Legislature(2009 - 2010)HOUSE FINANCE 519

03/27/2009 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 09:00 am 03/28/09 --
Heard & Held - Assigned to Subcommittee
Moved CSHB 35(FIN) Out of Committee
Committee Discussion/Amendments
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
HOUSE BILL NO. 161                                                                                                            
     "An  Act  relating to  the  Alaska Mental  Health  Trust                                                                   
     Authority  Subport  Office   Building;  authorizing  the                                                                   
     issuance   of   certificates    of   participation   for                                                                   
     construction of the building  and authorizing the use of                                                                   
     up to $25,000,000 from the  mental health trust fund for                                                                   
     construction  of the building;  approving leases  of all                                                                   
     or   part  of  the   building  by   the  Department   of                                                                   
     Administration; and providing for an effective date."                                                                      
161 and introduced several people  who could answer questions                                                                   
regarding the legislation.                                                                                                      
5:14:18 PM                                                                                                                    
Representative Munoz  informed the committee that  HB 161 was                                                                   
introduced  on  behalf  of the  Alaska  Mental  Health  Trust                                                                   
Authority (AMHTA) so that the  trust could develop a piece of                                                                   
property  in  the  subport  area   in  downtown  Juneau.  She                                                                   
explained  that the  plan calls  for the  construction of  an                                                                   
office  building  that  will house  approximately  500  state                                                                   
Representative  Munoz added that  a primary mission  of AMHTA                                                                   
is to  develop land that it  holds throughout the  state. For                                                                   
many years,  the trust has viewed  the subport property  as a                                                                   
top development priority.  She pointed to a  critical need in                                                                   
Juneau  for office  space; two  of the  state facilities  are                                                                   
aging and  face immediate  renovation costs of  approximately                                                                   
$8.5 million.  In addition, both  facilities will need  to be                                                                   
replaced  in the  future.  The Department  of  Fish and  Game                                                                   
(DFG) building  in Douglas  is nearly 50  years old,  and the                                                                   
Department of Public Safety (DPS)  building downtown is about                                                                   
40 years old.  The DPS building was constructed  in 1970; the                                                                   
intent was  to use  it for ten  years. A  lease on  the third                                                                   
facility, the Department  of Labor (DOL) building,  is due to                                                                   
expire soon.  The state will  need to find replacement  space                                                                   
for approximately 300 DOL employees.                                                                                            
5:16:10 PM                                                                                                                    
Representative  Munoz listed  four key  points regarding  the                                                                   
   · Over the life of the lease, the state will save                                                                            
     approximately $13 million.                                                                                                 
   · The trust is allowed to develop a key land holding,                                                                        
     which  will  provide  a stable  and  dependable  revenue                                                                   
     stream for beneficiaries of the trust.                                                                                     
   · As land owner, the trust provides the land and half the                                                                    
    construction costs, or approximately $22.7 million.                                                                         
   · The state, in partnership with the trust, is able to                                                                       
     meet  a  critical  space   need  for  around  525  state                                                                   
     employees,  and  agrees  to  bond  an  equal  amount  of                                                                   
     approximately $22.7 million,  with the lease payments as                                                                   
     security on the bonds.                                                                                                     
Representative  Munoz emphasized that  timing is  crucial. In                                                                   
order  for the  project to  work,  enabling legislation  must                                                                   
happen in  the current session,  as the DOL lease  expires in                                                                   
5:17:47 PM                                                                                                                    
Representative Foster opined that  the bill was the best he'd                                                                   
ever heard.                                                                                                                     
Representative Crawford  agreed and asked if  the legislation                                                                   
