SENATE BILL NO. 160 "An Act relating to a procurement and electronic commerce tools program for state departments and instrumentalities of the state; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. 9:38:24 AM Senator Bunde, the bill's sponsor by request of the Senate Labor & Commerce Committee, stated that this legislation would assist in modernizing the State's procurement methods by transitioning the State away from a "pencil and paper" procurement system toward an electronic (e-commerce) system. This "Supply Chain Modernization Program" would provide financial benefits to the State. He read segments of the Sponsor Statement as follows. …it is very important that the Legislature remain focused on the need to deliver long-term reductions in the cost of government. Therefore, this bill renames, expands and extends the pilot procurement, eCommerce and supply chain management program authorized by HB 313 in the 2003 Legislative Session. The program is already delivering savings in the cost of overhead and administration. … It needs to be expanded and extended to reach its full potential. Overhead costs represent a significant portion of the total cost of government. However, the State of Alaska generally performs overhead functions using outmoded tools and methods. Private industry has delivered considerable gains in productivity during the past two decades by contracting out back-office functions to specialist firms and installing modern computer-based systems. It is time that State government embraces these techniques and participates more fully in the U.S. productivity boom. Senator Bunde noted that projected annual net labor cost savings for the fourteen primary State agencies in which the e-commerce system would be implemented would range from two to five million dollars. Total cost savings for goods and services could range between five to twenty-five million dollars. In addition, an increased degree of efficiency would occur, as the e-Commerce system would increase the speed of acquisitions and purchasing. 9:41:04 AM Senator Bunde stated that the adoption of HB 313 during the 2003 Legislative Session authorized a three-year "Pilot Procurement and Internet e-Commerce Program" specific "to two agencies and two other state instrumentalities. Cost savings on administrative salaries and benefit burden are currently projected to exceed $150,000 over this two-year period. This represents a savings on procurement administration of over 20%. Cost savings on goods and services will evolve over time as the program matures and other regions and agencies are added, and the resulting volume savings and purchasing can be obtained." Support of this bill "would help move the State of Alaska into the Twenty-first century". Senator Hoffman recalled the discussions that transpired in 2003 when HB 313 was adopted. Because there was concern regarding the possible impacts of the Program, it was limited to two State agencies and two other State institutions for a three-year period in order to allow the Legislature could evaluate the program. Therefore, he questioned the reason for considering this legislation at this time as it would "be premature" to continue it prior to a complete report being compiled. 9:43:05 AM Senator Bunde stated that there is evidence that the program is working well. "It has worked exceptionally well in the private sector". Acting now would be financially beneficial. Senator Hoffman voiced concern about whether sufficient data is available from which to make a determination as to the success or failure of the program. While evidence might support there being monetary savings, other drawbacks might become evident. He urged that the complete report be finalized before further action occurred. 9:44:17 AM Senator Bunde anticipated there to be resistance to changing the process, regardless of whether action was taken now or in three years time. Monetary savings, "sooner rather than later", should prevail. Others might disagree with this position. Co-Chair Green noted that an abundance of back-up material [copies on file] accompanies Senator Bunde's sponsor statement. 9:45:04 AM VERN JONES, Chief Procurement Officer, Division of General Services, Department of Administration, shared that, upon the passage of HB 313, which implemented the State's Pilot Procurement Program, the Department issued a Request for Proposals (RFP) for a private contractor to outsource State procurement functions for the Southeast Region of the Department of Transportation and Public Facilities (DOT). A feasibility study was conducted as required under organized labor bargaining unit agreements, and subsequently, the contract was awarded to Alaska Supply Chain Integrators (ASCI). The bill, which has a contract termination date of June 2006, limited the pilot procurement program to two departments and two instrumentalities of the State. ASCI has been coordinating the procurement program for DOT for nine months. Mr. Jones stated that this bill would eliminate the restrictions on the number of State departments and instrumentalities that could implement this procurement program. In addition, it would eliminate the June 2006 termination date of the program. The Labor & Commerce committee substitute being considered would require the contractor contract include the Alaska Bidder and other preferences requirements. 9:46:52 AM Senator Hoffman asked whether sufficient information is available from which to determine the success of the program. 9:47:17 AM Mr. Jones responded that it is "the Administration's position that this program is still in transition". At this time, it would be unfair to label it as being a "failure"; it would be premature "to draw any firm conclusions" about the program. Senator Olson asked whether Mr. Jones' remarks could be indicative of there being "a sense" that the program is a failure. Mr. Jones responded that that is not the Department's or the Administration's position. He clarified that it would be "premature" to label the program as either a success or a failure. 