disputes the fact that we're not taking very good care of these buildings now," Frasca said.

Clark said one of Murkowski's main priorities is to protect the Constitutional Budget Reserve. "We need that for protection against oil price-shocks and to provide for cash flow," he said. "We can never let it run down to zero."

The Department of Revenue recommends a minimum $1 billion balance in the reserve fund as a cushion against unexpected oil price declines, and another $400 million is needed for cash flow.

The state draws on the CBR during months when incoming revenues do not match expenses, such as during the summer when oil production and revenues dip but state expenses are high.

Oil production drops because the efficiency of oil process facilities on the North Slope declines during the warmer temperatures of summer, and expenses are higher because of summer construction.

The state has deposited $7 billion in the Constitutional Budget Reserve since it was created in 1991, Frasca said, and has spent $5.4 billion of the CBR to fund recurring deficits in the general fund budget.

The CBR fund now has about $1.9 billion, according to the state Department of Revenue.