Legislature(2001 - 2002)
04/30/2001 02:04 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 152
"An Act relating to the handling of and interest on
contract controversies involving the Department of
Transportation and Public Facilities or state agencies
to whom the Department of Transportation and Public
Facilities delegates the responsibility for handling
the controversies."
DON SMITH, STAFF, SENATOR COWDERY explained that the
legislation would require the Department of Transportation
and Public Facilities to pay interest on disputes, which are
settled in favor of the contractor. Interest accrues at a
rate applicable to judgments. Interest accrues on the date
the claim is filed and continues until the date of
settlement. The interest rate would be guided by AS
09.30.70, which is three percentage points above the 12th
Federal Reserve District discount rate. He stressed that the
current situation is unfair to contractors in dispute with
the state of Alaska. Disputes are taking too long to settle.
The state of Alaska earns money while the case proceeds.
Contractors may be forced to settle because they cannot
afford to carry the burden of the expense.
BRAD FINNEY, SOUTH COAST CONSTRUCTION, KETCHIKAN testified
via teleconference in support of the legislation. He
recounted an incident with the Department of Transportation
and Public Facilities. He observed that it should take 9
months for a claim to go to a hearing officer. It took four
years for his claim to receive a hearing, which resulted in
a $400,000 thousand dollar settlement with prejudgment
interest of $240 thousand dollars in his favor. The state
has refused to pay the interest. He maintained that the best
way to resolve a contract issue is through negotiation. He
asserted that without a prejudgment interest award the state
has nothing to risk and no incentive to equitably and timely
settle disputes.
Mr. Finney reviewed the timeline of the claim process. He
noted that it is difficult to formulate amounts until the
project is complete.
Representative John Davies clarified that the claim is
denied by the on site project manager before it is submitted
for further review.
Representative Hudson questioned if there would be cases
where the contractor would owe the state and if interest
would be assessed if there were. Mr. Finney pointed out that
it is not in the contractor's best interest to submit a
frivolous claim. Minor issues are not worth the lawyer fees.
He added that the state might be able to introduce punitive
or liquidated damages if the project is not completed
timely.
JERRY RENICH, PRESIDENT, SOUTH COAST CONSTRUCTIONS,
KETCHIKAN testified via teleconference. He expressed concern
that the state has protected itself. The legislation would
put the state and the contractor on a reasonable level
playing field.
LARRY SMITH, PRESIDENT, D AND L CONSTRUCTION, KENAI
testified via teleconference in support of the legislation.
He suggested that it be amended to cover all claims to the
date of the legislation. He recounted his experience with
claims before the Department of Transportation and Public
Facilities. The legislation would provide equity for
contractors. Most other tort claims and contract actions in
the state of Alaska pay prejudgment interest. The hearing
officer awarded them all but $50 thousand dollars of their
$900 thousand dollar claim. The commissioner reduced the
claim by $100 thousand dollars. They collected $750 thousand
dollars, but the state of Alaska did not pay the $93
thousand dollars owed in interest.
Vice-Chair Bunde questioned why persons with pending claims
would be excluded.
FRED THOMPSON, HERMAN AND THOMPSON, HOMER testified via
teleconference in support of the legislation. He asserted
that the claims process can be unfair. He maintained that
the process would be fairer if the state had an incentive to
settle. He felt that it was unfair for private business to
sponsor the claims process and to be punished by a refusal
of interest payment. He spoke in support of amending the
legislation to cover all pending claims.
DICK CATTANACH, EXECUTIVE DIRECTOR, ASSOCIATED GENERAL
CONTRACTORS OF ALASKA, ANCHORAGE, testified via
teleconference in support of the legislation. He pointed out
that contractors have already spent thousands of dollars by
the time the claim comes to judgment. He questioned why the
Department of Law feels that the construction industry
should be discriminated against.
Representative Hudson asked if the federal government
authorizes interest from the date the claim is made when the
contractor prevails. Mr. Cattanach affirmed that the federal
Highway Administration and the Federal Aviation
Administration (FAA) include interest. He noted that the
model procurement code calls for a payment of interest.
MICHAEL SWALLING, PRESIDENT, SWALLING CONSTRUCTION,
ANCHORAGE, testified via teleconference in support of the
legislation. He noted that funds have been spent in advance.
He observed that his banker expects to be paid if he has
borrowed funds. The lack of interest amounts to no penalty
and no compensation for the time and money spent redeeming
the funds.
In response to a question by Representative Hudson, Mr.
Swalling noted that municipal contracts do provide for
interest on claims settled.
