HB 161-CERTIFICATES OF PARTICIPATION FOR SUBPORT   8:46:20 AM CO-CHAIR HERRON announced that the next order of business would be 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." 8:46:28 AM CO-CHAIR MUNOZ, speaking as the sponsor of HB 161, welcomed those who are present to testify today. 8:47:47 AM KEVIN BROOKS, Deputy Commissioner, Department of Administration (DOA), pointed out that the committee packet should include a letter and answers to questions from Representative Millet. He also pointed out that attachment 3 entitled "Briefing Paper AMHTA Subport Office Building" addresses many of the 12 questions from Representative Millet. Mr. Brooks explained that DOA approached The Alaska Mental Health Trust ("The Trust") a year or so ago regarding possible space due to the upcoming sunset of the Department of Labor & Workforce Development's (DLWD) lease of the current aging facility. Absent progress with The Trust by July 2009 a Request for Proposals (RFP) will have to be put out to procure new space. Mr. Brooks emphasized that new space in the amount of 68,000 square feet needs to be procured and be moved into by July 2012. Currently, the state is paying $2.33 a square foot for the DLWD building, which is reflective of the condition of the building. With regard to the backup on the lease, DLWD has been a tenant of the building for 27 years and the thick files are available to anyone interested. He mentioned that the water intrusions, mold, and necessity to move staff from the building are a matter of record. Mr. Banks acknowledged that the costs for a new building will be more than the current costs for the existing aging facility. Current estimates of the market in Juneau for the downtown core are $3.80-$4.00 range. He noted that The Trust has been told that any facility has to be competitive with the market and the best deal for the state will be sought. The Trust, he opined, has developed a plan and financing mechanism that make their proposal competitive. The Trust, he further opined, is a good partner because it holds land in the downtown corridor and holds cash in the amount of $22.7 million in its fund. The Trust will borrow the remainder. The documents in the committee packet relate various scenarios, including repaying the bonds after 20 years at which point there would be a fairly significant reduction in the state's lease obligations because the debt would be retired and the state would deal with only the return on the equity for The Trust. He noted that the aforementioned isn't dissimilar from other lease arrangements the state holds. He then informed the committee that DOA's analysis is performed over 30 years, specifically a 20-year initial term with 2 10- year renewals. If the state stays in the lease and renews for the second 10-year period, the lease would look even more favorable in terms of a cost benefit analysis. MR. BANKS reminded the committee that the DLWD building alone wasn't a large enough project for The Trust to build the facility. A larger footprint was necessary, and thus the Douglas Island building that houses the regional offices for the Alaska Department of Fish & Game (ADF&G) and the Department of Corrections as well as the Department of Public Safety building was included. The aforementioned buildings are older and in such disrepair that a fairly significant investment would be required. The cost analysis includes what DOA charges state agencies, which is about $1.30 per square foot, and the currently identified deferred maintenance. Although some of the needs of these older buildings are known, there isn't a comprehensive list of everything that's wrong. For instance, there is knowledge that the DPS building needs a new roof and the ADF&G building needs a new envelope. Therefore, the analysis doesn't include additional costs that would be required in order to bring the buildings up to a tenantable position or to replace them. The aforementioned are anticipated costs, but they're not included in the analysis in order to avoid inappropriately padding the numbers. 8:56:43 AM CO-CHAIR HERRON directed focus on question number 10: "Does the Governor support HB 161?" MR. BROOKS explained that the governor's office has been provided the same analysis as the committee. Ultimately, [the governor's office] has expressed the need for the project to pencil out. Therefore, the governor is likely reviewing this proposed project in terms of needs throughout the state. Mr. Brooks said that any project the state undertakes has to be fiscally sound. He related that DOA will continue working with the governor's office and hopes to return to the committee with a more definitive position. He then related his understanding that the sponsor of the legislation has had a discussion with the governor regarding this proposal. In further response to Co-Chair Herron, Mr. Brooks confirmed that DOA's comfort level is fairly good. CO-CHAIR MUNOZ confirmed that she met with the governor, who she said likes the project. However, the governor wants to ensure that the project makes financial sense for the state. Co-Chair Munoz opined that the proposed new facility is a better deal for the state when compared to the existing lease costs and the costs to upgrade existing infrastructure. Furthermore, The Trust will have great benefit over the long-term as it will receive a steady revenue stream to support mental health programs. 