MINUTES SENATE FINANCE COMMITTEE February 1, 2000 9:04 AM TAPES SFC-00 # 17, Side A and Side B CALL TO ORDER Co-Chair John Torgerson convened the meeting at approximately 9:04 AM. PRESENT Co-Chair John Torgerson, Co-Chair Sean Parnell, Senator Al Adams, Senator Lyda Green, Senator Randy Phillips and Senator Gary Wilken. Also Attending: Senator ROBIN TAYLOR; ANNALEE MCCONNELL, Director, Office of Management and Budget; JACK KREINHEDER, Senior Policy Analyst, Office of Management and Budget; ALISON ELGEE, Deputy Commissioner, Department of Administration; KEITH GERKEN, Architect, Facilities Section, Division of General Services, Department of Administration; BARBARA COTTING, Legislative Aide to Representative Jeannette James. SUMMARY INFORMATION SJR 29-DURATION OF REGULAR LEGISLATIVE SESSION This bill was scheduled but not heard. SB 165-LTD PARTNERSHIPS AND LTD. LIAB. COMPANIES The Committee heard testimony from the sponsor. The bill was reported out of Committee with no objection. HB 112-ESTABLISH ALASKA PUBLIC BUILDING FUND The Committee heard testimony from the sponsor, the Office of Management and Budget and the Department of Administration. The bill was held. SENATE BILL NO. 165 "An Act relating to the remedies available to judgment creditors against limited liability company members and their assignees and against limited partnership general and limited partners and their assignees; and providing for an effective date." Senator ROBIN TAYLOR referred to the sponsor statement saying that he would not read it into the record. Senator Taylor told the Committee of two differing court decisions addressing how a creditor would receive judgement taken against a member of a limited partnership. In the Florida case it was ruled that the creditor had the right to go after the limited partnership to obtain only that member's interest in the partnership to satisfy the debt. The other case was held in Connecticut. The court in this case allowed the judgement's creditor to foreclose upon the partnership's assets, which essentially destroyed the partnership. Senator Taylor asserted that the ruling made in the Connecticut case allows actions to be taken against a limited partnership that are beyond the control of the other members not involved in the judgement. If one member is sued then the entire partnership could be ruined, he stated. This bill relieves members of a limited partnership from that liability while still allowing the creditor of a specific member to receive that member's distribution from the partnership. Co-Chair Torgerson commented that this bill is strait forward. Co-Chair Parnell offered a motion to move SB 165, 1- LS0919\A from Committee with accompanying zero fiscal note from the Department of Law and individual recommendations. There was no objection. HOUSE BILL NO. 112 "An Act establishing the Alaska public building fund; and providing for an effective date." BARBARA COTTING, staff to Representative Jeannette James apologized that the Representative could not be present and read the sponsor statement into the record. Alaska has an enormous problem with maintenance of its public facilities. Funds are not allocated for on- going maintenance, so we are forced to continually repair and replace our existing facilities at great expense. House Bill 112 would establish the Alaska public building fund as a special account in the general fund. It would also create an agreement whereby the occupants of state-owned buildings would pay "rent" into this fund. The money collected could be appropriated by the Legislature to pay use, management, operation, maintenance, and depreciation costs. Ms. Cotting noted the bill passed the House of Representatives with no objection. Ms. Cotting directed the Committee's attention to the effective date, which will need to be updated from last year's date. Senator Phillips noted the vote tally in the House was 33 to five. Ms. Cotting pointed out that there were five excused absences and two other absences on that day and that the bill did not receive any "no" votes. ALISON ELGEE, Deputy Commissioner, Department of Administration testified that this legislation provides a tool that better enables the state to manage its buildings. She stated that the bill creates an internal service fund that will enable the Department of Administration, as rent is collected, to collect a portion of that rent for the capital portion of building repair and replacement. She noted that the internal service fund will "pool" until there is sufficient funding for major part replacements, such as heating, ventilation and air conditioning. She added the department would be collecting money for maintenance and operations and the administration of the internal service fund program. Ms. Elgee explained that the federal government allows the state to establish a rent structure that provides for these major projects through depreciation of the building. She elaborated saying that as long as the state charges rent on a uniform basis to all programs, additional federal funds can be used to pay for the housing of some of the programs the federal government financially supports. By establishing this rent pool, Ms. Elgee told the Committee the state will also be able to leverage other fund sources within state government, such as the Division of Retirement and Benefits. Currently this self-supporting division occupies space in the Juneau State Office Building at no charge. Under this legislation, she explained, funds collected to administer the retirement and benefits program can be used to pay