Legislature(2003 - 2004)
04/20/2004 03:40 PM Senate STA
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* first hearing in first committee of referral
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SB 380-STATE LEASE AND CONTRACT EXTENSIONS
SENATOR GARY STEVENS announced SB 380 to be up for
consideration. He asked for a motion to adopt the \D version
committee substitute (CS).
SENATOR JOHN COWDERY made a motion to adopt \D version CS for
discussion purposes.
SENATOR GARY STEVENS asked Mr. Jones to come forward and present
the bill.
VERN JONES, chief procurement officer, Department of
Administration, explained that the current procurement code
allows for negotiation for extension of office leases of up to
ten years in exchange for rent reductions. He further explained
that:
SB 380 would increase the State's ability to negotiate
lease extensions by changing the required threshold
from a 10 to 15 percent reduction from the existing
lease rate, as the current law requires, to a 10
percent reduction from the current market rate for the
area.
Existing statutory restrictions on negotiations have
hampered our ability to negotiate lease extensions
with our lessors. The increase in the real estate
market in Alaska combined with the way we structure
our leases often makes a 15 percent reduction from the
current lease rates unattainable. Tying the reduced
lease rate to a percentage of the market rate is a
more reasonable approach that will allow us to
negotiate reduced rates more frequently and avoid the
lengthy and expensive reprocurement process not to
mention the cost and disruption of moving state
offices and large numbers of state employees.
Holding up a chart he continued to say:
Our typical state office leases are comprised of
several cost elements. First of all we have the
lessors profit that's built in throughout the life of
the lease. We have the lessor's base cost that are
ongoing throughout the life of the lease. We also have
the landowner's construction or tenant improvement
costs that typically are financed and amortized only
through the first firm term portion of the lease.
Typically those fall off in the optional renewal
periods. This is intended to demonstrate the cost of
the lease - all the cost elements of the lease
throughout the life of the lease.
As the chart demonstrates, a rate below the already
reduced rate of an option year is often too low for a
lessor to agree to. On the other hand a percentage
below the market rate, which is generally established
at the beginning of the lease, is much more
reasonable. [It's] something that lessors will more
often accept and again, the more often we can
negotiate a below market rate and avoid the cost of
reprocurement and moving expenses, the more the state
saves.
The committee substitute that you just adopted makes
some changes to the original bill. Those changes are:
It removes procurement contracts from the bill. Now
it's just strictly office space leases. It specifies
how the market rate is established. It's either a
broker's opinion of rental value or an appraisal of
the rental value. It tightens the definition up. And
it changed what was a five percent reduction to now a
10 percent reduction.
CHAIR GARY STEVENS thanked him and asked if there were any
questions.
SENATOR BERT STEDMAN noted there was a memo from Theresa
Bannister, Legislative Counsel, warning that the draft's
coverage of the judicial branch could raise a separation of
powers issue. He asked Mr. Jones to define the issue and comment
on the potential impact.
MR. JONES said this issue was raised in a House Labor and
Commerce Committee hearing. It refers to Section 1 (b) and is
talking about the Legislature passing a law that would restrict
the court system. However, one of the committee members spoke
with a representative of the court system who supported the bill
and stated that they plan on taking advantage of the bill if it
should pass. "Beyond that I really couldn't comment," he said.
SENATOR JOHN COWDERY asked whether he'd addressed the other
issue raised in the same memo that said the "proposed Sec.
36.30.083 establishes a reporting requirement for the judicial
branch."
MR. JONES replied that same Section 1 (b) requires the executive
branch to report on lease extensions under the bill. He wasn't
sure the court system was uncomfortable with that and he didn't
have any suggested change. "I think the intent here is that
since this is not full open RFT or ITD type procurement that the
Legislature would like to see reporting on agreements made under
this section," he said.
SENATOR COWDERY asked if the bill had a Judiciary Committee
referral.
SENATOR GARY STEVENS told him the Finance Committee would hear
the bill next. He noted that the bill addresses rental space and
goods and services. The bill authorizes term extensions for five
years on goods and services contracts, but he wasn't clear as to
whether the extensions were for rental space or leases as well.
"Is this a similar thing or not," he asked.
MR. JONES explained that the CS removes other contracts from the
bill so only procurements of leased real estate or leased office
space are included. "The rule that the bill would employ would
be up to a ten year maximum extension of a lease in exchange for
minimum 10 percent reduction from market value."
SENATOR GARY STEVENS wanted to make it clear and asked for
verification that although the governor's letter of March 24,
2004 spoke of leases and contracts for goods and services, the
CS relates to just leases and not with contracts for goods and
services.
MR. JONES agreed that is correct.
There were no further questions.
SENATOR GARY STEVENS asked for a motion.
SENATOR COWDERY made a motion to move CSSB 380(STA) [\D version]
from committee with attached fiscal note and asked for unanimous
consent. There being no objection, it was so ordered.
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