HB 120-PUPIL TRANSPORTATION FUNDING  8:04:28 AM CHAIR GATTIS announced that the first order of business would be HOUSE BILL NO. 120 "An Act adjusting pupil transportation funding; and providing for an effective date." 8:04:30 AM ERICK CORDERO-GIORGANA, Staff, Representative Lynn Gattis, Alaska State Legislature, stated the bill, HB 120, contains an adjustment to the consumer price index (CPI) on pupil transportation for school districts. The reason for the bill is to ensure that school districts don't need to use instructional funding for pupil transportation. Historically, the funding for pupil transportation has been derived from funding outside the instructional funding. In 2012, Senate Bill 182, [27th Legislature], recalibrated the amount of funds school districts received for pupil transportation. That bill included a CPI to help ensure that school districts could cover the full amounts of the contracts. However, the final version of the bill reduced the annual CPI adjustment to a 1.5 percent inflationary adjustment for 2014 and 2015. Thus funding would revert back to a level requiring use of instructional funds to fund pupil transportation. This bill would bring back the full adjustment so school districts would not need to spend instructional funds for pupil transportation. MR. CORDERO-GIORGANA explained that Senate Bill 182 also included language to allow the EED to help school districts. He read proposed AS 14.09.010(d), as follows: The department shall adopt regulations that provide for oversight of and support to school districts in achieving a safe and cost-effective student transportation system. The regulations must include a requirement for contract terms of not less than three years, if feasible, standardized conditions and bid periods, and standards that ensure cost efficiencies and exclusions. MR. CORDERO-GIORGANA said he reviewed the history of pupil transportation and discovered that prior to 2004 the department had a larger role. In 2004, individual school districts were negotiating their contracts for pupil transportation but it wasn't effective to do so. At the time, the Senate Education committee included the language to allow the department to take on a larger role and to ensure the pupil transportation reimbursement program will pay, as intended, to safely transport students between home and school. 8:07:54 AM REPRESENTATIVE P. WILSON asked whether school districts were aware at the time they finalized the contracts that the contracts did not include adjustments to the consumer price index (CPI). She further asked why the school districts would do so since it was not a state policy. 8:08:54 AM REPRESENTATIVE GATTIS suggested this question should be held for the school districts. 8:09:29 AM REPRESENTATIVE SEATON noted that HB 120 puts in place an annual increase, [the CPI], but the bill does not contain a sunset provision. He questioned why a sunset review is not included in the bill. MR. CORDERO-GIORGANA answered that the school districts can come forward with recommendations in 2016 and will promulgate regulations. He understood the EED has hired a consultant to survey the school districts to obtain their recommendations. In the meantime, this bill could still help school districts until the recommendations are finalized. REPRESENTATIVE SEATON asked whether the recommendation could be brought forward with a corresponding sunset date. He asked whether that would be problematic for the bill. 8:11:09 AM ELIZABETH SWEENEY NUDELMAN, Director, School Finance and Facilities Section, Department of Education and Early Development (EED), explained that the bill does not contain a sunset provision, which would be a policy decision by the legislature. She said the EED is amenable to a sunset provision. REPRESENTATIVE SEATON asked when the review would be completed. MS. NUDELMAN suggested that the department will work on this issue over the summer and it would likely be several months before the review would be available. REPRESENTATIVE SEATON asked whether the recommendations are due in 2016. MS. NUDELMAN answered that there is not a specific due date but many contracts span multiple years with the final term year in 2016. After 2016, many school districts will sign new multi- year contracts. REPRESENTATIVE SEATON confirmed dates to be considered, that the school districts would need to know by January 2016. MS. NUDELMAN confirmed the date for the 2016 contract. 8:13:16 AM REPRESENTATIVE DRUMMOND remarked that the Anchorage School District (ASD) spent years coordinating their contracts in order to achieve efficiencies. She asked whether the EED would research the history of the funding, including using the Anchorage system as a contract model. MS. NUDELMAN responded that the EED will review and will work to have the major contracts on the same cycle. She agreed that the state has grappled with this in the past. She commented that this is a good piece to consider in terms of restraining costs. She suggested that historically there hasn't been any exact cause and effect for reduced costs. Thus, the department will consider multiple efforts, including aligning contracts, considering other contract language, including items such as how fuel is purchased in an attempt to achieve cost savings. 