into the internal service fund program. Ms. Elgee assured the Committee that this program would just redistribute existing funds and not require additional funds. She said, "We are distributing the monies that are currently existing within the budget to the respective programs but expanding the available pool of dollars by the ability to capture those other funds." According to Ms. Elgee, the department's intent is to start the process with a few select buildings rather than all state-owned facilities. In determining which buildings will be included in the first phase, she said the department would look at those facilities with the greatest leverage for outside funds. Co-Chair Parnell pointed out language on page 1 lines 8 and 9 of the bill, ".by a public or private occupant of the building." and asked who were some of the private occupants that would be paying into this account. Ms. Elgee gave examples of the Court Plaza Building in Juneau and the Atwood Building in Anchorage, which currently have some private tenants. She noted that this bill allows the state to charge those private tenants depreciation expenses on the same basis and pool those revenues as well. Co-Chair Parnell next referred to depreciation costs shown on page 2 line 1 of the bill. He wanted to know how funds are currently appropriated to cover those costs. Ms. Elgee replied that it is part of the "approved cost allocation methodology" used by the federal government. Instead of trying to anticipate an allotment in the rental structure for repairs and replacement, she explained, the state is allowed to depreciate the building. She said a depreciation schedule is determined using the purchase price of the building, the remaining useful life and other factors. The depreciation allotment is then added into the rent structure and charged based on square footage. Co-Chair Parnell then asked why the bill is structured so the appropriations don't lapse after one year like most appropriations do. Ms. Elgee responded that absence of the one-year lapse allows the department to continue to collect the money in the fund, which needs to accrue in order to reach an adequate amount for large capital projects. She added that once enough money is collected, the department would come before the legislature to request appropriations for certain capital projects. Co-Chair Torgerson questioned how the payments made will not be shown as an annual expense and whether the payments don't need to be accounted for in the program's individual budgets. Ms. Elgee answered that the rental cost would show up in each program and appropriated annually. Once that money is appropriated for that program, she explained, it is paid into the fund, the fund accrues a balance and the legislature appropriates the fund for maintenance and operation. Co-Chair Torgerson said he could understand collecting rent for operation expenses. However, with the $400 million in state assets and considering that many buildings have a limited life, he predicted a huge amount of money will be needed to fund the depreciation. He suggested this program is a back door attempt to get revenue bonds for deferred maintenance projects. ANNALEE MCCONNELL, Director, Office of Management and Budget stressed that the state has a huge deferred maintenance problem. She noted that when the state leases space from the private sector, part of the rent paid is set aside by the owner to use to keep the building in good condition. She stated that other governments, particularly in Canada, have realized if a government only operates on a year to year basis, with no consideration for future need, the government finds itself with a large deferred maintenance problem. She stated that in addition to addressing the existing deferred maintenance problem, the Administration wants to prevent future situations where a needed repair cannot be funded. She pointed out that establishing a rent structure is a long-standing practice in the private sector and in many forward-thinking governments. She assured the Committee the intent of this legislation is not to build up enormous amounts of unused money, but to keep building conditions up to standards. She added that there would be continuous pressure to plan wisely and not over-fund the future needs of existing buildings. Co-Chair Torgerson appreciated the forward thinking but argued that this is already done. He stressed that he needs to know the impact of this legislation on each program's individual budget. He believed it would have a large impact and unless the legislature decides to increase those individual operating budgets, those budgets will have to be cut in order to set aside money for depreciation. Ms. McConnell responded that in considering this plan, the Administration looked at the ability to capture non-general fund dollars, such as federal reimbursement programs that are not capped and some state programs that are supposed to be self-supporting but in fact receive free rent. This will allow the state to capture some of that money and put it toward the overall resolution of the issue, she stressed. She pointed out that this program would add $1.5 million revenue from non-general fund sources to the FY 01 budget. Co-Chair Parnell requested a fiscal note that shows all the federal and other funds included for comparison, rather than having each budget subcommittee try to figure out the costs for each program. Ms. McConnell replied that the information was being prepared. She restated Ms. Elgee's comments that no additional general funds are requested for