would   be   under   the   state's   prevailing   wage   law.                                                                   
Representative  Munoz did not  know but  offered to  find the                                                                   
Vice-Chair Thomas asked who owns  the building being vacated.                                                                   
Representative Munoz  answered that the state  of Alaska owns                                                                   
the DPS  facility on Willoughby  Avenue and the  DFG building                                                                   
in Douglas. The  DOL facility is owned privately  by a family                                                                   
who lives outside of Alaska.                                                                                                    
Vice-Chair   Thomas   wondered   what   the   Department   of                                                                   
Administration  planned for the  two state-owned  facilities.                                                                   
Representative  Munoz   replied  that  the   buildings  would                                                                   
probably  be  torn  down  and the  property  sold  for  mixed                                                                   
development such as housing.                                                                                                    
Vice-Chair Thomas  queried if the proposal included  funds to                                                                   
tear the buildings down. Representative  Munoz responded that                                                                   
the legislation does not provide for demolition costs.                                                                          
Vice-Chair Thomas hoped there  was a plan. He had seen school                                                                   
districts  burdened with  old  buildings  after erecting  new                                                                   
ones. Representative  Munoz explained that the  state planned                                                                   
to take the  DPS facility down and put in  additional parking                                                                   
for  the area.  There  was also  discussion  about using  the                                                                   
facilities for things such as record storage.                                                                                   
5:21:36 PM                                                                                                                    
Representative Austerman  wondered if parking  space would be                                                                   
lost  in  the  downtown  area   with  the  new  construction.                                                                   
Representative Munoz replied that  the facility would require                                                                   
on-site parking to meet the planning  and zoning needs of the                                                                   
space. She assured  him that the needs could  be met on-site.                                                                   
In addition,  the city  is constructing  a parking  garage at                                                                   
Main Street  and Egan  Drive; this  garage is not  associated                                                                   
with the proposed project.                                                                                                      
Co-Chair   Stoltze   queried  possible   parking   variances.                                                                   
Representative  Munoz replied that  the project has  not gone                                                                   
through  a permitting  process yet, but  she understood  that                                                                   
there would be enough on-site parking.                                                                                          
5:24:04 PM                                                                                                                    
JEFF JESSEE,  CHIEF EXECUTIVE  OFFICER, ALASKA MENTAL  HEALTH                                                                   
TRUST  AUTHORITY (via  teleconference),  testified that  when                                                                   
the Department  of Administration approached the  trust about                                                                   
the  possibility of  constructing  the office  building,  the                                                                   
trust saw a unique opportunity  to develop its resources. The                                                                   
land  office has  relied on  more tradition  methods of  land                                                                   
management such as leases and  sales of property. The project                                                                   
would offer  the trust the option  of being a  developer. The                                                                   
trustees considered and decided  the project was an excellent                                                                   
investment for the trust. The  $22.7 million that AMHTA would                                                                   
invest  in the  building  would  return around  7.5  percent,                                                                   
which is  comparable to the  return on the trust's  permanent                                                                   
fund over  time. In the  current economic environment,  being                                                                   
able  to guarantee  the return  over a  30-year period  would                                                                   
help secure the endowment of the  trust. During the 30 years,                                                                   
the  payout would  be  offset  and after  the  30 years,  the                                                                   
entire lease  would go to the  trust, making it  an excellent                                                                   
investment. The state  has the advantage of  seeing its lease                                                                   
payments  ultimately return  to  the non-profits  that  serve                                                                   
trust beneficiaries in furtherance  of the mental health plan                                                                   
of  the  state.  The mental  health  needs  are  expected  to                                                                   
