Legislature(2001 - 2002)
05/06/2001 12:40 PM House RLS
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ALASKA STATE LEGISLATURE
HOUSE RULES STANDING COMMITTEE
May 6, 2001
12:40 p.m.
MEMBERS PRESENT
Representative Pete Kott, Chair
Representative Brian Porter
Representative Vic Kohring
Representative Carl Morgan
Representative Lesil McGuire
Representative Ethan Berkowitz
Representative Reggie Joule
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Norman Rokeberg
Senator Jerry Ward
COMMITTEE CALENDAR
SENATE BILL NO. 152
"An Act relating to the handling of and interest on contract
controversies involving the Department of Transportation and
Public Facilities or state agencies to whom the Department of
Transportation and Public Facilities delegates the
responsibility for handling the controversies."
- MOVED HCS SB 152(RLS) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: SB 152
SHORT TITLE:DOTPF-RELATED CONTRACT CLAIMS
SPONSOR(S): SENATOR(S) COWDERY
Jrn-Date Jrn-Page Action
03/20/01 0735 (S) READ THE FIRST TIME -
REFERRALS
03/20/01 0735 (S) TRA
04/10/01 (S) TRA AT 1:30 PM BUTROVICH 205
04/10/01 (S) Moved Out of Committee
MINUTE(TRA)
04/11/01 1067 (S) TRA RPT 4DP
04/11/01 1067 (S) DP: COWDERY, TAYLOR, WILKEN,
WARD
04/11/01 1067 (S) FN1: INDETERMINATE(DOT)
04/11/01 1067 (S) FIN REFERRAL ADDED AFTER TRA
04/24/01 (S) FIN AT 9:00 AM SENATE FINANCE
532
04/24/01 (S) FIN AT 6:00 PM SENATE FINANCE
532
04/24/01 (S) Moved Out of Committee
MINUTE(FIN)
04/25/01 1258 (S) FIN RPT 5DP 1DNP 1NR
04/25/01 1258 (S) DP: DONLEY, KELLY, WILKEN,
WARD, LEMAN;
04/25/01 1258 (S) DNP: HOFFMAN; NR: OLSON
04/25/01 1258 (S) FN1: INDETERMINATE(DOT)
04/25/01 1258 (S) FN2: INDETERMINATE(CED)
04/26/01 1278 (S) RULES TO CALENDAR 1OR 4/26/01
04/26/01 1283 (S) READ THE SECOND TIME
04/26/01 1283 (S) ADVANCED TO THIRD READING
UNAN CONSENT
04/26/01 1283 (S) READ THE THIRD TIME SB 152
04/26/01 1284 (S) PASSED Y14 N5 A1
04/26/01 1284 (S) ELLIS NOTICE OF
RECONSIDERATION
04/26/01 (S) RLS AT 10:45 AM FAHRENKAMP
203
MINUTE(RLS)
04/27/01 1310 (S) RECONSIDERATION NOT TAKEN UP
04/27/01 1311 (S) TRANSMITTED TO (H)
04/27/01 1311 (S) VERSION: SB 152
04/28/01 1296 (H) READ THE FIRST TIME -
REFERRALS
04/28/01 1296 (H) FIN
04/30/01 (H) FIN AT 1:30 PM HOUSE FINANCE
519
04/30/01 (H) Heard & Held
MINUTE(FIN)
05/03/01 (H) FIN AT 1:30 PM HOUSE FINANCE
519
05/03/01 (H) Moved HCSSB 152(FIN) Out of
Committee
MINUTE(FIN)
05/04/01 1528 (H) FIN RPT HCS(FIN) 5DP 1NR
05/04/01 1528 (H) DP: LANCASTER, WHITAKER,
HARRIS,
05/04/01 1528 (H) DAVIES, MULDER; NR: BUNDE
05/04/01 1529 (H) FN1: INDETERMINATE(DOT)
05/04/01 1529 (H) FN2: INDETERMINATE(CED)
05/06/01 1585 (H) RLS RPT HCS(RLS) 3DP 3NR 1AM
05/06/01 1585 (H) DP: PORTER, MCGUIRE, KOHRING;
05/06/01 1585 (H) NR: MORGAN, JOULE, KOTT;
05/06/01 1585 (H) AM: BERKOWITZ
05/06/01 1585 (H) FN1: INDETERMINATE(DOT)
05/06/01 1585 (H) FN2: INDETERMINATE(CED)
05/06/01 (H) RLS AT 0:30 PM BUTROVICH 205
WITNESS REGISTER
SENATOR JOHN COWDERY
Alaska State Legislature
Capitol Building, Room 101
Juneau, Alaska 99801
POSITION STATEMENT: Testified as the sponsor of SB 152.