this year to fund this program. She spoke of the ability of charging the Division of Retirement and Benefits. Senator Leman said he thought the rent would be established at the market rate. However, it seemed to him that the rent principles seem to be calculated differently in the bill. He also noted that the program is to charge all tenants the same rate. He asked if space rented at the Atwood Building is rented at an established market rate for downtown Anchorage. Ms. McConnell responded that when this bill was prepared the fact that private agencies still occupy some state- owned buildings was not considered. She stressed that the state is not looking at making a profit, but looking to break even for both the operation costs and future deferred maintenance. Senator Leman wanted to make sure the rent calculation method does not violate generally recognized accounting principals. Ms. McConnell assured him it does not. She did note that the private tenant contracts would reflect their rental agreements. Senator Green requested a side-by-side printout showing the current situation and the proposed plan. She wanted to know where the money for future repairs is currently going. Ms. McConnell said she would provide some information but noted that there currently is no money set-aside for future repairs. She stated this is the problem with the existing system. Co-Chair Torgerson agreed that a "side-by-side" would be helpful, and requested a breakdown by maintenance and depreciation per building and per tenant. Senator Wilken clarified that this legislation applies only to buildings owned by the State Of Alaska and located within the state. Ms. McConnell affirmed but pointed out that in the future, it could apply to any state-owned buildings located outside of the state. Senator Wilken asked if the rent is calculated on the square footage occupancy of each agency. Ms. Elgee affirmed. Senator Wilken asked if there was any correlation between the amount of space an agency occupies and the cost of their building operation. Ms. McConnell said there is not, which is part of the current problem because there is no incentive for an agency to reduce the amount of space it uses when the need goes down. She stated this legislation would help with overall space management. Senator Wilken then asked if contributions to the fund are specified for the particular building from where the rent was charged. KEITH GERKEN, Architect, Facilities Section, Division of General Services, Department of Administration replied that the department will account for the revenues and expenditures by building. Senator Wilken noted the substantial amount of money involved and was surprised at the zero fiscal note. He asked where the program's administrative costs would appear. Ms. Elgee responded that this program establishes a fund within the general fund and costs will be reflected through "access programming". The costs are for actual implementation of the program not for establishment of the fund, according to Ms. Elgee. She said the distribution of funds and the administration of the program will be reflected in the budget. Co-Chair Torgerson wanted to know when discussions would begin to address establishing a separate agency for facilities and moving it out of the Department of Transportation and Public Facilities. Ms. McConnell replied that because the issue was so large it was decided to take it one step at a time and this bill was a first step. Co-Chair Torgerson asked if the report will show how much each agency currently spends for such services as janitorial versus what the plan intends to charge. Ms. McConnell pointed out that janitorial service is currently shown as part of the Department of Transportation and Public Facilities' maintenance budget. However, she said the report will show the actual expense of these services. Co-Chair Torgerson was still concerned this program will require more funds than are currently set aside. He believed that the charge for these services and the fund would be more than currently charged and he needed to see all the information for comparison. However, he did not disagree with the direction the legislation was taking. Ms. McConnell again stated that there would be no change to the general fund for the FY01 budget. The only additional money involved, she explained, is what could be gained from other funding sources of different agencies. Co-Chair Torgerson asked when the department would start charging for depreciation. He understood that the Administration was requesting the bill be passed now but does not intend to implement the plan for a couple years. Ms. Elgee responded that lots of work goes into the process of establishing the building value and setting an appropriate rate structure that reflects what is actually being spent on a building-by-building basis. She stressed that the federal government requires the state to do this. She listed eight buildings that have been identified as having the highest leverage of non-general funds. These buildings include the Alaska Office Building in Juneau that houses the Department of Health and Social Services; the Atwood Building, the Court Plaza Building, The Douglas Island Building that houses the Department of Transportation and Public Facilities, the Department of Corrections and the Department of Fish and Game, the Fairbanks Regional Office Building, The Juneau Community Building that formally housed the Department of Community and Regional Affairs, the Juneau Public Safety Building and the Juneau State Office Building. She pointed