At the same time Gov. Sarah Palin prepares to make her first major policy statements in her State of the State address to the Legislature, and continues to get her new state administration in place.

Democrats made gains in both the state House and Senate in November, and while the House continues under a traditional Republican leadership led by House Speaker John Harris, who was also speaker in the last Legislature, the state Senate will function under an unusual bipartisan coalition of Republicans and Democrats.

Leadership posts are held by a handful of Republicans like Senate President Lyda Green, but several major committees are under the control of Democrats.

Meanwhile, a rump group of experienced Republican senators outside the coalition are already advancing proposals for legislation, which will ensure an interesting 2007 session.

Among ideas being proposed is a bill by Sen. Gene Therriault, R-North Pole, that would add protections against identity theft. Therriault cosponsored a similar bill in 2006, but it died in the closing days of the legislative session. The veteran North Pole senator said he will also introduce legislation on a natural gas pipeline.

Sen. Fred Dyson, R-Chugiak, will push a bill to require hospitals to declare their discount rates to insured patients and cost shifts for charges. Dyson has long been interested in health care reform. Sen. Gary Wilken, R-Fairbanks, has introduced legislation to repeal the 2003 business license fee increase; create a sustainable dividend program; and expand the Washington, Wyoming, Alaska, Montana and Idaho medical education program to more students, the goal being to eventually ease a looming shortage of physicians in Alaska.

The major question likely to occupy lawmakers will be what to do with a revenue surplus projected for the current state fiscal year 2007. Legislators will grapple with how to contain pressures for increased state program spending unleashed in the last two years after former Gov. Frank Murkowski relaxed tight budget controls he imposed when he first took office.

Gov. Palin proposes to put the current surplus into the Constitutional Budget Reserve (CBR) and to hold the line on spending increases from current-year levels. That may be difficult because costs increases are almost uncontrollable with some programs, like Medicaid, which has increased at annual increments of $100 million in recent years.

There may also be a fight looming between lawmakers and Palin over the state capital budget if Palin sticks to what she said in mid-December. At that time she proposed putting surplus revenue into the CBR fund and allow only a bare-bones capital budget, spending only the state funds required to match federal programs, such as those for highway construction.

However, some influential legislators, such as Sen. Wilken, say they support Palin's idea of putting some or all of the surplus into savings. Wilken has introduced legislation to do just that.

The big issue that dominated the Legislature during much of 2006, the natural gas pipeline, won't be formally on the table for the 2007 regular session, but will be just underneath it.

The new administration will be starting talks with North Slope producers and others, and there are no predictions on how soon another gas contract proposal will be presented to the Legislature. It is unlikely to be soon, however.

Lawmakers will begin holding informational sessions on their own to brief new members on the complex gas issues. House Resources co-chair Rep. Craig Johnson, himself a freshman, has indicated his committee will hold hearings on natural gas.

Another thorny issue that will get attention, but probably no real action, is the swelling liability the state faces on pension obligations, including medical benefits, to retired public employees and teachers. Estimate of the liability of state government and municipalities are now as high as $8 billion.

In the closing weeks of his administration, former Gov. Murkowski proposed using some of the current surplus to reduce the liability by investing the funds in the public employees' and teachers' pension funds, but it is doubtful Palin or legislators will follow this advice.

The state retirement board also recommended an aggressive series of increases in public employer contributions to retirement funds, and the FY 2008 budget proposed by the outdoing Murkowski administration included these increases for state agencies for next year, but whether Palin and the Legislature will approve the increases remains to be seen.

The pension deficit developed after the state retirement board recommended a reduction in public employer contribution rates during the stock market go-go years of the late 1990s, which reduced money going into retirement funds.

When financial markets took a dive in 2001 and 2002 and the pension funds lost significant value, the public employer contribution decreases were not reversed. Other factors also played a part, such as the use of outmoded retiree mortality tables in projecting future liabilities, which has since been corrected.