SENATOR BEN STEVENS: Good afternoon. Welcome to Alaska. The first day of our winter here, it seems like, finally. We got the cold weather, now we got a little bit of snow. But I'm here to talk a little bit about the upcoming session. It's that time of year. John and I have done this a couple of times now, so we pretty much know each other's routine. We agree on a lot of things. We don't exactly agree on everything but we work together to make sure that it's a successful session.

I think this is, without question, the number one issue before us as we get ready to go to Juneau is the anticipation of receiving a gas line contract from the administration. Before we go into that, there's just one thing that I'd like to exemplify is the fact that from the very beginning in the Stranded Gas Act, when it was reauthorized in 2003, it was always anticipated that along with a contract on fiscal terms we would expect a package of what we labeled enabling legislation. And it seems that that's been forgotten, or it's been overlooked, but those of us in the legislature have always anticipated that along with the contract would be legislation that had to do with maybe some fiscal terms and changes in the tax regime, as well as some streamlining of some permitting processes, and it's anticipated that there'll be, along with a contract, a robust package of legislation that will need to be enacted along with the ratification of a contract when we get it.

Just to go back and remind everybody in terms of the timing of the contract, under the Stranded Gas Act, when the governor has concluded negotiations and has an agreed upon contract he will turn that contract over to the legislative budget and audit committee. There's a minimum 30 day public review process. We anticipate that the governor will probably be -- it's up to his discretion to announce the length of that public review process and once he does that, after that public review process takes place there can be some revisions in the contract as long as its agreed upon by all parties, and then once the LB&A public review process is complete it becomes the possession of the legislature and at that time the contract can no longer be modified. It's either ratify or reject the contract.

However, the legislation is a different story and as the legislation is introduced it will go through the proper committee referrals along with the contract and the committee referrals and the contract. John and I have both agreed that when the package does come, if it comes, we both refer those packages to the resources committees and to the finance committees and that's where deliberation in the legislature will take place.

So the first hurdle is, will there be a contract presented to the legislative budget and audit before we go to Juneau. If I had the answer to that question I wouldn't be here talking to you, I can tell you that. But, at least in my mind, that's our number one priority. That will emerge as the number one priority if it is in fact produced and given to the legislature.

I'd like to talk a little bit about the operating budget and the capital budgets before we go down. As we all know the operating budget and the capital budget are introduced by the governor on December 15th. And so there'll be a public review of those before we go down and begin on January 10th. You also know that the governor has 60 days in which to propose his own amendments to the operating budget, and after that point only the legislature can make changes to the budget. So March 10th is the day for that.

Before we even go down to Juneau, or before the governor even introduces his complete budget from the operating side we already know that there's going to be a significant formula of increased drivers. The number one increase that we've faced from the state general fund for the past several years is going to again be the largest increase, and that's going to be the increased contribution to the public employees and teachers retirement system. We anticipate that will be about what it was last year, about 120 million.

The second biggest in the general fund side will probably be the proposed increase that the governor has made for public education. That's 90 million. Another formula driver that the state is obligated and required to match is the FMAP or Federal Medicaid Assistance Programs, that's anticipated to be about 65 million. And as we all know, the other big number that's been put on the table by the board of regents at the University of Alaska is a requested increase to their operating budget of 47 million. So before we even go to Juneau the four biggest items account for a $322 million increase and we haven't even considered the other 21 state agencies.

It doesn't include proposed increased to the public safety, the transportation. Doesn't include fuel cost adjustments that we know rural Alaska and school districts are going to be looking for. It doesn't include the cost associated with last summer's fire season which was one of the biggest ones on record. And it also doesn't include another big annual increase that we face, is fuel cost adjustments for the marine highway system.

So before we even go to Juneau the ground is laid for significant operating budget increases. And how we're going to do that on a sustainable basis and how we're going to make those decisions on a sustainable basis is probably going to be a big topic of conversation.

There's one thing I want to mention about the capital budget from last year. Many of us have heard comments about the size of last year's capital budget, but many of us look at last year's capital budget as an investment in the future for Alaska. As you know, one of the biggest expenditures was the deferred maintenance list that was for the first time retired completely. And that is considered an investment in the state's educational facilities. The next year, for FY-07, John and I just had a conversation on the side. We're going to look to see probably one of the biggest single expenses will be the completion of the University of Alaska Anchorage integrated science complex. That was a 72 million number that we tried to get last year. We got 22 million of it. We're going to be looking to secure the rest of the other 50 million for the authorization for that project. And there's a big, big project that we all know about that's attracted a lot of national attention and that is the Knik Arm crossing, if that money stays in the federal budget for the Knik Arm crossing.

Tomorrow the Knik Arm Bridge Toll Authority had meetings with us and they're going to be requesting approximately 180 to 200 million in state funds to match the 220 million that they think they have secured on the federal side along with the 240 million in bond debt that will be retired with the total. So that total package will be before us and I think that it is going to -- if the federal money stays, that the discussion over the state's participation in that Knik Arm crossing will be a large component of the capital budget.

