GOV. FRANK MURKOWSKI: Thank you very much, Janie, I appreciate the rather brief introduction. And I want to acknowledge our head table guests. I had the pleasure of attending an energy conference with Governor Hickel a short time ago and I can tell you he's a straight shooter, but you're gonna have to talk to him about the details of that.

Ordinarily I introduce my wife, Nancy. Unfortunately we scheduled a trip up here -- you know this little airplane now, it flies a lot faster so you don't have to worry about some of the necessities of life, but Mort Plumb held us over here for a while this morning and so she missed her hairdresser appointment so she's gonna come in late. So that's the best I can do in the interest of full disclosure. It's Christmas time, you know, and I suggested that I should have my hair done and that didn't go over very well either.

In any event we have, I think, an interesting opportunity to share with you some significant events. But I want to kind of put you in the spirit of Christmas, the holiday giving. And, of course, depending on your point of view and the particular responsibility associated with the public funds, it's somewhat appropriate that we pay attention and that's going to happen right now. Because we have something that I think epitomizes the frugality of state government.

Now some of you haven't seen this and the particular individual responsible, you probably want to hold it up here, let me hold it up. This -- I'm sure not many of you recognize this, Pat Gamble might recognize it and the Commissioner of Transportation might recognize it, but this was an occasion where I was greeting President Chen Shui-Bian who is the president of Taiwan at the railroad tracks down near Alyeska and photographers were around. We were talking about things and I looked over and I thought to myself, who owns that building, for crying out loud. And one thing nice about being governor, you can find out things. So we did make an inquiry and Carson (ph) took a picture of it and it took us a little while to track it down, but it's the Department of Transportation, Mike Barton owns this building.

So we made an inquiry and the response was that it was a useable building and they were getting functional use out of it, they stored salt in it and so forth and if we'd give them an increase in the budget -- here, take it away, they would be happy to add a paint job to it.

So I did want to put you in the mood that this is a responsible government that is counting its pennies and that's the living proof of it. Is that what I was supposed to say, Cheryl?

Okay. Let me reflect a little bit on the responsibility of governors in submitting budgets. One of the things you wanna make sure you do is you structure a budget that the legislature will pass. On the other hand that can take some doing because you need to not only structure the budget, but you need to structure the legislature to pass your budget. So what we have before us today, I think, is a compromise that certainly deserves consideration.

What we've done here is more than simply set forth proposed expenditures and anticipated income. In my opinion, you know, budgets somewhat address the direction in which governors intend to lead the state and they indicate the amount of confidence that the governor as executive has in the future of the state.

Now I've got several of my commissioners here who are in attendance and I don't know whether, Pat, you bought 'em lunch or not, but if you did, thank you. But I do want to recognize them because this was a team effort, putting this budget together. The Lieutenant Governor is with us, Loren Leman, my chief of staff Jim Clark. Commissioner of Revenue Bill Corbus. Karleen Jackson, the Commissioner of Health & Social Services. Mike Menge, the new Commissioner of the Department of Natural Resources. Commissioner of Commerce, Bill Noll. Commissioner of Labor, Greg O'Claray. And the Commissioner of Public Safety, Bill Tandeske. And Marc Antrim, the Commissioner of Corrections.

And I'm not going to ask you to do any more than stand up so you can be recognized in the sense of bearing some responsibility for my remarks, so some of the after discussion can be directed. So will you stand up, please, lady and gentlemen? I'm very proud of this group and they've certainly done an extraordinary job of committing their talents and the talents of their organizations for the benefit of the state.

Now today I'm submitting my administration's budget for fiscal year 2007 which, of course, begins next July 1 and ends June 30th of 2007. You're gonna, I think, be provided with a clearer road map of where we're headed and a strong belief that we have that we're headed in the right direction.

Now I have a hunch that some of you are really interested in getting down to the bottom line here, you're probably more interested in hearing what we've proposed to do with the surplus and I anticipated that so we're gonna get that out of the way first.

The media has an occasion to, you know, expand on generalities and highlight rumors and so forth and there was a rumor that came out some time ago that we were gonna have $1.5 billion surplus. And I was kind of amused because I wondered where it came from, couldn't get any admissions, but nevertheless I think it set a mind set for Alaskans that we were -- they were looking at somewhere in the area of 1.5 billion.