DOUG GARDNER, Assistant Attorney General
Transportation Section
Civil Division (Juneau)
Department of Law
PO Box 110300
Juneau, Alaska 99811-0300
POSITION STATEMENT: Testified on SB 152.
DENNIS POSHARD, Legislative Liaison/Special Assistant
Office of the Commissioner
Department of Transportation & Public Facilities
3132 Channel Drive
Juneau, Alaska 99801-7898
POSITION STATEMENT: Testified that DOT&PF strongly supports HCS
SB 152(FIN).
ACTION NARRATIVE
TAPE 01-16, SIDE A
Number 0001
CHAIR PETE KOTT called the House Rules Standing Committee
meeting to order at 12:40 p.m. Representatives Kott, Porter,
Kohring, Morgan, Berkowitz, and Joule were present at the call
to order. Representative McGuire arrived as the meeting was in
progress. Also in attendance were Representative Rokeberg and
Senator Ward.
SB 152-DOTPF-RELATED CONTRACT CLAIMS
CHAIR KOTT announced that the only order of business before the
committee would be SENATE BILL NO. 152, "An Act relating to the
handling of and interest on contract controversies involving the
Department of Transportation and Public Facilities or state
agencies to whom the Department of Transportation and Public
Facilities delegates the responsibility for handling the
controversies."
Number 0051
REPRESENTATIVE PORTER moved to adopt HCS SB 152 [22-LS0552\J] as
the working document before the committee.
REPRESENTATIVE BERKOWITZ objected and requested an explanation
of the differences between the two versions.
CHAIR KOTT pointed out that Section [4 of HCS SB 152(FIN)] was
deleted. In further response to Representative Berkowitz, Chair
Kott said that the section was deleted because "we" don't like
it.
REPRESENTATIVE BERKOWITZ said that others do like the deleted
section.
CHAIR KOTT said that once the HCS is adopted, then the rationale
for the deletion of the section could be discussed.
REPRESENTATIVE BERKOWITZ expressed his concern for showing the
appropriate deference to the House Finance Committee, which went
to a lot of trouble to develop a version that committee liked.
However, now the House Rules Standing Committee is going to
change it. Therefore, he felt there should be some explanation.
CHAIR KOTT reiterated that once the HCS is adopted, there would
be an explanation.
Number 0161
REPRESENTATIVE BERKOWITZ withdrew his objection. Therefore,
version J was before the committee.
Number 0194
SENATOR JOHN COWDERY, Alaska State Legislature, testified as the
sponsor of SB 152. Senator Cowdery said that he worked on this
bill with the industry and the Department of Transportation &
Public Facilities (DOT&PF) in arriving at the language that was
sent from the Senate. Therefore, he urged the passage of the
original bill, SB 152.
REPRESENTATIVE BERKOWITZ inquired as to the problem that this
bill is trying to fix. He asked if Senator Cowdery could give
some examples.
SENATOR COWDERY said, "If it's not broke, we don't have to fix
it. I don't think it's broke."
REPRESENTATIVE BERKOWITZ inquired as to why there is a bill
then.
Number 0265
SENATOR COWDERY said, "Why do we want the government to pay
interest on claims that a court says is valid. I think that you
have anything to do with any financing that you're going to have
to pay interest on the money and that's all we after in this.
Just because the claim doesn't need the interest, it's the court
that decides it was a valid claim, and it's basically that."
Senator Cowdery said this legislation will provide an incentive
to settle claims.
REPRESENTATIVE BERKOWITZ related his understanding that the bill
attempts to address the problem of contractors incurring costs
that they shouldn't be.
SENATOR COWDERY clarified that what he is saying is that the
courts make that decision. He emphasized that he isn't saying
that all claims of contractors should be paid. He specified,
"I'm saying when the court, in a lawsuit, decides ... and awards
it to the contractor that then the interest should be paid from
the time of the claim."
