MINUTES SENATE FINANCE COMMITTEE April 12, 1993 9:20 a.m. TAPES SFC-93, #57, Side 1 (337-end) SFC-93, #57, Side 1 (575-end) SFC-93, #59, Side 1 (000-496) CALL TO ORDER Senator Drue Pearce, Co-chair, convened the meeting at approximately 9:20 a.m. PRESENT In addition to Co-chair Pearce, Senators Kelly, Kerttula, Rieger, and Sharp were present. Co-chair Frank arrived soon after the meeting began. Senator Jacko arrived as the meeting was in progress. ALSO ATTENDING: Senator Robin Taylor; Senator Randy Phillips; Randy Welker, Legislative Auditor, Legislative Audit Division; Shelby Stastny, Director, Office of Management and Budget; Jack Fargnoli, Office of Management and Budget; Gary Anderson, Office of Management and Budget; Dugan Petty, Director, General Services, Dept. of Administration; Mark Hickey, lobbyist for the Alaska Railroad Corporation; David Skidmore, aide to Senator Frank; and aides to committee members and other members of the legislature. SUMMARY INFORMATION SB 76 - CHARITABLE GAMING RESTRICTIONS Scheduled, but not heard during the course of this meeting. SB 88 - CAPITAL PROJECT GRANTS Testimony was presented by Senator Randy Phillips and Robin Taylor, Shelby Stastny, and Jack Fargnoli. Two amendments were adopted. The bill was subsequently HELD in committee. SB 128 - LEGISLATIVE AUDITS Testimony was provided by Senator Randy Phillips, Randy Welker, and Gary Anderson. CSSB 128 (STA) was subsequently REPORTED OUT of committee without recommendation, accompanied by a zero fiscal note from Senate State Affairs Committee for the Office of the Governor. [This action was subsequently rescinded. See meetings of 4/13/93 and 4/14/93.] SB 129 - POWERS OF CHIEF PROCUREMENT OFFICER Testimony was presented by Senator Randy Phillips, Randy Welker, and Dugan Petty. The bill was subsequently HELD in committee. SB 148 - ALASKA RAILROAD CORPORATION Testimony was presented by David Skidmore and Mark Hickey. CSSB 148 (Finance) ADOPTED as a working document. The bill was subsequently HELD in committee. SB 76 CHARITABLE GAMING RESTRICTIONS Co-chair Pearce announced that SB 76 would not be heard at the present meeting. She advised that the committee was seeking opinions from both the Dept. of Law and Legislative Legal Services regarding sections relating to the Alaska Public Radio Network. (Co-chair Frank arrived at the meeting at this time.) SENATE BILL NO. 88 An Act relating to grants to municipalities, named recipients, and unincorporated communities; establishing capital project matching grant programs for municipalities and unincorporated communities; establishing a local share requirement for capital project grants to municipalities, named recipients, and unincorporated communities; and providing for an effective date. Co-chair Pearce directed that SB 88 be brought on for discussion, noted a prior committee hearing on the legislation, and referenced proposed amendments. SENATOR ROBIN TAYLOR and SHELBY STASTNY, Director, Office of Management and Budget, came before committee. Co-chair Pearce directed attention to an amendment by Senator Taylor and asked that members designate it Amendment No. 2. Senator Taylor explained that instead of merely utilizing the population base and differentiating on a percentile basis what each community should pay toward capital grants, the amendment factors in actual community ability to pay. The Senator explained that it would not be proper for a community such as Wrangell, with a mill levy of $73.0 to $75.0, to be classed with Anchorage, which has a tax base of $10 million, and the North Slope Borough with $12.3 billion. Those with a greater tax base should pay a greater percentage. Senator Taylor next referenced a spread sheet attached to Amendment No. 2, saying it presents figures for additional dollars driven into the formula as a result of the proposed amendment. When queried by Co-chair Pearce for his comments, Mr. Stastny noted that when the capital matching grant program was originally introduced by the administration, two years ago, it included an "ability to pay" concept. That formula was removed from the bill prior to introduction in the current legislature. The administration has no objection to the concept or the amendment. Senator Kerttula MOVED for adoption of Amendment No. 2. No objection having been raised, Amendment No. 2 was ADOPTED. Co-chair Pearce next directed attention to Amendment No. 1. She explained that it results from correspondence from Anchorage Mayor, Tom Fink. That correspondence speaks to opposition to increase of the match ratio from 70/30 to 50/50. Senator Rieger MOVED for adoption of Amendment No. 1. Senator Kelly OBJECTED and inquired concerning percentage changes. Senator Kerttula noted that population is not necessarily a good factor on which to base grants. Ability to pay based on the tax base is a better indicator. He then questioned whether communities aside from those with large tax bases could