Well, our Department of Revenue has other ideas and has put together the surplus for FY '06 and it's important that you kind of get this because we're playing with '06 and '07. This is an '06 surplus and it's tagged at 1.2 billion. Now I expect a little reaction anyway, but, you know, that's kind of sweet and sour because we all know where it came from and we all know we're paying a higher price for it. But being citizens of this state, obviously there's a significant benefit.

Now Cheryl will go into some of the details a little bit later, but I wanted to bring it back to not so many years ago when there was a bumper sticker around and that bumper sticker in effect promised that Alaskans, if we ever had the good fortune of a surplus or a windfall, we wouldn't let it happen again. Well, I think we need to have a little sobering reflection upon when again begins and Bill Clinton could elaborate on that further and enlighten you, but he's not here.

So in any event what we have in this surplus is really another windfall and I assure you we're not about to waste it. We propose to save half of the surplus and that's about $565 million primarily to advance fund education K through 12. I don't hear the NEA out there, but they ought to be out there somewhere.

In any event we propose to save about 400 million for investment in the gas line and that is an equity investment that we anticipate will ultimately require the state to invest about $4 billion and this is the first installment. We think that's a practical way to invest in the future of Alaska and to invest in the future cash flow associated with that gigantic project.

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

Now back to the FY '07 budget. Let me give you a little background. It's very different than the proposed spending plan that greeted those of us who came in three years ago. And it was three years ago this month wasn't it, Cheryl? The budget that we inherited proposed spending $800 million more than anticipated revenues for that year. Well, you know what happens to your checking account when you propose to do that, you either better have a good banker or your checks are gonna bounce.

It called for using up almost half of the money remaining in the state's Constitutional Budget Reserve at that time, that's kind of a savings account which the state had. There were no aggressive plans that we could identify to spur the development of the economy of the state and as a consequence we had to make some tough decisions.

We heard debated about whether the state should have an income tax, take money from working Alaskans or just limit the size of the permanent fund or the dividend checks and use that source instead.

You know, looking back I really didn't see an awful lot of confidence in Alaska's future at that time, however you'll find the '07 budget proposal much more optimistic about what lies ahead for the state of Alaska. Thanks to projected high oil prices we anticipate a revenue surplus, that's for 2007.

Now again as we looked at what we faced a few years ago we had to make some tough decisions. It wasn't a pleasant job of eliminating money that some people had grown used to receiving. However we knew that we had to halt the hemorrhaging of state spending, spending beyond the budget and the budget reserve that we had. We couldn't really let that safety net disappear.

Our initial long-term financing plan was and still is a good one, and one that I feel very confident about. Unfortunately we weren't able to get everyone to agree to our proposed solutions.

Some of you recall in 2004 I convened the Conference of Alaskans in Fairbanks to begin the task of ending our history of deficit spending. We came up with a fiscal plan. Based on the decisions of the Conference we proposed a rather simple solution using the percent of market value, and I want to emphasize percent of market value, or the POMV, to manage basically the permanent fund and its ability to source specific needs of the state of Alaska.

For refreshment of your memories as you luncheon here, we proposed taking 5 percent of the fund's value each year, 5 percent. Now that fund currently, if you were to cash it out, potentially is $32 billion today. Taking 5 percent of the fund's value each year, half of it going to the dividend checks for Alaska, had we done that back then the dividend check this year would be $1,030. 45 percent to education, had we done that two years ago that would have funded education about $580 million. And 5 percent to communities, had we done that two years ago that would have funded the community grant about $65 million.

The proposal made a lot of sense, but we didn't do it. It passed the House, it didn't pass the Senate.

Commonwealth North, and I want to commend this organization because you supported it as a solution, was among several civic organizations that helped develop and support this particular effort. And I appreciate that leadership that this organization has consistently provided to advance the need for a sound state fiscal plan with continuity. And I remain committed to Alaskans putting something like this or a community dividend that's been proposed by Governor Hickel, put it in place and let's get on with it.

