SENATE BILL NO. 229 "An Act relating to the employment of hearing examiners and mediators by the Regulatory Commission of Alaska; repealing a requirement that the principal office of the Alaska Oil and Gas Conservation Commission move to the same location as the principal office of the Regulatory Commission of Alaska; relating to the sharing of record-keeping facilities and clerical staff by the two commissions; and providing for an effective date." PAT CARTER, Legislative Assistant, Senator Pearce stated that SB 229 makes technical changes to SB 133, which the legislature passed last year. He outlined that SB 133 abolished the Alaska Public Utilities Commission (APUC) and established a new regulatory commission of Alaska. He added that SB 229 makes three changes to SB 133. He noted that the first of these repeals the provision that SB 133 contained, which statutorily obligated the Regulatory Commission of Alaska (RCA) to co-locate with Alaska Oil and Gas Conservation Commission. He continued that initially this provision was to achieve cost savings through record storage facilities, as well as clerical staff, etceteras. Mr. Carter offered that the Department of Administration conducted a thorough review and determined that the economies of scale that they had hoped to achieve could not be realized. He noted that this was primarily due to the current lease space that RCA presently occupies. He added that the rent is cheap where they are located, but the building cannot accommodate both agencies. Mr. Carter continued that the second change concerned a drafting error. He noted that SB 133 allowed the Commission to employ Hearing Officers, but what the Commission actually needs is a Hearing Examiner. He stated that the difference between the two is that a Hearing Officer need not be an attorney, but a Hearing Examiner is an attorney. He added that a Hearing Examiner is needed to adjudicate legal matters during the RCA's hearing process. He continued that the final revision clarifies that the RCA may employ and utilize mediators, as well as arbitrators. He stated that this was the original intent of SB 133, although the language is slightly unclear and already challenged. Amendment #2: Mr. Carter explained that this amendment clarified language contained on page one, line 12, by inserting "arbitrators, mediators" after the reference to administrative law judges. The amended language would read: "The commission chair may employ engineers, hearing examiners, administrative law judges, arbitrators, mediators, experts, clerks, accountants, and other agents and assistants considered necessary." Co-Chair Torgerson asked if this conformed to page two, line 22, which stated, "A decision of a hearing examiner, an arbitrator, a mediator, or an administrative law judge is not final until approved by the commission." Mr. Carter responded affirmatively. Co-Chair Parnell made a motion to move Amendment #1. Co-Chair Torgerson stated that this language might also need insertion into the title of this bill to conform. He noted that hearing no objection, Amendment #1 was ADOPTED. NANETTE THOMPSON, Chair, Regulatory Commission of Alaska, Department of Community and Economic Development testified via teleconference from Anchorage, stating that she supported all the comments made by Mr. Carter and urged the Committee to pass this legislation. Co-Chair Parnell made a motion to move SB 229, version 1- LS1351\H with individual recommendations and a zero, Department of Community and Economic Development fiscal note from Committee. Co-Chair Torgerson hearing no objection MOVED FROM COMMITTEE SB 229. hb#112 HOUSE BILL NO. 112 "An Act establishing the Alaska public building fund; and providing for an effective date." Co-Chair Torgerson stated that the last time the Committee heard this legislation it was requested that a fiscal note be provided with necessary fund sources, along with the application of depreciation per building. He then asked for the Administration to review their spreadsheet. Senator Green asked what would happen if this legislation did not pass. REPRESENTATIVE JAMES responded that the state would "keep on, keeping on," like they have been. Senator Green asked if there would be any loss of funds to the state. Representative James responded that according to the fiscal note, $783,000 in federal funds would be lost. Senator Green noted that this was because the federal government requires that there be an even [inaudible.] Representative James responded that "we can't charge them rent if we don't charge rent across the board." Senator Green asked if there was anyway that the fee schedule for this legislation could become arbitrary in nature. She noted her concern that this legislation would create new administrative fees charged back to agencies in an arbitrary fashion. Representative James asked if Senator Green was referring to charges related to maintenance or to monies being moved from the budget to the agencies consistently. Senator Green clarified that she spoke to situations such as when departments are charged a fee for an administrative charge back, such as for Data Processing services. She wondered if this charge back fee, in this instance, would be included in a rent payment as allowed for in this bill. She asked if this would be an arbitrary or a consistent charge throughout the years. Representative `James responded that it was her understanding that the whole purpose of this bill would not allow for this to happen. She spoke to the established rental rates, different for each building, as noted. She added that these rates are based on such things as maintenance costs and appreciation