HB 371-STATE LAND AND MATERIALS    CHAIR P. WILSON announced that the final order of business would be HOUSE BILL NO. 371, "An Act providing for the Department of Transportation and Public Facilities to hold the surface estate of certain state land; relating to the transfer of certain state land and materials from the Department of Natural Resources to the Department of Transportation and Public Facilities for the construction or maintenance of the state highway system, state airports, and state public buildings and facilities; relating to the lease or sale of certain marine or harbor facilities; relating to the lease or disposal by the Department of Transportation and Public Facilities of rights-of-way, property interests, or improvements that are no longer required; relating to the grant of certain easements over submerged state land to the federal government; relating to the transfer of certain maintenance stations on the James Dalton Highway to the Department of Transportation and Public Facilities; relating to the conveyance of land for right-of-way purposes from the Alaska Railroad Corporation to the Department of Transportation and Public Facilities; and providing for an effective date." 2:27:42 PM REPRESENTATIVE ISAACSON moved to adopt the proposed committee substitute (CS) for HB 371, labeled 28-LS1545\C, Bullock, 3/17/14 as the working document. There being no objection, Version C was adopted as the working document. 2:28:08 PM JOHN BENNETT, Right-of-way Chief, Northern Region, Department of Transportation & Public Facilities (DOT&PF), referred to a letter of March 13, 2014 in response to questions posed by the committee on March 11, 2014. He stated the proposed committee substitute (CS) for HB 371, Version C, will help clarify language in Section 16 regarding reciprocal easements. He also understood questions arose on whether this bill would eliminate or reduce public involvement or public notice so the department generated a chart to show all the points of involvement and notice [entitled "Typical DOT&PF Project Development Process"]. MR. BENNETT also understood Representative Johnson has been considering a proposed amendment. REPRESENTATIVE KREISS-TOMKINS asked to discuss some questions raised. CHAIR P. WILSON referred to the aforementioned response letter from the DOT&PF that answers a number of the questions raised at the March 11, 2014 hearing. 2:31:15 PM REPRESENTATIVE KREISS-TOMKINS referred to the private sector would interface with the bill. The [March 18, 2014] letter from DOT&PF poses questions on how SB 211 or HB 371 impact funding for DNR and DOT&PF. He read [from a letter by a DNR person not identified], as follows: Would DOT lose funding from the lost material sale revenue as a result of this bill? Would DOT gain a new funding source from selling material from the material sites? Section 13 of the bill states DNR would no longer charge DOT for material. Does "DOT" include DOT contractors? Would DOT start charging their contractors or others for material from state material sites? If so, where would those funds go? REPRESENTATIVE KREISS-TOMKINS acknowledged the large number of questions. MR. BENNETT responded he is correct, with respect to the issues of payment for materials, since DOT&PF would no longer be charged so DNR would no longer have that revenue stream. He related his understanding that the bulk of the revenue for the sales of material goes into the state's general fund. To the extent that some of it might be used in management or processing of material sales contracts, he pointed out that the DNR would not have the burden of applying for or processing material sales contracts so the lost revenue wouldn't be quite as big of a problem [since neither department would have to administratively manage these contracts]. With respect to DOT&PF generating revenue by sale of materials, he responded that this bill does not provide authority nor has the department had authority to sell materials to third parties. Thus, there wouldn't be any revenue stream coming in to DOT&PF by virtue of this bill. Further, the DOT&PF wouldn't charge contractors for materials because the department is expecting the bidding process to result in better prices since the department will use state- owned materials and not need to procure them. 2:33:51 PM REPRESENTATIVE KREISS-TOMKINS acknowledged he has had a vague impression that private businesses sell materials. For example, in Sitka there are private quarries that sell gravel. He expressed concern that the state would be competing with the private sector if the state provides the material for free but a private quarry in the same proximity sells the same materials. MR. BENNETT acknowledged the concern. Even though the department has hundreds of BLM and DNR sites available, the department likes to consider its contracts as advertised ,au contain contract-furnished materials. For example, the department might make a material site available - a BLM or DNR site - but the contractor is not obligated to use them. The contractor may decide to purchase materials elsewhere or develop a material site. It all depends on the market forces as to what is best for the contractor to reduce his/her overall costs. Clearly a lot of commercial material sites and competition