CS FOR SENATE BILL NO. 125(TRA) "An Act relating to protests of state contract awards, to claims on state contracts, to the arbitration of certain state construction contract claims, and to hearings and appeals under the State Procurement Code; making conforming amendments in the State Procurement Code; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken informed that this legislation would reform the method through which construction claims against the State are addressed. He relayed that, approximately a year prior at a Senate Transportation committee meeting in Anchorage, the committee heard testimony regarding the construction industry's frustration on this issue. He continued that, as a result of that meeting, representatives from the Department of Transportation and Public Facilities and the Associated General Contractors of Alaska (AGC) worked together to develop a consensus on how the construction claims process against the State could be revised. RICHARD SCHMIDZ, Staff to Senator John Cowdery, the bill's sponsor, informed the Committee that the Department of Transportation and Public Facilities and the AGC would present this legislation. MARK O'BRIEN, Chief Contracts Officer, Division of Contracting, Procurement and Appeals, Office of the Commissioner, Department of Transportation and Public Facilities, informed the Committee that the Department has been working with AGC to improve the construction claims process. He stated that AGC originally presented three suggestions toward making the claims process "faster, fairer, and less expensive," and he contended that this legislation would adequately address their concerns. He explained that in order to quicken the claims process, specific timeframes "where none existed and shortened timelines where ones did exist" as well as implementation of an arbitration process as opposed to the current hearing officer process have been incorporated into the proposal. He stated that specific timelines for resolution would be identified in the arbitration process. These timelines, he noted, "would serve to speed up the process and reduce costs" as compared to the costs resulting from attorney and consultant fees in the current litigation process. Mr. O'Brien specified that the arbitration decision would be final. He noted that with the exception of appeals based on charges of fraud, misapplication of the law, and a few other narrow issues, there would be no lengthy court appeal process. Mr. O'Brien communicated that the arbitration process would include regulations regarding the selection of an arbitrator who would be acceptable and fair to both parties. He stated that implementation of an arbitration system would reduce costs as it would shorten the process and limit appeals. Mr. O'Brien acknowledged that the award of costs and fees is the lone point of dissention remaining between the Department and AGC. He noted that Rules 79 and 82, as referenced in the Department's fiscal note #1, require payment of attorney fees and claims costs. He commented that these provisions would incur costs at "a baseline average" of $145,000 per year based on an eleven-year average in which expenses ranged from a high of $340,000 to a low of $7,000. He explained that this expense would be subject to such factors as the complexity of the case and the length of litigation. Furthermore, he explained that in addition to these expenses, the cost of additional attorney fees associated with litigating these awards is estimated to be approximately $6,000 per year or 20 hours per claim. He specified that another factor is the Rule 68 provision that allows for an "offer of judgment." He stated that this factor is considered to be "a driver" in settling a claim. Mr. O'Brien informed that while most construction claims are associated with federally funded projects, no federal funding support exists for expenses associated with Rules 79 and 82. Therefore, he stated that an award of costs and fees would require general fund dollars. Senator Hoffman asked the dollar amount of claims currently being processed. Mr. O'Brien responded that he is unsure of the current outstanding claims amount. DICK CATTANACH, Executive Director, Associated General Contractors of Alaska, spoke in support of this "fair and balanced" bill. He stated that while he appreciates the concern regarding the potential level of the fiscal note, he asserted that the proposed process would speed things up and would be less expensive. He noted that AGC worked diligently with the Department of Transportation and Public Facilities, the Department of Law, and other affected parties to address this issue. Co-Chair Wilken asked whether the industry is satisfied with the results of those discussions. Mr. Cattanach confirmed. Amendment #1: This amendment inserts a new section on page 1, following line 5 as follows. Section 1. AS 36.30.005 is amended by adding a new subsection to read: (d) Notwithstanding the provisions of AS 36.30.627, the University of Alaska is not required to arbitrate construction contract claims unless the university specifically agrees to the arbitration. Co-Chair Wilken offered Amendment #1 and objected for explanation. Co-chair Wilken explained that this amendment would exempt the University of Alaska from the binding arbitration requirement for claims valued at less than $250,000 unless the claim was mutually approved by both the University and the contractor. He noted that no other provisions of the bill would be affected by this proposed change. WENDY REDMAN, Vice President of University Relations, University of Alaska stated that the University was not involved in the aforementioned discussions due to the understanding that the University would not be impacted by the legislation. However, she advised that the University is seeking the exemption for the small claims section, and she noted that there is no opposition to this exemption request. In addition, she expressed that the University has a good working relationship with AGC. Continuing, she stated that the University would be involved in the implementation of procedures pertaining to this