rates. She continued that in order to change this rent figure, the value of the property would have to change. Co-Chair Torgerson referred to personal services on the fiscal note and asked if it was the intent of this legislation to hire two individuals to carry out the designated duties. Representative James responded that she understood that two new individuals would not be hired, since presently this work is being conducted by established employees. Co-Chair Torgerson referred to a new Committee Substitute (CS), Version "1-LS0522\D before the members. He encouraged the adoption of this CS since it inserts the language "covered buildings," and then identifies these as only the eight buildings referred to in the Office of Management and Budget spreadsheet. He stated his concern with legislation that would apply to any other building in the future not anticipated by this transition. Senator Green asked if this legislation would anticipate the acquisition of any other real estate and, if not, would the legislature need to consider such a transaction in light of budget concerns. Co-Chair Torgerson stated that it was not a question of acquisitions. He added that, in the future, anytime a piece of property was added to the list, through a purchase or by lease agreement, this transaction would come before the legislature. He noted that he had a problem with charging agencies for depreciation and wondered where subsequent monies would come from. JACK KRIENHEDER, Senior Policy Analyst, Office of Management & Budget, Office of the Governor referred to the related fiscal note for HB 112. He stated that the Department had built a facilities rent proposal into the Governor's FY01 budget request. He added that the department set out to extract the related rent figures from the Governor's budget and incorporate them into a fiscal note. He continued that the 35 pages of backup were budget transactions to implement the rental program. He noted that the numbers included on the front page of the fiscal note, the total operating budget of $1.25 million, were in increments of non-general fund monies. He explained that this instigates the authority that the affected departments would need to expend for rental costs, which is non-general fund money collected from federal funds and other non- general fund sources. Mr. Krienheder added that the transfer of money from the Department of Administration and the Department of Transportation & Public Facilities to the affected agencies to pay rent, are not reflected on the cover page, since this is essentially "a wash." He reiterated that this was an effort of moving money from one department to another, as reflected in the attached documentation. KEITH GERKEN, Architect, Division of General Services, Department of Administration clarified comments made by Representative James. He stated it was true that the rates were all by specific building. He added that each building has their own rate calculation, based on actual expenses. He pointed out these rate calculations were based on Federal Office of Management and Budget guidelines in order that recipients are fairly charged and audited. Senator Green asked if there was a fair method for estimating what would be needed in the future, based on a percentage rate calculated on the value of a building. She noted that this was the arbitrary figure she worried about. Mr. Gerken responded that the formula for payment from the federal government is based on actual costs. He continued that if any given yearly rate is more or less, the next year's rent must be adjusted to equalize this. He summed up that a projection, as Senator Green characterized, is not allowed. Senator Green asked for further clarification. She thought this proposal was based on planning for the future and allowed for the creation of a formula to pay for maintenance costs and an improvement fund for the buildings specified Mr. Gerken responded that the one increment, which affects this assumption, is depreciation. He noted that depreciation is part of what can legitimately be charged for rent, which is a theoretical calculation. He added that it must be demonstrated how depreciation is conducted, and the department has to do so based upon the replacement costs of the buildings. He pointed out that the federal government will pay for rent that includes a calculation for depreciation. He summed up that depreciation is the "new money" injected into these facilities that allow the department to keep up with preventative maintenance, along with renewal and replacement costs. He added that the related fiscal note reflects these figures. Senator Green asked if these figures could be manipulated. Mr. Gerken responded that these figures cannot be calculated arbitrarily. He added that the methodology for determining a depreciable basis for a building has to meet normal government accounting standards. He continued that the department has used a regressed, replacement value for the buildings. He noted that once this figure is set, it is the annual amount that can be charged for a particular building's depreciation, until this depreciation is gone. He then used an example of a 30-year life of depreciation and how this affects the overall calculation. He added that this calculation can change only if investments are made to a building affecting depreciation, but these figures cannot be manipulated. Mr. Gerken summed up that these upgrades would be part of the yearly budgeting process. ANNALEE MCCONNELL, Director, Office of Management and Budget, Office of the Governor stated that if the legislature conducts an unallocated budget reduction and the Office of