easily accumulate matching funds, and he voiced support for the amendment. Senator Rieger pointed to need to extend the proposed amendment beyond July 1, 1994, and indicated need for an amendment to Amendment No. 1, deleting most of subsection (1) at page 11, lines 1 and 2. The only language from the subsection to be retained should be "the local share percentage is." Co-chair Pearce concurred. Senator Rieger then MOVED for adoption of the amendment to Amendment No. 1. Senator Kelly again OBJECTED. He suggested that if municipalities are to be weaned from state dollars, the 50/50 match is a better plan for the state general fund. Senator Kelly then REMOVED his OBJECTION. No further objection having been raised, the amendment to Amendment No. 1 was ADOPTED. Co-chair Frank noted that passage of the proposed bill would not prohibit the legislature from making designated grants. (Senator Jacko arrived at the meeting at this time.) Senator Kelly stressed that grant funding would go a lot further if the match is 50/50 rather than 70/30. Senator Rieger concurred in comments by Co-chair Frank that even with the proposed matching grant program, designated grants would continue to be made. He then voiced his belief that the higher the local match requirement, the greater the disparity between municipalities favored by the direct grant approach and those not favored by appropriations flowing through a mechanism similar to the proposed bill. He voiced skepticism as to how the program is likely to work. Some communities will be funded 100%, while others will match 70/30. A 50/50 match would increase that disparity. Co-chair Pearce directed that the roll be called on adoption of Amendment No. 1: YEAS: Kerttula, Rieger, Jacko, Frank, Pearce NAYS: Sharp, Kelly The motion CARRIED on a vote of 5 to 2, and Amendment No. 1 was ADOPTED. Co-chairman Pearce called for additional amendments. None were offered. She then directed that Amendments 1 and 2 be incorporated within a draft CSSB 88 (Finance). The Co-chair next referenced two fiscal notes from the Dept. of Community and Regional Affairs. The first seeks an accounting clerk III and a grant administrator III as well as associated computer equipment. An additional $10.0 is sought, on the second note, for regional offices. A note from the Dept. of Administration requests four additional positions with associated travel, contractual, and equipment. The Co-chair expressed concern regarding the magnitude of the fiscal notes. She then questioned whether the grant process within the proposed bill would be that much more onerous than current capital grants. Shelby Stastny again came before committee accompanied by JACK FARGNOLI, Office of Management and Budget. Mr. Fargnoli explained that meetings with Dept. of Administration staff indicate that past budget reductions have left the department only one person to deal with municipal grants under Title 37. There are no auditors, and accounting clerks serve a number of sections. The proposed bill would impose a new work load on the department. In addition, it calls for extension of matching requirements to existing programs. Individual accounts will have to be set up for all municipalities under the matching grants portion of the bill, and verifications and determinations will be required for match criteria under the existing municipal grant program. That creates need for an auditor. The department does not have one. An accounting clerk would also be needed to split his or her time between the two programs. End, SFC-93, #57, Side 1 Begin, SFC-93, #57, Side 2 Mr. Fargnoli attested to understaffing at both accounting and supervisory levels. Co-chair Pearce questioned need for involvement of both the Dept. of Administration and Dept. of Community and Regional Affairs. Mr. Fargnoli explained that both department are utilized under the present program. Efficiencies are to be gained by having the new capital matching grants program parallel the existing structure. Mr. Stastny commented that one of the programs functions as a matching grants program under municipal assistance while the other issues from revenue sharing. Senator Kerttula suggested that the two could be combined. In response to a question from Co-chair Pearce, Mr. Fargnoli explained that the Dept. of Administration would be administering the new matching grants, created by SB 88, for municipalities as well as extension of matching requirements to the existing municipal grant program. The Dept. of Community and Regional Affairs would provide parallel administration for unincorporated communities. Discussion followed between the Co-chair and Mr. Fargnoli regarding existing staff at both departments. Mr. Fargnoli noted considerable difference between Dept. of Administration dealings with municipalities having institutional governments and interaction of the Dept. of Community and Regional Affairs with unincorporated communities that do