04/11/2014 08:30 AM House FINANCE

SENATE BILL NO. 74                                                                                                            
                                                                                                                                
     "An  Act creating  the  University  of Alaska  building                                                                    
     fund for  the payment  by the  University of  Alaska of                                                                    
     the costs  of use, management,  operation, maintenance,                                                                    
     and   depreciation   of   space   in   buildings;   and                                                                    
     authorizing the  Board of Regents of  the University of                                                                    
     Alaska to designate buildings for which the fund is to                                                                     
     be used."                                                                                                                  
                                                                                                                                
9:04:59 AM                                                                                                                    
                                                                                                                                
HEATHER SHATTUCK, STAFF, SENATOR  PETE KELLY, testified that                                                                    
SB 74 would  create the University Building Fund  (UBF) as a                                                                    
special account  in the  general funds.  She stated  that it                                                                    
was  modeled after  the Alaska  Public Building  Fund, which                                                                    
had  been   operated  successfully  by  the   Department  of                                                                    
Administration (DOA)  since 2000. She shared  that currently                                                                    
there was approximately $1.2  billion in backlog maintenance                                                                    
for the  University's 7 million  square feet  of facilities.                                                                    
She  said  that the  University  was  shifting to  long-term                                                                    
strategic  planning   to  adequately  address   the  ongoing                                                                    
maintenance issue.  She relayed  that the  UBF would  be one                                                                    
tool to  arm the University to  do its part in  order to get                                                                    
out from  under the billion  dollar problem and  ensure that                                                                    
facilities were  properly taken care of  while bringing down                                                                    
the deferred  maintenance to  a responsible  and sustainable                                                                    
level.  She  related that  the  fund  forced departments  to                                                                    
fully  think through  every square  inch of  space that  was                                                                    
actually  necessary.   She  said  that  with   the  UBF  the                                                                    
University  could  begin   charging  departments  for  rent,                                                                    
encourage improved  space utilization, and  see efficiencies                                                                    
in operations. She shared that  collecting rent from tenants                                                                    
and departments  was an  important feature  of the  fund and                                                                    
part of  the rent  could come from  federal grants  that the                                                                    
University already received and  designated of portion of to                                                                    
be  used for  maintenance.  She furthered  that the  concept                                                                    
would allow the  University to first list  new buildings and                                                                    
those  under  15  years  of age.  As  older  buildings  were                                                                    
rehabbed  through  renewal  and  replacement,  and  deferred                                                                    
maintenance, they  would be added  to the fund so  that they                                                                    
did  not  backslide  into  the  same  situation  again.  She                                                                    
elaborated that  the model  of charging  for space  had been                                                                    
implemented at several large  universities across the United                                                                    
States and  experience had shown  that it  improved internal                                                                    
discipline,  leading  to   improved  space  utilization  and                                                                    
efficiencies  in operation.  She  spoke to  the letter  from                                                                    
Legislative  Legal  clarifying  that  it did  not  create  a                                                                    
dedicated fund (copy on file).                                                                                                  
                                                                                                                                
9:09:05 AM                                                                                                                    
                                                                                                                                
PATRICK GAMBLE,  PRESIDENT, UNIVERSITY OF  ALASKA, testified                                                                    
that the University sought a  paradigm change with regard to                                                                    
the  way   to  programmatically  examine  ways   to  address                                                                    
deferred maintenance,  buildings on  the verge of  being put                                                                    
on  the  deferred  maintenance   list,  and  operations  and                                                                    
maintenance   costs.  He   said  that   when  the   deferred                                                                    
maintenance  cost   got  so  big  that   failures  occurred,                                                                    
operations and maintenance  money had to be used  to fix the                                                                    
problem. He  stated that there  were 174  academic buildings                                                                    
in the  system, 8 of  which would cost  more to fix  up than                                                                    
they were worth  and should be torn down. He  opined that it                                                                    
cost a lot  to tear down a  building but that it  cost a lot                                                                    
more not to.  He related that there were 28  building with a                                                                    
low net asset  value, but the function  inside the buildings                                                                    
had a  high University  value with  regard to  education and                                                                    
research.  The   deferred  maintenance  backlog   for  those                                                                    
buildings was $300 million, the  renovation and repair (R&R)                                                                    
backlog was $100  million. He explained that  those were the                                                                    
main  campus  buildings,  mostly   in  Fairbanks,  and  once                                                                    
building  of this  kind went  into deferred  maintenance the                                                                    
risks  involved in  working in  the buildings  increased. He                                                                    
shared that  in the past  they University would  come before                                                                    
the  legislature each  year and  attempt to  break the  work                                                                    
that needed to  be done into categories; only  10 percent of                                                                    
what was  asked over the years  had been given to  help with                                                                    
the problem.                                                                                                                    
                                                                                                                                