Management and Budget has told the agencies that they are under this rent plan, there will be future choices to consider. She noted that rent must be paid. She added that the department will be faced with these choices in the face of budget cuts, but this will not be because of the rent plan. She continued that rough choices would be present regardless of a rent plan in place. Senator Wilken stated that as he understood this rent plan, it has to be established by generally accepted accounting principles. He added that this would include depreciation. Secondly, he added, in order to capture the $750,000 in federal money, the state has to follow a certain "Circular A87," which defines what the state is allowed to consider as a cost, including depreciation. Thirdly, he concluded, that if an agency feels they are being treated unfairly, there is a state system in place to aggrieve these assessments. He asked if these three assessments were correct. Mr. Gerken responded that the first two points were correct, but he was not sure that there was a process in place to hear related grievances as noted in the third assessment made by Senator Wilken. He noted that there was a process for questioning whether the calculations for rent payments are correct. He added that this was part of the reason the department has requested an accounting position, in order to demonstrate to the federal government that the calculations as they are figured are correct. Co-Chair Torgerson noted that the rent rate established was upon general accounting principals. He understood that appreciation would be included in this, but he asked if the rental rate was on a cost basis. He added that if this was the case, a top end could not be definitively established. He noted that a budget problem could result if more rent than the general public would charge is assessed, and then a competitive situation is created between the Department of Administration's rental rate and private enterprise rental rates. He added that it was not the department's intent to do so, but that there was nothing in the present legislation to prevent this from happening. He noted that this was not general accounting practice unless rent is figured on cost, plus depreciation. He offered that profit and other characteristics would be involved otherwise. Ms. McConnell referenced a chart created by the department, entitled "FY01 Facilities BRU Summary by Building." She noted that these charts reflect an $.88 per square foot figure that Office of Management and Budget would charge agencies in the State Office Building. She added that this chart makes comparisons with other facilities in Juneau where the state has rental space. She pointed out that because of profit margins and so forth, the market rate of the State Office Building would be considerably lower than what the agencies could hope to get out on the street. She added, that if utility rates go up next year, there would be an increase in the cost of maintenance. She continued that this would be true in the private sector and noted that this would not be a static change, but certainly budget pressures will force the Office of Management and Budget to conduct the building maintenance in a cost- effective manner. Mr. Gerken added that the existence of the market rate and the pressure this puts on the state to keep their rates down is healthy. He noted that if the state can not deliver a building rate under market, this should be an indicator and something that should be questioned. Co-Chair Torgerson responded that he appreciated this explanation but still felt as though these costs could ultimately be manipulated. He added that the depreciation might be impossible to manipulate if general accounting practices are followed, but any rate that gets by this bill could be manipulated. He continued that this potential was not limited to a rental rate based upon cost, plus appreciation, but rather on management fees. Co-Chair Torgerson also took offense with the potential hire of two employees to carry out this bill's mandates and noted that next year this employee amount could be increased to four. He illustrated by this example that other costs could be added into this base amount, negating its set rate characteristics. Co-Chair Torgerson explained that he also had questions regarding the generation of funds from the depreciation of the Atwood Building and the relocation from the Frontier Building. He wondered about these characteristics as being built into the base funds for this legislation. He noted that he would examine the Office of Management and Budget's related fiscal note. Mr. Krienheder emphasized the two new positions created by this legislation were funded by non-general funds and allow the state to bring in roughly an additional $1.5 million in non-general fund money, including federal funds. He explained that the existing Department of Administration staff does not have the spare time to take on this project, which encompasses a significant workload. Co-Chair Torgerson asked the witnesses to explain the relationship between the Office of Management and Budget, the Department of Administration, and the Department of Transportation & Public Facilities. He asked about the facility manager position allowed by this present bill. He understood that the Department of Transportation & Public Facilities did not have such a position and if that was the case, he suggested that the legislature could take two or three of these positions out of the present budget, since the state presently funds these salaries. He asked how the witnesses envisioned the new position interacting with the Department of