SENATE BILL NO. 40 "An Act relating to construction of highways by the Department of Transportation and Public Facilities." This was the second hearing for this bill in the Senate Finance Committee. Co-Chair Wilken explained that this bill would limit the use of Force Account Construction funds to highway construction projects that cost less than $250,000. He noted that bill version 23- LS0381\A, which was initially heard during the First Session of the Twenty-Third Legislature, is before the Committee. SENATOR JOHN COWDERY, the bill's sponsor, explained that this legislation was introduced in response to concerns from private construction contractors regarding the fact that a $2.4 million highway construction project at St. Mary's in Rural Alaska was conducted by the State through the Force Account process and without abiding by the State Procurement Code that requires a competitive bid process be utilized. Senator Cowdery stated that the legislation was developed following conversations with contractors and discussions with the Department of Transportation and Public Facilities (DOT). He noted that DOT was also asked to develop a Statewide Delivery Order maintenance contract that would require a 24-hour call-out for a job. He stated that this legislation would be in the State's best interest. Contractors throughout the State support the $250,000 limit specified for Force Account highway construction projects. Senator Dyson asked that additional information be provided regarding past situations of abuse of this issue. He also asked how Governor Frank Murkowski's Administration is addressing the issue. Senator Cowdery explained that in the past, and particularly in the notorious St. Mary's project, the State circumvented the system by utilizing State employees or hiring construction crews and paying State employee wages rather than paying higher, contractor Davis- Bacon wages. He characterized the State's behavior in the St. Mary's project operation as being "very creative." Senator Cowdery voiced support for the $250,000 State Force Account limit and stated that it an appropriate level as the purpose of such an account is to allow the State to respond to unforeseen projects. He stated that this limit would assure, in a workable manner, that DOT would operate using the competitive bid process. Senator Hoffman asked whether this limit is pertinent only to general funds expenditures. Senator Cowdery responded that it would apply to any project exceeding $250,000 regardless of whether the funding for that project was State or federal. Senator Olson asked whether this legislation would specifically apply to Department of Transportation and Public Facilities (DOT) highway construction projects. Senator Cowdery responded that the legislation could be expanded to include all State departments, as the intent is to address abuses within the State procurement system process. Senator Olson asked whether this bill could therefore apply to other departments. Senator Cowdery pointed out that, as reflected, in the bill's title, this legislation is specific to DOT. Amendment #1: This amendment deletes language in Section 1, lines eight through eleven, on page one that reads as follows. "when the estimated cost of a construction project is less than $100,000 or when it appears to be in the best interest of the state and the estimated cost of a construction project is $250,000 or less, the department may perform the work notwithstanding any other provisions of law. In addition, the following language would be inserted on page one following line seven in Section 1. the department may perform the work notwithstanding any other provisions of law when (1) the estimated cost of a construction project is less than $100,000; (2) the construction project is not connected by a land road to the main road system of the state and the commissioner determines that [OR WHEN} it appears to be in the best interests of the state; or (3) the construction project is connected by a land road to the main road system of the state, the estimated cost of a construction project is $250,000 or less, and the commissioner determines that it appears to be in the best interests of the state[, THE DEPARTMENT MAY PERFORM THE WORK NOTWITHSTANDING AN Y OTHER PROVISIONS OF LAW]. New Test Underlined [DELETED TEXT BRACKETED] Senator Olson moved Amendment #1. Co-Chair Wilken objected for clarification. He noted that Amendment #1 is accompanied by a sponsor statement from Senator Olson and a copy of Administrative Order No. 199 [copies on file]. Senator Olson stated that this amendment addresses the fact that the legislation, as presented, would require all DOT public road projects exceeding $250,000 to be subject to the competitive bid process. This process could limit the economic feasibility of numerous Rural construction projects. Therefore, this amendment would exempt Rural road projects that are not connected to the Alaska road system from the competitive bid requirement. Questions regarding the use of the competitive bid process in these areas is best answered by language in Administrative Order No. 199, which addresses construction projects in rural Alaska. This Order has been in effect since October 2002. Senator Olson noted that Administrative Order No. 199 is working effectively and was, when