Now we have what I think is a common sense budget, but we also have some things that aren't very exciting, but they're very real and one of them is Medicaid. That's the largest expenditure to the state's budget, nearly $1.1 billion this year. There's nothing you can do about it, it just has to be paid. When we came into office we had hope that the federal government would pick up a little bit more of the cost.

And I see Nancy's come in and I don't know -- your hair looks lovely. Between you and I it looks pretty much like it was. Anyway back to that, I'm not here to talk about hairdos.

We, I think, were successful in our efforts to recognize the situation that we had relative to the obligation for Medicaid. Instead of millions in increases during our first two years we actually saved about $45 million by refinancing a program and implementing changes by the team at Health & Social Services led at that time by Joel Gilbertson.

But we also inherited one of Medicaid's financing arrangements called Fair Share and it depends on which end of the fair share you're on, and we were on the wrong end because we went to court, litigated with the federal government, we appealed, lost, and that resulted in a 45 million increase to this and next year's budget.

There's another area that was a little tough on the legislature last year and tough on some of you folks, some of you helped us, some of you didn't, but we reorganized the retirement system. And one day one of -- I guess it was on day one when we first walked in, we had to face up to 4.2 billion in potential liabilities on an underfunded state public employees retirement system. You've got a series of decisions through the '90s to not increase, even in some cases to reduce, the employer's contribution coupled with ever increasing health care cost has meant that the government and the school districts have had to pay tens of millions in increased dollars over the past year. Not much point in pointing fingers, it is what it is, you have to take the corrective action and you have to pay the piper because there's no free lunch.

This year the state's bill for its retirement system contribution is $165 million. For school districts and local governments it's $209 million. The obligation will grow to $117 million next year which means that it will cost nearly a half billion dollars, roughly 491 million to be exact, to meet the public employees retirement system obligation.

Now that's why we supported passage of Senate Bill 141, that modernized Alaska's retirement system. It created for the first time a defined contribution plan similar to a 401(k) which many of you have. And now it's become very common in the business world and more and more states are seeking it. Under this plan new 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. In other words you can take your 401(k) with you.

Now the change that we made there was certainly controversial, I'm absolutely convinced it was the right thing to do. We've learned important lessons from the pension crisis that's occurring all over the United States, whether it be United Airlines, General Motors, U.S. Steel and nearly factually every other state in the union that has now recognized the need to change to a program that they can fund and meet the obligation that they have to future retirees.

After looking for better ways to control state spending cost we just finished a positive employment enrollment program for our state employees where we ask them to verify eligibility information for continued health care coverage. Now people can get a little sloppy, we found $3 million as a consequence of that process. Now we're doing the same verification for retirees which we feel could potentially save us about $10 million annually.

Now we have the obligation that we have assumed for PERS and TRS, teachers and public employees retirement. 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 governments' increased retirement system cost just as we did the previous year. And I want to emphasize the increased portion.

At that time I cautioned the Alaska Municipal League about my concern that this relief had to be temporary because it rested on the state's projected revenues. I also challenged the Municipal League to come up with a solution, a solution of how these costs could be covered on a recurring basis. And that means obviously not coming to the general fund each year. Well, this is a recurring obligation, it needs a recurring solution, a dependable way to pay for it other than the state's general fund.

And I continue to believe the POMV proposal or the community dividend or anything else that's out there can be a good alternative and I'll support it. But I want a solution. As a consequence as I indicated earlier had we put in the POMV proposal two years ago local governments would have been funded about $65 million this year in distribution to communities. Well, as I indicated it didn't happen.

But to remain focused on a sustainable solution the budget I have proposed today does not, does not include funds for the state to pay this obligation for local governments. However when consensus is reached regarding a recurring source, then I'm going to amend my budget accordingly.

Now you might say that's a little bit of self-imposed discipline, but I think it would be irresponsible for the governor of this state to simply recognize that this was something that we were going to take and meet relative to a surplus as opposed to finding a solution.

As you know we have proposed -- and this is outside of state funds, but part of that is the Amerada Hess availability of about $27 million a year as a partial contribution and I am committed to that. And that's gonna need legislative approval, but that differential that we need which is about $38 million, we're looking for a renewable source which we think is responsible.