KEVIN BRADY, ATTORNEY, OLDS, MORRISON, RINKER AND BAKER,
ANCHORAGE testified via teleconference. He clarified that
the state demands interest on cases where the state is owed
funds. He maintained that the state should pay interest if
it expects to collect interest. Small independent
contractors are financing state projects interest free. This
is unfair and anti business.
BILL RENNO, ATTORNEY, OLDS, MORRISON, RINKER AND BAKER,
ANCHORAGE testified via teleconference in support of the
legislation. He recommended that the legislation be amended
to affect pending claims. Pending claims would have to
appeal to the Supreme Court if the legislation is not
applicable to all claims. He maintained that Supreme Court
appeals would be unnecessary, which would reduce the state's
legal costs.
DOUGLAS GARDNER, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW provided information. He clarified that punitive damages
do not pertain. If it were made retroactive for all pending
claims, the date would have to go to 1996. The state would
also have to treat with other contractors that have settled
claims but were similarly situated at the time of
settlement. The fiscal note would be huge [if pending claims
were included]. There would be no participation in
retroactive payouts by the federal government. He discussed
the Kennicott case, which started as a $50 million dollar
claim against the state of Alaska. The claim came in with
eight pages without documentation. The Department of Law
already has difficulty obtaining documentation for claims
and questioned if the legislation would encourage poor
documentation. Few states have similar provisions. The
department must ascertain that the claims are sound.
Municipalities don't enjoy sovereign immunity as the state.
The state cannot consent to pay administrative claims.
There are several constitutional problems with equal
protection. The bill would single out construction claims.
Other claimants in a wide variety of issues will argue that
construction contractors should not be singled out. A court
may decide that interest should be paid on all claims, which
could amount to a large general fund amount.
It is true that the Federal Highway Administration and the
FAA has a restricted ability to participate in interest.
However, the bill covers all buildings. There is no federal
agency with additional funds to pay the interest. Interest
payments would come from general funds.
There are a number of construction projects that are not
subject to AS 36.30, including new vessel construction. Mr.
Gardner noted that because projects by the Alaska Railroad
Corporation (ARRC) or Alaska Aerospace Development
Corporation generally have to follow procurement code that
they would also be subject to interest payments.
Representative Croft questioned if the date of a decision of
an administrative officer had been considered. He referred
to the Kennicott claim. Mr. Gardner noted that the claim
came in the form of an 8 - 10 page letter without
documentation. After two years of working with the case a
large amount of documentation has been submitted.
Representative Croft felt that contractors raise a good
point that once the administrative process is completed that
payment should occur. He questioned the affect of an
amendment [to make interest due from the date of the
procurement officer's decision].
Mr. Gardner noted that there are three levels before an
administrative case goes to Superior Court.
TAPE HFC 01 - 107, Side B
Mr. Gardner noted that 80 percent of cases are solved at the
first step: the Engineer's report. The second step is the
contracting officer's decision. Then the director of a
region will evaluate the engineer's decision. In some cases
a contracting officer's decision may change the engineer's
decision and settle the case. Representative Davies
clarified that the contracting officer is the procurement
officer, which is the last division level. Mr. Gardner
explained that the next level goes to the commissioner. If
the party is still not satisfied it is appealed to the
Superior Court.
Mr. Gardner referred to a possible amendment to run the
interest from the time the contracting officer or the
procurement officer issues their decision. He explained that
administrative claims process is an alternate dispute
resolution process. It is a way to settle cases before they
go to court and carries a high success rate. The policy
concern is: should the state be exposed to interest on a
claim that has not been documented.
Vice-Chair Bunde questioned if the federal government would
pay 90 percent of the interest that accrues on prospective
application of the law. Mr. Gardner clarified that the
federal government would only pay on projects where the
Federal Highway Administration is the participating agency.
If the law were retroactive the same funds would not be
available from federal highway payments.
Vice-Chair Bunde asked if this is a good idea why should it
not apply to all state agencies. Mr. Gardner noted that all
departments that perform construction work would be covered.
He added that there might be situations where the claims
were not allowed. Contractors can incur costs due to their
own lack of due diligence. Disputes are not always the
state's fault. Mr. Gardner argued against having interest
running from the beginning of the case.
In response to a question by Representative Hudson, Mr.
Gardner noted that interest is paid on overdue liquidated
claims.
In response to a question by Representative Hudson, Mr.
Gardner explained that the procurement officer is the last
staff level person that makes a decision on behalf of the
department.