Transportation & Public Facilities. Mr. Gerken responded that there was presently no fund or rental program. He stated that there was a new level of work that must be considered in both the Department of Transportation & Public Facilities and the Department of Administration related to this new legislation. He noted that the Department of Administration is the fund manager, acting as a building owner would for rental pools. He added that the Department of Transportation & Public Facilities as the property manager for seven of the eight affected buildings, excluding the Atwood building, is already accounted for by the Department of Administration. He continued that the Department of Administration would essentially enter a contract with the Department of Transportation & Public Facilities to deliver the maintenance services, which they now deliver to these seven buildings. He reiterated that there does not presently exist a management type position that would establish cost centers, tracking costs, establishing rates and conducting audits. Co-Chair Torgerson asked if the department was currently billing the federal government for agency costs, such as janitorial services and other things. Ms. McConnell responded that this really depends on the program since for some, a certain amount of facility costs have been built into what is recovered from the federal government. She noted though that this was much more limited than it could be and the roughly $4.5 million that is referred to in additional funds is on top of what is currently being collected. She added that there are many programs where the state currently does not receive federal dollars, of which they would be entitled even on a program that is strictly based on cost reimbursement, such as one that might be capped at the federal level. She summed up that what the state receives now is relatively incidental. Co-Chair Torgerson countered that he did not understand the fiscal note in light of this assessment. He understood that the department would be collecting for monies other than depreciation, namely pure costs. Ms. McConnell answered that the pure cost was budgeted for facility maintenance, for example, in the Department of Transportation & Public Facilities. She added that these costs are presently general funded costs for the agencies. She added that some of the agencies occupy leased space, which is partly funded by federal programs. She pointed out for these specific buildings outlined, that the direct operating costs are budgeted fund items in the Department of Transportation & Public Facilities or in the case of the Atwood Building, through the Department of Administration Co-Chair Torgerson asked if the State was billing the cost related to Department of Labor and Workforce Development or whomever else and commented, "we're going after CSED or their share of the cost of the space that they occupy now." He asked if the state was recovering actual out-of-pocket costs for this. Ms. McConnell responded that in regards to the affected buildings here, the department does not bill the federal government, rather, general fund monies are used. Tape: SFC - 00 #27, Side B, 10:22 am. Senator Wilken referred to the related fiscal note and more specifically to the fund source of $713,000. He noted that this figure was potential federal funds. He continued that the $66.4 million was the Department of Revenue program receipts from the Alcoholic Beverage Control Board and the Tax Division. He asked about the $468.3 figure. [It was unclear which fiscal note Senator Wilken referred to.] Ms. McConnell acknowledged that there was other fund sources such as Retirement and Benefit to consider. She noted that this agency occupies space in the State Office Building. She added that this creates an accumulation of other fund sources which are neither federal, nor general fund program receipts. She outlined that since the fiscal note represents costs that are different than today, and because the Department of Administration and Department of Transportation & Public Facilities already have general funds in their budget, what is before the Committee is how this budgeting will look as a result of this legislation. She added that the Department of Administration will move money in order to accommodate the rent plan, for example, transfer general funds out of the Department of Transportation & Public Facilities, but these are not new dollars to the entire system. She stated this is why the Committee does not see these funds on the fiscal note. She confirmed that this fiscal note indicates all of the non- general fund sources, including the Permanent Fund Dividend Division, the Mental Health Trust Authority, etceteras. Senator Wilken asked how the $468 thousand figure on the fiscal note was reached. Mr. Krienheder noted the budgeting is not shown in this form within the packet. He noted that the full list would be Division of Retirement and Benefits; Central Mail Room; Department of Administration, Risk Management Office; Permanent Fund Dividend Division; Alaska State Pension Investment Board; Mental Health Authority; Department of Revenue; Department of Labor and Workforce Development, Human Resources Investment Council and the Alaska Police Standards Council. He outlined these agencies along with the corresponding figures. Senator Wilken stated that this budget included everything except Information Technology and the federal funds. He asked about the $468 thousand figure as new depreciation dollars and wondered what constituted the cost component here. Ms. McConnell stated that these were two different slices, in other words, the Department of