REPRESENTATIVE BERKOWITZ related his understanding that
currently interest accrues from the time of judgment.
SENATOR COWDERY explained that was the case until the [Knowles]
Administration. In further response to Representative
Berkowitz, Senator Cowdery said that he couldn't provide any
specific examples. However, lots of people, such as the
Associated General Contractors, small business people, and the
trucking industry, came forward wanting to resolve this problem.
Number 0423
CHAIR KOTT asked if anyone came forward during the committee
process and announced that they had been harmed by the lack of
this bill.
SENATOR COWDERY replied yes and noted that there are pending
cases. Furthermore, there were some that wanted to make this
retroactive, although [SB 152] does not.
CHAIR KOTT turned to the House Finance Committee amendment that
added Section 4. He asked if Senator Cowdery recalled the
discussion surrounding that amendment.
SENATOR COWDERY answered that he didn't. He related his belief
that other amendments were also discussed in the House Finance
Committee.
CHAIR KOTT pointed out that the bill was reported from the House
Finance Committee with five "Do Pass" recommendations and one
"No Recommendation."
Number 0571
REPRESENTATIVE KOHRING related his understanding that Senator
Cowdery supported the proposed House Rules Standing Committee
CS, but he didn't support the House Finance Committee CS.
CHAIR KOTT clarified that the proposed House Rules Standing
Committee CS essentially returns to the language of SB 152 that
was transmitted to the House.
REPRESENTATIVE JOULE related his understanding that prior to the
[House Finance Committee] amendments, this legislation was
headed to a subcommittee, which probably meant that it would
have been held through the summer. He asked if Senator Cowdery
had any knowledge of that.
SENATOR COWDERY said that he hadn't heard that until five
seconds ago.
CHAIR KOTT asked if Representative Joule was suggesting that was
the discussion that occurred in the House Finance Committee.
REPRESENTATIVE JOULE replied yes.
CHAIR KOTT noted that the committee should have a document from
the [Department of Law] dated May 5, 2001.
Number 0708
DOUG GARDNER, Assistant Attorney General, Transportation
Section, Civil Division (Juneau), Department of Law (DOL),
turned to the original bill, which proposed to pay interest on
contract claims. Currently, the state hasn't waived its
sovereign immunity with respect to the payment of interest on
administrative claims and that position has been defended in
court. Although this issue is currently headed to the supreme
court, the judges to date have agreed that the state hasn't
waived its sovereign immunity with respect to interest on
administrative claims. The original bill would [require] the
interest to be paid from the time the claim was submitted.
However, the Attorney General had serious concerns with that due
to [the office's] own experience with the claims process. The
[Attorney General] felt that there is a severe imbalance between
paying interest on claims from the day they're filed, when the
complete claim is often not received until late in the process.
He specified, "The major concern was that: 'How can the people
of the state of Alaska have interest running against them when
they don't know the full parameters of the claim that may be
hanging over their heads,' if you will."
MR. GARDNER explained that in the House Finance Committee,
Representative Davies offered an amendment to SB 152, which
would add language to AS 36.36.025. The language that was added
was as follows: "An appeal by a contractor of the Department of
Transportation and Public Facilities may not raise any new
factual issues or theories of recovery that were not presented
to and decided by the procurement officer." On the other hand,
the contracting community was concerned that DOT&PF wasn't
paying claims quickly enough. He explained that when a
contractor has to pay to do the job, the contractor has to pay
for it and claim for it later. Therefore, the contractors were
concerned that this cost them interest and thus why should the
contractor pay for it when the state may ultimately be found
responsible for paying for it. Representative Croft offered an
amendment in the House Finance Committee that said, "that a
complete claim is filed that meets the requirements of AS 36.30
through the date of the decision by the procurement officer."
The department testified in support of the amendments from
Representative Davies and Representative Croft because it
balanced the payment of interest.
Number 0873
MR. GARDNER said that if the contracting community wants to get
these claims paid quickly and fairly, it would be in the
contracting community's interest to put their documents on the
table. Typically, the contracting community will code costs
associated with the claims in a way that those costs can be
tracked. If that information is provided at the beginning of
the process, then the department has the ability to make a
better decision and pay something that it needs to. Then, if
there is a dispute, the department would understand that
interest would accrue. Mr. Gardner said that he spoke with both
the Attorney General and Commissioner Perkins who both feel that
there is a good balance [in CSSB 152(FIN)]. In regard to the
retroactivity issue, Dr. Gardner said that he wouldn't address
that because he didn't believe that question remains.
