SENATE BILL NO. 40 "An Act relating to construction of highways by the Department of Transportation and Public Facilities." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated, "SB 40 allows the use of force account construction only for highway construction projects estimated to cost $250,000 or less. Projects greater than $250,000 will be subject to a competitive bid process as outlined in State statute." RICHARD SCHMITZ, Staff to Senator Cowdery, stressed importance of the competitive bidding process to State government operations. He explained this is to ensure fairness and to garner the best prices available. He noted the current system does not accurately compare the expense of private ownership of equipment and contract employees with that of State-owned equipment and State employees. Mr. Schmitz spoke to a handout [copy on file], which reads as follows. Re: SB 40 alternatives: Is DELIVERY ORDER CONTRACTING an alternative? • DOC is used by, and was developed by, the Department of Defense (it's called JOC by the Army, SABER by the Air Force) and is being increasingly used by local governments and educational facilities. • DOC is a competitively bid, fixed price, indefinite quantity, indefinite delivery (IDIQ), general construction contract. • The contract typically has a base year with 2 to 4 option years. • The contract sets parameters such as location of work, type of work to be done, design criteria, etc. • A DOC contract uses unit price guides (UPG) and/or a unit-price book (UPB) to establish a price for a multitude of lines items of work. A typical UPB has about 40,000 line items in order to cover just about every imaginable task. Items that are not in the book are then negotiated, priced, and added to the UPB. A UPG uses computer cost databases, etc. • The contractor bids a coefficient that is a markup or markdown to the UPB items, rather than a dollar price. What you get with a Delivery Order Contract: • On-call general contractor where prices for line items of work are predetermined. • A contract that is easy to manage. • A contract that puts more money into "hard construction" instead of soft upfront costs. Mr. Schmitz surmised this legislation would provide incentive to the Department of Transportation and Public Facilities to institute new methods of contracting for smaller projects. SENATOR JOHN COWDERY told of contractors that bid on a $3 million project located in Saint Mary's, in which the Department elected to utilize a force account. He opined this was an abuse of the force account. He reported that many states have defined maintenance and construction, separated by dollar amounts. He intended to provide a "level playing field", understanding that the Department must have the ability to utilize a force account. He considered the $250,000 limit to be adequate and would provide necessary latitude. He relayed he had asked the Department the lowest cost of a project located in rural Alaska, in which a request for bids would be issued. He was told the amount was between $75,000 and $100,000. Senator Cowdery stated this legislation would "get the State out of the construction business". Senator Taylor asked if this legislation would prevent abuses. Senator Cowdery responded it would require competitive bid. He noted that currently no limitation is imposed. Senator Taylor asked the regulatory authorization under which the Department makes the decision that only certain contractors could bid on a project. He gave the construction of high-speed ferries as an example. GEORGE LAVASSEUR, Acting State Maintenance Engineer, Office of the Commissioner, Department of Transportation and Public Facilities responded he would provide an answer at a later time at Co-Chair Wilken's request. Mr. Lavasseur testified to his 29 years in Southcentral Interior Alaska maintaining highways. He gave a history of the force account method beginning with a meeting eight years ago in Washington D.C with the National Highway Administration, where he learned that other states have the same problem of infrastructure without adequate funding to maintain it. As a result, congressional approval was granted to allow the use of federal funds for maintenance purposes, including pavement life extension, bridge repair and gravel-to-pavement programs. Before this authorization, he reminded that for several years during the 1980s, the State did not have enough funds to maintain highways. Mr. Lavasseur told of significant damage caused by the melt of discontinuous permafrost and the use of federal funds in the force account to maintain road smoothness, and to rehabilitate older pavements. He listed the type of projects undertaken with these funds, including boardwalks, community roads and capital projects performed by the Department maintenance staff. Of the $42,600,000 appropriated for this purpose in 2003, 86 percent is paid to private contractors. He detailed the percentages allocated to private contractors and Department staff in each region, based on the availability of hot asphalt. Mr. Lavasseur indicated photos showing heavy equipment, and the process of repairing roads in the Northern Region. SFC 03 # 38, Side A 10:37 AM Mr. Lavasseur asserted the force account method allows efficiencies for maintenance work done in Interior Alaska. He elaborated that the Department combines maintenance resources from a variety of "camps", which allows reduced per diem costs and better mobilization of units. He cautioned that if this type of work were contracted to the highest bidder, the costs would increase. He listed design problems, since typical as-built specifications are not available for 150 to 200 sections of a particular road that could be worked on. He added that the sections only measure between 50 to 300 feet rather than one continuous section and that he has learned from private contractors they are not interested in these projects. He attributed this to the short construction season and the large area in which equipment and manpower must be distributed. He noted that when a project is comprised of one section measuring three or more miles, a private contractor is employed, as the Department only addresses spot repairs. He assured that all crushing is done by the private sector, amounting to over $1 million annually in the Northern Region. In addition, he reported that all the emulsion is purchased from the