not have access to personnel, financial resources for development of grant proposals, financial planning, economic development, etc. Co-chair Pearce suggested that, with that in mind, one would expect the fiscal note from the Dept. of Community and Regional Affairs to be larger than that from the Dept. of Administration. However, the reverse is true. Mr. Fargnoli acknowledged that were the programs starting from scratch, the request from the Dept. of Community and Regional Affairs would be the larger. At the present time, Dept. of Administration staff is maxed out in terms of what it can handle. An integer increase in the number of positions is thus needed. Co-chair Pearce queried members regarding action on the fiscal notes. Senator Kelly questioned need for staff increases at the Dept. of Administration. Co-chair Pearce requested that Senator Jacko and Co-chair Frank, chairmen of the respective budget subcommittees, review the notes and report back to committee at the next meeting. She then directed that the bill be HELD in committee pending that review and preparation of Senate Finance Committee fiscal notes for the departments, if necessary. Discussion followed between Co-chair Frank and Mr. Stastny concerning the flow of funding to nonprofit groups and percentage allowances for administrative costs. Mr. Stastny noted that the 10% administrative allowance was incorporated within the bill by Senator Phillips when the legislation was before Senate Community and Regional Affairs. The intent was to prohibit municipalities from charging more than 10%. Co-chair Frank questioned whether an administrative fee was appropriate in situations where a municipality merely acts as a pass through from the state to a nonprofit or other grantee. SENATOR RANDY PHILLIPS came before committee and cited an example where municipal engineering and administrative costs on a highway project within his district utilized $450.0 of the $1.1 million project. Both Senator Kelly and Co-chair Frank voiced need to establish the 10% administrative fee as the maximum rather than the rule. Further discussion of engineering/architectural and administrative costs followed. Co-chair Frank voiced need to distinguish between pass-through situations and true administrative services. Co-chair Pearce asked that Co- chair Frank and staff work on proposed amendments. Senator Kelly suggested that the committee provide guidelines but leave the ultimate decision to administrators of individual grants. Co-chair Frank concurred in the need to provide more direction. Co-chair Pearce suggested that a letter of intent might be appropriate. Senator Kerttula inquired about savings that might derive from combining the grant program within a single department rather than the present division between two agencies. Mr. Stastny agreed that perhaps some savings could be achieved. He questioned, however, whether the Dept. of Community and Regional Affairs has authority to make grants to municipalities. Co-chair Frank asked how legislative designation portions of the bill would work. Mr. Stastny acknowledged that the provisions represent a change in the current bill over the one introduced in the past legislature. He then explained that communities would be required to submit projects to the Office of Management and Budget for inclusion within the budget. The legislature would either approve and fund or deny approval as it reviews and acts on the capital budget. Senator Kelly asked if the administration would only include 70/30 projects rather than 100% matches in the program. Mr. Stastny said that is how the capital budget had evolved in the past. The legislature then adds direct grants in the process of its budget review. Water and sewer projects within the Dept. of Environmental Conservation and school projects in the Dept. of Education would be requested per the current process. Further discussion followed between Co-chair Frank and Mr. Stastny concerning inclusion of community projects in priority order. Mr. Stastny explained that legal opinion indicates that the legislation cannot direct the Governor to fund projects in priority order. The bill thus states that the Governor should present them by priority or submit information explaining why they are not so listed. The Office of Management and Budget expects that they will be in priority order. Co-chair Pearce noted the newly enacted requirement that legislation impacting municipalities carry a municipal fiscal note. The note from the Dept. of Community and Regional Affairs appears to be a better fit for the appropriation bill rather than SB 88. She then asked that the department provide a municipal fiscal note indicating the percentage impact on each community rather than the specific $65 million dollar amount set forth on the present note. Co-chair Pearce directed that the meeting be briefly recessed prior to proceeding to discussion of SB 128. RECESS - 10:00 