9:48:27 AM Senator Olson understood that the University of Alaska has a different procurement mechanism in place. To that point, he inquired as to whether the University has opted out of the State's procurement process. Mr. Jones explained that the University is required "to adopt substantially similar procedures to those contained in the Procurement Code". Therefore, while the University "is not technically governed by the Procurement Code, they, in essence follow the spirit and intent and most of the provisions that are contained in the Procurement Code." Senator Olson asked for further information in this regard. Mr. Jones responded that Alaska Statute 36.30 requires the University "to comply substantially with the provisions" in the State Procurement Code. Co-Chair Wilken, noting that the backup material contains the first audit of the Pilot Program, asked the status of the second audit. 9:49:53 AM Mr. Jones responded that, while the complete second quarter audit is not yet available, the cost of goods portion of the second quarter audit has been completed and is available. Co-Chair Wilken asked when the second audit in its entirety would be available. Mr. Jones anticipated that the second audit to be completed within the next week. Co-Chair Wilken asked whether the second audit would contain information pertaining to the three-month quarter ending December 31, 2004. Mr. Jones affirmed. Co-Chair Wilken noted that a substantial amount of information was provided in the first audit. He asked Mr. Jones to identify information in the audit from which the Committee could "form an opinion". Mr. Jones understood Co-Chair Wilken's remarks to infer that "the first quarter audit was really inconclusive". Co-Chair Wilken disagreed that to be the point of his remarks, as he could not understand the report. "This is a report built to confuse not to inform." The hope is that the second report would provide "decision makers" with more substance. He asked who was responsible for the report. Mr. Jones affirmed that he was. Co-Chair Wilken opined that it was "a very poor report". Subsequent reports should be improved. Co-Chair Wilken asked how much staff time is being devoted to the project. Mr. Jones responded that the time varies. A number of people, including himself, a dedicated DOT contract administrator position, and a Department of Administration contract manager, devote a substantial amount of time to the program. 9:52:21 AM Co-Chair Wilken specifically asked the number of hours in each workweek that Mr. Jones devotes to this "important" project. Mr. Jones determined that he spends a couple of hours a week on the project. Co-Chair Wilken expressed that "a deal is a deal". He disclosed that his being one of the initial supporters of the project; however, now he is "a little concerned" and "conflicted" about the efforts being exerted to the program. The expectation was that six quarterly progress reports would be provided. He noted that the privately owned company, British Petroleum, has experienced good results with this type of a program. Co-Chair Wilken perceived the Administration to be "somewhat detached" from this effort. "Some influence/management direction" must be provided to the project; else wise, the Legislature would continue to receive reports similar to the first audit report. Therefore, he supported tabling further action on the legislation until the next Legislative Session. That would allow three more audit reports to be compiled through which the Legislature could better evaluate the program. Co-Chair Wilken characterized the current program scenario as being "set adrift" with "the bureaucracy fighting the privatization people" and there being no one in the middle to bring the two sides together. "Someone needs to manage the program" in order to provide the Legislature the information necessary to make decisions about the program. He suspected that, were that done, the decision would be to support the program. The benefits of the program as highlighted in Senator Bunde's remarks would be realized. Co-Chair Wilken stated that were the concept of the pilot program undermined by "delays, a lack of cooperation, and falsehoods on both sides", the Committee might be required "to craft it at this table" during the next Session. That would not be the preferred course of action. "Really good data, understandable by the Committee, understandable by this Legislature" must be provided by next January. Co-Chair Wilken noted that he had conveyed his reluctant to vote in favor of this legislation to Senator Bunde. This hearing would be a determining factor in his decision. 9:55:39 AM Senator Bunde moved to adopt committee substitute, Version 24- LS0224\C as the working document. This committee substitute would serve to "clean up" some provisions of the bill. Senator Hoffman objected for explanation. KEVIN BROOKS, Deputy Commissioner, Department of Administration, assured the Committee that the Department is committed to the effort to analyze the Pilot Procurement Program. 9:57:05 AM Mr. Brooks spoke to the Department's assistance in developing language in the committee substitute that would "clean up" Title 36 preferences currently applicable to State purchases. These preferences have been expanded over time and, as result, have become quite cumbersome. While no changes were made to the preferences themselves, efforts were made to develop language that would make the application of those preferences "easier to administer as procurements are made". Senator Hoffman asked for assurance that the changes included in Version "C" would, therefore, be limited to "cleaning up" current language. Mr. Brooks affirmed. Senator Hoffman removed his objection. 