MR. GARDNER informed the committee that if this bill passes,
interest accrues at 3 percent above the prime, which is
calculated on January 2 of each year. He related [the
department's] belief that "they" will be fully compensated with
interest and thus balancing that with the full documentation of
claims is fair for all parties. Such a path should accelerate
the process and prevent the long litigation of claims that often
occurs later. He noted that sometimes the department doesn't
see the full claim until the hearing officer stage, which he
didn't believe benefits the contractor or the state.
Number 0995
REPRESENTATIVE BERKOWITZ asked if the language in the section in
question [mirrors] the federal standards.
MR. GARDNER answered that DOL feels that HCS SB 152(FIN) is very
consistent with what the federal law would require as it
requires the payment of interest, a full claim, and disallows a
claim later in the process. He said, "I think the answer is yes
to your question."
REPRESENTATIVE BERKOWITZ posed a scenario in which the state had
a contract controversy with a contractor. He inquired as to the
point at which prejudgment interest would begin to accrue.
MR. GARDNER specified that under HCS SB 152(FIN), [prejudgment
interest] would begin to accrue from the time that a complete
claim is filed with the procurement officer. Under the proposed
House Rules Standing Committee CS, he believes the [prejudgment
interest] would begin on the date the claim is filed.
REPRESENTATIVE BERKOWITZ clarified that he was referring to a
situation in which the state pursued an action against a
contactor.
MR. GARDNER suggested that [the state] would be bound by the
same requirements as the contracting community. He wasn't sure
whether such claims had been brought by [the state] before and
whether those claims had been brought to the procurement
officer. However, he reiterated his belief that [the state]
would be bound by the same requirements as the contracting
community.
Number 1087
REPRESENTATIVE BERKOWITZ inquired as to the general standard for
when prejudgment interest begins to accrue with a contract
controversy.
MR. GARDNER answered that for a regular contract controversy in
superior court, interest would begin to accrue the date the
claim was filed.
REPRESENTATIVE BERKOWITZ related his understanding then that the
interest would begin to accrue at the time the claim was filed
versus the time the breech occurred.
MR. GARDNER said that he guessed it would be dependent upon how
it was plead, but he wasn't exactly sure. However, he
reiterated his belief that [the interest would begin to accrue]
at the time the claim is filed [or rather] the time when one is
noticed that there is a claim.
Number 1142
REPRESENTATIVE McGUIRE returned to Mr. Gardner's opinion that
the amendment made in the House Finance Committee would speed up
the process. Representative McGuire saw [the amendment] as
adding another step, a discovery phase, which she indicated
would add more time to the process. Therefore, she inquired as
to why Mr. Gardner believes HCS SB 152(FIN) would expedite the
process.
MR. GARDNER answered that he believes there will always be some
discovery because that is part of the due process afforded to
people. Based on "our" experience with the process, a complete
claim at the beginning may negate the need to have experts to
fight the claim. Mr. Gardner related his belief that much of
the discovery and lengthy claims come from the department
receiving an entirely new claim during the hearing officer
process. He used the Kennicott claim as an example of the
aforementioned problem. However, he noted that most of these
claims are not like the Kennicott claim but rather smaller. He
recalled DOT&PF testifying in the House Finance Committee that
over 80 percent of their claims are resolved before entering
into the hearing officer process. Therefore, this bill is
addressing a very narrow volume of claims because most of the
documents can be reviewed by DOT&PF engineering staff to
determine whether to pay or not pay the claims. He reiterated
that there will have to be a discovery stage and no one is
trying to circumvent that process. Mr. Gardner informed the
committee that there are many situations in which DOT&PF calls
DOL to review a claim [because] it appears that all the
information isn't present. There is no way to make the
contractor provide more information. Therefore, sometimes [the
lack of information] forces the situation into a full-blown
discovery process during which litigation strategy can become
involved.
REPRESENTATIVE McGUIRE noted her opinion that it defies logic to
suggest that a contractor would withhold information that would
assure that contractor prejudgment interest. Therefore, she
believes that the incentives are in place to present that
information, if it's going to benefit the contractor.