A few points on other issues, public safety. I'm very pleased that the Commissioner and the Colonel are here today because we've really made some terrific progress in this state. And, you know, we read the papers and we see some of the crises that occur and very seldom do we really reflect on the people that are out there in the front line and the success that they're having.

So I'm gonna share this with you because on a positive note we've not only added 25 troopers over the last few years to make sure that you have the best safety that we can provide, but I want to tell you it's working. Alaska State Troopers have resolved 17 out of 17 homicides in FY '05. That's a pretty good batting average, isn't it? And as tough as it sounds FY '06 they're five for five and still batting a hundred. Thank you. Now that success rate for solving murders by state troopers, I think, really is a recognition to the dedication and commitment and the sophistication associated with that particular department.

Much of this success really is traced to the work of the scientists and what we have now is a crime lab, referred to as CSI Alaska. You television addicts have some idea of what I'm talking about. This year alone the DNA profiles obtained from over 90 crime scenes in our state were matched to known offenders. The FY '07 capital budget proposes funding to expand that crime lab and add additional professionals.

Obviously we want to get the word out we're gonna be tough on crime and I think that record indicates the commitment and the fact it's working. I'm very proud of it.

Fighting meth, you know what that's all about. We assigned 10 troopers to a special investigation and drug enforcement team and the results in 2005, nearly six pounds of processed meth were seized, that's a 48 percent increase from the last year. A 32 percent drop in the number of meth labs, the first reduction we've had in four years. The FY '07 budget has funding so that these efforts can continue and includes funds for local police and others to do their work on behalf of the public.

You've heard a lot about economic development because that's the theme of my administration, build a strong economy from natural resource development and then you can take care of your social needs, job opportunities and your young people.

Well, the Alaska Statehood Act contemplated that the citizens of this state would fund public services through revenue generated by natural resource development and not taxes. With that in mind I committed the administration to placing our emphasis on resource development, we identified where we felt the roadblocks were in state government that were causing dis-incentives to development and we made significant changes. We also identified where the state should invest in roads and infrastructure to attract private sector investment and exploration and development because that's where the cash flow's coming from.

Well, today we're beginning to see those results, mining, fishing, petroleum, tourism, timber, all are picking up. Jobs are being created, local communities are beginning to see the benefit of new revenue from these industries. Our FY '07 budget proposes additional investments to roads and infrastructure and setting aside a good portion of this year's anticipated revenue surplus to invest in the state's equity position in the gas line as I previously mentioned about 400 million.

Education. You know I had the pleasure with Nancy the other day to shake hands with about 2,200 Alaskans in Juneau visiting the residence for the Christmas holidays and I can tell you there's a lot of children in Alaska. And if you start shaking hands with 'em you get some idea of the responsibility a governor has to provide quality education. As a consequence during the first three years of our administration we substantially increased state funding for education and the percentage, I'm told, and Cheryl will nod her head and say 22 percent is the right number, that's pretty significant. In this new budget I propose another $90 million increase for K through 12 education.

Some of the folks that are around the education fraternity reflect on the maintenance that's fallen behind. Well, last season we funded every school's maintenance projects that's been on the Department of Education's list -- I should say the wanting list or the waiting list, for years. One hundred and forty-one projects are now being undertaken to protect the investment in schools and I think that's somewhere in the area of $70 million.

Education Commissioner Roger Sampson and I recognize that more funding isn't the answer alone to our educational needs or challenges. Over the last three years this state has gone from 42 percent of schools making adequate yearly progress to 59 percent last year and that's a 17 percent improvement. So ladies and gentlemen, I think you're starting to get your money's worth.

We started a statewide monitoring program for teachers, new teachers, particularly those that are going out in rural Alaska. Based on a one year data review we're seeing some impressive results. Of the rural teachers mentored, three out of four returned after the first year. And several rural districts' turnover rates were cut from 35 to less than 20 percent. We modernized some of the teacher certification systems to make certain that qualified teachers are in the classrooms. And starting next year new teachers will have to pass a test to demonstrate that they have mastered the subject matter and demonstrated that they can effectively teach students.