9:58:26 AM Senator Dyson inquired to the obstacles that "have kept our existing workforce from" being more innovative in the purchasing process. Mr. Brooks responded that no State's procurement office employee would "dispute" the fact that "the implementation of e-commerce tools would be a great benefit to the State". Some monetary investment would be required to automate the existing "labor intensive paper process" which is "based on a procurement code that in many cases is not meant to be as efficient as it is to be fair". It is designed to provide any bidder a chance to bid for public dollars. The rules governing the Pilot Procurement Program contractor in procuring goods and services for the State are "more relaxed" than those required of a State agency. Mr. Brooks noted that, although not occurring on a wide scale basis, efforts have been undertaken across departments to automate the procurement processes. Some have been successful. 9:59:52 AM Mr. Brooks stated that the Department's perspective on the bill "is that there is room for improvement" in the manner in which the State currently procures goods and services. He disagreed that the Pilot Program "has been cast adrift", as the Department is anxious to determine whether the program would work. Senator Dyson restated the question as to what might have prevented the State from advancing its procurement methods to align with procurement trends that have occurred elsewhere over the past twenty-five or thirty years; specifically whether the State's existing procurement code or Statutes are preventing the existing workforce from accomplishing "these really imaginative things". Mr. Brooks expressed that "the procurement code is not an impediment to automating" the procurement progress. Senator Dyson asked whether any of the State's bargaining unit agreements were an impediment to transitioning toward more efficient modes of conducting procurement. Mr. Brooks did not recognize bargaining unit agreements as being an impediment. Senator Dyson asked whether the Legislature has refused to provide the necessary resources, specifically computers and networks that would be required to advance the process. Mr. Brooks responded that the necessary computer resources and staff are available; however the necessary software that would be required to automate State government has not been procured. Senator Dyson asked the reason for the absence of such software. Mr. Brooks responded that no recent software-funding request had been made; higher priorities, such as new payroll and accounting systems, have preceded the procurement software request. However, it should be noted that "the procurement module for automation" is in the Department's five-year plan going forward. Senator Dyson opined therefore that since the issue is not the law, the procurement code, or the people, then "ultimately" it's the lack "of will to do it". To that point, he asked whether it was the Department's intention "to move towards the very best, most modern kind of procurement system" available. Mr. Brooks affirmed that to be the intent. Senator Dyson voiced appreciation for the fact that an entity was willing to participate in the Pilot Program and "commit a lot of money and resources" to demonstrate that such a program would work in the State's environment. "That's the genius of the free enterprise system." Senator Dyson asked what might occur where the State to authorize a private contractor to conduct all or a major portion of the State's key goods and services procurements functions, and then the contractor discontinued their service, went out of business, or increased their fees astronomically. Mr. Brooks speculated that the alternative would be for the State to reassume the responsibility or hire another contractor. Senator Dyson asked how much notification of separation is specified in this legislation. 10:05:10 AM Mr. Brooks communicated that the Pilot Program established by HB 313 would terminate in June 2006, or in approximately 14 months. During that time period, efforts would be exerted to determine whether the program would be feasible to expand to other State departments. SB 160 would provide the authority needed to expand the program in such a manner. In addition, passage of SB 160 would assure the contractor that the State could continue the program. Senator Dyson recognized, as did the Department, that this program could provide a multitude of possibilities. However, the specific question is how, after the State "committed major portions of its State business into their hands", the State would continue to conduct "its business" were the contractor to un-expectantly "cease to function". Mr. Brooks "speculated" that the State would be required to hire staff or hire another contractor. 