HOUSE BILL NO. 204 "An Act relating to the State Procurement Code, including the use of small procurement provisions for certain amounts of leased space, the requirement of Alaska business license proof for Alaska bidder and other procurement preferences, the registration of construction contract bidders and offerors, the establishment and maintenance of lists of persons who want to provide supplies or services to the state, state agencies, and state instrumentalities, electronic bids and proposals, small procurements, and writings; and providing for an effective date." 1:21:10 PM VICE-CHAIR ANNA FAIRCLOUGH, SPONSOR, explained the legislation. She pointed out that HB 204 along with the companion bill HB 205 attempted to modernize the state procurement code, streamline procurement processes and change the definition of small procurement. She offered that HB 204 clarified business license requirements for sealed bids and qualifications for the Alaskan bidder's preference. The threshold for small procurements was increased from $50 thousand to $100 thousand and construction procurements were increased to $200 thousand. The bill increased the square footage for small procurements from 3000 to 7000 square feet. Electronic bids and signatures were allowed. The legislation updated the vendor list and enabled the Department of Administration (DOA) to manage the vendor list online. She concluded that the legislation modernized the entire procurement process. VERNON JONES, CHIEF PROCUREMENT OFFICER, DIVISION OF GENERAL SERVICES, DEPARTMENT OF ADMINISTRATION, provided a sectional analysis of HB 204 (copy on file). Section 1: Amends AS 36.30.080(f) Increases the threshold limit for small procurements of leased space from 3,000 square feet to 7,000 square feet, consistent with section 7. Section 2: Amends AS 36.30.110(b) Clarifies Alaska business license requirements for competitive sealed bids and qualification for the Alaska bidder preference. Change would require bidders to show proof of their Alaska Business License prior to award, but would require the license at the time of bid submission in order to qualify for the Alaska bidder preference. Mr. Jones expounded that the department experienced a disproportionate amount of technical disqualification on larger procurement bids. The change was recommended by a legislative audit to remedy the situation. Section 3: Amends AS 36.30.130(a) Eliminates reference to a procurement officer's use of vendor lists, reflecting the repeal of the statute establishing the vendor lists, consistent with section 10. Mr. Jones added that bid requests were noticed online for the public. 1:25:29 PM Mr. Jones continued with the sectional analysis. Section 4: Amends AS 36.30.210(b) Clarifies construction contractor registration requirements, now explicitly requiring registration before award of a contract. Section 5: Amends AS 36.30.210(e) Clarifies Alaska business license requirements for competitive sealed proposals and qualification for the Alaska bidder preference using language consistent with that used in section 2. Section 6: Amends AS 36.30 by adding a new section 36.30.290 Adds a new section allowing an agency to accept electronic bids and proposals. Section 7: Amends AS 36.30.320(a) Increases the threshold under which a state agency may use informal procurement process to $100,000 for goods and professional services, to $200,000 for construction, and 7,000 square feet for lease of space. Section 8: Amends AS 36.30.655 Eliminates reference to the removal of debarred or suspended persons from vendor lists, reflecting the repeal of a law establishing the vendor lists, consistent with section 10. Section 9: Amends AS 36.30.990 Adds new definitions for "in writing" and "written." Section 10: Repeals statute establishing the vendor list. Section 11: Amends the uncodified law of the State of Alaska Clarifies the application of the procurement act to pending solicitations during transition period. Section 12: Effective Date Language making the procurement act effective immediately. Representative Gara remarked that he liked the bill. He questioned Section 5. He wanted to tighten the Alaska bidder preference. He felt that it was too easy for non- residents to procure bids. Vice-chair Fairclough replied that HB 204 did not attempt to change the bidder preference. She communicated that restrictions were legally challenged in the past and failed. The legal precedent maintained what latitude did exist in state statute. She revealed how Section 5 related to the Alaska bidders preference. The bidder's preference process was frequently appealed and challenged because of ambiguity in the language on procurement. Both Section 2 and Section 5 provided explicit language that an Alaska business license was required at the time of bid submission. She noted that the change does address Representative Gara's concern. The provision at least ensured an Alaska residential preference on the opening bid. 1:29:51 PM Representative Gara commented on the legal issue. He informed the committee that interstate commerce laws precluded that the state cannot require residency in Alaska for more than a year. A residential bidder preference was legal up to one year. He wanted to research a way to ensure that the Alaskan presence [residency] was real and not a "shell presence." Mr. Jones outlined the existing requisite for the Alaska bidder preference. The statute required that a place of business in Alaska was operating and staffed six months prior to the bid opening. A shell presence was illegal. Representative Gara argued that the problem existed. An outside company can open a fake office and pay an employee to appear busy. Mr. Jones countered that tightening the regulations would hurt honest businesses. Further regulatory measures could eliminate small business or large corporations from the competitive bid process. Co-Chair Stoltze noted flaws in Alaska's procurement process. He gave the example of a Colorado company that was considered an Alaskan business because its previous business in the state counted as a presence. The company acquired an Alaskan bidder's preference over an Arizona firm. Mr. Jones confirmed that the firm did qualify because of their presence in the state even though the work was performed out of state. 