A.M. RECONVENE - 10:05 A.M. SENATE BILL NO. 128 An Act relating to legislative audits. Co-chair Pearce directed that SB 128 be brought before committee, referenced the Senate State Affairs committee substitute for the bill, and noted the presence of Senator Phillips, the Legislative Auditor, and staff from the Office of Management and Budget. SENATOR RANDY PHILLIPS again came before committee. He explained that the bill was introduced at the request of the Legislative Budget and Audit Committee. It provides systematic follow-up procedures for recommendations made by the Legislative Auditor. In the past, when audits were conducted, there was no formal follow-up to ensure that recommendations for accounting or procedural improvements were effected. RANDY WELKER, Legislative Auditor, next came before committee. He explained that the legislation provides recognition that ultimate responsibility for implementation of audit recommendations rests with the administration. To enhance implementation, a structured follow-up processes is needed. The proposed bill would effect that process. It allows the Legislative Budget and Audit Committee to select which items warrant follow-up. It would then become OMB's responsibility to undertake follow-up on those items, resolve differences of opinion between the agency and the Legislative Audit Division, and report the status of the recommendations to LBA. Senator Rieger noted language indicating that the committee could direct the Office of Management and Budget to continue to monitor implementation. He then asked if the Legislative Budget and Audit Committee actually has that power. Mr. Welker explained that some audit recommendations may take time to implement. The foregoing language recognizes that "not everything can be satisfied in a one-year time . . . ." The Office of Management and Budget is thus to continue monitoring as the recommendation is implemented. Senator Rieger noted that direction from committee would not carry the force of law. Mr. Welker concurred. At the request of Co-chair Pearce, Mr. Welker provided a step-by-step description of action under various sections of the bill, using recommendations from the recent audit of the Division of Elections as an example. SHELBY STASTNY again came before committee accompanied by GARY ANDERSON, Director, Division of Audit and Management Services, Office of Management and Budget, came before committee. Mr. Anderson said that the bill presents difficulties for OMB. He explained that, on one hand, the office is sympathetic to legislative concerns. The problem is that the legislation requires the Office of Management and Budget to perform follow-up functions. OMB is approximately one-third the size of the Legislative Audit Division. Major resources would have to be devoted to the effort. The executive branch already performs follow-up on audits conducted by the administration. Mr. Anderson then suggested that Legislative Audit perform follow-up procedures for its audits as well. He noted that many audits are complex. For OMB to follow up on recommendations made by another branch of government would be difficult. OMB staff would need access to Legislative Audit work papers and have to develop an understanding of the recommendations to provide implementation oversight. That is not the most efficient or effective means of follow up. In his closing comments, Mr. Anderson expressed OMB willingness to work with Legislative Audit on oversight. Mr. Stastny concurred in remarks by Mr. Anderson. He said an even more overriding concern involves the issue of separation of powers. There is a reason for separation of legislative functions from those of the administration. Senator Phillips said he had not before been made aware of OMB concerns. Co-chair Pearce called for additional questions or testimony relating to the legislation. She then queried members on disposition of the bill. Senator Rieger MOVED, for the purpose of discussion, that SB 128 (STA) pass from committee. Co-chair Frank OBJECTED, seeking clarification of concerns relating to separation of powers. Senator Phillips said that he foresaw no territorial domain problems occasioned by the bill. He noted that the legislature establishes public policy, and the burden is upon the executive branch to execute that policy. End, SFC-93, #57, Side 2 Begin, SFC-93, #59, Side 1 Co-chair Frank WITHDREW his OBJECTION. CSSB 128 (STA) was REPORTED OUT of committee with a zero Senate State Affairs Committee fiscal note for the Office of the Governor/OMB. Co-chair Pearce and Senators Jacko, Rieger, Sharp, and Kerttula signed the committee report "no rec." Co-chair Frank signed "do pass." [NOTE - The foregoing action on CSSB 128 (STA) was rescinded 4/13/93. See committee minutes of 4/13/93 and 4/14/93] SENATE BILL NO. 129 An Act relating to the state's chief procurement officer. Co-chair Pearce directed that SB 129 be brought on for discussion. SENATOR