private sector for approximately $2.5 million annually, and rollers, belly dumps, tractor-trailers, and milling machines are rented from the private sector. Mr. Lavasseur stressed the Department performs some of the maintenance work because of the lower costs associated with not paying Davis-Bacon Act wages, bypassing bid packages, preparing construction engineering on the grade, and not paying for a profit. He also spoke of the need to employ the "highly-trained" Department staff for at least nine months per year, explaining that previously the winter seasonal workers fished commercially during the summer months before the fishing industry declined. Mr. Lavasseur informed that the Department has been able to adapt to lower budget appropriations, inflation and unfunded salary increases because of cost saving efforts such as these. Mr. Lavasseur assured the Department was committed that the abuses of the past would not occur under the leadership of the current Murkowski Administration. He warned that passage of this bill would have a "devastating effect" on the highway maintenance program. Senator Taylor asked if a series of repairs along 50 miles of a highway could be divided into separate projects, each costing less than $250,000 and complying with the provisions of this legislation. Mr. Lavasseur predicted the costs would be higher than $250,000. He voiced concern that the Department would be limited by the $250,000 maximum amount and indicated he preferred a $1 million limit. He gave the repairs needed to the Alaskan Highway between Tok and the Canadian border as an example of this. He stated that private contractors would be hired to make repairs to the larger sections of the highway, but the Department would conduct the repairs on damaged sections of only several hundred yards in length. He detailed the process of staging equipment and a two-year supply of materials in key locations along the highway. He calculated the cost of repairs utilizing this method at approximately 65 cents per square foot, or $100,000 per square mile of area actually repaired. He predicted that to divide the repairs into smaller projects would increase the cost significantly. Senator Taylor restated his scenario suggesting the Department could address the smaller repair sections as separate projects, yet still utilize the efficiencies of stockpiled materials and equipment. Mr. Lavasseur expressed the Department would not chose to violate the intent of the bill. He qualified that if the division of repairs as Senator Taylor described were specified in the legislation, the Department could utilize the practice. Senator Cowdery countered Mr. Lavasseur's comments pointing out that the private sector also has a trained workforce. He mentioned one project covering 38 miles. He relayed that he spoke with Commissioner Barton about day-labor contracts to address larger projects and had received assurance this would be done. EDEN LARSON, President and Chief Executive Officer, Associated Builders and Contractors of Alaska, testified via teleconference from an off net location to dispute the Department testimony. She characterized this legislation as designed to prevent abuses to the force account system in the future. While she was assured the current Administration would not commit such abuses, she voiced concern that the proposed limitation must be imposed to prevent future administrations from committing abuse. She furthered that the limitation would allow the Department to perform efficiently. Senator Cowdery asked the size of the membership of the organization. Ms. Larson listed 145 contractors, their associates and suppliers, representing approximately 4,000 employees in the State. DON VALESKO, Business Manager, Local 71, testified via teleconference from Anchorage representing Department of Transportation and Public Facilities the 500 to 600 employees who perform road and facility maintenance. He voiced concerns with this legislation, particularly the impact it would have on regular maintenance operations, such as snow removal. He detailed the high cost of clearing roads after a heavy snowfall, which must be bid upon under the provisions of this bill. He understood one incident brought this issue to light, but stressed that one incident should not "dictate bad legislation". Senator Cowdery told of research indicating the definition of maintenance is "tighter" in other states, and that many states categorize projects costing less than $50,000 as maintenance and those over $50,000 as construction. He asked if the witness would favor such definitions. Mr. Valesko did not, because snow removal after even lighter snowfall would require the bidding process. He stated that the time involved with the bidding process would cause unnecessary delays in clearing the roadways. Senator Cowdery asked what information the witness based his comments on. Mr. Valesko calculated the $200 daily salary paid to an operator plus the $200 daily cost for equipment, multiplied by the 30 operators working five days per week in the Anchorage area to be $60,000 per week. He remarked this would place snow removal services in the category of construction, which he disputed. JEFF ALLING, Alcan Builders, and Member, Associated Builders and Contractors of Alaska, testified via teleconference from Fairbanks, in support of the bill. He agreed this legislation was prompted by an incidence of abuse committee by the prior gubernatorial administration. He expressed the intent is not to hamper snow removal efforts, but rather to prevent the State from competing with private industry on large construction projects. Mr. Alling told of bidding on a University of Alaska project and the use of multipliers to simplify the process. Mr. Alling questioned the representation by Mr. Valesko of union members. Senator Bunde asked if the employees of Alcan Builders are union members. Mr. Alling replied they are not, although he stated the company engages unionized subcontractors and they "work together quite happily". Senator Cowdery asked if most of the private contractors pay Davis Bacon Act wages to its employees. Mr. Alling answered yes. Senator Taylor understood the presence of a systemic problem of the distinction of the Department between construction and maintenance. He commented that in British Columbia, Canada, maintenance operations have been contracted to