10:06:30 AM Senator Dyson asked whether the conditions in this bill would adequately provide the time and file/software access that would be required were the State required to resume those functions. Mr. Brooks replied that in that event, "the procurements being performed by the contractor would be available to the State". Senator Dyson specifically asked whether the State would have access to the associated software files. Mr. Brooks replied in the negative; software files are proprietary to the contractor. After a brief exchange with Senator Dyson, Mr. Brooks stated that even thought the software was proprietary, the fact that the State had provided data to the contractor at the onset of the Pilot Program, would allow that action to be reciprocated at the termination of the program. However, he voiced being unfamiliar with the specific terms of the contract. Senator Hoffman asked whether other states have privatized their procurement process. Mr. Brooks remarked that no other state has outsourced its procurements. Mr. Jones affirmed that to be correct. Senator Hoffman asked regarding "the public policy reason" for that decision. Mr. Brooks voiced being unsure of the reasons that other states had not furthered such a privatization endeavor. "The issue for Alaska is" whether we can "provide this service better; there is fair evidence that procurement can be done more efficiently". The public policy issue question should include "who does procurements for the State". The issue of public trust is involved when there is "an expenditure of State funds; do we value that vendors have a fair shake at State dollars and that there is a fair and open process for doing that". These questions are valid, and this Pilot Project would provide the opportunity to determine the answers to such questions. Even though "the jury is still out" on whether the program would be an overwhelming success, this bill would further the opportunity to investigate the endeavor. While "the data is inconclusive" at this point, there is no reason to discontinue the investigation as to the program's potential. 10:09:30 AM Senator Olson, noting that "an essentially zero" fiscal note accompanies the bill, asked what specific costs would be associated with utilizing a private contractor. Mr. Brooks responded that whenever a privatization effort is being considered that would displace State employees, the bargaining unit must be notified, a plan must be developed, and a feasibility study must be conducted. The effort only moves forward were there to be "savings in the labor costs". The bargaining unit agreement contains specific guidelines regarding the conditions of the feasibility study. It is anticipated that an automated process, whether it be conducted by a private entity or by the State, would also "realize savings in the actual" procurement costs of goods. Senator Olson asked regarding the exemptions that are currently specified in the State's procurement code. 10:11:00 AM Mr. Brooks asked for further clarification of the question. Senator Olson understood there to be several exemptions currently specified in the State's procurement code. Thus his question was to "the end result" of those exemptions. 10:11:20 AM Mr. Jones stated that there are currently 47 exemptions specified AS 36.30.850 of the State's procurement code. Rather than indicating that entities were exempted from abiding by the code, the result is that certain classes or commodities of goods and services are exempted across the board. For example, "dentists and doctors are not required to abide by the competitive bidding requirements". Such things as grants and certain investment instruments are also exempted. At times, the issue of there being 47 exemptions has been mistakenly interpreted to mean that there were 47 agencies or entities "that didn't have to abide by the code". By and large, these exemptions exempt a certain class of goods or services from the code. Senator Olson asked regarding the recourse the bill would provide to a vendor who might wish to protest an award. Mr. Jones responded that while protest provisions are included in the State's procurement code, no such provisions were included in the current contract. "There is no allowance for that." 10:13:10 AM Mr. Brooks remarked that Co-Chair Wilken's earlier comments regarding the audit reports were "points well taken". While early reports pertaining to the program "were lacking", the fact is that they were being developed during the transitioning phase of the program. Going forward, the Department would require that the successes of the program be identified and articulated. "Accurate and timely reporting" must occur in order to meaningfully make those measurements. He assured that such efforts would occur, and that, "as the program moves forward" … "data that everyone could agree with" would be provided. 10:14:15 AM Co-Chair Green revisited the issue of what changes were included in the Version "C" committee substitute being considered by the Committee, as it is noticeably longer than the previous version, Version 24-LS0524\X. Specifically, she asked whether language in Section 1(g), page two, lines 11 and 12, and Section 1(l), page two, lines 28 through 30 of Version "X" had been revised in some manner in Version "C". Mr. Jones communicated that two major changes occurred in the transitioning of language between Version "X" and Version "C". One of those changes was the Statute reference change from AS 36.30.190 as specified in Section 1(a), page one, line ten of Version "X" to AS 36.30.265 in Version "C". This change would allow the Department "to award a contract of this type via an RFP rather than a low bid invitation to bid situation. The second change in Version "C" was a series of changes starting on page two" that would incorporate "all the procurement preferences", currently specified in AS 36.30 into this bill. This action would serve to "apply them to the procurements that are made by the contractor". As previously mentioned the existing Statutes are confusing and do not interact well. Therefore, existing procurement language was altered in Version "C" in order "to make all the preferences uniform, understandable, and a little simpler to apply and administer". Co-Chair Green corrected her earlier remarks about Version "C" being larger than Version "X" as she had discovered that two copies of Version "C" had been inadvertently stapled together in her bill packet. Version "C' was not as large as it had appeared. 