exist in the urban and suburban areas so the market forces will work very well for the state. In rural areas it is more difficult since not many property owners have materials to sell. Additionally, the department must perform geotechnical investigations to determine whether the material meets its specifications and sufficient quantities exist. He acknowledged there might be a private property owner who is aware of available gravel, but that gravel may not be suitable for the project. Further, there isn't any assurance that the private property owner will offer the same conditions, terms, or prices to all the contractors. It could skew the project significantly in the instance that only one commercial provider exists. He summarized that the department recognizes commercial providers exist but the market will determine whether those will be used by the contractor. 2:37:00 PM REPRESENTATIVE JOHNSON related a scenario in which DOT&PF has a material site for a project. Since the materials are free to the department, the DOT&PF can underbid or complete the project for less by hiring state employees. He would like to ensure that the state does not perform projects that have previously been done by the private sector under a competitive process for the materials. MR. BENNETT deferred to the deputy commissioner to answer; however, he offered his belief that prior to taking on a project that would have gone out to bid, the department would need to do a best interests findings to determine it was in the state's been interest that the maintenance forces did not pay for materials or even larger maintenance work that could constitute a project. In the same sense contractors aren't going to be charged either since the materials are state-owned and are designated for state projects. Thus, the department doesn't envision any issue will arise. 2:38:34 PM REPRESENTATIVE JOHNSON asked whether it is constitutional to give away the state's resources. MR. BENNETT answered that the state would not be giving away its resources since the materials would be used for public projects. Further, DOT&PF represents the public in this instance. 2:39:03 PM CHAIR P. WILSON related her understanding that everyone is on the same "playing field" since the DOT&PF doesn't charge the contractors either. MR. BENNETT agreed. REPRESENTATIVE JOHNSON maintained the state would be giving away resources to a private contractor even though it is for the public good. MS. RICE explained that the department does not intend to change contracting procedures. Under the bill, the proposed change would merely reduce paperwork between DNR and DOT&PF. First, the DOT&PF physically manages most of these pits. Currently, the DOT&PF contacts DNR, creates a materials sales contract at $.50 per yard - the standard price - and makes the contract available in specifications to contractors. All contractors can use this source for materials; however, the contracting specifications also allow the contractor to go to any supply. In fact, contractors will sometimes make their own pits. Any materials that come from the state's pit will end up being embankment so essentially the DOT&PF is moving from one resource to another. The public will always continue to use it. The $.50 per yard not being paid is pretty inconsequential compared to the $2-4 per yard that the department would pay. Further, most of that money is haul and placement. The DOT&PF needs certain quality materials, makes them available, but most of the time the materials are not used. 2:41:05 PM CHAIR P. WILSON surmised most of those are not in urban areas. MS. RICE said that most of the material used by the Municipality of Anchorage (MOA) is hauled from the Matanuska-Susitna valley by train since did not believe DOT&PF has a pit in the area. 2:41:38 PM REPRESENTATIVE JOHNSON maintained that the state would be giving away state assets since they would not be charging the contractor. He related his understanding the department would waiver the $.50 per yard fee and asked whether this is constitutional. MR. BENNETT answered that the DOT&PF has purchased land for its project. The state requests that the contractor use the state- owned material on the state's project. REPRESENTATIVE JOHNSON envisioned a paving project in which private contractor can bid on it $.50 per yard, but under the new scenario the fees are waived. 2:43:16 PM REPRESENTATIVE ISAACSON understood that since DNR was involved and the DOT&PF has paid DNR for materials, which he equated as an administrative fee. He further understood that under the bill, since DNR is no longer the owner, the DOT&PF is moving material from one state site to a road bed. The state doesn't provide a public benefit by paying DNR an administrative fee. This bill attempts to consolidate the process by limiting the management the project and materials for the project to one department [the DOT&PF]. 