Administration does not say that the exact dollars from Retirement and Benefits will go towards depreciation. She noted that in a sense, everyone's rent is composed of cost expenditures such as janitorial service and some elements of depreciation. She added that by looking at the overall revenue sources and the overall expenditures, it turns out that the department is able to cover the depreciation essentially with this new money, even though it is not carved out specifically. She offered that when the department looks at all the revenues brought in under this formula, the department can cover the depreciation expenditure, something which they have never been able to do before. Senator Wilken pointed out though that this $468 thousand figure was supposedly new revenue from a table entitled, "Depreciation." He confirmed that these were new depreciation dollars, but the department does not presently charge the agencies rent. He asked if the department begins charging depreciation from this day forward, along with costs such as janitorial services, would this be considered a new dollar coming into the formula. He wondered if the department would then use this new money to help pay for this program and meet the cost of the sinking maintenance fund. Mr. Krienheder noted that the table, which Senator Wilken referred to with the column labeled "depreciation," should read "new rental funds." He noted that the reason this page focused on depreciation was to address Co-Chair Parnell's question about how the department pays for depreciation without tapping new general fund monies. The department was attempting to show that this total of new money available is more than enough to cover their depreciation cost. He then referred to janitorial, fuel oil, electrical, maintenance worker figures and noted that these costs were already included in the Department of Administration's budget. He continued that this money is already available. Senator Wilken asked that if the Committee looked at the Division of Retirement and Benefit funds, the figure $178,900 and wondered if this was not the depreciable amount for this agency but rather the rent that will be charged them. Ms. McConnell responded affirmatively and added that the words "fund available" was intended to show how the department is able to cover depreciation without relying on general funds. Senator Wilken asked why the "Information and Technology" expenses would not be included in this budget as new money. Ms. McConnell responded that this amount was already incorporated in the rate structure for the Division's entire program as a component of rent. She noted that if this figure was not built in up front, the department would have to adjust it at a later date. She added that these rates have already been calculated as a charge to their rental space. Senator Wilken confirmed that the collected $2.4 million would be applied to operating expenditures and noted a change of revenue of $783,000. He asked where this figure was derived. Mr. Krienheder responded that the change in revenue reflects new money from non-state sources. In other words, although the department brings in a total $1.5 million, to bear on this budget, when the department looked at a change of revenue line, they decided to count new money into the state, not counting retirement and benefits. He noted that this cost would come from that fund even though it is comprised of non-general funds. He noted that this figure was comprised of $713,000 in federal receipts, accounting also for general fund receipts and miscellaneous totals. He added that he would get back to Senator Wilken on this breakdown. Ms. McConnell added that the department discovered during this process that the typical fiscal note structure does not adapt very well to what the department is attempting to illustrate here. Mr. Krienheder referred to a handout entitled, "FY01 Facilities BRU Summary by Building." He noted that the first pages gave a good summary by building, (eight in all) along with the different cost components of rent. He noted that these categories made up each buildings "total annual cost," divided by "usable square feet," which results in a corresponding rental rate. He added that it was a federal requirement to highlight these costs per building. He noted that maintenance and operation costs, as actual expenditures are currently budgeted. He continued that administration costs are reflected in the fiscal note, as well as risk management costs. Mr. Krienheder clarified the total depreciation on the first page of this handout, and noted that the discrepancy of the figure, was due to private tenants with leases that have yet to expire. He continued to the second page, which was a break out of the same numbers by agencies within each building. He noted that page three, highlights very specific totals of rental rates and what non-general fund sources are available to cover these costs. He then made reference to this specific information according to agency. Mr. Krienheder moved to page four, which separates the Atwood Building from the others since, it is administered by the Department of Administration, rather than Department of Transportation & Public Facilities. Co-Chair Torgerson asked if a manager currently existed for the Atwood building. Mr. Gerken responded that a contractual property manager, Pacific Tower Properties, was in place. Mr. Krienheder noted that the next page was a continuation of the previous. He then referred to the page entitled, "Budget>Summary Rev. Allocations," which is the detail that goes into calculating the rental rates, including total maintenance and operations, depreciation