increase, so the additional revenue will be good.                                                                               
5:28:59 PM                                                                                                                    
Representative  Fairclough  asked   for  further  information                                                                   
regarding  the  benefit  to  the state  of  using  the  $22.7                                                                   
million  general fund.  Mr. Jesse understood  that the  $22.7                                                                   
million  will come  from certificates  of participation;  the                                                                   
state will not  be fronting general funds.  Private investors                                                                   
will  put up  the capital.  Through the  lease payments,  the                                                                   
certificates  of participation  will be paid  off over  a 20-                                                                   
year period of time.                                                                                                            
5:30:12 PM                                                                                                                    
Representative  Crawford   suggested  that  the   design  not                                                                   
include a flat roof, which does not make sense in Juneau.                                                                       
Vice-Chair  Thomas queried the  acreage of  the land  and who                                                                   
owns it.  Representative  Munoz replied  that the trust  owns                                                                   
the land.                                                                                                                       
HARRY NOAH,  EXECUTIVE DIRECTOR,  ALASKA MENTAL HEALTH  TRUST                                                                   
LAND  OFFICE (via  teleconference), recollected  the size  as                                                                   
approximately four acres.                                                                                                       
Vice-Chair Thomas  asked the property value of  the land. Mr.                                                                   
Noah replied that comparable appraisals  in the area had been                                                                   
made, but  he did not  have the data.  He offered to  get the                                                                   
Vice-Chair  Thomas asked why  the parking  area had  the best                                                                   
view. Mr.  Noah answered that  the subport area  is extremely                                                                   
valuable  land. Initially,  the intent  was to take  (through                                                                   
the trust  land replacement program)  the land where  the DPS                                                                   
building stands  and build the  parking garage.  However, the                                                                   
cost  of the  parking  garage was  $20  million. The  project                                                                   
could not  offset the  high number  with lease payments.  The                                                                   
trust has reluctantly  decided to use the area  where the old                                                                   
subport building  was as surface parking until  there is some                                                                   
economic reason to  change. Then the parking  garage would be                                                                   
constructed and the  area where the old subport  building was                                                                   
would be  developed. He  called the  measure an interim  one.                                                                   
The trust has no specific use  currently for the land. When a                                                                   
good one  comes along, the trust  intends to build  a parking                                                                   
garage and  further develop  the area that  will be  used for                                                                   
surface parking.                                                                                                                
5:34:37 PM                                                                                                                    
Representative  Gara   voiced  concern  about   taking  $22.7                                                                   
million from  assets that generate  income for the  trust. He                                                                   
wanted to make sure there would  be enough. Mr. Jesse replied                                                                   
that  there  will  be  no  interruption   of  cash  flow.  He                                                                   
explained that at the end of the  fiscal year, the trust pays                                                                   
out a  percentage of its assets  held by the  permanent fund.                                                                   
In  this  case,  the  $22.7 million  will  still  be  in  the                                                                   
permanent fund at  the end of FY10; payout  will be available                                                                   
in  FY11. For  2012, the  lease  payments will  begin at  the                                                                   
start  of the fiscal  year, and  the lease  payments will  be                                                                   
available subsequently.                                                                                                         
Representative Gara  asked whether there  would be a  risk if                                                                   
tenancy did  not occur or  if construction were  delayed. Mr.                                                                   
Jesse responded that  no business deal is entirely  free from                                                                   
risk; however,  there are major  incentives to make  sure the                                                                   
building  is completed  on  time,  including  that the  state                                                                   
lease on  the current facility  expires at same time  the new                                                                   
building will be completed. He  added that even if there were                                                                   