9:12:51 AM                                                                                                                    
                                                                                                                                
Mr.   Gamble   expressed   enthusiastic  support   for   the                                                                    
legislation. He noted that in  a tough budget year, like the                                                                    
on the legislature currently faced,  the seed money to start                                                                    
the fund would be problematic  but had to begin sometime. He                                                                    
stressed that  there were  many different  sources available                                                                    
for funding:  excess capital appropriations,  donations, and                                                                    
rental  income.  He  suggested  that  online  classes  could                                                                    
lessen  the need  for academic  buildings. He  believed that                                                                    
there  would not  be much  money put  into the  fund in  its                                                                    
first year and  it could take up to 5  years before the fund                                                                    
was fruitful. He  said that each year  the legislature would                                                                    
have the appropriation  responsibility, while the University                                                                    
sought different sources  for the fund. He  thought a source                                                                    
could  be the  Alaska  Sovereign Education  fund. He  shared                                                                    
that  the fund  used an  education funding  source from  oil                                                                    
royalties being diverted into an education account.                                                                             
                                                                                                                                
9:18:51 AM                                                                                                                    
                                                                                                                                
Representative  Holmes  wondered   whether  there  had  been                                                                    
discussions about putting any seed  money in the fund in the                                                                    
present year.                                                                                                                   
                                                                                                                                
Mr. Gamble replied in the negative.                                                                                             
                                                                                                                                
Representative  Holmes  asked  whether  the  fund  would  be                                                                    
managed for sustainability.                                                                                                     
                                                                                                                                
Mr. Gamble replied that it  would have an inflation proofing                                                                    
element to it and that sustainability was a goal.                                                                               
                                                                                                                                
Representative  Holmes she  spoke of  the Alaska  Children's                                                                    
Trust  as a  sub-account of  the general  fund. She  thought                                                                    
that the legislature should  encourage private donations but                                                                    
wondered whether  people would donate  if the fund  was part                                                                    
of the general fund.                                                                                                            
                                                                                                                                
Mr. Gamble answered that a lot  of advice would be needed in                                                                    
order to lock down the actual components of the idea.                                                                           
                                                                                                                                
9:23:19 AM                                                                                                                    
                                                                                                                                
Representative Thompson expressed  concern that donations to                                                                    
the building fund could have  a negative effect on donations                                                                    
to other University departments.                                                                                                
                                                                                                                                
Mr. Gamble  answered that it  was a possibility.  He relayed                                                                    
that  many  donors  were  specific   with  regard  to  their                                                                    
donations.  He  said  that unspecified  donations  would  be                                                                    
considered for the fund.                                                                                                        
                                                                                                                                
9:26:27 AM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  assumed that  the fund could  handle any                                                                    
component.                                                                                                                      
                                                                                                                                
Mr. Gamble  did not think that  using the fund to  build new                                                                    
buildings  was  part  of  the  plan;  operation  and  rehab,                                                                    
certainly, but the  capital cost of building  a new building                                                                    
would deplete the fund.                                                                                                         
                                                                                                                                
Co-Chair Austerman  thought that lapses in  funding could be                                                                    
problematic.                                                                                                                    
                                                                                                                                
Mr. Gamble  stressed that the  initiation of the  fund would                                                                    
concentrate   on  newer   buildings  that   had  less   cost                                                                    
associated with the maintenance.                                                                                                
                                                                                                                                
Vice-Chair   Neuman   asked    about   appropriations   from                                                                    
endowments.  He noted  that if  they  were not  specifically                                                                    
mentioned  in the  appropriations language  then they  could                                                                    
not  be  accepted.  He thought  that  perhaps  the  language                                                                    
should be added to the bill.                                                                                                    
                                                                                                                                