8:15:18 AM DEENA PARAMO, Ed.D., Superintendent, Matanuska-Susitna Borough School District (MSBSD), read a prepared statement, as follows: I am testifying on behalf of the Matanuska-Susitna Borough School District in support of House Bill 120, an Act adjusting pupil transportation funding. Last session Senate Bill 182, which has been referenced, addressed pupil transportation funding for the fiscal years 2013-2015. However, the year-to-year increases established within this measure were based upon a standardized increase of 1.5 percent for both fiscal years 2014 and 2015. To our knowledge, there are no current transportation contracts within the State of Alaska that are limited to only a 1.5 percent increase in their cost escalation language. In actuality, the vast majority of contracts around the state refer to the annual percent increase in the Anchorage Consumer Price Index for All Urban Consumers (Anchorage CPI-U) as determined by the United States Department of Labor, Bureau of Labor Statistics. The CPI-U has averaged 2.6 percent over the last six years. This creates funding shortfalls that reduce the amount of instructional dollars that can be spent in the classroom. Using current language from [Senate Bill 182], just to give you an example, the MSBSD is preparing to subsidize transportation operations from its general fund by approximately $1.5 million in FY 2014. This, in turn, will impact MSBSD's ability to fund instructional programs and pay for teachers. In fact, a $1.5 million shortfall is the equivalent of 15 teaching positions that would need to be reduced from our general operating budget. While House Bill 120 will not erase the shortfall in its entirety, it will serve to reduce the deficit by approximately $500,000. DR. PARAMO then provided recent contract history for pupil transportation that has been cost prohibitive. For example, during the MSBSD's transportation contract process, when the contract went out to bid only two responses were received and the MSBSD took the lowest bid. However, the next higher bid was for a $10 million increase over five years. Subsequently, the MSBSD suggested to the EED that these contracts were too great for individual school districts to negotiate. In summary, school districts are joining together to align contractual agreements for cost saving purposes. She concurred with Representative Drummond that the MSBSD works to achieve contract dates ending at the same time to potentially allow for statewide bids in order to save money. She emphasized that school districts cannot do this alone any more. 8:18:28 AM REPRESENTATIVE P. WILSON commented that the legislature is no longer able to approve, fund, or sustain expenses that are tied to the CPI due to declining oil revenues. She asked whether the transportation contracts are union contracts. DR. PARAMO answered it would depend on the individual school district; however, the MSBSD's transportation contractor became unionized through the Teamsters. REPRESENTATIVE P. WILSON asked whether the MSBSD noticed any difference in the negotiation process. DR. PARAMO stated her belief that statute requires when a new contract is bid that the actual employees' salaries are twice the minimum wage. She offered to provide the statute reference. She added that companies are not eager to provide transportation in Alaska. The majority of the contracts are for 187 buses with First Student Inc. REPRESENTATIVE P. WILSON related the legislature's frustration since it has traditionally not tied these contracts to the CPI. She asked for further clarification for the reason to have this tied to the CPI. DR. PARAMO answered that the CPI provision is an attempt to achieve a transportation contract. She recalled the regulations require the bus temperature must be maintained at 45 degrees. Thus buses must be outfitted with additional heaters in Alaska. She remarked that of course the school district wants the buses to be warm. In some areas buses must be kept in heated garages in order to maintain daytime temperatures to meet the regulation. Thus individual school districts have some issues. The MSBSD travels greater distances with fewer students than Anchorage. In conclusion, the CPI component is to attract Lower 48 bus companies to provide transportation. REPRESENTATIVE P. WILSON confirmed that contracts are from the Lower 48. DR. PARAMO answered that yes, the larger companies come from the Lower 48. Alaska does not have a company large enough to provide services. One company is out of England, which causes some difficulties. She related that ASD uses Reliant, but everyone else uses First Students, Inc. She understood that the budgets are tight but individual school districts have lost the ability to negotiate and have contracts end at the same time to allow the whole state to negotiate a contract. 