developed, supported by a vast number of people in the construction industry, including State contracting agencies, the Associated General Contractors, labor unions, and rural construction entities. Senator Olson stressed that $250,000 oftentimes might not even provide for the required air transportation and mobilization and demobilization of equipment and materials relating to a construction projects in Rural areas. Senator Dyson asked whether the intent of the amendment is to provide local people an opportunity to work. Senator Olson responded that is correct. He cited several successful "Force Account" projects, including the St. Mary's project, that were completed below budget, on time, and with no worker's compensation claims. Another benefit of hiring local residents and having local expenditures, including equipment, is that a community is able to continue to utilize purchased equipment to maintain its roads and airports. He stressed that were the $250,000 limitation in place, construction projects costs would be driven upward due to equipment transportation and other related expenditures rather than being the result of labor expenses. He exampled the 1998 Selawik Boardwalk Improvement project as one whose $75,000 labor costs were minimal when compared to its $310,000 cost relating to equipment transportation and other associated things. He referred the Committee to the "DOT&PF Force Account Report" [copy on file] dated February 12, 2003 that was provided by the sponsor that depicts Force Account projects for the years 1998 through 2002. Senator Olson argued that the $250,000 limitation would be a logical approach for a construction project that could be reached via the State's connected road system; however, the fact that a project is not on a road system has significant financial impact that, adhering to the competitive bid policy, would not serve to be in the best interest of the State. Senator Hoffman, referencing the aforementioned Force Account list, stated that projects such as boardwalk projects do not require a high level of skilled labor; however, the costs associated with the project mobilization and the demobilization expenses could either increase the costs associated with the project or serve to provide "less of a project." In addition, he noted that in addition to providing jobs to rural residents, experiences indicate that when a community is involved in a project, it becomes invested in it and subsequently takes care of it. Therefore, he summarized that the benefit of Force Account projects include getting a better product, local control and investiture, and dollars being spent in a community which has few other financial opportunities. "The Amendment makes a lot of sense." Senator Cowdery spoke against the amendment, particularly in regards to Davis Bacon wages not being paid, the State procurement code being circumvented, and there being questions regarding the liability of using city rather than private contractor equipment. Rural contractors have testified that they have been denied the opportunity to bid on rural projects because Force Account operations were conducted. He noted that local contractors support the development of a DOT day-labor Delivery Order Contract, which would specify a 24-hour callout timeframe through which maintenance projects could be conducted. Development of this contract would not be difficult as DOT is quite good of estimating what a job would cost. This would assure that the public is served at the best price and would allow local contractors an opportunity to bid jobs accordingly. Senator Hoffman, referencing the sponsor's position that the Force Account program has been abused, characterized that position as a "stretch" as the aforementioned Force Account report indicates that the jobs conducted in this manner between the years 1998 and 2002 amount to less than three percent of the total construction projects of the Department. Therefore, he stated that legislation that would prevent Rural residents from working these limited projects "is going a little bit too far." Senator Dyson voiced appreciation for the intent of the legislation; however, he understood that this amendment would not preclude the use of Davis Bacon wages. In addition, the use of local qualified applicants and equipment would be beneficial. He questioned how limiting the price of a contract would prevent State government from utilizing State employees. Senator Cowdery explained that the initial purpose for allowing use of Force Accounts was to address unforeseen problems that might occur relating to a job that was already under contract. The use of Force Accounts "was never intended" to fund a job "from scratch." Co-Chair Wilken asked that Committee discussion focus on Amendment #1. Senator Dyson understood that in order to provide a good bid package, such things, as core samples are required. Continuing, he opined that the development of a DOT Delivery Order Contract would be useful in managing the many small jobs that do not require in- depth investigation. Funding of these jobs through the use of Force Accounts would be more cost efficient. The question is, what is the threshold. He agreed with Senator Olson that were local equipment and labor available, their use would be more economical. Therefore he asked the sponsor whether $250,000 is the right threshold limitation for Force Account work. Senator Cowdery supported the $250,000 limit. Originally, a $100,000 limit was entertained. Continuing, he noted that DOT is responsible for providing contractors with such things as soil analysis because jobs that go to bid should not be misrepresented. A job that has a soil problem could become very expensive. Senator Dyson clarified that rather than referring to jobs in which a contract has been awarded, he is referring to small jobs in which it would not be cost effective to prepare a bid package and go thought the competitive bid process. Senator Cowdery stated that during previous, separate Committee discussions with local contractors in Nome, Bethel and other communities, testimony supported a limit, as it would allow local contractors to participate in a competitive bid process. Senator Dyson asked whether DOT could respond to his question. Senator Olson stated that the amendment was patterned after language in Administrative Order No. 199. The purpose of the amendment is to provide an opportunity for local hire as opposed to addressing Davis Bacon wages. He referenced Order language in this regard on page two, section 3.(a) that reads as follows. 3.(a) Grant agreements for projects first funded for construction after the date of this Order under the following state programs shall include a requirement for the payment of prevailing wages, including contributions to a pension or retirement account, equal to the prevailing wages under AS 36.05, as modified through the use of the progressive, graduated pay scale developed under (b) of this paragraph, on all public construction projects: Senator Olson stated that the inclusion of this language in the Order was the reason that contractors and labor unions supported it. This language does address wage concerns. Senator Hoffman noted that, based on the Force Account Report for the years 1998 through 2002, less than one half of one-percent of the jobs depicted are under the $250,000 limit. Therefore, were this amendment not adopted it would "slam the door" on the potential for local hire in Rural Alaska, as, it could be said that "basically this bill" would not allow the use of Force Account projects in rural Alaska due to the high cost of construction in those areas. He reiterated that while there is a lack of a skilled workforce in those areas, things such as boardwalk projects could use local hire and therefore benefit a community. Therefore, he voiced support for the amendment, which would preserve "the status quo" of less than three-percent of available DOT construction projects and thereby provide jobs and revenue to Rural areas. "This is not asking too much." Senator B. Stevens questioned how Administrative Order No. 199 could relate to Force Account projects conducted in Rural areas in 1998 through 2002, as it was not enacted until October 1, 2002; specifically that it is unknown whether Davis Bacon wages were or were not being paid during that time. He also noted that the legislation would not prevent DOT from awarding three percent or more of its projects to rural areas regardless of whether a Force Account were utilized. Co-Chair Wilken characterized Senator B. Stevens's comments as pertaining to the bill in general. Therefore, he stated that a further discussion in this regard would continue after discussions relating to Amendment #1 are concluded. Senator Dyson asked whether DOT has "a policy or threshold" regarding how minor construction projects in Rural Alaska would be addressed "on a Force Account basis, and if so," is utilizing Force Account funding more efficient than utilizing the competitive bid process. FRANK RICHARDS, State Maintenance and Operations Engineer, Statewide Maintenance Division, Department of Transportation and Public Facilities, testified via teleconference from Anchorage and responded that the funding source of a project is one of the primary determining factors in both Rural and urban area projects. Before any work is advanced, the Department must conduct a cost analysis to determine what method of construction would be the most cost effective. Senator Dyson asked whether Amendment #1 would provide the Department, after its cost analysis is conducted, more flexibility to address Rural construction projects. Mr. Richards responded that the $250,000 ceiling denoted in the Amendment "would still limit" the Department's ability to perform work. Another issue would be the definition of what would constitute a Rural area. Were this designation applied to Rural roads that are part of the State's continuous highway system, it would be "severely limit" the Departments work efforts. Senator Dyson understood that the amendment would eliminate the $250,000 limitation on construction jobs in Rural areas not connected to the highway system. Mr. Richards responded that were the amendment to allow the Commissioner to remove constraints pertaining to projects in Rural areas that are not part of a contiguous road system, the Department would view it as favorable. This would apply to villages primarily in Western and Northwestern Alaska as well as some communities in Southeast Alaska. However, were it to apply to Rural places such as Tok and Northway that are on the contiguous highway system, it would be limiting. Senator