HB 155-PUBLIC CONSTRUCTION CONTRACTS  4:07:24 PM CHAIR OLSON announced that the final order of business would be HOUSE BILL NO. 155, "An Act relating to public construction contracts."   4:07:40 PM JENNIFER SENETTE, Staff, Representative Kurt Olson, on behalf of the prime sponsor, the House Labor & Commerce Committee, chaired by Representative Kurt Olson explained that this bill accomplishes two things. It raises the trigger point for when public construction projects must adhere to the Little Davis- Bacon Act (LDBA) for prevailing wages. Currently, the threshold for Alaska's Little Davis-Bacon Act is set at $2,000. This bill would raise the threshold to 75,000 before the LDBA would be triggered. This bill would establish a boundary between maintenance, which would not subject to the LDBA and public construction, which is subject to the Little Davis-Bacon wages. 4:08:30 PM MS. SENETTE referred to Section 1 of HB 155, which specifies that the chapter only applies to public construction projects over $75,000. She explained that during the great depression, the Congress enacted a federal statute, the Davis-Bacon Act, which required prevailing wages as the minimum wage to be paid on public works projects. Subsequently, states enacted similar laws, which are known as the Little Davis-Bacon Acts (LDBA). She referred to the LDBA in Alaska, which is located in Title 36. That law currently applies to public construction contracts over $2,000. This limit is modeled after the limit included in the federal Davis-Bacon Act. She emphasized that the federal Davis-Bacon Act was enacted during the Great Depression in 1935. The reason for the threshold was to acknowledge that some projects are simply too small to justify the administrative burden associated with the Davis-Bacon compliance. Currently, if a project falls under the threshold the municipality or community does not have to go through the "administrative hoops" necessary to comply with the LDBA, including certified payroll, additional reporting requirements, and filing with the Alaska Department of Labor and Workforce Development (DLWD). She characterized the requirements as a substantial administrative burden. She highlighted that in Alaska and particularly in rural Alaska it is hard to find a public construction project that does not exceed $2,000. The federal limit was based on a mobile workforce during a time when communities were easily accessible. In Alaska, many communities are accessible only by ferry or barge so by the time the materials are transported and the logistical factors are considered, the cost will probably greatly exceed $2,000, she surmised. 4:11:04 PM MS. SENETTE stated that in practice imposing such a low threshold has the effect of not having a threshold. She highlighted that the low threshold also has the effect of discouraging economic development since the rigidity of the LDBA compliance requirements discourages smaller firms from submitting bids on projects. In rural areas it can also mean that workers must be imported to perform work that otherwise could have been done by local workers had local firms bid on the jobs. Raising the threshold would create opportunities for smaller contractors, who may not have had the experience or desire to content with the LDBA requirements. These smaller contractors would be eligible for more projects not subject to the LDBA. A number of other states have raised their thresholds, with the average threshold amount of $108,000. She reported that 19 other states current have higher thresholds than suggested by HB 155. She related that the DLWD list is in members' packets. She reiterated the current federal threshold was set in 1935 by the Davis-Bacon Act and Alaska's LDBA is modeled after that federal law. She stated that the inflation alone justifies an increased trigger point, but the specific impacts on Alaska she just mentioned support increasing the threshold amount proposed in HB 155. 4:12:58 PM MS. SENETTE referred to Section 8 of HB 155, which would clarify maintenance and construction requirements. This bill attempts to exclude maintenance contracts from the definition of public construction. Thus, maintenance contracts would not be subject to the LDBA under the bill. The current statute broadly defines construction, yet it is unclear which projects are considered construction projects and which ones are considered maintenance projects. There is a huge difference between maintenance and construction. Filling 15 potholes or replacing guardrails along the roadway should be considered maintenance work and should not be subject to the LDBA prevailing wages. The fiscal note reflects a $396,000 decrement, which is due to the decrease in filing fees. She pointed out letters of support from organizations and municipalities in members' packets. This bill has generated considerable public comment, she said. 4:14:46 PM REPRESENTATIVE MILLER asked for the rationale to increase the threshold from $2,000 to $75,000 before the job is subject to the LDBA. MS. SENETTE answered that the original conversation with municipalities suggested an increase the threshold for the LDBA to $250,000, but that figure seemed too significant of an increase. The prime bill sponsor wanted to start lower, she offered. REPRESENTATIVE MILLER asked if $75,000 was selected for any particular reason. CHAIR OLSON said, "That number was pulled out of the air." He related the $75,000 is not as high as the average increase adopted by other states that have increased the threshold for the LDBA. He offered his belief that HB 155 must be a collaborative effort between the unions, the public entities, and the legislature. He suggested the amount will likely be lower. He anticipated some amendments will be necessary to clean up language and address the threshold limit. He further suggested the amount might be as low as $50,000 or slightly less. He reiterated the threshold amount must be palatable to a number of people. 