I'll talk a little bit about the surplus. I think first we have to look at last year, and the surplus we had last year. But before I do that I think -- you know, I can say with a lot of confidence that I think this year with that surplus that we looked at the last time we got an update from the legislative finance division with oil averaged at $56 a barrel, you're looking at about a $1.2 billion surplus. But of that surplus of 1.2 billion there's 400 million of it that was created by legislative action last year because it's been overlooked and it's been sort of forgotten that what the legislature did with the surplus from '05 was we forward funded $400 million in education funding for FY-06. So of the 884 million that we put forward for education funding for FY-06, 400 million of that was from the surplus in '05. So if you look at it the way I look at it, instead of putting it in a savings account and waiting to spend it this year, we spent it last year on a forward expense. So of that 1.2 billion surplus, 400 million of that was caused because of legislative action last year. So I think what we'll see is a repeated effort to use that surplus to offset FY-07 expenditures, and possibly even FY-08 expenditures, which is surplus in those large dollar amounts that are required by the state for education funding.

Another thing that I think is interesting to say what we're going to do with the rest of it is the proposal that -- it is an election year and it's always popular in an election year to say we're going to put money into the Permanent Fund. So I anticipate three or four bills that will make deposits into the Permanent Fund from that surplus.

But, you know, last year was an interesting year for the Permanent Fund. Last year was the first year in history that the amount appropriated into the fund for inflation proofing exceeded the amount available for dividend distribution. 641 million was deposited into the fund and only 521 million was available for dividend distribution. So if you take that 641 million and you combine that with the constitutional mandate of royalty deposit of 480 million, last year the Permanent Fund grew by $1,121 million in direct deposits. So if we're going to talk about doing additional deposits into the Permanent Fund I think you'll see some of us look at that and say is it really the best use for the future investment of Alaska.

Some of the other things I think that you'll see discussed is a proposal to put it in the constitutional budget reserve. I checked this morning and the constitutional budget reserve stands today about $2.2 billion. And if you look at it the way we look at it, the earliest draw that could happen right now is July 1, '08, because we have a surplus that carries forward. So we're not even going to use the constitutional budget reserve fund for a number of years under the assumption that oil will maintain prices above 45 or 46 the remainder of this fiscal year. So there's going to be a lot of discussion on how we utilize that surplus, how we're going to use it to invest in the future of Alaska.

On the legislative front I think probably the most contentious legislative issue that's going to come forward will be surrounding the concept requiring boroughs to incorporate. There's a legislative task force on municipal borough incorporation now that's Senator Gary Stevens from Kodiak is chairing and they're meeting. And as you know the governor last week proposed putting some money forward to allow this, to facilitate the incorporation of some of those boroughs. But there is a lot of momentum in the legislature to try to get regions of Alaska that are not incorporated, that do not have a regional tax structure, that could help offset the public services that are provided in those regions.

I think it's important to say that I don't think anybody in the legislature is going to require a hundred percent of participation in those unincorporated boroughs, but I think that there is momentum that says we want to see regions of a state that aren't contributing to their local public services to make the effort. And that is going to come in two things. One, I anticipate a package of legislation coming out of that task force that Senator Gary Stevens is chairing, as well as there's already a bill in the senate that Senator Bunde has introduced which is Senate Bill 112, which is called an education tax. And for those residents in unincorporated boroughs would be taxed a level that would contribute to their local education match for those areas that aren't doing it. So watch for that. That's going to be a very contentious fight.

I think another package of legislation that's going to come forward out of some work in the interim that's going to rotate around continuing to try to improve the workers' compensation of insurance conditions that we have here in the state. Senator Seekins from Fairbanks has held numerous meetings on the workers' compensation task force and I think we'll see a package of legislature come in sometime in mid February that will continue to try to reform that system. And as you recall, the governor's package that was passed last year, the initiative was to arrest the rate of increase in workers' compensation rates. You have to remember Commissioner O'Claray never made any promise that he was going to be able to lower the rates, but he was going to try to arrest the rate of increase. So we're going to see if that's successful and then continue to try to get those rates back into alignment with the rest of the nation.

Finally, as I said, it is an election year and there'll be numerous individual initiatives being introduced. And we don't know which way that's going to go but it is election year. Everyone wants to come home and say that they got their legislation passed that it has to do with their region. So we'll look to see a lot of that.

But I think it's going to be a good legislative session. It's always good to know that we're going to go to Juneau facing a budget surplus versus a budget deficit, so it's more fun to say how we're going to use money, to invest it or save it for the future instead of where we're going to cut to make ends meet. I look forward to working with the senate, working with Representative Harris, the speaker of the house, so that we can diligently use these resources to invest in the future for Alaska, prepare our infrastructure for the large upcoming projects we have as well as to train our work force to meet the increasing needs for job opportunities that will be created I think in years to come. I think Alaska has a good year ahead of it and I think we have many good years ahead of us. So I look forward to your questions and thank you for taking the time to listen. Have a good afternoon.