legislation. Co-Chair Wilken removed his objection. Senator B. Stevens asked whether the University utilizes a State procurement officer. Ms. Redman responded that the University has an in-house procurement officer. Senator B. Stevens asked the University's total annual construction budget. Ms Redman specified that the amendment addresses small claims valued at $250,000 or less. She continued that the University's construction budget ranges between $20 million to $40 million annually. Senator B. Stevens asked the importance of excluding this level of contractor claims. Ms. Redman explained that the bill specifies that small claim arbitration could be initiated "solely at the discretion of the contractor," without the approval of the University. She stated that because the majority of University construction projects fall into the small claim category, its attorneys have determined that the bill's current language is not in the University's best interest. Senator B. Stevens ascertained therefore, that the basis of the amendment would be to address the concern that the University would be negatively impacted because of the multitude of small contractors it deals with. Ms. Redman affirmed that the majority of University projects would be classified as small projects. She reiterated that the University's legal council has determined that this bill might influence small contractors to pursue arbitration measures. Senator B. Stevens asked what the University's alternative to arbitration would be. Ms. Redman responded that the alternative would be the current settlement process through which hearings are conducted. She noted that the University's attorneys have determined that the proposed arbitration process might remove the incentive to settle. Senator Hoffman surmised therefore, that contrary to testimony stating that the arbitration process would shorten the time involved in settling claims, the University has determined that the arbitration process would lengthen its time required to settle disputes. Ms. Redman clarified that this legislation would introduce binding arbitration as a method to settle small contractor disputes. She stated that while the State has experience with this issue, the University has not. She acknowledged that University attorneys might eventually conclude that it might be an acceptable alternative. However, she stated that because the University was not involved in the aforementioned discussions, the concern is that the small claim arbitration mandate might increase its number of arbitrations and litigations. Senator Bunde voiced being nervous "that a State agency would escape the full impact of this law." He attested that this would set a poor precedent unless the University already has an arbitration process in place that would be duplicated by this mandate. He asked whether the University currently has in place a system to adjudicate these small claims. Ms. Redman replied that the University must adhere to and abide by the State procurement code that has established provisions pertaining to hearings and the appeal process. Senator Bunde stated everything "except for this exemption." Ms. Redman concurred. Senator Olson agreed with Senator Bunde's comments. Senator Olson asked AGC's position on the amendment. Mr. Cattanach commented that the $250,000 small claims category limit was agreed upon after six months of discussion between the AGC and the Department of Transportation and Public Facilities that determined that a binding arbitration determination would be a fair method of addressing a claim. He asserted that arbitration is very expensive and that it would not unusual to spend a quarter of a million dollars when prosecuting a claim. He shared that after a hearing is conducted, a contractor might determine that an independent arbitrator could levy a fair opinion without incurring further expense. He stated that claims below $250,000 could be handled quicker and cheaper via the arbitration process. He specified that claims in excess of that amount would be better managed through the routine claims process. Mr. Cattanach stated that AGC agrees with the University's position on this amendment because the University was not involved in the process. Additionally, he commented that the University has committed to work with AGC to determine whether the binding arbitration process would work with University projects. He voiced confidence that it would work. Therefore, Mr. Cattanach replied that AGC supports the amendment. Co-chair Wilken removed his objection to the amendment. There being no further objection, Amendment #1 was ADOPTED. Amendment #2: This conceptual amendment addresses a technical error in the bill whereby Sections 1 and 15 of the bill specify two differing effective dates pertaining to the applicability of the bill. The clarifying language being inserted into the bill reads as follows. Sec. 16. The uncodified law of the State of Alaska is amended by adding a new section to read: APPLICABILITY. Sections 1-16 and 18 of this Act apply to a contract if the contract is entered into on or after the effective dates of secs. 1-16 and 18 of this Act. Co-Chair Wilken moved for the adoption of Amendment #2. There being no objection, Amendment #2 was ADOPTED. Senator Taylor asked whether this legislation would alleviate other [unspecified] issues that have been discussed over the years. Mr. Cattanach responded that by implementing a fair and quicker process, the legislation would address other [unspecified] issues. Senator Taylor voiced support of the legislation if it would result in improving "the Department's reluctance to adjust claims in a good faith and meaningful manner that has literally bankrupted" numerous businesses. In addition, he noted that a contractor's bonding ability is jeopardized when a timely determination is not forthcoming. Senator Taylor moved to report the bill, as amended, from Committee with individual recommendations and accompanying fiscal note. There being no objection, CS SB 125 (FIN) was REPORTED from Committee with indeterminate fiscal note #1 from the Department of Transportation and Public Facilities.