MR. GARDNER related his opposing belief. He said, "If interest
is running and there's no requirement to give us a report that
may describe things that are both good and bad for the
contractor, why would the contractor want to give that to us.
That's our dilemma."
MR. GARDNER, in response to Representative Berkowitz, explained
that he believes if SB 152 doesn't pass, there will be
discussions between DOT&PF and DOL regarding how these cases are
dealt with. This legislation has highlighted this claims
process and thus he suspected that the process would be sped up
due to the level of discussion that there has been. He
specified that if SB 152 doesn't pass, the current law will
remain the same and the [state] won't pay interest on
administrative claims.
Number 1422
REPRESENTATIVE PORTER related his understanding that under the
current law, a contractor could add additional information to
their claim on appeal.
MR. GARDNER explained that [under the current law] there is
invariably new additional information and theories of recovery,
which [DOL] considers a new claim, before the hearing officer.
Although [DOL] has argued that shouldn't be allowed, they
haven't had much success in that area. Therefore, "we" will
continue to receive new claims at the hearing officer stage.
REPRESENTATIVE PORTER related his understanding that Mr. Gardner
was saying that for the state to consider paying prejudgment
interest, the ability to add new information should be
eliminated.
MR. GARDNER clarified that there should be a complete claim
before the department.
Number 1518
MR. GARDNER asked if Representative Joule was asking whether a
small contractor in a rural community would be able to provide
DOL with the claim information that it needs under the bill as
drafted. To that question, Mr. Gardner said the answer would be
yes.
REPRESENTATIVE JOULE clarified that he was referring to the
current system. He asked whether [small contractors] who bring
claims for necessary cost overruns would be able to recapture
some of [those cost overruns] under the current system. He then
directed attention to the House Finance Committee CS that
wouldn't allow a claim to be changed.
MR. GARDNER addressed the current system first. Under the
current system, if the small contractor filed a claim and it
took a substantial amount of time to develop the claim, the
small contractor wouldn't receive interest during that period.
Therefore, Mr. Gardner felt that the current system is probably
a bit more burdensome than the new system would be. He said
that most of the claims on smaller projects from rural
contractors are some of the best-documented claims because the
claims are up-front and the jobs are usually not massive.
Usually, those claims are easy for DOT&PF to deal with. He said
that those claims usually are not the claims that are part of
the claims process.
MR. GARDNER, in response to Representative Joule, specified that
a big job would be a $5 to $15 million road job, while a smaller
job would be a $200,000 to $1 million job.
MR. GARDNER addressed the new system [as proposed in the bill].
Under the new system, he suggested that a smaller contractor who
provides the department with a complete claim quickly would be
able to get interest running. Therefore, if there is some
dispute, the smaller contractor would be better able to weather
a dispute process than under the current system.
Number 1674
MR. GARDNER informed the committee of his experience that DOT&PF
doesn't like claims, but rather they like to pay claims and pay
them fairly quickly. This desire to pay the claims is reflected
in the over 80 percent success rate of claim resolution at the
contracting officer stage.
REPRESENTATIVE JOULE inquired as to the claim process for
companies that are doing business that is not state business.
MR. GARDNER explained that there could possibly be a dispute
mechanism in the contract that would have to be used. However,
if that didn't work out, then the next likely step would be a
suit in superior court that would probably have a fairly lengthy
hearing process. In further response to Representative Joule,
Mr. Gardner didn't believe that the committee needed to deal
with that because it is currently dealt with under civil rules
and the normal litigation process.
REPRESENTATIVE JOULE asked if "we" are looking at being in line
with the current practices outside of contracting with the
state.
MR. GARDNER said he believes so. He pointed out that the
administrative process that DOT&PF has been focused on is
similar to the process in a commercial contract that includes an
alternative dispute resolution mechanism. If there is a private
contract, most parties include a mechanism to resolve the
dispute short of going to court. Mr. Gardner related the desire
to resolve these cases before expensive litigation ensues. On
behalf of DOT&PF, DOL would like DOT&PF to deal with these
claims themselves. Therefore, [DOL] wants to see this process
resolved in the alternative dispute resolution phase, which is
ultimately the administrative claims and thus "we" want complete
claims. Mr. Gardner emphasized that DOL doesn't want to have
situations in which it can't appropriately advise DOT&PF because
all the information hasn't been provided and isn't provided
until later.