8:23:49 AM REPRESENTATIVE SEATON asked whether the multi-year contracts have a built in increase or if they are open ended. DR. PARAMO answered that she believed they were based on the CPI, although the ASD may base it on a set amount. She related her understanding that the problem exists due to the tie to the CPI REPRESENTATIVE SEATON was unsure of the contract provisions. CHAIR GATTIS recapped the question, which is if the bill passes whether it would provide a raise to the bus companies. 8:26:23 AM LUKE FULP, Chief Business Official, Business & Operations, Matanuska-Susitna Borough School District (MSBSD), answered no, if the bill passes it would cover the current costs that the school district has been experiencing. He reiterated that the costs are true costs and the current contract runs through FY 2016. The increase in the contract each year is based on the Anchorage CPI-U. Thus, the contract specifies the Anchorage CPI-U and the MSBSD hopes the state funding contract will match up. 8:27:36 AM REPRESENTATIVE DRUMMOND asked whether the MSBSD runs some of its own district buses as well as contract buses. DR. PARAMO answered that the MSBSD outsources all of its buses; however, the contract is limited to home to school busing and not for other programs. REPRESENTATIVE DRUMMOND related the ASD had about one-third school district owned buses and provided two-thirds service via contracts, although she was uncertain if that has changed. She stated that some school districts operate their own buses in order to provide competition for contracts. 8:29:09 AM TERRY SNYDER spoke in support of HB 120 paraphrasing from a prepared statement, which read [original punctuation provided]: First I want to let you know that Dr. Deena Paramo and Chief Business Officer Luke Fulp through their solid leadership are good stewards of the MatSu School District budget and of the state and taxpayer monies for education. According to a chart in the March meeting packet of the Alaska State Board of Education the district although only required to meet a minimum of 70 percent of its school operating expenditures in the instructional component of the district budget actually invests closer to 80 percent which is one of the highest percentages in the state. If our school district were an Alaskan business that made that kind of monetary reinvestment in their business operations we would consider it a phenomenal successful business strategy. Well I would like to sing praises for our district for doing just that by re-investing every dollar they can in kids. The district has made some painful cuts and great strides at efficiencies over the past several years and they continue to look for cost savings diligently. But they have always put kids first. Providing transportation to 40 plus schools over an area the size of Scotland is a daunting task. Just to get around the Big Lake area buses must travel over roads that over 80% are substandard. Pure and simple transportation is challenging and expensive. Passage of House Bill 120 will allow the Mat Su School District to put approximately $500,000 back into the classroom and toward everyone's goal of successful outcomes for students our future workforce. I would like to thank Valley Representative Gattis for sponsoring the bill. I look forward to the passage of HB 120 out of committee and your continued common sense financial support for obligations to our public educational system. Thank you for allowing my testimony and your service to the committee and state. 8:31:21 AM DAVE JONES, Assistant Superintendent of Operations, Kenai Peninsula Borough School District (KPBSD), spoke in support of HB 120. He said that Senate Bill 182, enacted last year, provided significant relief to the KPBSD. The KPBSD was at the point of subsidizing a little over $2 million from the general fund annually for pupil transportation prior to passage of the bill. He stated the KPBSD's contracts were tied to the Anchorage CPI in its contract; however, if the 1.5 percent CPI adjustment in the bill falls below the Anchorage CPI-U that amount would come from general classroom funding. He offered his understanding of how the CPI factor was introduced into the contract, which was an effort to standardize contracts and provide contract incentives. The goal was to attract multiple vendors from out of state. Historically, single vendors have a monopoly since the company set its own prices. The adjustment to the CPI was added to all contracts to provide vendors with the assurance that if they came to Alaska, they would be compensated for inflation. He described prior KPBSD contracts that did not contain an adjustment for the CPI, which were heavily front-loaded. Ultimately, the contracts cost more without the adjustment to the CPI. 8:34:36 AM REPRESENTATIVE SADDLER asked how accurate the Anchorage CPI-U escalator is as an indication of transportation costs. He understood that the CPI adjustment includes other factors, such as housing costs and food, as well as fuel and space heating. Again, he asked how accurate the Anchorage CPI-U adjustment is in terms of bus costs. MR. JONES answered that the KPBSD bids out the contract as a separate contract. The current vendor is First Student, Inc. and the company employs its drivers as employees. He acknowledged that since wages are involved the cost increases are not limited to fuel increases. Initially, the First Students, Inc. drivers were not part of a union. Referring to a previous comment that a school district might be able to operate buses at a savings, he offered he spent considerable time last year costing out the services. However, once the school district operates the buses, it must also cover employee salaries and benefit costs as well as bus operating costs. Ultimately he found it would not be cheaper for the KPBSD to offer pupil transportation. 