Dyson understood therefore that the amendment would provide the Department more flexibility on projects that are not connected via the contiguous road system. SFC 04 # 62, Side B 09:51 AM [NOTE: Due to a technical malfunction, Side B of Tape 62 did not record; however, the minutes continue, uninterrupted, on Side A of Tape 63.] SFC 04 # 63, Side A 09:51 AM Senator Dyson voiced the understanding, however, that the Department is uneasy about the lack of a definition for what constitutes a Rural area." Mr. Richards viewed Force Accounts as being "a tool in the toolbox" that the Department could use to support its maintenance, construction and operation responsibilities to the State's transportation system. Mr. Richards stated that in response to the furor that resulted after the Force Account was utilized for the St. Mary's project, the Department worked with contractors and labor unions to develop Administrative Order No. 199. As a result, the Order provided a framework through which either the Force Account or a competitive bid process would be utilized to address Rural area projects on a fair basis. Senator Olson pointed out that while there is some ambiguity regarding the definition of Rural, the Amendment is specific to off-road system construction projects. Senator Hoffman asked the Department for justification for its analysis reflected in fiscal note #1, dated February 18, 2003 that specifies that there would be "lost savings" exceeding $25 million were this legislation enacted. In response to a question from Co-Chair Wilken, Senator Hoffman pointed out that the answer to this question is important, as adoption of Amendment #1 might serve to continue savings rather than negating them. Mr. Richards responded that the calculation used to determine the $25 million potential lost cost savings is based on annual savings of four million dollars for six years that would result were the State to use Force Account funding rather than conducting projects utilizing the competitive bid process, based on historical cost analyses. He noted that most of the money that could be saved is federal money with a General Fund (GF) match. Senator Hoffman declared that he supports the amendment because he "would rather save money than blow it." Senator B. Stevens asked, for clarification, the amount of the total $505 million surface transportation program expenditures, as specified in the 2002 Force Account Report, that were directly related to construction projects. He stated that this is an important element of the equation, as, as depicted, the calculation that only 2.23 percent of the total $505 million was spent on Force Account projects, could be misleading. Mr. Richards affirmed that the total amount would include other components. Senator B. Stevens stressed therefore, that the 2.23 percent depicted is on the low side as were funding for Shakwak, the Marine Highway System, Trails and Recreation Access for Alaska (TRAAK), and other federal components removed, the percentage of money spent for Force Account Construction projects would increase. Mr. Richards affirmed that the $505 million amount is all-inclusive in that it does contain such things as Shakwak, federal highway funding, and other Community Transportation Program (CTP) funding for surface transportation projects. He also noted that the 2002 projects listed on the Force Account Report comprise the 2.23 percent. It is important to note, that while the State does contract out for the majority of the cost of materials, equipment, and supplies, the benefits to the State of using Force Account funding is garnered from savings associated with State personnel and equipment costs. Senator B. Stevens understood that and commented that the purpose of his comments was to clarify that the percentages of Force Account construction projects is actually higher than depicted. He also noted that CTP projects in the year 2002 amounted to approximately $340 million. For further clarification, he asked whether projects in Southeast Alaska communities such as Juneau, Ketchikan, Sitka, and other communities that are served by the Alaska Marine Highway System rather than a contiguous surface road system, would be included under the auspice of this Amendment. Mr. Richards reiterated that the question of what would constitute "Rural" must be addressed. Senator B. Stevens asked the Amendment's sponsor whether the intent of the Amendment would be to include in its Rural, off-the-road system designation, communities in Southeast Alaska that are served by the Alaska Marine Highway System. Senator Olson responded that the purpose of the Amendment is to address the high cost of transportation construction in Northwest and Western Alaska. He stated that he would either defer to or work with the bill's sponsor to address questions regarding Southeast Alaska communities. Senator Hoffman stated that the inclusion of these communities is insignificant, as, were their inclusion to equate, for example, to the 2002 CTP program level of $340 million, their inclusion might increase Force Account expenditures "to a whopping 3.3 percent." Senator B. Stevens pointed out that, "there is nothing to prevent those projects from being included under the normal process." AT EASE 10:00 AM/ 10:00 AM Senator Olson stated that there is no adversarial intent