1:32:52 PM Representative Guttenberg cited Sections 2 and 5 of the legislation. He queried the language change from "must" to "shall." Mr. Jones replied that the change in semantics did not make a difference. Representative Costello asked whether Department of Commerce, Community and Economic Development (DCCED) had the ability to share their business license data base with DOA. Mr. Jones answered in the affirmative. He related that DOA often referenced DCCED's data base when verifying qualifications. Representative Costello referred to Section 7. She asked what percentage of projects would fall under the lower limit of small procurements. Mr. Jones voiced that the question was difficult to answer due to lack of an automated procurement system to tally the numbers. He explained the logic behind the changes in small procurements. The previous raise in dollar limits occurred in the 1990's. The changes in small procurement afforded procurement officials more time to deal with higher risk procurements and less time on simple procurements. The department hoped that by raising the threshold and placing more procurement in the small procurement realm small and rural business would benefit. The small procurement realm offered small business a streamlined process and easier access to state bids. 1:36:00 PM Representative Costello cited the repeal of the vendor list in Section 10. She wondered what the vendor list was and what effect removal would provide the process. Mr. Jones explained that vendor lists were used by DOA to notify bids to interested parties. The state law mandated DOA to maintain vendor lists. The vendor list became outmoded since the onset of electronic media. Currently, the state provided public notice of bids on its online public notice website. The online tool was convenient and free. The public learned where to find the information online. The department abandoned expensive newspaper notices and mailings. He did not believe the lists were useful any longer. Representative Neuman questioned how the changes to small procurements ensured that the process remained competitive for the state. Mr. Jones revealed that the state was required to obtain a minimum of three informal bids. The change removed the more formal competitive bidding requirements. He assured that minimum levels of competition remained in statue for small procurements. Co-Chair Stoltze OPENED and CLOSED public testimony. Co-Chair Stoltze noted the zero fiscal note for DOA. HOUSE BILL NO. 205 "An Act relating to state and public entity procurement, including the State Procurement Code, procurement preferences, and contract awards; relating to the meaning of 'Alaska bidder'; and providing for an effective date." REPRESENTATIVE ANNA FAIRCLOUGH, SPONSOR, highlighted the legislation. She explained that HB 205 endeavored to provide uniformity to the application of preferences through statutory changes in the procurement code. Currently, preferences do not contain the same language so they must be applied differently. It also clarified which preferences are cumulative and those that may not be combined. The legislation consolidated the procurement preferences under one statute. The bill eliminated the seldom used preference for employers of the disabled. The changes streamlined the procurement code to ensure consistent application of the law which resulted in a clear and efficient procurement process. Mr. Jones emphasized that HB 205 made preferences more consistent and organized into a single section of statute. He related that the current process was complex. The preferences were diffused through statute with different formulas and applications. A three-hour class was provided for procurement employees to learn how to apply the preferences. He noted that HB 205 did not eliminate the Alaska offers preference. 1:42:07 PM Mr. Jones pointed out that the biggest change to statute was Section 11, which consolidated all preferences into a new section of statue. All of the preferences would transfer into the new section except for the preference related to the disabled. The department viewed it as a duplicate preference. He identified two other preferences that benefit the disabled. He noted that the section authorized use of alternative verification for the disabled who qualify for a preference. Under current law the disabled must provide letters from doctors. The requirement placed undue burden on the disabled. Vice-chair Fairclough emphasized that the controversial offers preference contained in the legislation in the past was not included in HB 205. She stated that it was not her intention to offer the preference as an amendment. Her intention was to provide a better working environment and more competition and savings for the state. She noted that the Alaska State Chamber of Commerce supported both HB 204 and HB 205 and read the contents of a handwritten letter: Dear Vice-chair Fairclough: The Alaska State Chamber of Commerce supports HB 204 and HB 205 as important steps in reforming the procurement code. Thanks for working with us on this. Rachael Petro Executive Director Vice-chair Fairclough noted that she did a substantial amount of outreach before she offered the legislation. 1:46:10 PM Representative Costello queried what organizations supported the legislation. Vice-chair Fairclough responded that her staff contacted the Alaska State Chamber of Commerce which redirected the request to all local chambers. Her staff contacted Anchorage homebuilders and any homebuilding association, the Associated General Contractors, as well as any entities that opposed or expressed interest in the previous versions of the legislation. She added that the legislation was vetted to all of the interested and contacted parties. Representative Costello questioned whether the administration requested the changes or if she initiated the legislation. Vice-chair Fairclough responded that the legislation was her own idea. She expounded that she was working on the Alaska veteran's preference when she discovered inconsistencies in the preference language. She began discussions with the department and learned of DOA's challenges with the preferences. She offered the complex legislation because she wanted to create efficiencies in the code, save procurement officer's time, and provide opportunities for competitive bids in smaller communities. Representative Neuman shared concerns with Sections 2 and 3 of HB 205. He noted that the legislation provided a 7 percent preference for agricultural products purchased in the state and deleted language that specified the agricultural products shall be of like quality compared to agricultural products harvested outside the state. He maintained that Alaskan suppliers produced superior quality products. He supported the purchase of Alaskan agricultural products by state agencies and schools. He felt that quality was an inducement to buy locally. 