8:37:22 AM REPRESENTATIVE SADDLER wondered if the CPI escalator was part of the formula whether any mechanism exists to create downward pressure on the KPBSD's transportation costs. MR. JONES answered that competition would likely arise with multiple vendors, which has not historically happened. He hoped the state would have more leverage by contracting with a multi- national company on a single contract or by issuing multiple contracts simultaneously. He thought this process could attract multiple vendors. REPRESENTATIVE SADDLER asked what provision in the bill would attract multiple bidders. MR. JONES responded that Alaska currently has one vendor besides the multi-national company in Anchorage. This bill would not attract additional vendors on the existing contracts, but it would be a vital aspect of the request for proposal (RFP) process. 8:39:57 AM REPRESENTATIVE SEATON asked how much flexibility the school districts have in determining bus routes and the level of service the district will provide. MR. JONES said the contracts are negotiated to meet the level of service the school district would like to offer. Typically, the RFPs are based on existing routes, which are adjusted each school term based on the number of students. He pointed out Homer considered changing its service last year similar to the Kenai process. This would have reduced the number of buses, but it also affected the timeframe for students and teachers so ultimately changes weren't made. REPRESENTATIVE SEATON understood that the school districts have some scheduling flexibility, but the overall cost is based on the number of buses being used per day. MR. JONES concurred. 8:42:21 AM REPRESENTATIVE P. WILSON asked whether there is any other means to attract additional vendors. MR. JONES reiterated his belief that having the state contract on behalf of all school districts at one time will make a difference. He suggested that bus companies would have an opportunity to provide service in numerous communities, thus the additional volume of services would be an incentive. Additionally, facility arrangements such as providing bus barns would be attractive. He suggested the state could build a bus barn in each district and lease the facilities to contractors, which would remove a major inhibitor. REPRESENTATIVE P. WILSON agreed. She understood incentives would exist if the state negotiated the contracts for transportation and fuel, noting perhaps school districts could also own their buses. She asked whether any vendors would lease buildings if they were available. MR. JONES answered that leasing the buildings could be one aspect of the RFP. REPRESENTATIVE DRUMMOND reported that one neighborhood in Anchorage is adjacent to a bus lot so having a building would be an improvement. 8:46:07 AM DAVID MEANS, Director, Administrative Services, Juneau School District (JSD), testified in support of HB 120. He said much of the testimony today highlight the reasons that the JSD supports the bill. He pointed out the JSD has a cost-of-living clause in its contract based on the Anchorage CPI-U. He stated that as this funding runs out the JSD will use instructional funding to support pupil transportation. 8:47:03 AM AMY LUJAN, Executive Director, Alaska Association of School Business Officials (ALASBO), testified in support of HB 120. She reiterated that the organization as a whole supports the bill. The intent of Senate Bill 182 last year was to provide additional pupil transportation funding so instructional funding would not be used to support pupil transportation. Yet, if the CPI adjustment is limited to 1.5 percent, instructional funds would be used. He said using the Anchorage CPI-U adjustment was an effort to standardize contracts. 8:48:16 AM BRUCE JOHNSON, Executive Director, Alaska Council of School Administrators (ACSA), testified in support of HB 120. He said this issue is one that was discussed in a joint position statement resolution that was developed collectively with the business officials, superintendents, and principals. In 2006, a task force brought up multi-year funding and added the CPI inflationary protection for school districts since the districts are required by law to offer pupil transportation. 