10:17:27 AM Co-Chair Green asked whether the Automatic Bid Award language had been eliminated in the Version "C" committee substitute. Mr. Jones asked for further clarification. (e) Except as otherwise provided under (g) or (h) of this section, if a bidder qualifies as an Alaska bidder, is offering services through an employment program, and is the lowest responsible and responsive bidder with a bide that is not more than 15 percent higher than the lowest bid, the program contractor shall award the contract to that bidder. This subsection does not give a bidder who would otherwise qualify for a preference under this subsection a preference over another bidder who would otherwise qualify for a preference under this subsection. (g) If a bidder is an Alaska bidder, is a qualify entity, and is the lowest responsible and responsive bidder with a bid that is not more than 10 percent higher than the lowest bid, the program contractor shall ward the contract to that bidder. This subsection does not give a bidder who would otherwise quality for a preference under this subsection a preference over another bidder who would otherwise qualify for a preference under this subsection or (h) of this section. In this subsection "qualifying entity" has the meaning given in AS 36.30.170(e). Co-Chair Green specified that language in Version "X", Section 1(e), page two, lines eight through 14 and Section 1(g), lines 19 through 25, specified that an automatic bid could be awarded were certain conditions in place. She understood that this language was changed in Version "C"; therefore, she asked to the reason for that change. Mr. Jones responded that while the Version "X" language would work in a bid process, it would not be appropriate for an RFP process. Mr. Brooks reiterated that the endeavor was to clean up the preferences; there was no intent to change any of them. Any provision that was included in Version "X" is included in Version "C". "Just in cleaner more straightforward language." There being no further objection, the Version "C" committee substitute was ADOPTED as the working document. Co-Chair Wilken asked what would occur on June 30, 2006, were this legislation not adopted. In other words, the question is whether the process would revert to how it functioned prior to the implementation of the Pilot Program. Mr. Jones replied that absent this legislation, the Pilot Program contract would expire on June 30, 2006. "There are, however, extension optional renewals included in there should the legislation amend that sunset date." Co-Chair Wilken asked, for clarification purposes, whether the extension option language was included in HB 313 or in SB 160 Version "C". Mr. Jones stated that HB 313 specified a termination date of June 2006 and SB 160 would eliminate the termination date provision. Adoption of SB 160 would allow the State "to amend" the existing contract going forward. Senator Bunde highlighted the fact that the adoption of SB 160 would provide the option to extend the contract; its extension would not be mandatory. This is a "permissive" bill that would allow the project to continue were it deemed warranted. Senator Hoffman asked whether the Administration would promote legislation making the program more permanent were it determined that such a program would produce "considerable savings" to the State. Mr. Brooks responded that while the Administration was interested in determining whether such a program would work, he was unsure as to whether the Administration would introduce such legislation. Senator Olson voiced being uncomfortable that there was not more support for a program that is supposedly "working and working well", as acclaimed by the bill sponsor's remarks. Mr. Brooks expressed that his testimony was that "we have not determined that this has been successful in saving money. We have very preliminary data; only a couple of quarters have been analyzed". There is support for continuing the procurement pilot, as further analyses would provide more complete information. "The jury is still out on … whether privitization of all State government" would be the appropriate action. 10:22:19 AM Co-Chair Green recalled there being frustration and delays in the implementation of the program. That situation might have impacted the amount of reporting that has been provided to date. As a result, the evaluation process has been more difficult. The delay also shortened the amount of time that the contractor was able to manage the procurement system. This bill would provide more time "for the program to be in place". Mr. Brooks stated that Co-Chair Green has a "good point", as he also questioned the progression of the endeavor since HB 313 was adopted. The first year was dedicated to the development of a plan, conducting the feasibility study, developing the project RFP and selecting the vendor. Therefore, the contractor was unable to undertake the DOT procurement process in July 2004. As a result, rather than having three years in which to evaluate the program, only two years would be available. This bill would assure the vendor that the program would not terminate in 14 months. It would also provide the Administration sufficient flexibility in which to determine which other departments and agencies would benefit from such an endeavor. Co-Chair Wilken agreed that the original timeline was of concern; however, the vendor's actual involvement in the procurement process began on June 30, 2004, and only one report, which took approximately four months to compile, has been provided. The second report is not yet completed. A total of four reports should be available were action on this legislation delayed until January 2006. However, it is uncertain as to whether a decision made at that time would be sufficient "to make plans for June". Co-Chair Wilken suggested that the Committee consider extending the Pilot Program another year. That would provide time for "a solid basis of information" to become available. He opined that the four reports that could be available in January might not provide a lot more information than is available now. Co-Chair Green characterized that issue as being "the heart of the conversation". 