2:44:49 PM SEAN LYNCH, Assistant Attorney General, Transportation Section, Department of Law (DOL), responded that Representative Isaacson's characterization is fully accurate. When the state furnishes culverts, materials, or anything else for a project, all bidders accommodate for this in their bid, which results in reduced project costs and general fund savings. In instances in which contractors have to purchase materials from the state, the state would also pay additional administrative costs for the two agencies [DNR & DOT&PF]. He clarified that the contractors are not taking materials for their own personal use for third party uses, but are moving state materials from one place to the state's project site. CHAIR P. WILSON characterized this as "getting rid of the middle guy" since it will be cheaper. MR. BENNETT agreed. He described the current process as moving money from DOT&PF to DNR and the contractor does not benefit in any way. REPRESENTATIVE JOHNSON thought it might be circular logic. 2:47:01 PM REPRESENTATIVE FEIGE acknowledged it was shifting money from one pocket to the other. He asked how this is applied in federally- funded projects. MR. BENNETT answered that most of DOT&PF's projects are federally-funded projects. In those instances, the department uses federal dollars to pay the $.50 fee per cubic yard fee to DNR. He suggested that for the most part the funds end up in the general fund. REPRESENTATIVE FEIGE said the process would allow the DOT&PF to obtain more from the federal funding for any given project. MR. BENNETT answered that is correct. 2:47:47 PM REPRESENTATIVE GATTIS related a scenario in a contractor invests in a pit that provides the materials used on jobs; however, the state is giving the contractor's competitors free gravel which gives them an advantage. CHAIR P. WILSON using that scenario, suggested that if the contractor could get it for free that the competitors may also wish to use the free material. REPRESENTATIVE GATTIS agreed but pointed out that the contractor would still be paying for the pit. CHAIR P. WILSON suggested the contractor could save his/her own pit gravel for another purpose. 2:49:43 PM REPRESENTATIVE FEIGE said the competitiveness of the private gravel pit owner is somewhat reduced by eliminating the cost of the gravel. He suggested that the cost of the gravel is primarily the transportation cost to deliver the material. MR. BENNETT agreed that is a relevant point. One contractor may bid and plan to use the state's existing material site. The successful bidder may have purchased a site to develop since it could result in a 20-mile less haul distance. He maintained the developed site could be more competitive and it will still "shake out" in the market. 2:51:12 PM REPRESENTATIVE KREISS-TOMKINS understood the discussion. However, he suggested that this bill changes the market to a certain extent. While transportation and haul costs will still determine whose gravel pit is most competitive in a project, the current market forces are changed under the bill. He was interested in hearing from the private sector in the rural and non-rural areas with respect to the bill. He offered his belief that it merits further investigation as to the specifics of how this will affect contractors. CHAIR P. WILSON suggested that contractors would be complaining if the bill [created disadvantages for them]. 2:52:31 PM REPRESENTATIVE ISAACSON referred to the DOT&PF's response to the committee [dated March 13, 2014]. He referred to page 2, which read: Could DOT&PF lease land from the Alaska Railroad  Corporation (ARRC), rather than the ARRC selling land  to DOT&PF?    REPRESENTATIVE ISAACSON said the response was, in part, "The short answer is that while leasing land from ARRC may benefit the railroad's bottom line, it may not represent a good long range policy for the management, operation and funding of DOT&PF facilities." REPRESENTATIVE ISAACSON offered that the letter gives two examples, first, in which the ARRC was compensated in the Illinois [Street project in Fairbanks]. In the second example, the Healy River airport, the ARRC doesn't want to continue to pay for a lease since it is a state benefit. He concluded that the ARRC suffers negligible operational impacts when a portion of ARRC's property is transferred as required for DOT&PF's projects,. He understood the ARRC's land similar to the Alaska Mental Health Trust Lands in that its purpose is to generate revenue. Thus, the more land that is taken away from the railroad the larger the impact it will have in terms of loss of rent and profit. Currently, the ARRC has been suffering because of fewer active leases and the ARRC has declining revenues due to declining production at refineries and coal mines. Therefore, any impact to the railroad can hurt, he said. 2:54:41 PM REPRESENTATIVE ISAACSON wondered if there might be a different way to address this. He asked whether instead of taking land the DOT&PF could exchange state land to compensate the railroad. MR. BENNETT answered that DOT&PF doesn't have a land base that it could trade since it is constrained by its obligations to the federal funding agencies, such as the Federal Highway Administration (FHWA). Further, the DOT&PF pays fair market value to the railroad for any land DOT&PF takes. The concept behind this just compensation is that the ARRC can take the proceeds and replace the right-of-way land taken from them. Therefore, it doesn't necessarily reduce the land base unless the railroad doesn't replace the lands acquired for the project. Additionally, a railroad is considered a utility so in terms of highway rights-of-way or airports, the ARRC can through a