Mr. Smith summarized that the bill is about fairness. It was
introduced as a response to requests from the contractor
community. He maintained that the state of Alaska has no
incentive to move the process along. Years can pass before
payment occurs. Contractors would be required to pay
interest on their bank loans during the time.
Representative John Davies did not think that there was
evidence that the state is trying to draw out the process
and questioned if it was fair for the state to pay on cases
where there is a legitimate dispute.
Representative Lancaster MOVED to ADOPT Amendment 1.
APPLICABILITY.
(a) AS 36.30.623 and 36.30.625(c), added by this
Act, and AS 36.30.625(a), as amended by this Act, apply
to controversies
(1) That are pending before an agency on the
effective date of this Act; or
(2) For which a claim is filed with an agency
under AS 36.30.620 on or after the effective date of
this Act.
(b) In this section, "agency" means the Department
of Transportation and Public Facilities or a state
agency to whom the responsibility for handling the
controversy is delegated by the Department of
Transportation and Public Facilities under AS
36.30.632.
Representative Lancaster explained that the amendment would
make the bill retroactive.
Representative Croft acknowledge the need for the
legislation but pointed out that every case would have to be
reviewed for equal protection.
Mr. Gardner argued that the amendment would require a search
of all the claims.
Representative Croft gave the hypothetical case were two
claims were submitted at the same time. One claimant
provides all the necessary documentation and the case is
resolved. The other fails to submit the necessary
documentation and the case is dragged on [until the passage
of SB 152]. The first case would not receive interest
because it was settled before the effective date of the
legislation. The second settles after the date [in the favor
of the contractor] and is awarded interest. He suggested
that the first claimant would seek interest through
litigation.
Co-Chair Mulder questioned the state's exposure if the
amendment were adopted. Mr. Gardner stated that he could not
quantify the exposure. He observed that if interest were
applied in only the three cases represented by previous
testifiers that there would be well over million and a half
dollars in owed interest. He stressed that the number could
be quite large if previous settled cases came forward.
Claims that were entered but not settled through litigation
would also be subject to the amendment.
Representative Hudson questioned if the Kennicott claim
would be at risk if the amendment were adopted. Mr. Gardner
noted that the Kennicott case has been posed hypothetically
and that he did not have any information on how it would be
affected.
Mr. Gardner explained that the retroactive problem was with
subsection (1).
Representative Whitaker MOVED a conceptual amendment to
amend Amendment 1 by deleting subsection (1). There being
NO OBJECTION, it was so ordered.
Representative Hudson WITHDREW Amendment #2: Insert "from
the date the procurement officer's decision is issued in
accordance with AS 36.30.620."
Representative John Davies MOVED to ADOPT #2. Co-Chair
Mulder OBJECTED for the purpose of discussion.
Representative John Davies spoke to the amendment. He
observed that documentation must be in place before the
claim can be settled. He suggested that the procurement
officer's decision is the earliest bright line decision
point in the process and the last staff level decision.
Representative Croft noted that AS 36.36.20 was attached to
the fiscal note and that the decision should be made no more
than 90 days after the waiver. He pointed out that good
timelines are included to assure that everything necessary
to determine the claim is available.
Representative Hudson suggested that "up to 30 days after
the claim was filed" could be added to give the department
30 days to move the claim to the final adjudication point.
Representative Croft argued against the change. He pointed
out that the claim could be submitted without proper
documentation.
Representative Whitaker asked clarification of the proposed
language. Representative John Davies referred to subsection
(b) of AS 36.36.20. The contractor has 90 days to submit
material. The contracting officer then has 90 days from the
time that they agree the materials are complete to make a
decision. John Davies noted that there might be additional
time between these timelines. Representative Whitaker
thought that 180 days would be enough time to address the
dispute. Discussion occurred between Representative John
Davies and Representative Whitaker regarding the 90-day
concern.
Representative Croft noted that under AS 36.30.620 (b) that:
"The decision shall be made no more than 90 days after
receipt by the procurement officer of all necessary
information from the contractor." He observed that the issue
is with the receipt of all necessary information from the
claimant.
Representative John Davies pointed out that: "Failure of the
contractor to furnish necessary information to the
procurement officer constitutes a waiver of the claim." The
only time the case would be delayed would be at the
contractor's request. The state may grant a delay requested
by the contractor. He questioned why interest should run
during this period.
Representative Whitaker asked what would preclude the state
officer from being unreasonable in their request for
information. Representative John Davies pointed out that the
contractor could litigate against unreasonable requests.
SB 152 was heard and HELD in Committee for further
consideration.
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