10:27:11 AM Mr. Brooks expressed that the intent is to provide "better and quicker information". The second quarter report would be completed shortly and the third quarter report, ending March 2005, should be available within the next 30 days. A 30-day turnaround after the end of each quarter is the goal. The report for the quarter ending on December 31, 2005 should be available in January 2006. Co-Chair Wilken understood therefore that six quarterly reports would be completed by January 2006. 10:28:08 AM JIM DUNCAN, Business Manager, Alaska State Employees Association (ASEA), informed the Committee that ASEA represents approximately 8,000 State employees. ASEA members hold a significant portion of the 200 State jobs that would be impacted by this legislation. He voiced being very concerned about the impact that this legislation would have on the livelihood of all State employees represented by bargaining units. Mr. Duncan questioned the appropriateness of furthering this legislation prior to more Pilot Project quarterly reports being compiled. The data provided in the lone report is insufficient upon which to make a sound judgment. While the report provides a multitude of figures and information, it does not provide any substantive conclusion about the program as previously inferred by Co-Chair Wilken when he asked for assistance in identifying which portion of the audit findings could be utilized as a base upon which to further a decision. He referred the Committee to "Section Two - Department's Comments on Audit" of the "Department of Transportation and Public Facilities Report on the Outsourcing Procurement Pilot February 14, 2005" as attached to DOT Commissioner Mike Barton's February 16, 2005 memorandum [copies on file] addressed to Ray Matiashowski, Commissioner of the Department of Administration. Section Two stated that, "It is clear from the audit conclusions that under ASCI management there has been no improvement in service and the cost of goods to the state have actually increased. Based on these finds we recommend that there be no expansion of the pilot until ASCI's performance demonstrates significant benefit to the state." Mr. Duncan declared that, "that is a clear and very direct statement." This language should answer Co-Chair Wilken's question. Mr. Duncan stated that while the second quarter, October 1 through December 31 2004, audit has not as of yet been completed, the "Costs of Goods" portion is available and indicates that there was a 16.3 percent increase in the cost of goods to the State during that quarter. An increase in the cost of goods also occurred during the first quarter. These increases, combined with the DOT recommendation against expanding the pilot program, "are very good indicator[s] that there are questions about whether this is really saving the State money or not", in regards to the cost of goods. He asked that the Members strongly consider this information. "The trend is there," and its continuance would clearly indicate that the program would not save the State money. A final decision on the program should not be made until all the reports have been provided. 10:32:43 AM Mr. Duncan characterized the "privatization of State jobs" as being an important issue. The response to Senator Hoffman's question as to whether any other state has pursued privatizing procurement was "no", no other state or municipality has done it. There had been discussion during a different committee hearing on this bill regarding the fact that the Municipality of Anchorage was doing "something innovation and different" in regards to its procurement. "While that is true and should be applauded, the City's effort to streamline its procurement system "is being done by government employees". Mr. Duncan addressed Senator Hoffman's question as to whether there was "a good public policy reason" against privatizing the procurement process by providing an Executive Office of the President, President George Bush, Office of Management and Budget Washington, DC 20503 Circular No. A-76 (Revised) dated May 29, 2003, [copy on file]. The Bush Administration has sought to privatize "jobs wherever they can", and this circular addressed the development of a policy regarding the performance of commercial activities. The "Policy" component of the circular reads "Policy. The longstanding policy of the federal government has been to rely on the private sector for needed commercial services. To ensure that the American people receive maximum value for their tax dollars, commercial activities should be subject to the forces of competition." Continuing, he pointed out that section "b." of the Policy section specifies that government agencies shall "b. Perform inherently governmental activities with government personnel." Mr. Duncan continued that the question of what would be defined as an inherent governmental activity is addressed in section "B.a." and section "B.a.