9:00:07 AM REPRESENTATIVE MILLETT pointed out that in the memorandum of agreement (MOA) there's no talk of cost overruns. Therefore, she questioned whether the state has planned any contingency for cost overruns. She further questioned whether cost overruns would impact the lease. MR. BROOKS remarked that the MOA was entered into as a manner in which to work collaboratively toward a solution. He noted that there's a contingency built into construction, which he recalled was 20 percent of the total construction cost. The Trust, he opined, is bearing some risk to make the project competitive, which is reflected in The Trust's rate of return. He noted that there are some variables, including the rate on bonds for the portion being financed. The responsible steps expected with a project of this magnitude have been built in through contingencies and other factors. 9:02:18 AM REPRESENTATIVE MILLETT inquired as to what occurs if cost overruns are in excess of 20 percent. MR. BROOKS deferred to representatives from The Trust. However, he opined that The Trust is taking a risk and the state isn't subject to any cost overrun that would drive the lease rate beyond the market rate of $3.80-$4 being discussed. 9:03:27 AM HARRY NOAH, Executive Director, Trust Land Office, Alaska Mental Health Trust, related his understanding that when the lease is signed, cost overruns would be the responsibility of The Trust. He explained that The Trust has estimated the project at a high point in terms of cost, with a fairly significant contingency. He informed the committee that The Trust has some additional work that's necessary in terms of geotechnical work and information regarding foundation characteristics. The Trust will also perform additional work on the design of the building. Mr. Noah said that often with state buildings, the [costs] reach the budget and the size of the building is decreased [in an effort to not have cost overruns]. However, with this proposal, The Trust will lease a specific amount of space. 9:05:45 AM MR. NOAH related that he is in favor of HB 161 as there are benefits to The Trust, the state, and Juneau. He opined that it's unusual that the aforementioned would occur at one time, which he attributed to various factors occurring at once. Those factors include the demolition of the subport building, The Trust wanting to develop its waterfront parcel, and DLWD's lease becoming available. He said he hoped the committee can support [HB 161]. 9:06:52 AM REPRESENTATIVE GARDNER asked if The Trust anticipates any problems with regard to zoning and variances from the City of Juneau. MR. NOAH related that last night the City & Borough of Juneau Assembly unanimously passed the zone change. However, he anticipated that once the process reaches the variance stage, it will certainly elicit comments. In terms of the location of the parking, he characterized it as a calculated move. He explained that building the parking garage added $20 million to the process without any revenue, and therefore that cost to the state would be too high as part of this agreement. The Trust didn't want to use the land for parking, but did so in order to allow an agreement to be made. The aforementioned places the land in a holding position and the intent is for The Trust to take over the DPS building and ultimately build a parking garage on that property. At some point, something will come along and allow that property to be developed and push the parking to the parking garage, he said. 9:09:05 AM CO-CHAIR MUNOZ commented that the location of the proposed building will cause more use of that portion of the waterfront once the building is constructed. 9:09:36 AM MR. NOAH, in response to Representative Millet, offered to provide the committee with a copy of The Trust's cost estimate. Construction is scheduled to begin in 2010, he related. He further related that eight months ago The Trust engaged an architectural firm in Juneau and has done quite a bit of work including cost estimates of the building. Furthermore, The Trust has already started the process of obtaining a Department of Transportation & Public Facilities (DOT&PF) project manager and is in the process of developing a design-build type of contract in case this legislation passes. He offered to provide the committee with the work that has been done to date. 9:11:49 AM MR. BROOKS, in response to Representative Millet, clarified that the DLWD building is a leased facility whereas the Douglas Island building that houses ADF&G and Department of Corrections and the Department of Public Safety (DPS) building are owned by the state. The DPS building is potentially a site of a future parking garage. He noted that at a minimum those two facilities would be moth-balled or be used in another fashion. Once the proposed facility seems to be moving forward, the state would earnestly try to determine an alternate use for the buildings. In the most extreme case, the buildings could be leveled. 9:13:54 AM CO-CHAIR HERRON, upon determining no one else wished to testify, closed public testimony. 9:14:12 AM CO-CHAIR MUNOZ moved to report CSHB 161, Version 26-LS0605\T, Cook, 3/11/09, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 161(CRA) was reported from the House Community and Regional Affairs Standing Committee.