limited fee of a utility permit can gain access to them. He characterized this as being a very lopsided relationship. The DOT&PF pays full fair market value for any lands it needs to acquire from the ARRC, but the railroad can use DOT&PF's land for a very limited fee. MR. BENNETT, in terms of the Illinois Street project, explained that the public used Illinois Street for 100 years and will likely use it for another hundred years. He anticipated that for a 50-year lease the DOT&PF would pay for the property "over and over again." More importantly, when the term comes due it will likely be out of synch with a DOT&PF project that would generate revenue to renew the lease. For example, it would be possible to pay for a lease from a Federal Aviation Administration (FAA) funded project if one was available. Even though the DOT&PF has been seeking one that without project funding the DOT&PF doesn't have anything available to renew the lease. 2:57:18 PM CHAIR P. WILSON commented that the ARRC reviewed this bill and agreed with it. REPRESENTATIVE ISAACSON answered that this doesn't mean it will necessarily be good for the railroad. He asked for further clarification on the Healy project. MR. BENNETT answered that it is not a good public policy for a transportation department with long-term public needs to lease land with a recurring renewal fee. CHAIR P. WILSON remarked that the ARRC's agreement should relieve members of these specific concerns. REPRESENTATIVE ISAACSON responded that it doesn't. He asked whether the ARRC would receive any compensation for the $320,000. MR. BENNETT answered that this bill doesn't address leasing. It would only eliminate the step necessary to receive legislative approval for the ARRC to convey fee simple title. The department believes this will advance projects by one to two years. He maintained that this bill does not address leasing. It will not eliminate any lease revenues due to the railroad for the airport. The DOT&PF must secure these funds prior to the end of the lease in 2017 if the public intends to use the land. CHAIR P. WILSON pointed out a letter of support from the Alaska General Contractors is in members' packets. 3:00:30 PM REPRESENTATIVE JOHNSON, with respect to gravel, noted that DNR will make available gravel sales to private companies for private projects. He asked whether the ARRC will sell materials to a private project. He interjected by related a scenario in which the DOT&PF has materials and asked whether the department will make gravel available to the public or if it is it just for state use. MR. BENNETT related his understanding the question is if DOT&PF has acquired land from the ARRC or DNR, whether the DOT&PF would sell gravel. To his knowledge, all the land acquired from the ARRC has been dedicated to the actual operational need of the highway or the airport. The DOT&PF doesn't have authority to sell gravel, he said. 3:02:17 PM REPRESENTATIVE JOHNSON pointed to non-railroad materials. He understood a provision exists for DOT&PF to take a gravel pit from DNR and use it for a state project. He asked whether DOT&PF would sell non-railroad gravel to a private company, which DNR can currently do. MR. BENNETT answered yes. 3:02:47 PM MR. LYNCH advised that the DOT&PF exemption in Section 13 of HB 371, relieves the DOT&PF from the material sales requirements. He read, "Notwithstanding the provisions in AS 38.05.560 - 38.05.565 ...." This provision provides DNR authority to sell materials from state-owned material sites. This bill relieves the DOT&PF of the requirement from entering into a material sales contract, but DNR retains its authority under AS 38.05.550 - 38.05.565 to sell material from these sites to third parties. He reiterated that DOT&PF does not have any authority for third- party sales and doesn't take the physical site itself. 3:04:05 PM REPRESENTATIVE JOHNSON recalled testimony that if the state were to provide a discount to a refiner on royalty oil, the state would need to provide the same discount to everyone. MR. LYNCH said he can't speak to the comparison since he doesn't know the facts; however, this would allow for state-owned resources to be removed from a state pit and put into a state project. He concluded that the material is never disposed to a third party. All bidders would have equal assess asset to incorporate state owned material into the state project. It would be the same way as if DOT&PF had an overstock of culverts and lists it in the contract to be incorporated into the project. REPRESENTATIVE JOHNSON maintained that in terms of oil, whether it was jet fuel for trains or something else that if the state offered a discount it must give the same discount to all parties. 3:05:54 PM REPRESENTATIVE ISAACSON recalled the commissioner said "may" but not "must." REPRESENTATIVE JOHNSON asked whether the state was subjected to the same "may" for gravel as it is for oil so would the state be putting itself in the position that it needed to give the material away. MR. LYNCH explained that the bids incorporate the same common ground for "all bidders" so he did not envision this would set up a disparity. 