In mid-December, he laid out his 2005 budget proposal, calling for taxes on cigarettes, the cruise ship industry, hotel lodging, guided tours and pulltab gambling.

But Murkowski and the Legislature must find long-term solutions to the state's fiscal gap by 2007, when the savings account is projected to run dry.

Second time around: Gov. Frank Murkowski speaks to reporters in a Capitol hallway last May on the last day of the 2003 legislative session. Murkowski, a longtime Republican U.S. senator who was elected governor in November 2002, is entering his second session as the state's leader. BRIAN WALLACE/ THE JUNEAU EMPIRE

Q: What do you think your biggest accomplishments were last session?

A: I think getting a handle on reducing the rate of growth of government and the fact that we indicated we would not go into budget reserve more than $400 million, when in actuality we went in about $276 or $278 million; I think meeting our commitment to the voters that we would not propose a state income tax or a broad-based statewide sales tax, neither of which we supported. We had a seasonal sales tax, which wasn't supported. I think basically getting a hold of government, turning it around, expediting the permitting process, addressing accountability within the state agencies, reducing duplication, having positions that had been unfilled for some time eliminated.

Q: Last year you gave a tax break to oil companies for exploratory drilling ...

A: Yeah, it wasn't a tax break. It was to address the fact that Alaska was in a noncompetitive role of other oil-bearing provinces and what we attempted to do is to make Alaska competitive, and I think it's fair to say that we now rank in the middle with regard to incentives.

Q: Have you had any oil companies commit to drilling new wells, and how much do you expect the tax break to raise?

A: Oh, yeah. You're probably aware in Juneau, you know, we had some dozen, I think there were 19 people representing a dozen oil companies. These are the smaller groups. We did not invite the majors. And we offered the attractiveness of the Bristol Bay area, which previously hadn't received much attention because nobody had been really promoting it as an oil province, although 20 years ago you had the North Slope, you had Cook Inlet and you had Bristol Bay. Bristol Bay is back in line and we will have some leases in that area.

We are going to do some licensing. We've got several companies that are interested. We've moved into NPR-A with some smaller companies as well. We're going into significant road development to try and make the leases more attractive. We're negotiating right now with an Alaskan contractor to open up about 120 miles up in the Nuiqsut area. The Arctic. That's in the NPR-A. So, you know, oil goes for a reasonable return on investment and a competitive atmosphere, and that's what we're trying to do in Alaska by making our leases more attractive, so you generate more revenue, recover some of the costs associated with roads, transportation and so forth.

Q: The state's Public Employees' Retirement System and Teachers' Retirement System are underfunded by about $4.2 billion right now. Much of the burden has been passed on to cities and school districts. What's your plan for resolving this situation?

A: Well, we've got a couple of recommendations. One of them, obviously, is to increase the employer contribution, but that's not going to be enough. We are going to have to reach out and address some other areas that will, I think, be negotiated with the various groups before we reach a final accord because, obviously, these are commitments that are made. And the fact that they are underfunded is associated with expanded benefits, increased costs and so forth. And the legitimate question is to what extent should the employee contribute as well. But clearly it is going to take more of a contribution from the state.

Q: Do you plan to fully honor past commitments on bond debt reimbursement for school construction?

A: Well, we will honor, obviously, the authority of the bonded indebtedness that we went to the market a year ago with significant issue for both new schools, maintenance and infrastructure. Not only in schools but in (the state Department of Transportation) as well. We will fund those commitments. In fact, we've accelerated that program. Beyond that I'd have to comment on an individual basis. ... We are committed, for example, to increasing the capacity at Mount Edgecumbe by an aggressive utilization of some space that needs renovating, and I think we're talking about a combination for about another 60 students. We think that the waiting list is evidence of the level of support for that institution, and they do a good job providing alternative boarding facilities, particularly for rural kids.

Q: Last session the administration pushed for the adoption of a state sales tax, threatening budget cuts if the tax was not passed ...

A: No, no, no, not a state. It was a seasonal sales tax.

Q: Will there be a similar push this session for a broad-based tax in place of cuts.

A: No. There will not be a proposal for a major broad-based tax. ...