CHAIR KOTT asked if the language added to Section 2 in the House
Finance Committee was ever addressed.
MR. GARDNER replied yes. He recalled that there was a
considerable amount of dialogue on [the amendment].
Number 1860
DENNIS POSHARD, Legislative Liaison/Special Assistant, Office of
the Commissioner, Department of Transportation & Public
Facilities, said that the department is very supportive of the
concept of paying interest to contractors when a dispute
resolution ends in favor of the contractor. He informed the
committee that DOT&PF strongly supports HCS SB 152(FIN). If the
department is going to take on the responsibility of paying
interest to the contractors that should be balanced with
receiving a full record, which would allow the department to
make a good decision in regard to the validity of the claim.
The department believes that HCS SB 152(FIN) is consistent with
federal law and strikes a balance between the payment of
interest and an expedited process as well as providing the
fairness needed.
Number 1933
REPRESENTATIVE McGUIRE asked if Mr. Poshard was aware of the
federal procurement code requirement that allows the payment of
post claim increases if new information arises.
MR. POSHARD answered that he was aware of that to some degree.
He related his belief that there is a small provision to raise a
claim based on new facts, but he didn't believe that new
theories of recovery were allowed. He informed the committee
that his discussions with DOL have indicated that DOL doesn't
believe that this language necessarily presents that. Mr.
Poshard posed a situation in which a contractor submits a formal
claim regarding some work on a particular project that required
him to lease two D8 Cats. However, if, through the process, it
is discovered that this contractor leased two D9 Cats, which are
larger equipment that cost more, then the department could
reasonably adjust that because the contractor presented the fact
that he had two pieces of equipment on lease.
REPRESENTATIVE McGUIRE emphasized her belief that the language
is relatively clear and narrow and says "no new factual issues."
Therefore, she encouraged some thought be given to that.
Number 2004
REPRESENTATIVE KOHRING turned to Mr. Poshard's earlier comment
regarding the department's desire to pay claims and asked why
this legislation is necessary and why the department didn't pay
interest on claims in the past.
MR. POSHARD explained that up until a few years ago, DOT&PF paid
interest on some cases that had gone to the hearing officer
level. He noted that no interest was paid on claims that were
resolved at the contracting officer level or anything dealt with
in the field by the project manager. However, DOL realized that
DOT&PF was paying that interest in error because there was no
statutory basis for the department to be required to pay that
interest. There has been litigation over the payment of
interest and in fact, there is litigation that is heading to the
supreme court. Up to this point, the courts have found in favor
of the state not having to pay interest. However, Mr. Poshard
reiterated that DOT&PF supports changing the law to pay interest
because it is the correct and fair thing to do and thus SB 152
is before the committee.
Number 2080
REPRESENTATIVE PORTER related his belief that this is
straightforward situation. This is a public policy decision.
Although Representative Porter appreciated [the department's
support of paying interest], the fact remains that the state
wouldn't be paying any prejudgment interest if SB 152 hadn't
been filed. Representative Porter said he believes it to be
ridiculous that the state took a position not to pay prejudgment
interest when every other entity in this state has to do so. He
related his belief that this extremely restrictive [language in
HCS SB 152(FIN)] wouldn't even allow the state to allow new
information. Therefore, he supported the proposed House Rules
Standing Committee CS.
Number 2143
REPRESENTATIVE BERKOWITZ related his understanding of the
testimony to be that the state would now be in the same position
as anyone else in a contractual dispute and thus prejudgment
interest would begin to accrue at the time an action is filed.
He said he would be willing to reevaluate his position if his
understanding is incorrect. Representative Berkowitz said that
the state should be in no different position than anyone
involved in a contractual dispute nor should the state be
subject to harsher penalties.
Number 2198
REPRESENTATIVE KOHRING moved to report HCS SB 152 [22-LS0552\J]
out of committee with individual recommendations and the
accompanying fiscal notes. There being no objection, HCS SB
152(RLS) was reported from the House Rules Standing Committee.
ADJOURNMENT
There being no further business before the committee, the House
Rules Standing Committee meeting was adjourned at 1:25 p.m.
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