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

Another interesting thing that has been reported by the media and it's a little sensitive, but I think we have to take a good long look at the boarding school opportunities in the state of Alaska, particularly as it affects opportunities in rural Alaska.

We expanded Mount Edgecumbe. If you haven't been down there and ever have an opportunity to go to Sitka, take a look at it. We've gotten great results. 90 percent of the students there passed the exit exam. 86 percent of those graduates from Mount Edgecumbe go on to college. It has a waiting list.

What we were able to do is we were able to take the concrete, old navy dormitory, put it in first class shape, add 60 students. But you know what we did with the students in the meantime? We took the third floor of the Pioneer Building in Sitka and housed them there for one year until we could get it done. You know it was a great impact on our pioneers to have the young people around and the young people got an awful lot out of the pioneers. It worked very well.

Now 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. We're seriously looking at a way to fund, if you will, the boarding part of the students that attend those particular areas.

Some of you have heard about the Alaska Military Youth Academy, helping young kids who have perhaps got in a little trouble. This is probably in my opinion after visiting it several times, one of the greatest savings that we have in education. A lot of these kids without that experience could cost society an awful lot of money. Every time I go out there I just look with awe at how these kids have turned around. It's yes sir, no sir, yes ma'am, no ma'am.

I heard a story from my daughter who went out there on one occasion and was talking to the young women and she said well, let's sit down and talk about it. And she sat down on the bed and they stood up and she said why don't you sit down. We don't sit on our beds. So all of us sat on the floor. Just a little -- you know, a little deal there that they got the word.

You know some of those teens are really finding a new course in life, a new meaning and instead of going through our correctional system or our substance abuse treatment centers, it's working. Now we intend to establish another academy in interior Alaska because it's working that well.

The investment in educations really are producing the desired results. We got a long way to go, but we're on the right track. Quality education for our youth is how we help create good paying jobs and economic stability for the future.

Now we have our university system that we're very proud of. And each year that I have been in office we've increased funding for the university system by 5 percent and over four years, President Hamilton, that's 20 percent which isn't bad. But nevertheless he has -- always one step ahead of me. Now that's for programs.

However next year we're proposing an increase of about 17 percent and we're proposing investing in the first phase of building university research as an industry to help, if you will, our oil and gas and our mineral industry and other segments of our society. Some of it's gonna focus on biomedical, behavior health and Arctic related research.

We're providing the university the funding necessary to meet today's careers in the areas of nursing and teaching as well. You know, enrollments at the university are up, they're up 17 percent since 2000, for health and engineering courses it's almost double, up 35 percent.

We need to make sure we answer the world demand and many of these areas are in our state. You know, one of the areas that's in most demand in the state are jobs in mining. That's a switch, you know, we kind of cooled off the School of Mines, I think we have to get it fired up again because we have to meet the needs. I know some of these firms are soliciting outside the state of Alaska to bring miners into this state.

In the capital budget we propose to fund completion of the University of Alaska's campus here in Anchorage and the Integrated Science Building, it's going to be a great addition to the university system.

Last year as some of you recall we funded the University of Alaska Fairbanks virology lab that's so important in the potential exposure to bird flu and some of the other more exotic exposures that we have in this world today.

We all know attending college can be difficult, those parents out there that write checks can certainly speak up to that. And what we have done is reviewed what we call a Alaska's Scholar's Program and in the review we found some very, very gratifying results. That's a program that takes the top 10 percent of the graduating seniors from our high schools and basically provides them with a scholarship for the balance of their college assuming they maintain a grade average. We found that 98 percent of our University of Alaska scholars that graduated in the last five years have stayed in Alaska so we think the state's getting a return on investment.

Now the good news is starting in FY '07 I propose expanding the Alaska Scholar's Program to the top 15 percent, so we're gonna raise it another 5 because it's been that successful bringing the opportunity of higher education to more of our young Alaskans. I think you'd agree with me that's a worthwhile (indiscernible - applause).....

Now I'm thinking about -- this is giving me an opportunity to make a change in the name, calling it the Governor's Scholarship. But, just a minute, it's not a selfish sign. It's a recognition to ensure that it will continue in the future, at least that's my main thought. So think about it.