behind the offering of this amendment. Its purpose is to recognize that the bill raises some concern and to make its impact more palatable by furthering language that was supported in Administrative Order No. 199. He stated that the Amendment would compliment the intent of the bill, which is to provide consideration for contractors. Senator Cowdery suggested that adoption of this amendment could lead to increased levels of Force Account exemptions for projects in Rural Alaska. Senator Olson asked whether any federal highway penalties might be incurred were the amendment adopted. He also asked whether the adoption of the bill in its current form might incur federal penalties. Mr. Richards voiced being unaware of any penalties. A roll call was taken on the motion. IN FAVOR: Senator Dyson, Senator Olson, and Senator Hoffman OPPOSED: Senator Bunde, Senator B. Stevens, Co-Chair Green, and Co- Chair Wilken The motion FAILED (3-4) Amendment #1 FAILED to be adopted. DON VALESKE, Business Manager, Public Employees Local 71, testified via teleconference from Anchorage and shared that the Committee discussion and testimony has clarified that this bill is limited to construction projects rather than to both maintenance and construction projects which was his concern. Senator Olson asked whether Mr. Valeske supports the legislation. Mr. Valeske commented that due to the fact that the bill does not apply to maintenance projects, he does not have a position on the bill. However, he noted that he is supportive of local hire as it is beneficial to local people and communities. He noted that Local 71 members were involved in the St. Mary's project. EDEN LARSEN, President and CEO, Associated Builders and Contractors, testified via teleconference from an offnet site in support of the bill. Co-Chair Wilken noted that Members' bill packets contain a written comment [copy on file] from the Associated Builders and Contractors (ABC). Senator Hoffman asked the reason behind their support. Ms. Larsen responded that ABC's "fundamental principle" is that an "open and competitive bidding process is the best methodology for State procurements." Limits on what the State could conduct through the use of Force Accounts and the continuance of the established procurement process are appropriate. Senator Hoffman asked whether ABC's position is mindful of the fact that this legislation would serve to lose the State $25 million dollars in lost savings over the next six year. Continuing, he stressed that no abuse of the system has been provided. The fact that Force Account Construction projects have cost the State less than three percent of the total construction budget and would save the State $25 million dollars over the next six years makes it difficult to understand why, in these times of a fiscal dilemma, anyone would support this legislation. Ms. Larsen responded that testimony has been provided to ABC regarding the fact that many small construction businesses in off- road system communities have gone out of business due to the increased usage of Force Account Construction projects over the last eight years. The cost to these communities of losing these businesses and their year-round employment opportunities should be a consideration in "the true costs." She noted that the justification for using Force Account Construction funding is that money would be saved by not being required to pay prevailing wages. The ABC's position is that there is a reason for an established wage scale and that this should be considered when allowing the State to avoid the competitive bid process. Senator Olson asked the number of people in ABC who are actively involved in road construction. Ms. Larsen responded that ABC has a minimum of three contractors who are actively involved in building roads and other roadwork. Senator Olson understood Ms. Larsen to say that some contractors have gone out of business due to Force Account Construction. However, he countered that the impetus behind the number of contractors, both in rural Alaska and on the road system, being reduced is that the number of State road construction projects in the State have been diminishing. Ms. Larsen noted that she is "only passing along" comments that ABC has received from Rural contractors. Senator Hoffman and Senator Olson asked that the names of the businesses that have gone out of business in Rural Alaska be provided. Ms. Larsen stated that she would attempt to acquire this information. JEFF ALLING, Representative, ALCAN Builders Incorporated, testified via teleconference from an offnet site in support of the bill. Co-Chair Wilken asked whether the sponsor would be opposed to the legislation being subject to a four-year termination period. Senator Cowdery responded he would not object. Conceptual Amendment #2: This conceptual amendment would establish a termination date of June 30, 2008. Co-Chair Wilken moved to adopt Conceptual Amendment #2. There being no objection, Conceptual Amendment # 2 was adopted. Senator Bunde moved to report the bill, as amended, from Committee with individual recommendations and accompanying fiscal note. There being no objection, CS SB 40(FIN) was REPORTED from Committee with a zero fiscal note, dated March 26, 2004 from the Department of Transportation and Public Facilities. AT EASE 10:15 AM / 10:16 AM