4:16:38 PM REPRESENTATIVE SADDLER referred to page 3, line 29, of HB 155 and asked for the different between rehabilitation work covered under the bill and maintenance, which would not be covered. MS. SENETTE deferred to the Department of Labor & Workforce Development (DLWD) to address the definitions. REPRESENTATIVE HOLMES also asked for clarification on how repair work would differ from maintenance work. 4:17:29 PM GREY MITCHELL, Director, Division of Labor Standards & Safety, Department of Labor & Workforce Development (DLWD), stated that the department relies on a 1982 attorney general's opinion that draws a distinction between repair work subject to the LDBA, and maintenance work, which is not subject to the LDBA. It hinges on whether new material is needed for the project. If a roadway is resurfaced, graded, and potholes are cleaned out and repaired, it is considered maintenance and the project is not subject to the LDBA. However, if new materials such as truckloads of dirt are necessary or new guardrail must be used, the project would be considered repair work rather than maintenance work. 4:18:56 PM REPRESENTATIVE HOLMES said she would like to review the 1982 attorney general's opinion. She referred to page 4 of HB 155 and stated the definition of maintenance does not bear any resemblance to what he just described. She was unsure of what rehabilitation or repair work would be subject to the LDBA and maintenance work. The definition of maintenance in HB 155 does not speak to new or used materials. MR. MITCHELL agreed. He said the language in HB 155 does not match the DLWD's interpretation of maintenance and repair work. CHAIR OLSON agreed that this is one issue he is working to resolve. REPRESENTATIVE HOLMES asked the committee to also consider definitions for rehabilitation and repair since the terms seem to be overlapping concepts. 4:20:37 PM REPRESENTATIVE HOLMES asked whether school districts and regional education attendance areas (REAAs) would be exempt from the bill. CHAIR OLSON offered his belief that the REAAs will need further clarification. REPRESENTATIVE MILLER related he had the same question. 4:21:24 PM REPRESENTATIVE HOLMES asked for the DLWD's position on HB 155. MR. MITCHELL answered that the DLWD is neutral on the bill. 4:22:18 PM GARY KNOPP, President, Assembly, referred to line 3 of the second paragraph in the sponsor statement, which refers to the bill updating an antiquated statute/ This is what HB 155 does, he said. He related that the current statute erodes the purchasing dollars for local communities and taxpayers. He highlighted that the dollar threshold for the LDBA exists due to the wide recognition that some projects are simply too small to justify the overhead associated with compliance with the law. He stated that these requirements drive a lot of contractors away from participation on LDBA projects. He acknowledged that the sponsor statement is accurate. He reiterated that the bill would only affect local and state projects, since the federal projects would be subject to LDBA. A lot of the KPB's revenue is derived from service areas with small revenue streams. It is detrimental to the KPB since it must pay prevailing wage rates for small maintenance projects such as filling potholes or redistributing gravel. He offered his belief that the definition of maintenance and repair is almost one and the same. Since the term is so broadly defined in statute, it has been the KPB's experience that the DLWD interprets any public project over $2,000 as a construction project. The difference between maintenance and repair should not be based on whether new material is used but rather on the overall value of the project. He wondered if a project less than $75,000 should warrant using the LDBA with the additional requirements necessary to comply with the law. He hoped the committee would consider these issues. In response to Chair Olson, he offered to address any amendments at the next hearing. 4:26:36 PM MR. KNOPP referred to the fiscal note and analysis. He said that the filing fee is not necessary for all projects up to $25,000. He pointed out that the filing fee of one percent does not "kick in" until the $25,000 threshold is reached. Thus, the fiscal impact should be based on projects from $25,000 to the proposed $75,000 threshold, he said. He referred to the fiscal note analysis that lists 1,413 public construction projects with contract values of less than $75,000, which he thought represents about 70 percent of all projects. He surmised it would also considerably reduce the DLWD workload, which would translate to substantial savings to the state. He referred to page 12 of the FY 05 Legislative Audit report, 05-4605, which suggests a deluge of certified payrolls up to $4,000 per week negates any systematic screening by the DLWD. This bill would drastically reduce the department's workload since the public construction projects total 2,200 and the DLWD is currently bombarded with certified payrolls. He referred to the FY 2000 Legislative Audit Report, which recommended a shift to a $25,000 threshold. The audit also suggested defining the terms maintenance and construction, he reported. 4:29:01 PM MR. KNOPP stated that he is also a contractor and performs some "dirt work." He said that he could pay an equipment operator $25 per hour, but that it would cost and additional 32 to 35 percent for the Workers' Compensation and unemployment insurance for the employee. However, the cost for an employee on a prevailing wage job to perform the same work would cost $86 to $87 dollars per hour. The wages alone would increase from $25 to $47 per hour, he remarked. Additionally, since insurance premiums are based on the payroll costs, his Workers' Compensation and general liability would also increase. He predicted it costs nearly 100 percent more for LDBA employee costs. 