RANDY PHILLIPS again came before committee. He explained that the legislation was introduced at the request of the Legislative Budget and Audit Committee. It responds to past problems surrounding issuance of an $800.0 sole-source contract. RANDY WELKER, Legislative Auditor, concurred in comments regarding the noted sole-source contract, but he advised that it is not the only example of an improperly entered contract. In examining the root of the problem, it was determined that when the procurement code was established, the chief procurement officer was envisioned as an autonomous position with statutory protection. The position was to act independently of agencies doing the contracting in the approval or denial of contracts. That position has not functioned as envisioned. The proposed bill provides more autonomy by changing the position to a six-year term to ensure overlap from one administration to another. It further provides statutory salary protection to deter an administration from retaliating against the procurement officer by salary manipulation. For sole-source contracts, the chief procurement officer is required to independently examine the facts and determine whether the procurement is eligible for sole-source. At the present time, requests for sole-source contracts are reviewed by the procurement officer and approved based only on information provided by the agency seeking the procurement. In response to an inquiry from Senator Kerttula, Mr. Welker said that, per the procurement code, the chief procurement officer can only be removed for cause. Since cause is not necessarily defined, that aspect remains in question. DUGAN PETTY, Director, Division of General Services, Dept. of Administration, came before committee, voicing support for the bill. He said the department believes the bill will improve state procurement. Several sections seek to improve efficiencies and standardize the treatment of procurements. The department supports those streamlining efforts. Increased effort and review required of the chief procurement officer are offset by increased accountability and enhanced integrity of the process. Mr. Petty directed attention to Sec. 5 and registered concern regarding emergency procurements. He cited current statutory provisions and noted that revisions in the proposed bill would remove an agency procurement officer from making that determination and vest it totally in the chief procurement officer. It allows the chief procurement officer to delegate that duty only when he or she does not have sufficient time to make such a determination. Mr. Petty voiced his understanding that the department may interpret Sec. 5 broadly enough to allow it to encompass not only the chief procurement officer's written determination, but the process of gathering and submitting facts. If that could not be done within a 72-hour period, the power of determination would be delegated, in advance, to the agency that might incur the emergency. Mr. Petty said the department would have no objection to Section 5, if the foregoing represents an acceptable interpretation. Mr. Welker subsequently concurred in Mr. Petty's interpretation of Section 5 and voiced hope that the department would develop regulations further defining procedures. Senator Rieger directed attention of Section 9 and inquired concerning provisions exempting contracts between the Dept. of Law and contract attorneys from provisions of the procurement code. Mr. Petty said that a statewide procurement audit recommended that selection and contracts for special prosecutors be exempted from the procurement process. Issues surrounding these arrangements are often confidential. A public procurement process negates that confidentiality. Discussion followed between Senator Rieger and Mr. Petty regarding cost-reimbursement contracts. Mr. Petty noted that a variety of cost-reimbursement contracts are legitimate, effective contract tools. The administration feels agencies should have the latitude to use the form of contract that most effectively meets needs. The proposed change eliminates need for advance determination that a cost-reimbursement contract would be the most efficient means of contracting. Co-chair Pearce called for additional questions or testimony on the bill. None were forthcoming. Co-chair Frank stated need to offer an amendment relating to the leasing budget within the Dept. of Administration. He referenced department complaints that the division does not have the ability to renegotiate existing leases. That portion of the procurement system fails to operate properly. He explained that he had been working with both the department and bill drafters to develop language that would allow the department to renegotiate with an existing lessor. The initial reaction from the department has been that a savings would occur. Co-chair Frank asked that the proposed bill be HELD in committee pending development