1:50:33 PM Representative Neuman worried that removing the language regarding "comparable quality" would hurt Alaskan producers. Mr. Jones indicated the change in language was specifically meant to make the application of the preference simpler and would not change how the products were graded. He judged that changing the language would remove an impediment currently in place that mandated comparison of Alaska produce to outside produce. He added that the current agricultural preference was cumbersome. In order to calculate the preference the state went through a bidding process, applied the Alaska bidder preference and found the lowest bid, took 7 percent of that bid and subtracted that number from the bid that offered the Alaskan produce. The change would allow for a simple 7 percent deduction. He deemed that the change was easier to understand and apply, and would remove an impediment. Representative Neuman argued that the problem was where the quality of the produce was measured. The outside produce was graded and compared at point of origin. The produce lost quality and vitamin content in transit to Alaska. Alaskan agricultural products cannot compete against the outside produce with the existing process. In reality Alaskan produce was the better product measuring quality and nutritional value. 1:54:15 PM Co-Chair Stoltze asked whether Vice-chair Fairclough would object to a "friendly" floor amendment on the issue if warranted. Vice-chair Fairclough reminded that the preference guaranteed 7 percent instead of up to 7 percent. She requested confirmation that the 7 percent agricultural preference could couple with a 12 percent "assurity" preference for agricultural products. Mr. Jones confirmed that the agriculture preferences accumulated. Representative Neuman noted that price was not the only factor. He recognized the important multiplier effect and substantial benefit to the state by purchasing Alaska products. He contended that Alaska cannot compete with outside suppliers because of economies of scale. The outside supplier was aware of the 7 percent preference and was able to underbid Alaskan suppliers. The bidder's preference did not consider the significant value to the state when large state institutions buy locally. He exemplified that the Department of Corrections (DOC) purchased large quantities of agricultural products but are often able to purchase large quantities from outside buyers at greater than 7 percent savings compared to in-state products. He was uncertain how to rectify the situation with preferences. He reported that many agency commissioners agreed with his assessment. He asked if the legislation was an opportunity to correct the problem. Mr. Jones agreed the problem was difficult. He noted that the department was focused on bottom line costs. He suggested an increase in the agricultural preference but was not sure that was the answer. Representative Neuman believed that a solution was authorizing commissioners to purchase in-state if the purchase provided substantial benefit to the state. Mr. Jones related that he had dealt personally with the issue through several administrations. He reminded the committee that HB 205 raised the small procurement threshold. He informed that a state agency could simply call a small procurement from three Alaskan vendors and ensure buying in-state. He thought the problem was more complicated than simply preference. Market issues, timing, and the way the state purchased products contributed to the problem. He exemplified that DOC held contracts with large firms that purchased agriculture products. The purchasers were looking for year around consistency and reliability. Alaskan suppliers cannot provide that. 2:00:19 PM Representative Gara supported the agricultural preference. He was concerned about the size of some of the preferences. He pointed to Page 5, Line 11, and asked where the 15 percent preference applied. He believed in the state accepting the extra costs of a 5 to 7 percent preference for the benefit but thought 15 percent was excessive. Mr. Jones explained that the preference benefited employment programs that employ people with developmental disabilities. Representative Gara established that the entire section dealt with vocational programs for the disabled. Mr. Jones agreed. Representative Gara thought the preference was justified. He asked if the state was losing the blind person's preference for vending machines. Mr. Jones replied that was a federal program not affected by the bill. Representative Gara turned to Page 8, line 13, which cited cumulative preferences. He asked which preferences were cumulative and what the cumulative sum was. Mr. Jones answered that in general, a bidder that qualified for two similar preferences was prohibited from receiving both. He exemplified that someone cannot be a disabled bidder and receive a preference for an employment program or a bidder cannot receive an agricultural preference and also obtain a timber preference. He added that agricultural, timber, and fisheries products cannot be combined. Disability preferences cannot be combined. He exemplified that someone can qualify for an Alaskan bidders preference or Alaskan products preference and also be a disabled bidder. A bidder could have an Alaskan product preference but could not combine an agricultural preference. 2:04:09 PM Representative Gara asked if cumulative language existed in current statute. Mr. Jones responded in the affirmative. He offered to provide a complete list. He reiterated that HB 205 did not change how preferences accumulated. Co-Chair Stoltze OPENED and CLOSED public testimony. 2:05:44 PM AT EASE 2:06:09 PM RECONVENED Vice-chair Fairclough MOVED to report HB 204 out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. HB 204 was REPORTED out of Committee with a "do pass" recommendation and with attached previously publish fiscal note: FN1, ADM. Vice-chair Fairclough MOVED to report HB 205 out of Committee with individual recommendations and the accompanying fiscal note. Representative Doogan OBJECTED to state that he commended the work and did not want to see the bills again. Representative Joule agreed. There being NO further OBJECTION, it was so ordered. HB 205 was REPORTED out of Committee with a "do pass" recommendation and with attached previously published fiscal note: FN1, ADM. 2:11:14 PM AT EASE 2:22:45 PM RECONVENED