the private sector with significant savings realized. He suggested the definition of maintenance and construction should be given further consideration, because this legislation as written, could result in "more disservice than good." Senator B. Stevens asked if Mr. Lavasseur has reviewed the handout titled, "Air Force Guide: Simplified Acquisition of Base Engineer Requirements (SABER)" [copy on file]. He asked if the information contained in this report address preventive maintenance. Mr. Lavasseur affirmed and explained that due to permafrost melt the destruction of roads has increased rapidly, and more resources have been necessary to perform repairs. Senator B. Stevens echoed Senator Taylor's assertion that the issue is based on the definitions of construction and maintenance. Senator B. Stevens characterized snow removal as one type of maintenance, yet preventative maintenance is more a type of construction. Senator B. Stevens next questioned the zero fiscal note, citing the second paragraph of the analysis, which reads as follows. Since it is not possible to determine which projects will be considered for FAC [Force Account Construction] over the next six years, we will base the projected savings on Calendar Year 2002. The estimated savings on 2002 force account projects (greater than $250,000) was $4,267,700. Assuming the amount of force account projects remains constant over the next six years, the lost savings would total $25,606,200. Senator B. Stevens asked if expenses would increase over $25 million. Mr. Lavasseur replied it would for the period of time indicated [six years]. He elaborated this would be due to the costs of issuing bid packages, engineering design, advertising and construction management. Senator B. Stevens indicated a fiscal note to separate legislation applying to FY 01 [bill number and further information not provided], estimated savings of $120 million utilizing a force account. He cited the analysis of the unspecified fiscal note as reading "Assuming the force account managed costs over the next six years, loss of savings would be a total of $120 million." He requested reconciliation of the information of the two fiscal notes and the aforementioned Air Force report. He suggested the matter could be discussed after this meeting concludes. Mr. Lavasseur agreed to explain the matter. Senator B. Stevens noted the funding has been accounted more often as "one line item" and wanted to understand the reason. Mr. Lavasseur indicated the majority of the projects in question have been gravel-to-pavement. Co-Chair Wilken asked the year the federal government ruled that federal National Highway System funds could be used for maintenance purposes as well as construction projects. Mr. Lavasseur answered 1998. MARK O'BRIEN, Chief Contracts Officer, Contracting, Procurement and Appeals, Office of the Commissioner, Department of Transportation and Public Facilities, testified via teleconference from an offnet location that he could answer questions posed by Committee members. Mr. O'Brien addressed Senator B. Stevens's queries regarding the fiscal notes, stating that the differences reflect a change in how the savings was calculated. He explained, "there were significant savings factors back in 2000 that resulted in estimates of savings as high as 55 and 60 percent." He informed that upon review of competitive bids and "the current marketplace", the savings estimates have been recalculated to 20 to 25 percent and the current fiscal note reflects a savings of 28 percent. He noted this percentage is based on a comparison of Davis Bacon Act wages, profit and construction engineering expenses. Mr. O'Brien next spoke to the definitions of maintenance and construction projects, indicating AS 19.45.001(2) provides the definition of construction as "?construction or any derivation meaning 'construction, reconstruction, alteration, improvement or major repair?'" and (10) provides the definition of maintenance. He assured this legislation would not hamper routine maintenance projects, such as snow removal. However, he pointed out that because the construction definition does not specifically define major repair, uncertainty over the classification of resurfacing projects would require the $250,000 provision. Senator Taylor asked how the matter could be resolved. He questioned the imposition of an "arbitrary number" and the situation of the cost of a project exceeding $250,000 and automatically becoming a major repair that is subject to the bidding process. He requested further clarification of the definition of repair and major repair. Mr. O'Brien ascertained the definition of repair was unrelated to the provisions of this legislation, surmising that maintenance would continue to be categorized as repair rather than as construction and not subject to the provisions of the force account, although he assured he would review the matter. Mr. O'Brien agreed with earlier testimony that most construction should be undertaken through the competitive bid process and informed that currently 97 percent of the work is handled in this manner. He noted that of the three percent of the work done through the force account process, half is contracted by competitive sealed bid. He stressed that less than one-half percent of the work is therefore not undertaken through competitive bid. Mr. O'Brien reported that community roads and boardwalk projects, which require considerable maintenance activity, is often transferred from the Department to the Bureau of Indian Affairs or Indian Health Agency undertaking other projects in the area. He stated it is often in the State's best interest and is cost effective to do so, as the other agencies have staff, equipment and materials on hand to perform the work. He noted this practice would be prohibited under the provisions of this legislation. Senator Cowdery asked the dollar amount of the three percent of the projects not currently addressed through the competitive bid process. Mr. O'Brien replied that $61 million was expended through the force account during the years 1998 through 2002. During the same period, he continued, the entire program expended $2,279,000,000. He calculated the force account comprised 2.68 percent of the total expenditure. Co-Chair Wilken ordered the bill HELD in Committee. ADJOURNMENT  Co-Chair Gary Wilken adjourned the meeting at 11:13 AM