Here are excerpts from Virginia Gov. Gerald L. Baliles' State of the Commonwealth address yesterday:

Ladies and gentlemen, the $22.5 billion budget that I propose to you for the 1988-90 biennium is balanced. It requires no new taxes . . . . The budget sets forth important new initiatives in education, economic development, human resources and natural resources.

{But} this budget also sets priorities and makes choices -- difficult choices. I'll repeat what I've said before: We cannot do it all.Economic Development

I propose that Virginia's economic development effort be expanded by investing in Virginia's Inland Port at Front Royal, to beat the competition and draw more shippers to the ports of Virginia . . . by setting up a port authority office in Seoul, South Korea, . . . by adding $3 million for tourism advertising . . . {and} by increasing support for Virginia's highly successful film office. After all, any film office that can put me in the movies has to be worth supporting. Higher Education

Virginia higher education is on a roll -- and I think we ought to keep it moving.

My proposals include an additional $218 million for the operation of our colleges and universities. And, to further the $90 million Higher Education Equipment Trust Fund -- a program you created to keep us on the cutting edge -- I recommend an allocation of $32 million . . . . I also propose that we boost our efforts on behalf of minority students by approximately $2.5 million.

Finally . . . I will send you a military tuition plan that recognizes the close relationship that Virginia shares with America's armed forces. The plan will recommend that military dependents be granted in-state tuition rates for a two-year period. At the end of that period, out-of-state tuition rates would be charged unless Virginia residency has been established. General Education

In 1986, I convened the Commission on Excellence in Education . . . . {It} concluded that "the gap is simply too great between our best schools and our worst." I agree.

There are many ways to address disparities. Technology is one -- and I will propose that we establish a state funding program, similar to the higher education equipment program, to install a satellite dish at every secondary school . . . . I also propose that we . . . equip every middle school with microcomputers to ensure that every student begins learning the skills of the future.

I recommend that an additional $554 million be appropriated for our public schools during the next biennium. For the first time, biennial state funding for public schools will exceed $4 billion.

It is also my intention to broaden Virginia's responsibility for funding the Standards of Quality {the state-imposed minimum requirements on local school systems}. In this budget, I propose that the state share of the costs per pupil be increased by 1 percent each year, with the ultimate goal of increasing the state share of the Standards of Quality by an additional 5 percent . . . . The state share of that cost will increase from 79 percent to almost 84 percent . . . .

Under the leadership of the most relentless lobbyist I know, the first lady of Virginia, Virginia's public-private literacy initiative has gained widespread attention throughout the commonwealth. I recommend that Virginia invest $4.3 million as our contribution to this important and necessary effort. And, I propose increased funding for regular school term classes and $4.8 million in state funding for summer schools to assist students who need or want additional instructional time.

Teacher Salaries

During the first two years of this administration, our goal was to reach the national median of teacher salaries. And we did so. Now it is my hope that we can reach the national average in the new biennium, but certainly no later than the 1990-92 biennium.

Therefore, I am recommending appropriations for the state share of an annual 8 percent salary increase for all instructional positions. {And} I am recommending that the state share of the 8 percent salary increase in the second year of the biennium be put into a Teacher Salary Incentive Fund. Localities that provide the requested salary increases for the biennium would receive payments from the fund. Dropouts

It is axiomatic that you cannot teach children if they are not in school . . . . I propose that we raise from 17 to 18 the age at which a student is allowed to drop out of school. I will submit legislation requiring all students to obtain either a high school diploma or certification in a specific trade if they wish to leave school before the age of 18. Dropouts represent an egregious waste of human resources. We cannot afford it.

Human Resources

I propose a series of key investments in human resources. To help prevent teen-age pregnancies, I propose that we provide additional public health clinicians and nurses for family planning clinics . . . . To help prevent economic dependency, I propose that we provide $10 million in additional child day-care assistance to low-income families.

Furthermore, I have also acted -- and will propose further actions -- to toughen the enforcement of child support payments. There's about $220 million owed to Virginia's children -- and we're going to work to collect it.

Mental Health

It's time to put the dollars where the people are. During the past two decades, virtually the entire American mental health care system was reformed through a process called deinstitutionalization. However, as Virginia moved thousands of patients out of the institutions and into the communities, sufficient funds for their support did not follow.

I propose that we invest an additional $65 million to allow new initiatives by our Community Service Boards. I also recommend that an additional $15 million be provided to the Community Service Boards to support and strengthen local operations. This additional $80 million will increase our community support to more than $248 million -- a 60 percent increase over the current biennium.

I also propose more than $8 million for the strengthening of {mental hospital} programs. I recognize, of course, that these are significant new expenditures. {But} it happens to be the right thing to do.

Housing

I propose an additional $45 million to address the housing needs for those in greatest distress: the homeless, the disabled, those who require emergency repairs.

Natural Resources

Between people, farming, fishing, industry and boats, the bay must have help to survive. Accordingly, I will submit to you legislation to establish the Chesapeake Bay Preservation Act . . . . I will also submit to you legislation for the protection of certain nontidal wetlands, to improve research and monitoring of toxic pollutants and to expand Best Management Practices for sediment control.

Altogether, I propose the expenditure of $53.1 million to improve water quality, enhance outdoor recreation and protect fish and game resources in the bay watershed that embrace such a large and important area of our commonwealth.

Public Safety

Only 10 states have a lower crime rate than Virginia, but only 15 states put more people in jail. Virginia spends well over $1 billion for criminal justice each biennium -- and it's rising. By 1990, we could easily face an inmate population exceeding 14,000 prisoners. Fourteen years ago, we only held a total of 5,300.

Are there less expensive alternatives for some of these inmates? I believe there are. Consequently, I propose a 30 percent expansion of our {early release} Community Diversion Program by 1990 . . . . Further, I propose an enhancement of our Literacy Incentive Program. Those who achieve the equivalency of a high school diploma, or go on to earn an Associate of Arts degree, could be eligible for a reduction of their time left in prison. An individual with the ability to get a job is an individual less likely to rob, steal or burglarize.

Other Issues

Campaign finance and spending reform: Runaway election costs and a lack of public confidence in the sources of campaign finance are eroding the foundation of our citizen legislature. I will report on Monday . . . my suggestions for your consideration.

The speed limit: Last year, Congress permitted the states to revert to a 65 miles per hour speed limit for rural portions of the interstate system. Public sentiment clearly favors 65 miles per hour, and I believe this assembly reflects that feeling. If you pass this bill, I will sign it -- so long as you retain the 55 miles per hour speed limit for trucks.

Conflict of interest: Last year the Conflict of Interest legislation was clarified and strengthened by this body. It is a good law . . . . I am aware of concerns about practical difficulties in interpreting and completing the disclosure forms by citizens who volunteer their time to serve on advisory boards and commissions. But we must remember that public perception is an important part of public trust in government.

Family life education: It's important. It ought to be taught in all Virginia schools . . . . I compliment the Board of Education on its efforts in this area and urge your adoption of these recommendations.

Sentence reform: Virginia's capital murder statute forces juries to choose between the absoluteness of the death penalty and a life sentence, which can result in parole in as little as a dozen years. The lieutenant governor asks you to give juries another choice: life imprisonment without possibility of parole. I concur.