(4)" of the circular. a. An inherently governmental activity is an activity that is so intimately related to the public interest as to mandate performance by government personnel. These activities require the exercise of substantial discretion in applying governmental authority and/or in making decisions for the government…. (4) Exerting ultimate control over the acquisition, use, or disposition of United State property (real or personal, tangible or intangible), including establishing policies or procedures for the collection, control, or disbursement of appropriated and other federal funds." Mr. Duncan stated that the Bush Administration has determined, as evidenced in this Office of Management and Budget circular, that the procurement of federal property, which could be viewed in Alaska's case as the purchase of State property, "is an inherently governmental function that should be performed by government employees". Mr. Duncan stated that this position is supported by the fact that there must be "significant public trust in the procurement function". "There should be no question" as to how Government procurement dollars are used or how contracts were developed. Mr. Duncan reminded the Committee that the State's procurement code was developed in 1985 as the result of a "significant" procurement issue that occurred relating to a Fairbanks facility. A select State Senate Committee developed the model procurement code, which was endorsed by the American Bar Association. The procurement code was adopted in order to regain public trust in regards to the procurement process. While the Code has been amended over time, it remains a good model. Mr. Duncan declared that this bill would exempt the contractor from the conditions of the State's procurement code. "The rules would no longer be those that you have in Statute", but would instead be those set by the contractor and the seated Administration. He spoke against providing that authority to those entities. The Legislature should desire a procurement process that would be "conducted with integrity and would follow" Statutory guidelines. Mr. Duncan shared that in addition to serving in the Alaska Legislature, he once held the position of commissioner of the Alaska Department of Administration. One of his responsibilities as Commissioner was to oversee the State's procurement process. While he has heard that there are problems with the State's procurement process; he did not experience any problems when he was commissioner. Such things as provisions that allow a dissatisfied "vendor to protest and to understand" the reason for their getting an award could slow the process down; however, the process "still works and it works the way it's supposed to". Mr. Duncan noted that the State employees involved in the procurement process are professionals who "do their job and … do it well". He noted that a request "for the tools to do e-procurement" was, as is currently the case, on the Department's capital project requests when he was commissioner. While the current request was pre-empted by the need for a new payroll system, that request is, and was, there. "There is nothing in the State's procurement system that would prohibit the use of electronic tools by State employees. The only need is the purchase of electronic software." Mr. Duncan urged the Committee to wait and evaluate the results of the Pilot Project audit and evaluate whether the process could be conducted "just as efficiently and effectively" by government employees were the required tools in place. These considerations should occur before the legislation moves forward. 10:40:27 AM Senator Bunde noted that, as Mr. Duncan had expressed in his opening remarks, Mr. Duncan's position was to represent the interests of ASEA members. Therefore, it could be assumed that even were the audit findings to determine that the process would save money, Mr. Duncan would be obligated to oppose it because it would eliminate State jobs. Mr. Duncan affirmed his responsibility to protect ASEA members' jobs; he would not support the loss of those jobs. However, "a different angle" is the anticipation that the first two quarterly reports would not reflect any money being saved; "matter of fact" the costs are increasing. While the contractor would argue that they have saved the State $200,000, those savings were the result of the elimination of State jobs rather than being the result of a decrease in the cost of goods and services. The union would be reviewing the forthcoming quarterly audits during the interim to further evaluate the program. It would also be determining methods in which the process could be more efficiently handled within State government. Even thought his job is to protect State employee jobs, it is also his job to work with the Legislature and the Department of Administration to further such efficiency. Mr. Duncan argued that even though this process is being touted as a public/private partnership, that would not be the case as jobs were being eliminated. Last year ten State procurement positions were eliminated. Some decry that positions for those individuals were created in other State departments. That might have been the case in the 1980s and 1990s, but that is not the case today due to budgeting constraints. Another consideration is that were all State procurement jobs eliminated there would be no option to secure a procurement jobs in another department. 10:43:36 AM MITCH ERICKSON, Representative, None Chamber of Commerce, testified via teleconference from Nome to voice concern in regards to the "expedited" manner in which this bill is advancing. The Pilot Project is still in the initial process and therefore, a proper analysis could not be provided. There is confusion as to whether the contractor would be held to the same procurement standards as the State would. Were they not, then the process could be likened "to comparing apples and oranges". Business conducted by the State is significant to local economies. There is fear that transitioning to a centralized procurement system would negatively impact local businesses. The State currently "commands a best pricing system due to its size", and "the fact that the State would pay for its purchases" is important. It should also be noted, "that eCommerce is not an exclusive private sector function;" it could easily be implemented in the State system. Mr. Erickson communicated that one consideration of the Costs of Goods information, particularly in regards to Rural communities, is that "the landed cost are the true costs". The purchase price is not the true cost. The belief is that, without proper analysis, State offices in Rural areas would be required to carry larger inventories in order to compensate for "the inefficiencies" resulting from a centralized procurement system. Currently, when an item is needed, it could be purchased locally. Mr. Erickson urged that a thorough evaluation of the program be conducted before this bill, or a similar bill, was advanced. The bill's appearance now is one of being "back-doored; it does not reflect well on the Legislative process". 