of that language. Senator Phillips advised that he had no problem with inclusion of that effort within the bill. Senator Kerttula asked that renegotiation provisions also apply to the legislature. SENATE BILL NO. 148 An Act relating to the Alaska Railroad Corporation; and providing for an effective date. Co-chair Pearce directed that SB 148 be brought on for discussion and referenced a draft CSSB 148 (Finance) (8- LS0583\X, Utermohle 4/12/93). Co-chair Frank MOVED for adoption of CSSB 148 (Finance) as a working document. No objection having been raised, CSSB 148 (Finance) was ADOPTED. DAVID SKIDMORE, aide to Senator Frank, came before committee. He explained that the adopted Senate Finance Committee version makes seven changes in the Senate Transportation version: 1. Deletes provisions relating to municipal property taxation. 2. Combines both qualifications for railroad experience into one director. One member of the board must have either ten years railroad management experience or have been an executive director of a U.S. railroad. 3. Creates a requirement for a director that represents the current executive management of the Alaska Railroad. 4. Provides that the next opening on the board shall be filled by a director who has the outside railroad experience called for in No. 2, above. 5. Specifies that meetings of the board where official corporate action is to be taken shall be teleconferenced. 6. Clarifies the definition of "nontransportation activity." The new definition excludes activity occurring before or subsequent to the transportation of people or personal property by the railroad. 7. Provides for participation in the regional land fill at Nenana. Co-chair Pearce pointed to the fact that up until the time Mr. Turpin left the railroad and Mr. Hatfield became CEO, the railroad had a board member with outside railroad experience. It was not expected that the director with outside experience would also end up as chief executive officer of the railroad. Co-chair Pearce further spoke to an inequity in original railroad law in that labor has a seat on the board while management does not. Mr. Hatfield is presently the CEO, a board member, and the outside expert. Co-chair Pearce said she had no problem giving management a seat on the board, but she said that that representative should not also be the outside expert. The proposed bill provides a seat for both management and a director with outside expertise. The reality of that is that an existing board member (Mr. Lindsey or Mr. Lounsbury) will have to leave the board this fall and be replaced with a new member with outside experience. Senator Kerttula voiced need for legislation providing for legislative confirmation of board members. Mr. Skidmore explained that the railroad reviewed the draft Senate Finance version of the bill and expressed approval with the exception of the new definition of "nontransportation activity." Railroad concern relates to the following subsections within Sec. 9: (B) an activity occurring before, or subsequent to the transportation of people or personal property by the railroad; or (C) an activity not (iii) conducted by the railroad on the date of transfer to the state. The corporation is concerned that instances may arise involving an activity conducted by the railroad on the date of transfer which also occurred before, or subsequent to, the transportation of people or personal property. That activity would conflict with new bill language. At the request of Co-chair Frank, MARK HICKEY, lobbyist for the Alaska Railroad Corporation, came before committee. Co- chair Frank asked what activities conducted at the time of transfer might be prohibited by subsection (B), above. Mr. Hickey pointed to the freight house and drayage operation the railroad has historically conducted as an example of conflict between language in subsections (B) and (C). He further noted that railroad warehousing of freight could also conflict. Co-chair Frank noted intent to curtail extension of railroad activities beyond those related to transportation. He then asked if the railroad was involved in hotel or lodging operations prior to transfer to the state. Mr. Hickey said that railroad operation of the Healy Hotel predates the transfer. Mr. Hickey next commented on definitions provided to a work session of the Senate Transportation Committee. The drafter at that time, did not include language relating to a value- added component. Mr. Hickey reiterated that different interpretations of the foregoing language could occur. He suggested that he be allowed to work with staff to structure the language to better define legislative intent. Co-chair Pearce directed that SB 148 be HELD in committee for that purpose. ANNOUNCEMENT Co-chair Pearce noted that SB 45 (MISC. LAWS RELATING TO MINORS), held from Saturday's meeting, would be on tomorrow's schedule. ADJOURNMENT The meeting was adjourned at approximately 11:15 a.m.