Legislature(2003 - 2004)

04/20/2004 03:40 PM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
           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                                                               
     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                                                                    
     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                                                                    
     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                                                                      
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                                                               
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                                                               
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                                                               
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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