4:30:04 PM MR. KNOPP referred to the fiscal note. He related that the committee should consider that the $152,000 in filing fees actually "belongs" to contractors and local contractors, which is significant to the taxpayers. 4:30:40 PM MARK FOWLER, Purchasing and Contracting Officer, Kenai Peninsula Borough (KPB), stated that the KPB mayor provided a letter of support for HB 155, which he hoped the committee has received. The KPB believes this bill will benefit the KPB by providing additional buying power and encouraging smaller contractors to bid on small contracts. The KPB is approximately 25,000 square miles, with many communities and villages spread throughout. The KPB encounters a small pool of contractors in the remote communities who are capable of meeting the KPB's needs. However, the KPB has found many small contractors are less willing to participate on contracts subject to the LDBA. The LDBA requirements drive up the cost of doing business and fail to generate local work for contractors. 4:32:25 PM MR. FOWLER related a scenario in which the KPB identified a need for fencing. A local contractor bid $7,500 for the job, which exceeded the $2,000 threshold and was subject to the LDBA. Once the contractor found out the job was subject to the LDBA, he was no longer interested due to the administrative burden posed by the law. The KPB paid in excess of $18,000 for a non-local contractor to perform the same scope of work. Often communities are logistically challenged, he said. Numerous smaller less complex projects have been negatively impacted due to the low threshold. He reiterated that smaller less complex projects that are subject to the LDBA are burdensome to the contractor and the DLWD. The KPB believes that HB 155 would benefit the KPB's residents and contractors. He referred to the fiscal note and stated that the DLWD does not receive a filing fee for projects less than $25,000, but the department must process all projects over $2,500. The DLWD does not receive any filing fee for jobs between $2,500 and $75,000. These projects require considerable administrative effort without any compensation to the DLWD. He predicted if the threshold is increased as proposed by HB 155, that the DLWD will receive a filing fee on all projects it processes. 4:35:01 PM REPRESENTATIVE HOLMES related her understanding that HB 155 would accomplish three things: it would increase the current $2,000 threshold for the LDBA projects, would change the definitions to exclude maintenance work, and would exempt school districts and REAAs. She asked whether the KPB's main interest is with the monetary aspects of the bill. MR. FOWLER answered the KPB supports HB 155 in its entirety. He suggested that his scenarios related to his work experience at the KPB. 4:36:27 PM SCOTT BLOOM, Assistant Attorney, Kenai Peninsula Borough (KPB), stated that he provides legal guidance for capital projects, road service, and maintenance departments, as well as other legal guidance for the KPB. The LDBA is unduly burdensome on the municipal public construction and maintenance activities. Currently, the statutes lack sufficient clarity for the KPB to accurately determine which projects are subject to the LDBA and which are not. He asked to focus on Section 8 of HB 155 to the definitions for public construction and maintenance. The proposed language is a departure from the current framework. It is based on a 1982 attorney general's opinion and little if any case law provides guidance to better define maintenance from construction. The KPB's road service area contracts out maintenance service for its roads. These activities include plowing and grading roads, maintaining ditches, brushing, replacing culverts, applying calcium chloride, and fixing potholes and sink holes. Additionally, contractors will also replace lost gravel and travel surfaces. The road service area has a Capital Improvement Program (CIP) to upgrade roads. The KPB clearly understand these CIP projects are subject to the LDBA. However, it is more difficult to determine whether other activities must adhere to the LDBA, including activities such as brushing or when brushing exceeds the "prior line," pulling gravel from the ditches when the ditch is made wider or deeper. He listed some work that may or may not apply to the LDBA, including adding new materials to the ditches, applying calcium chloride, or filling a sink hole or pothole. He asked whether these activities are considered as rehabilitation or repair projects. He asked whether applying $1,500 of gravel on a roadway and a week later apply $600 to an adjacent road would constitute one project over $2,000 or two separate projects. He stated that the KPB's maintenance projects are generally relatively small in value and do not exceed $20,000. He offered his belief that approving a higher ceiling on the LDBA projects and adding the proposed language in Section 8 of HB 155 which better distinguishes maintenance from construction will alleviate most of the KPB's struggle in determining whether a projects fall under the LDBA. It is critically important for the KPB to know whether a project falls under the LDBA for compliance reasons, he said. The LDBA projects take longer to process and complete, limit the pool of available contractors, and cost more. This limits the number of projects the KPB can complete and means fewer services will be provided to taxpayers. He referred to the fiscal note. He recommended that proposed Section 8, subsection (4) be changed to reflect the language in AS 36.95.010 (6), with the addition of the exclusionary language for the school districts. REPRESENTATIVE HOLMES referred to proposed Section 8 to the definition for public construction. She was unsure that this language provides clarity since rehabilitation and repair is included, but maintenance is excluded. She asked whether this language needs some additional work. MR. BLOOM agreed the definition is problematic. He said he was unsure a solution exists. The definition proposed in Section 8 does not define rehabilitation and repair, but tells what it is not. It is not maintenance, he said. He suggested that the current framework hinging on whether material is transported is problematic. He stressed that the DLWD is following an attorney general's opinion, but the opinion does not have legal consequences or any bearing in communities. He offered his belief that it may be necessary to for a court to decide the implications, which he did not think was the best route to proceed. 