out that these buildings represent about a third of all state-owned office space. Eventually, the program would expand to cover all state-owned office buildings, she said. Co-Chair Torgerson stressed the point is that the bill contains items that the department is currently not charging for, yet claiming that without changing the general fund impact, more federal funds would be brought in. He stated that the witnesses were testifying that although depreciation costs are not currently being set aside, they would be soon. He wanted to know what the depreciation and management fee costs will be, regardless of whether or not they are included in the FY 01 budget. Ms. McConnell responded saying in order to implement this program, federal rules governing how much rent is charged have to be followed. As part of that process, the state must establish up-front, the depreciation amounts and also establishes an overall rent structure. We will bill all agencies for the full amount of the direct expenses for that year of plus the depreciation amount. She then stated, "In the case of agencies that are purely general fund supported, we understand that full bill may not be collected. But if we're going to request reimbursement from the federal government or from other entities, we have to be sure that we are including all of those costs and treating everybody identically so that the federal government is not being charged for depreciation but the Retirement and Benefits folks are not. We can't have that kind of pick and chose." Co-Chair Torgerson stressed "that it is even more confusing now where you say you are going to set a policy but you don't care if the departments give you the money." Ms. McConnell responded that this is a situation where building maintenance has been under-funded due to economic conditions. She stressed that this program will begin to address the problems. Co-Chair Torgerson argued that this method of addressing the situation doesn't make sense but said he would look at the new fiscal note when provided. Senator Green asked what two or three projects the department intends to use this money to fund. Ms. Elgee replied this bill would set up an internal service fund that will allow the department to balance of money from year to year, which can't be done now. Senator Green then asked what traditional money could be accrued that can't be accrued currently. Ms. Elgee gave examples of the Division of Child Support Enforcement, which is heavily funded by the federal government. The federal government will allow the state to charge for rent, she said. Senator Green wanted an explanation of why the costs cannot currently be collected. Ms. Elgee replied that the federal government will not allow the state to charge them for costs not charged to state agencies or other tenants. Ms. Elgee answered another of Senator Green's questions saying that the department anticipates receiving an additional $1.5 million in federal funds. Co-Chair Torgerson predicted that in some cases, these would only be a reclassification of federal funds that will be deducted from other functions. He not think there would be a net increase to general funds. Ms. McConnell responded that was taken into account in the proposal and the decision was make to not reallocate from those programs that have limited funding. This program will only go after the programs where the rent is simply reimbursed and not those that receive no federal rental reimbursement, she promised. "We are not, in our proposal at this point, disadvantaging if you will, the programs where the federal dollars are limited. Now there is obviously a policy choice that could be made in the future if we want to do that, but we're not taking that step at this point. We're simply going after the federal funds that are out there for the asking but that we simply haven't had the mechanism to [receive them]." Co-Chair Torgerson asked if all of the $1.5 million would all be new federal dollars. Ms. McConnell clarified that some of those funds would come from other sources, such as administration fees for the retirements and benefits programs. She elaborated on the appropriateness of the Division of Retirement and Benefits paying rent costs. Co-Chair Torgerson conceded that he stood corrected on his earlier comments about redistribution of existing funds. Senator Wilken noted that the Department of Administration Budget Subcommittee spent time on this matter last year. He appreciated the other members' questions because he felt it is important to understand this issue since it is a bold move. He spoke of the public asking why the state is not run more like a business and he views this bill as an attempt to run government like a business. He signed on as a co-sponsor because he thought the bill has great merit for accountability. Co-Chair Torgerson commented that this bill has broad language and doesn't only address the eight buildings currently proposed for inclusion in the program. Ms. McConnell replied that more buildings could be added later and that is the intent of the program. This simply creates the funding mechanism, she said. Co-Chair Torgerson stressed that this legislation is much broader and could have larger impact than it appears. He compared the program to data processing, where each department is charged for the services but has no control in the matter. Tape: SFC - 00 #17, Side B 9:51 AM Co-Chair Torgerson ordered the bill HELD in Committee to await new fiscal notes. ADJOURNED Senator Torgerson adjourned the meeting at 9:52 AM. SFC-00 (12) 02/01/00