Legislature(2001 - 2002)

04/30/2001 02:04 PM House FIN

Audio Topic
* first hearing in first committee of referral
+ 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                                                                   
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                                                                   
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                                                                   
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.                                                                            
          (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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   

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