4:42:52 PM ROBERT RUTHNER, Executive Director, Kenai Watershed Forum (KWF), stated that he works for a small or medium sized nonprofit organization that performs habitat work in streams throughout the Kenai Peninsula. This represents a fairly large area to cover. He has learned the LDBA by trial and error since he performs road work. He related a lot of his work is clearly public construction and falls within the LDBA. However, some of the work falls outside the LDBA. He related the KWF would like clarity on the definitions just discussed. He outlined that specifically nonprofit organizations generally work for the public good and often have relationships with the local government and sponsors. One limitation that occurs is when someone wants to make a donation or volunteer his/her time to help on a public construction project. The LDBA limits the KWF's ability to complete projects that are in the best interest of the local government since it does not accommodate people who want to volunteer their time or donate funds to help complete a project. Thus, mixing local government funding with private sector monies, can be difficult. He offered the KWF's support for the increase to the threshold for the LDBA. Additionally, he suggested the committee determine whether an opportunity exists to exempt "do-gooder" projects. He thought using volunteers would be beneficial to local government. It could result in a better outcome for projects that have been deemed public construction, such as trails, parks, fences, buildings shared between local government and nonprofit organizations. He reiterated examining the nonprofit and public aspect would assist nonprofits. Additionally, the KWF supports raising the threshold amount for the LDBA. CHAIR OLSON commented that everyone wants the language as clear as possible in order to avoid litigation. 4:46:42 PM RON KOVALIK stated that he has served as a volunteer road commissioner for over 30 years. Two years ago this issue was "dropped on us like a bomb" and has nearly paralyzed us, he said. He spoke in support of raising the threshold to $75,000. He would also like to see the threshold indexed to inflation. He cautioned against defining maintenance, rehabilitation, and repair, as "we're going to go around in circles" and the result will not fix any roads. He said, "What the road needs, we do. If it takes gravel, we use gravel. If we need machinery, we use machinery." The LDBA has made it difficult to use volunteers to brush or remove snow. He said those types of restrictions practically paralyze the road service areas and prevents any work from being done. CHAIR OLSON asked how many road service areas are located in the Fairbanks area. MR. KOVALIK answered that Fairbanks has over 100 road service areas. CHAIR OLSON suggested the bill would affect small projects. MR. KOVALIK agreed that it drives off volunteers. 4:48:24 PM TIM BECK stated that he is a past road service area commissioner and has previously serves on the Fairbanks North Star Borough Assembly and Road Service Area Committee. He pointed out that today is speaking as a member of the Alaska Municipal League (AML) board. The FNSB does not have road powers. Road service is provided by road service areas, represented by a commission of local residents from within the road service area. The $2,000 threshold for the LDBA is easily surpassed in the larger service areas. Often, regular maintenance must be addressed as a capital projects due to the $2,000 limit. The LDBA increases project costs and the completion time. This threshold increase to the LDBA is long overdue and would save local residents thousands of dollars by awarding the administration and design costs associated with capital projects. He listed two things that are advantageous in HB 155: the increase to the $2,000 threshold to a more practical number and to clearly define capital improvements and maintenance. He related his understanding that maintenance means bringing a road back to its existing condition, prior to an event such as erosion, snowfall or flooding even if it requires additional material to do so. He informed members that Fairbanks currently has 107 road service areas. 4:50:06 PM MITCHELL ROCKIER stated that passing HB 155 would place a bigger risk on owners to complete jobs and on employee salaries. He predicted administrator would creatively split up a $150,000 project ends up being split up into two smaller projects to avoid the LDBA. This could lead to more contract management. He offered his belief that the bill would open it up to workers receiving different wage scales. Currently, the LDBA wages keeps everyone on equal parity. He related a scenario in which three contractors bid on a job at $30, $25, and $15 per hour. He surmised the bigger contractor will lose out. He stressed that the Davis-Bacon Act wages were established to provide a decent salary and benefits for the middle class. He reiterated his concern that changing the wage scale would open it up to "low bidders." 4:52:44 PM CHAIR OLSON stated he was leaving public testimony open on HB 155. [HB 155 was held over.]