Legislature(2003 - 2004)
04/20/2004 03:40 PM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 380-STATE LEASE AND CONTRACT EXTENSIONS SENATOR GARY STEVENS announced SB 380 to be up for consideration. He asked for a motion to adopt the \D version committee substitute (CS). SENATOR JOHN COWDERY made a motion to adopt \D version CS for discussion purposes. SENATOR GARY STEVENS asked Mr. Jones to come forward and present the bill. VERN JONES, chief procurement officer, Department of Administration, explained that the current procurement code allows for negotiation for extension of office leases of up to ten years in exchange for rent reductions. He further explained that: SB 380 would increase the State's ability to negotiate lease extensions by changing the required threshold from a 10 to 15 percent reduction from the existing lease rate, as the current law requires, to a 10 percent reduction from the current market rate for the area. Existing statutory restrictions on negotiations have hampered our ability to negotiate lease extensions with our lessors. The increase in the real estate market in Alaska combined with the way we structure our leases often makes a 15 percent reduction from the current lease rates unattainable. Tying the reduced lease rate to a percentage of the market rate is a more reasonable approach that will allow us to negotiate reduced rates more frequently and avoid the lengthy and expensive reprocurement process not to mention the cost and disruption of moving state offices and large numbers of state employees. Holding up a chart he continued to say: Our typical state office leases are comprised of several cost elements. First of all we have the lessors profit that's built in throughout the life of the lease. We have the lessor's base cost that are ongoing throughout the life of the lease. We also have the landowner's construction or tenant improvement costs that typically are financed and amortized only through the first firm term portion of the lease. Typically those fall off in the optional renewal periods. This is intended to demonstrate the cost of the lease - all the cost elements of the lease throughout the life of the lease. As the chart demonstrates, a rate below the already reduced rate of an option year is often too low for a lessor to agree to. On the other hand a percentage below the market rate, which is generally established at the beginning of the lease, is much more reasonable. [It's] something that lessors will more often accept and again, the more often we can negotiate a below market rate and avoid the cost of reprocurement and moving expenses, the more the state saves. The committee substitute that you just adopted makes some changes to the original bill. Those changes are: It removes procurement contracts from the bill. Now it's just strictly office space leases. It specifies how the market rate is established. It's either a broker's opinion of rental value or an appraisal of the rental value. It tightens the definition up. And it changed what was a five percent reduction to now a 10 percent reduction. CHAIR GARY STEVENS thanked him and asked if there were any questions. SENATOR BERT STEDMAN noted there was a memo from Theresa Bannister, Legislative Counsel, warning that the draft's coverage of the judicial branch could raise a separation of powers issue. He asked Mr. Jones to define the issue and comment on the potential impact. MR. JONES said this issue was raised in a House Labor and Commerce Committee hearing. It refers to Section 1 (b) and is talking about the Legislature passing a law that would restrict the court system. However, one of the committee members spoke with a representative of the court system who supported the bill and stated that they plan on taking advantage of the bill if it should pass. "Beyond that I really couldn't comment," he said. SENATOR JOHN COWDERY asked whether he'd addressed the other issue raised in the same memo that said the "proposed Sec. 36.30.083 establishes a reporting requirement for the judicial branch." MR. JONES replied that same Section 1 (b) requires the executive branch to report on lease extensions under the bill. He wasn't sure the court system was uncomfortable with that and he didn't have any suggested change. "I think the intent here is that since this is not full open RFT or ITD type procurement that the Legislature would like to see reporting on agreements made under this section," he said. SENATOR COWDERY asked if the bill had a Judiciary Committee referral. SENATOR GARY STEVENS told him the Finance Committee would hear the bill next. He noted that the bill addresses rental space and goods and services. The bill authorizes term extensions for five years on goods and services contracts, but he wasn't clear as to whether the extensions were for rental space or leases as well. "Is this a similar thing or not," he asked. MR. JONES explained that the CS removes other contracts from the bill so only procurements of leased real estate or leased office space are included. "The rule that the bill would employ would be up to a ten year maximum extension of a lease in exchange for minimum 10 percent reduction from market value." SENATOR GARY STEVENS wanted to make it clear and asked for verification that although the governor's letter of March 24, 2004 spoke of leases and contracts for goods and services, the CS relates to just leases and not with contracts for goods and services. MR. JONES agreed that is correct. There were no further questions. SENATOR GARY STEVENS asked for a motion. SENATOR COWDERY made a motion to move CSSB 380(STA) [\D version] from committee with attached fiscal note and asked for unanimous consent. There being no objection, it was so ordered.