and again, separating Atwood out from the other buildings. He continued that the following page gave a specific breakdown of the Atwood Building for the benefit of the departments that moved from the Frontier Building. Mr. Krienheder noted that the next page gave a department breakdown within their respective buildings in regards to depreciation, maintenance, and etceteras. He added that the next page was a continuation of the same. He noted other miscellaneous agencies, which were also included in these figures. He summed up that the last two pages of the handout was essentially the same information as previous, but was collated by building rather than department. Senator Wilken referred to the fiscal note and the figure of $468,000 outlined in the summary on page one under the heading "Other," he referenced language that stated, "with the exception of funds, Information Service Fund (ISF), Alcohol and Beverage Control Board (ABC) and the Tax Division." He asked that when this goes into effect, if the state will hand the other nine or so agencies a bill for $468,000 in rent and if so, will they be required to pay this amount. He asked where this money would come from. Ms. McConnell stated that one of the reasons the department has incorporated this rate schedule into the Governor's budget was because of the complexity of the necessary transactions. She used the Division of Retirement and Benefits, as an example of what this agency would owe, for designated rent amounts in the State Office Building. She added that each agency had a budget increment for retirement and benefit funds to cover this rent. Senator Wilken clarified that the $468,000 amount would be like match money for the state to claim $713,000 and asked if the state could not receive this latter amount without charging departments for the first figure. Ms. McConnell responded affirmatively. The state must treat the entities in each building the same way in order to receive federal money. Senator Wilken asked what constituted the contractual amount noted as $1.104 million on the fiscal note. Mr. Gerken responded that all costs except administrative costs are reflected in the contractual line item and he explained why this was so. Senator Wilken asked if it is true that the agency pays the "sinking fund," the legislature takes the money out and appropriates it each year towards janitorial services, etceteras, according to the contractual language. Ms. McConnell responded that the appropriations out of the building fund will cover both annual operating expenses such as maintenance and capital expenditures such as roof repairs. She continued that in either event, these budgets will come to the legislature for appropriation. Representative James stated that it was her understanding, that according to the fiscal note, this program allows for accumulating funds. She continued that when the legislature was required to make major decisions about depreciable items, this would come before the legislature for budgeting and appropriating. She noted that the way this legislation was drafted, the legislature is required to appropriate every year and there will be no money left over. She suggested that the fiscal note should break out those yearly expenses illustrating a pool of accumulated money, whereby when needed, money would be appropriated. Ms. McConnell noted that there would not be any accumulated money ready for use. She continued that each year, money will go into a building fund, but Representative James is correct, the legislature does not necessarily appropriate every dollar out of this fund within each fiscal year. Ms. McConnell reiterated that the fiscal note format does not accommodate this concept very well. Mr. Krienheder clarified that the intent on the contractual line shows agency rent payments into the public building fund, not expenditures out of the public building fund. Ms. McConnell stated that the fiscal note could be adjusted to clarify that none of the money will be deposited into the General Fund, Permanent Fund or any other location, but will remain in the building fund. She noted that the department will clarify that not all of the money will be appropriated out on a yearly basis. She stated that it was the department's intention that all of the payments would be deposited into the funds established by this bill. Senator Wilken asked if language could be inserted to allow for a "set-aside." Ms. McConnell responded that the department would come before the legislature every year with their recommendations of what kinds of building elements need replacing. She added that a set-aside situation as suggested by Senator Wilken could be accomplished, but continued that a better approach might be established by making schedule suggestions for necessary repairs. Mr. Gerken responded to a question by Senator Wilken saying that this money would go to a pool for all eight buildings. He added that the Department was in the process of identifying necessary upgrades for each property. Representative James stated that she did not like the present fiscal note as outlined and asked that it be amended. "If they need to have an appropriation into the fund, which I don't think they do, it either should be different than income at the top, or if they do need an appropriation into the fund, it should be under miscellaneous, not under contractual." She felt as though this was misleading and wanted to make sure that money was appropriated yearly. Co-Chair Torgerson stated that HB 112 would be HELD and considered at a later date. ADJOURNMENT Co-Chair Torgerson adjourned the meeting at 11:02 AM. SFC-00 SS1 (1) 02/15/00