3:06:38 PM REPRESENTATIVE FEIGE thought that the analogy would be to take royalty oil and refine it into fuel used by state vehicles. Further, the state could probably justify a lower cost of the royalty oil if it resulted in a lower cost of fuel to the state just as DOT&PF provides an equal opportunity for gravel to be used on a state project. In the end, the result would be to reduce the cost of materials. In the case of oil it could reduce cost of fuel to the state and result in lower consumptive costs to the state and hence the public. REPRESENTATIVE JOHNSON maintained that a discount to one means the state might need to give it to everyone. REPRESENTATIVE FEIGE thought that rationale would only apply since the state can only consume so much fuel. 3:07:57 PM REPRESENTATIVE JOHNSON referred to the language in Alaska's Constitution that indicates the state's resources are for the common good of all people. REPRESENTATIVE ISAACSON agreed that Article VIII, Alaska's Constitution requires the maximum use and benefit to the people; however, it also sets up a "similarly situated" aspect. Thus the benefits would accrue to similarly situated circumstances first and then to the rest. He suggested several other issues could trigger a definitive answer. REPRESENTATIVE JOHNSON remarked he still has questions. 3:10:02 PM DICK MYLIUS said he is testifying as a private citizen although he previously worked with DNR for 29 years and dealt with many of these issues. He stated that his letter is in members' packets [dated March 12, 2014]. He offered to summarize his concerns that have not yet been addressed. His primary concern stems from language in the bill that essentially says if the DOT&PF asks DNR for a parcel of land, under proposed Sections 3, 5, 8, the state "shall" transfer these lands to airport, highways, and facilities, respectively. Thus, DNR cannot decline, condition the transfer, or protect existing or future rights. His biggest concern relates to material sites or gravel pits. Of his six general comments, the proposed CS, Version C addresses his concern with Section 16. He explained that proposed Section 13 would allow the DOT&PF to extract gravel from any existing pit on state land. The DOT&PF would not be allowed to establish any conditions on the gravel extraction. He suggested that this provision needs to be distinguished from the other provisions of the bill that allow DOT to receive title to the surface estate. CHAIR P. WILSON asked for further clarification. 3:12:14 PM MR. MYLIUS reiterated that Section 13 of HB 371 allows DOT&PF to extract gravel from any existing gravel pit on state land, including gravel pits may have been developed by another party for a totally different purpose. For example, numerous gravel pits exist on the North Slope. These pits have been developed by the oil and gas industry or their contractors to specifically support North Slope development. Of course, any development on the North Slope would require gravel roads or pads although the DNR has issued numerous gravel sales contracts to parties. Under HB 371, DOT&PF could go take any amount of gravel from those pits without any consideration or restrictions imposed by DNR to protect those developing their own gravel pits. He reiterated that DOT&PF could remove gravel from these pits that essentially would make it impossible to fulfill contracts. The provision in Section 13 doesn't say anything about protecting valid existing rights although such protections are in other provisions of the bill applying to the transfers. Section 13 would apply to any existing pits on state land. He strongly recommended removing Section 13 from the bill. 3:13:48 PM MR. MYLIUS said the bill still does not address the overriding or competing land claims. He referred to an earlier example of Happy Valley and Franklin Bluffs, in which the North Slope Borough has municipal entitlement selections. The DOT&PF responses indicate the state should keep those and the borough essentially loses out. The bill doesn't address that there still is a valid selection. If the intent of HB 371 is that those parcels should be transferred to DOT&PF then the bill should actually indicate that the NSB's selections should be rejected. Otherwise the DNR will need to reject the selections and likely need to litigate the matter. Additionally, if the DOT&PF doesn't need all the land the bill leaves it totally up to the DOT&PF to determine how much land and specifically which land it gets to keep. This would essentially mean that the NSB would be left with "the leftovers." 3:14:52 PM MR. MYLIUS said the bill does not provide any method for public concerns with access or conflicts with existing landowners. The DOT&PF has indicated its existing process handles that process; however, the DOT&PF's existing process pertains to highway projects in terms of road location, but does not often get into the specific location of gravel pits for state highway projects. Those decisions are typically subsequent decisions and the decisions about buffers and similar issues are made through DNR at the time it executes a gravel sale to DOT&PF. Therefore, there isn't any provision that allows for those types of issues to be dealt with, he said. 3:15:31 PM CHAIR P. WILSON, asked him to put his concerns in writing. CHAIR P. WILSON, after first determining no one else wished to testify, closed public testimony on HB 371. [HB 371 was held over.]