some delay  in the  commencement of  the lease payments,  the                                                                   
amount of money  involved is $900,000 a year,  an amount that                                                                   
he  believed   trust  could  plan  for  and   absorb  without                                                                   
affecting its goals.                                                                                                            
5:38:12 PM                                                                                                                    
Representative Gara  stated that he is fine with  the risk if                                                                   
the  trust is  fine with  it. Mr.  Jesse replied  that he  is                                                                   
definitely  fine with  the risk, particularly  because  at 20                                                                   
and 30  years out, the investment  becomes an  excellent deal                                                                   
for future trustees.                                                                                                            
Co-Chair  Hawker  queried  how the  state  could  rationalize                                                                   
building on expensive Class A  real estate. Mr. Jesse replied                                                                   
that the  AMHTA intends  to provide  the state with  quality,                                                                   
energy  efficient,  aesthetically  appropriate  office  space                                                                   
without the health and safety  concerns caused by the state's                                                                   
current space.                                                                                                                  
Representative  Munoz added  that rates  at other  comparable                                                                   
spaces, such as at the Goldbelt  and Sealaska buildings, were                                                                   
comparable. In addition, the renegotiated  DOL lease would be                                                                   
considerably more than what is currently being paid.                                                                            
5:41:07 PM                                                                                                                    
Representative   Foster   asked   what  the   Department   of                                                                   
Administration thought about the provision.                                                                                     
VERN  JONES,   CHIEF  PROCUREMENT   OFFICER,  DEPARTMENT   OF                                                                   
ADMINISTRATION,  directed attention  to the  fiscal note  and                                                                   
analysis. He reported that DOA  thought the proposition was a                                                                   
good  deal. He  mentioned  the DOL  building  lease that  was                                                                   
expiring.   If  the  building   does   not  get  built,   the                                                                   
department's  other option is  to put out  an RFP  the coming                                                                   
summer.  The department's  analysis shows  that over  the 30-                                                                   
year  life of  the lease,  the  AMHTA option  would be  $13.5                                                                   
million less  expensive than  a lease  in the private  sector                                                                   
and maintaining the two older  buildings that require a great                                                                   
deal of deferred maintenance.  He pointed out that the fiscal                                                                   
note was  understated;  the cost showed  for maintaining  the                                                                   
old buildings  and continuing the  lease is probably  low. In                                                                   
addition, the  capital costs for the Douglas  Island building                                                                   
and the  DPS building only  have the known existing  deferred                                                                   
maintenance projects  listed. Over  the next 30  years, other                                                                   
work would need to be done.                                                                                                     
Mr. Jones added that DOA analysis  calculates the square foot                                                                   
price at  about $353.  The department thinks  the price  is a                                                                   
bargain for the quality of space being contemplated.                                                                            
5:44:24 PM                                                                                                                    
Co-Chair  Hawker  asked  if  he  was  referring  to  cost  to                                                                   
construct or leasehold costs.  Mr. Jones responded the number                                                                   
represents a cost  per square foot under a  lease. He pointed                                                                   
out that  the number  is a  ceiling to  negotiate under,  not                                                                   
necessarily the price that will be paid for the building.                                                                       
Co-Chair  Hawker  stated  his   inclination  to  support  the                                                                   
concept. He  referred to  arguments by  the current  owner of                                                                   
one of  the buildings  that they  could do  a better  job for                                                                   
less  money.  Mr.  Jones  replied   that  he  had  heard  the                                                                   
arguments; departmental analysis does not support them.                                                                         
Co-Chair  Hawker  wanted to  see  a  direct response  to  the                                                                   
arguments with the financial analysis.                                                                                          