8:49:01 AM REPRESENTATIVE SEATON asked whether the clause is an adjustment for Anchorage CPI-U for inflation or is it simply an increase. MR. JOHNSON said he wasn't the best person to respond. However, he suggested it would be another thing to consider so if inflation didn't exist, it would fall back. 8:49:45 AM REPRESENTATIVE P. WILSON asked for any suggestions to encourage potential vendors. MR. JOHNSON said the members would like to see an opportunity for competition. It's expensive to operate and mobilize the bus industry. He offered his belief that the larger scale RFP could likely to yield the best, cost effective approach to pupil transportation in Alaska. REPRESENTATIVE P. WILSON asked whether the construction of bus barns would be helpful. MR. JOHNSON suggested that the concept is very good and if it is legal to do so could be built into the statewide bid for providing pupil transportation. 8:51:32 AM CHAIR GATTIS, after first determining no one else wished to testify, closed public testimony on HB 120. 8:51:55 AM REPRESENTATIVE SEATON referred to page 2 of the fiscal note. He asked whether the figures would double or be compounded in the outer years. MS. NUDELMAN explained that the fiscal note uses 2.5 percent as an estimate of the annual CPI. She referred to the final column of page 2 of the fiscal note, entitled "Annual Increase in State Costs." She agreed that the increases are compounded. Thus if the CPI were higher in a given year than the 2.5 percent calculated at $1.9 million, then the cost would be increased. 8:53:18 AM REPRESENTATIVE SADDLER asked for the effect if the impact is limited to two years to allow the department and the school districts to work out regulations and recommendations on how to negotiate transportation deals. He restated his question on whether any downside exists if it is limited to two years. MS. NUDELMAN said she did not envision any immediate effect in the next two years, given the CPI would be in effect and the department would have information for additional discussions in FY 2015-2016. REPRESENTATIVE SADDLER asked whether it is her understanding that if the CPI were to go down by a half or full percent then the transportation costs via contract would also decrease. MS. NUDELMAN responded that she didn't see the language to decrease the amount. She suggested that perhaps the bill sponsor could address that question. 8:54:38 AM CHAIR GATTIS said she would not have any problem with an increase or a decrease. She welcomed an amendment. REPRESENTATIVE SADDLER referred to page 1, line 5, which read, " ... shall be adjusted annually on October 1 according to changes in the Consumer Price Index ...." He suggested that if it fluctuates up or down it could be adjusted. CHAIR GATTIS said she thought it addresses change. 8:55:01 AM REPRESENTATIVE DRUMMOND referred to the fiscal note and expressed concern that the costs appear to be doubling each year. MS. NUDELMAN answered that there are two fiscal notes the way the public education fund operates. One fiscal note has the backup for the K-12 pupil transportation. The second fiscal note places that money in the public education fund. She referred to the calculation on page 2 of the pupil transportation fund fiscal note. In the first year, since 1.5 percent increase is already in current law, the first year increase is calculated at 1 percent or $ 0.7 million, which is shown as the annual increase in state costs on page 2 of the fiscal note from K-12 Support; Pupil Transportation allocation. REPRESENTATIVE SADDLER stated his understanding of how the cost is calculated. In current law, 1.5 percent exists, and raising it 1 percent totals $0.7 million. MS. NUDELMAN responded that in 2015 there is also an existing 1.5 percent increase, so the increase is $0.7 million; however, since it compounds from one year to the next, the final amount is $1.5 million. Thus, the public education funding compounds from one year to the next since what is added into the base one year remains there, but the CPI is increased the next year. She then referred to FY 16, noting the increase is approximately $2 million so adding the totals from FY 14-FY 16 increases totals $3.4 million, which is the cost of the CPI increases in FY 16. To repeat this process for FY 17, the calculation would be $2.5 percent on the existing base and the cumulative total of $5.4 million. She explained that FY 18-FY 19 follow the same methodology. She further explained that considering the 2.5 percent increase just by considering what was added to the base each year, which is $2 million. The process is taking the $2 million, retaining it, and adding the CPI. REPRESENTATIVE DRUMMOND noted the point is that this doesn't remove funding from the classroom for pupil transportation. 8:59:26 AM REPRESENTATIVE SEATON asked for clarification that these are not annual, but cumulative. MS. NUDELMAN agreed that cumulative would be the correct heading for that column, instead of "Annual Increase in State Costs." 9:00:12 AM REPRESENTATIVE SEATON moved to adopt Conceptual Amendment 1 to add a Section 4 to provide a sunset date of January 1, 2016. The purpose of the amendment is to avoid rolling in and rolling out the program, thereby readdressing it each cycle. 9:01:30 AM CHAIR GATTIS suggested checking with other contractors of pupil transportation on the language. 