9:31:07 AM                                                                                                                    
                                                                                                                                
Mr. Gamble said that they  had the ability to track specific                                                                    
buildings, if a large project  came up a few million dollars                                                                    
short those  dollars could  be used  to fund  something else                                                                    
and would be included as candidates  to be put into the fund                                                                    
for broader use.                                                                                                                
                                                                                                                                
Representative  Guttenberg wondered  whether  the result  of                                                                    
Subsection  10  on page  2  would  allow the  University  to                                                                    
reconfigure space  on campus  that could  be leased  out and                                                                    
allow for  maintenance and operation  outside of  the normal                                                                    
University budget.                                                                                                              
                                                                                                                                
Mr. Gamble answered in the affirmative.                                                                                         
                                                                                                                                
9:34:02 AM                                                                                                                    
                                                                                                                                
Representative   Edgmon   asked   for  the   definition   of                                                                    
maintenance  versus   "depreciation  related  to   space  in                                                                    
covered buildings."                                                                                                             
                                                                                                                                
Mr.   Gamble  explained   that   the   notion  of   building                                                                    
depreciation was  central to  the whole  idea of  R&R, every                                                                    
single year a building aged.  He said that the definition of                                                                    
"covered"  meant buildings  that were  specifically occupied                                                                    
for research  or academics. He  said that  the depreciation,                                                                    
opposed  to a  financial  depreciation, was  related to  how                                                                    
quickly  the building  was aging.  When  the buildings  were                                                                    
analyzed and  categorized an assessment  was made as  to how                                                                    
far it had depreciated  from its original construction, this                                                                    
gave an  idea of the net  asset value of the  building which                                                                    
was  then  compared  to  the  R&R  required  to  re-age  the                                                                    
building,  and then  the depreciation  on  the started  over                                                                    
from where it had been re-aged.                                                                                                 
                                                                                                                                
Co-Chair  Stoltze asked  if assurances  could be  given that                                                                    
deferred maintenance or improvements  would not be construed                                                                    
as allowing new construction.                                                                                                   
                                                                                                                                
Mr. Gamble believed that the  integrity of the assessment of                                                                    
deferred  maintenance  was  fundamental to  the  trust  that                                                                    
dollars  were  being used  as  intended.  He said  that  the                                                                    
poster child  for deferred maintenance  was the  power plant                                                                    
at  the University  of Fairbanks,  the entire  structure had                                                                    
aged out  of its useful  service life. He relayed  that most                                                                    
of the deferred maintenance would be smaller issues.                                                                            
                                                                                                                                
9:38:17 AM                                                                                                                    
                                                                                                                                
Representative  Holmes noted  that  the account  was a  sub-                                                                    
account  of  the  general  fund  and  would  not  allow  the                                                                    
University  to use  it as  a checking  account. She  advised                                                                    
that the  legislature maintain control of  appropriating the                                                                    
money from year to year.                                                                                                        
                                                                                                                                
Vice-Chair Neuman assumed  that the fund would  be under the                                                                    
control  of   the  Board  of   Regents  or   the  University                                                                    
president.  He wanted  to ensure  that the  university would                                                                    
have the autonomy to determine  where the funds would go. He                                                                    
did not want  individual legislators to have  the ability to                                                                    
designate what the money would be spent on.                                                                                     
                                                                                                                                
Mr. Gamble replied in the affirmative.                                                                                          
                                                                                                                                
Vice-Chair Neuman  asked whether the legislature  would have                                                                    
the ability to amend their appropriation.                                                                                       
                                                                                                                                
Mr. Gamble did  not believe he would  have the authorization                                                                    
to make the decision.                                                                                                           
                                                                                                                                
9:40:54 AM                                                                                                                    
                                                                                                                                
Representative  Holmes believed  that the  legislature would                                                                    
had the power to amend the appropriation.                                                                                       
                                                                                                                                
Co-Chair Stoltze  noted that there  had been  some questions                                                                    
and suggestions  related to changes  in the  legislation. He                                                                    
relayed  that the  committee would  look at  the issues  and                                                                    
hear the bill at a later date.                                                                                                  
                                                                                                                                
SB  74  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.