Q: Do you support Juneau Mayor Bruce Botelho's plan to bond with the state to build a new Capitol in Juneau?

A: In general, yeah. Subject to, you know, the ability of the state to meet the lease obligations and the ability of the community to provide the facilities that are needed. I think we've waited far too long on that project. I intend to accelerate it.

Q: You've endorsed the permanent fund board of trustees' proposal to use an endowment method for managing the $27 billion Alaska Permanent Fund. It would inflation-proof the entire fund and impose a 5 percent cap on spending. You have not said whether you support using any of the earnings, which are used to pay dividend checks, to help pay for state government. Why have you not stated your position on the earnings and when will you do so?

A: Well, I've stated my position on the formula and it's quite clear, and the other issue relative to any utilization of those funds for state government deserves a consideration on trying to generate a consensus from Alaskans on the appropriate utilization if any, and I will be addressing that very soon.

Q: Last year there was little discussion on the topic of subsistence. Do you plan to address the issue this session?

A: You're correct in your assessment that, you know, we haven't heard an awful lot on the subsistence issue and I think that still is the case. I think the priorities primarily are going to be to get our fiscal house in order, but I'm not ducking the issue of resolving the subsistence issue. We, as you know, hope to have someone representing our administration on the federal subsistence board. That's going to be determined by the secretary of the Interior in a relatively short period of time.

Q: Last session the state fully funded the foundation formula for education ...

A: Yeah, and we intend to do it this year.

Friendly face: Gov. Frank Murkowski greets Rep. Norm Rokeberg, an Anchorage Republican, in a hallway at the Capitol last May on the last day of the 2003 legislative session. BRIAN WALLACE/ THE JUNEAU EMPIRE

Q: Other areas were cut in education such as pupil transportation ...

A: Pupil transportation previously was a cost plus. There was no incentive for the districts to try and be more efficient and we created, I think, an incentive. Some see it as a cut, but in reality it was an effort to get a incentive so the district could reduce the cost of transportation, they could use some of that money. So I don't look at it as a cut. But, nevertheless, some see it that way.

Q: A study by the University of Alaska's Institute of Social and Economic Research shows that more than 50 percent of the increase in the state's budget between 1990 and 2002 is due to new federal spending. You played a significant role in that during your time in the U.S. Senate. It's also largely due to Sen. Ted Stevens' position of seniority in the U.S. Senate. Do you anticipate that federal spending will rise, fall or remain steady and what is the backup plan if that money becomes no longer available?

A: Well, I think it's fair to say that we should plan for less federal spending. On the other hand the reality with such things as the missile defense system, which was really a matter of strategic location at Delta, has resulted in a tremendous commitment of federal funds because they recognize that Alaska is a first line of defense. We will continue to maintain, in my opinion, a high level of capability for troop training in both Eielson, and Wainwright, and Elmendorf and Fort Rich because the facilities are there and it's a good place to train as well.

The fact that the Alaska National Guard will be manning, basically, the missile defense system is another significant contribution that will remain constant because that missile defense capability will be there for a long time. Then you recognize the fact that we have got a lot of catching up to do. We've only been a state since '59. The federal contribution is significant inasmuch as the federal government owns so much land here, so the presence of the Park Service and the refuge system and the BLM and so forth will be very much a part of the economy. Those are sustaining.

Sen. Stevens' ability to maintain his chairmanship (of the Senate Appropriations Committee) is, of course, limited by Senate rules. That's a reality that suggests that, you know, there won't necessarily be the flexibility that a chairman has when that term ends. So that's why I'm so committed to expanding the private sector, based on resource development of fish, timber, oil, gas, minerals, tourism and so forth.

Q: Do you plan to run for re-election in 2006 and what do you hope to have achieved by then?

A: Well, first of all I haven't made any plans on re-election. It's becoming more and more apparent that it's going to take a little longer than 2006 to finish what I came for. On the other hand what I intend to contribute to the state is my commitment to the belief that we can develop our resources responsibly, sustain a better level of job opportunities to retain our young people and maintain a reasonable tax environment and have one of the highest standards of living of any state in the union.