9:02:27 AM REPRESENTATIVE SEATON restated the intent of Conceptual Amendment 1. He explained that a sunset clause is being added for January 1, 2016. This would mean future negotiations wouldn't be "set in stone." He understood the desire is to have a statewide contract, with the state being involved in multi- school districts. CHAIR GATTIS asked whether that January 1, 2016 is plausible and if the date works. MR. FULP responded that January 1, 2016 would get the MSBSD through its contract. The CPI increase from year to year is currently built into the contract terms. He said the sunset would work with the current contract and the sunset time period aligns appropriately for subsequent contracts. CHAIR GATTIS asked whether another date is more appropriate. MR. FULP answered the school fiscal year ends June 30 so June 30, 2016 would also work. REPRESENTATIVE SEATON offered his belief that it is better aligned with the legislative session dates. The adjustment is October 1. He suggested that it is important for the state and the school districts to be aware of the situation. He pointed out it wouldn't affect the bus routes on January 1, but would be in place prior to contract negotiations. He suggested the date could also be October 1, 2015 since the adjustment takes place on that date. 9:07:30 AM REPRESENTATIVE P. WILSON asked about the length of the negotiation period, and whether it would be helpful to have the counts in November. MR. FULP agreed it would be better to have the sunset align with the legislative session and January 1 or earlier would be workable. He said the district would be involved in contract negotiations nearly a year prior to the contract to work through the bid process. It's helpful to work as far out as possible to make sure the contract was in place with acceptable terms. 9:09:12 AM REPRESENTATIVE P. WILSON asked what date would be best. MR. FULP deferred to Dr. Paramo. DR. PARAMO said the date of November 1, 2015 would be good since the pupil counts would be known. 9:10:21 AM REPRESENTATIVE SEATON moved to amend Conceptual Amendment 1, to change the sunset date to November 1, 2015. MR. JONES agreed with the proposed date since the FY 16 escalator would be triggered on October 1. He suggested that the November 1, 2015 date is acceptable. It would be a good incentive for school districts to work together to solve the problem and it would give the school districts and the department an opportunity to consider the full spectrum for the new contract. CHAIR GATTIS said the intent is to help the school districts, but also to align the contract. 9:11:40 AM REPRESENTATIVE SADDLER said he is fundamentally leery of placing inflation-proofing in an education funding formula. The legislature needs flexibility to meet unforeseen circumstances and having that formulaic inflation escalator eliminates that flexibility there is no guarantee that the state's income will rise by 2.5 percent each year. However he understood the situation the sponsor is trying to address with the bill. He said it would give the department an opportunity to let this go forth, which is good. He stated his support for Conceptual Amendment 1 and with the amendment, he can support the bill. He cautioned against legislative finance considering this as support for inflation-proofing for education. 9:12:52 AM REPRESENTATIVE P. WILSON objected for the purpose of discussion. CHAIR GATTIS said the committee agreed with November 1, 2015 as the date the legislature could agree to sunset the proposed statute and to readdress the issue at that time. 9:13:07 AM REPRESENTATIVE P. WILSON removed her objection to Conceptual Amendment 1. There being no further objection, Conceptual Amendment 1 was adopted. 9:13:52 AM REPRESENTATIVE P. WILSON emphasized that the intent of HB 120 is to allow the DEED to consider pupil transportation. First, the state will work to negotiate the pupil transportation contracts. Second, the state will attempt to obtain fuel contracts for pupil transportation at a lower rate. Third, building facilities or bus barns will be considered by the state or the school districts to provide incentives. Finally, the school districts will consider owning the buses. As the bill moves forward, the legislature would need to consider funding for the bus barns so the facilities will be available for contract negotiations. REPRESENTATIVE SEATON recalled a statutory requirement to have the bus temperatures set at 45 degrees. He suggested that perhaps this could also be considered as the measure moves forward since the cost of maintaining a 40 degree bus and a 45 degree bus could have a significant financial impact. 9:16:33 AM REPRESENTATIVE DRUMMOND said that the Municipality of Anchorage (MOA) has a mass transit bus barn. She recalled this facility was built in the 1980s. She suggested this needs to be considered carefully, based on community needs. She offered her belief that the MOA would be delighted to have a bus barn. She pointed out that there are contractor's buses and school district's buses to consider. 9:17:53 AM REPRESENTATIVE REINBOLD moved to report HB 120, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, the CSHB 120(EDC) was reported from the House Education Standing Committee. 9:18:13 AM The committee took an at-ease from 9:18 a.m. to 9:21 a.m.