Representative  Munoz requested  that the committee  consider                                                                   
what the  state has  invested in the  facility. Close  to $50                                                                   
million has  been invested in  the old building.  She thought                                                                   
it  was important  for the  state  to find  space that  would                                                                   
allow  the  department  to  function   better.  She  reported                                                                   
numerous, well-documented problems.  She believed there would                                                                   
be good benefit for all the parties involved.                                                                                   
Co-Chair Hawker  asserted that the  state has to pay  for the                                                                   
property. He wanted questions answered.                                                                                         
Co-Chair Stoltze wanted numbers from the administration.                                                                        
5:48:45 PM                                                                                                                    
Representative  Kelly was  not  convinced that  the deal  was                                                                   
great.  He questioned  putting  state  employees  in Class  A                                                                   
space. The trust could also construct  a building and rent it                                                                   
out to doctors and attorneys to make money.                                                                                     
Representative  Munoz believed the  current cost for  the DOL                                                                   
building  was  $2.33  per  square  foot.  She  asked  if  the                                                                   
committee wanted an analysis of comparable space.                                                                               
Representative  Kelly  wanted  a comparison  with  costs  for                                                                   
Class B  or C space, which  he thought was  more appropriate.                                                                   
He referred to criticisms he was hearing about the measure.                                                                     
5:52:23 PM                                                                                                                    
Representative  Foster  relayed  his experience  with  office                                                                   
space.  He  opined  that  space  with  good  parking  can  be                                                                   
important for employees.                                                                                                        
Mr. Jones  reiterated  that the  $3.53 per  square foot  is a                                                                   
ceiling cost and  that the price is still not  negotiated. He                                                                   
pointed out that  the state is not a typical tenant;  it is a                                                                   
high quality but expensive tenant.  Technology needs are much                                                                   
higher  and more  expensive  to service  than  for a  typical                                                                   
private tenant.  There are higher natural  light requirements                                                                   
as well, which drive up the cost  of space. He suggested that                                                                   
it is  not fair to  compare to what  might be available  at a                                                                   
mall  or Class  C  space. The  department  projects that  the                                                                   
expectations for  price in  the RFP will  be in the  $3.80 to                                                                   
$4.00 per  square foot  range. The  department thinks  it has                                                                   
good backup to justify those expectations.                                                                                      
5:56:08 PM                                                                                                                    
Co-Chair Stoltze  talked about the information  needed by the                                                                   
Vice-Chair Thomas  wondered if there were letters  of support                                                                   
from the  municipality. Representative  Munoz responded  that                                                                   
the  City and  Borough  of Juneau  had  unanimously passed  a                                                                   
resolution of support.                                                                                                          
5:58:50 PMRECESSED until 9:00 AM March 28, 2009                                                                               
9:09:48 AM     RECONVENED                                                                                                     

Document Name Date/Time Subjects
A M E N D M E N T 1 - Gara.doc HFIN 3/27/2009 1:30:00 PM
HB 35
A M E N D M E N T 2 - Gara.doc HFIN 3/27/2009 1:30:00 PM
HB 35
CSHB161 Explanation of Changes from (H)CRA.pdf HFIN 3/27/2009 1:30:00 PM
HB 161
Exec Budg Act-HB127-detailed comments 3-23-09.pdf HFIN 3/27/2009 1:30:00 PM
HB 127
AK Railroad briefing.ppt HFIN 3/27/2009 1:30:00 PM
HB 127
AMHTA Subport HB161 Admin Briefing Paper 3 24 09.pdf HFIN 3/27/2009 1:30:00 PM
HB 161
Blank Rome memo to ARRC 032309.pdf HFIN 3/27/2009 1:30:00 PM
HB 127
A M E N D M E N T 3 - Gara.doc HFIN 3/27/2009 1:30:00 PM
HB 35
A M E N D M E N T 4 - Gara.doc HFIN 3/27/2009 1:30:00 PM
HB 35
A M E N D M E N T 5 - Gara.doc HFIN 3/27/2009 1:30:00 PM
HB 35
CSHB161(CRA)-DOR-TRS-03-27-09FN Corrected.pdf HFIN 3/27/2009 1:30:00 PM
HB 161
DHSS Response 033009.doc HFIN 3/27/2009 1:30:00 PM
HB 35
HB127 Letter AK Miners Assoc..pdf HFIN 3/27/2009 1:30:00 PM
HB 127
HB127 Opposition Letter.pdf HFIN 3/27/2009 1:30:00 PM
HB 127
HB127_Sponsor_Stmt.pdf HFIN 3/27/2009 1:30:00 PM
HB 127
HB161 SPONSOR STATEMENT.mht HFIN 3/27/2009 1:30:00 PM
HB 161
HB161 Labor Bldg. Lease Costs.pdf HFIN 3/27/2009 1:30:00 PM
HB 161
Rep Millet Response from Dept of Admin.pdf HFIN 3/27/2009 1:30:00 PM
HB 161
Rep Millet Response from The Land Trust.pdf HFIN 3/27/2009 1:30:00 PM
HB 161
Rep. Millet Questions.pdf HFIN 3/27/2009 1:30:00 PM
HB 161
Subport Architect Presentation.ppt HFIN 3/27/2009 1:30:00 PM
HB 161