Now we've got some needs based grants programs I'm gonna share with you. We propose to expand the Post-Secondary Education Commission's Alaska Advantage Program that we established two years ago. It provides needs based grants for students in career programs where there's a shortage such as the health science and teaching, ensures access to higher education regardless of the family's economic status and we think this is working as well. During the first year 35 percent of our grant recipients were the first in their families, the first in their families, to pursue a higher education beyond high school. With interest earnings we will have 1 million more for grants every year, it's a pretty good increase.

Job training. Obviously everybody isn't going to go to college. For those who don't want to go there needs to be top notch job opportunity available, but with it you've gotta have top notch training. And that's why we've expanding the AVTEC, that's our vocational training program down in Seward. We also are working with the federal government on the Job Corps program and their facilities up in Palmer where as you know they have a resident campus. We're also launching the Prepare Alaska Youth for Alaska Job Initiative that will show kids the options of vocational professions and help prepare the natural gas pipeline workforce.

Now there are a couple of biggies that I haven't mentioned. Some of you are wondering what about the cost of energy. Well, some of you will recall that we have proposed in a supplemental to take care of the various programs that we have for energy which I identified to the AFN at the convention in Fairbanks. So you'll be hearing a little bit more about it as the supplemental comes out, but I'm not going to address that at this time other than to say I didn't forget about it.

But the biggies that I did want to mention before I turn it over to Cheryl is the priorities and the gas pipeline negotiations. And over the last three years, you know, 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 '07 budget continues to build on that investment and, of course, the two projects that have attracted much of the nation's attention as well as your's and mine are the Knik Arm Crossing and the Gravina Island bridges. And I have a little plural there 'cause I happen to know the territory.

Our state rules -- we have rules relative to both federal and state spending of highway funds. They have basically come up with a formula on how we can allocate those funds towards the projects in any one year and I want to emphasize one year. But within this budget I am proposing we spend the maximum allowed and that maximum means that the capital project will include 94 million for the Knik Arm Crossing and 91 million for Gravina. So that's 94 for Knik, 91 for Gravina.

Now we can turn around and blame it on Katrina or anybody we want, but these projects obviously are gonna move more slowly as a result of the congressional action. But I intend to support both of them, I will move them along as fast as I can.

Now you've heard about a better way to build a railroad, well, we're working on that too. And what we're proposing is to fund a feasibility study with the Yukon Territory and the federal government to extend rail service beyond the Alaska Railroad and hook up with the Canadian system. And what we would like to do is coordinate that with the pipeline and develop a corridor where we can put a fiber option communication cable as well as a pipeline as well as a gas line. We've got a thousand miles to build and we think it's possible to complete this project in concert with the gas line. If we do it will reduce the cost of constructing the gas line, the savings will reduce the gas line tariff and increase the value of our gas. If we do not, it will still be helpful in bringing various supplies and so forth and the general development of the state as we look at Alaska as truly being a pipeline to America's energy independence.

Now speaking of pipelines, Alaskans have been talking about getting our North Slope gas to market for as long as Governor Hickel and I have been around at least. And finally the state is moving ahead to just do that. And the reason it's happening now is the economic support. I don't know if you picked up on the price of natural gas yesterday, it was 15.65. And the projection for oil is $50 a barrel for the balance of the decade. So we're up against some serious challenges and as a consequence in October some of you recall we made our proposals to the producers, they responded in November and we've been negotiating on a daily basis.

And where's Jim Clark, he can nod his head and say yes. He's moved up here from Juneau, I believe. But Jim is the lead staff -- my Chief of Staff's the lead negotiator and he's doing a yeoman's job and his color is reflecting it -- the color of his hair, that is. He does get a red face once in a while when he comes out of those meetings.

The potential annual revenue for the state is tremendous, I'm not gonna go into it now. We can and we will achieve the goals we're seeking. Future governors and future legislators will have many options to build bridges, to build roads, to provide the residents and communities of Alaska with their needs. I'm confident that we're going to get there.

Now I'm going to bring you to the next phase of our little pony show and, Cheryl, would you care to come in and really share the bottom lines and hopefully -- well, somebody stole my lunch.