10:46:07 AM Senator Bunde responded to the back-door argument by stating that this bill has transited through the Legislative process. He suggested that the action of the State buying locally could be considered as a form of revenue sharing. AT EASE 10:46:43 AM / 10:47:58 AM Senator Bunde communicated that a companion bill is also progressing through the House of Representatives committee hearing process. Co-Chair Green stated therefore, that there would be numerous committee-hearing opportunities in this regard. 10:48:31 AM SCOTT HAWKINS, Representative, Alaska Supply Chain Integrators (ASCI), communicated that ASCI, the contractor operating the Pilot Procurement Project program, was founded in 1999 to provide supply chain activities for the oil industry, primarily Prudhoe Bay operations. Over the past six years the company has increased in size to approximately 150 employees, most of who reside in Anchorage, the Mat-Su Valley, and the Kenai Peninsula. A small office recently opened in Juneau. A significant number of the employees in the Anchorage area graduated from the University of Alaska's global statistics program. The company specializes in back-office process management: helping both public and private sector entities streamline and automate back office duties more efficiently and expediently. Mr. Hawkins characterized this "permissive bill" as being "very important to the future of this program". "There is little danger that it would run amuck". Mr. Hawkins provided Members a handout titled "ASCI State Procurement Pilot Review and Outlook" [copy on file]. The company's perspective as program operator is that "the most important criteria" for the program is to produce cost savings. As discussed "from the very beginning", staff and personnel cost savings are foremost in the cost-savings endeavor. "There is also the potential to save money on the cost of goods." Those cost savings would occur over a longer timeframe, and would be most successfully accomplished when the program is applied across several agencies and several regions, as the result of purchasing larger amounts of goods and more agreements and automation occur. Mr. Hawkins referred the Committee to page four of the company's handout titled "Cost Savings Achieved". That information projects that over the first two years of the project, $163,089 in savings would be realized in personnel costs. Mr. Hawkins noted that it has been stated that the second quarter cost of goods report reportedly indicates that an increase in the cost of goods occurred. However, language in the report actually states that, "The Division of General Services, after consultation with Legislative Audit, does not believe the data can be extrapolated in order to draw firm cost increase/decrease conclusion, but that the data may serve to identify potential areas for improvement. The data documents less than one percent of the purchases." Mr. Hawkins stressed that, "these benchmark audits have been a feature of the program from the beginning". To that point, he opined that "the term 'audit' might be too strong a term" to characterize the activity. A benchmark provides a snapshot of data with the purpose of providing a record of the program, the methodology being used, and to highlight possible areas for improvement. The reports were not designed "to provide full program reviews". Mr. Hawkins stated that Co-Chair Wilken's description of the audit, as being "disappointing" would be correct were one looking for a conclusion. That is not the purpose of the benchmark; the purpose is to provide "on-going snapshots of data…" The Costs of Goods report for the first quarter "is particularly troublesome", as it is based on seven items. "Seven items out of several thousand that were done." As such, no "level of statistical validity" could be extrapolated. Approximately thirty items were included in the second quarter Cost of Goods report. That is also an insufficient number upon which to draw any conclusions. The purpose of the report is to provide information pertaining to such things as vendor trends. ASCI "was particularly concerned about the Costs of Goods piece being taken out of context". Therefore, ASCI conducted "an analysis of all the transactions to date under the web tools." For the period October 1 through December 31, 2004, the web tools/ catalog transaction comparisons provide "high data integrity". This analysis, which is depicted on page five of the handout, indicated there being a three-percent reduction in the cost of goods for the second quarter and an overall two-percent reduction for both the first and second quarter periods. This analysis of 972 catalog transactions would sufficiently "provide statistical validity". There are mechanisms through which to provide assurance that the State "is getting the best price available to it at any given time". There is evidence that the program is working. 10:55:50 AM Mr. Hawkins concurred with Mr. Brooks comments that, "the Administration is struggling with how to evaluate the program". However, he submitted that, "on the basis of cost of operations" and the early indications that the eCommerce web tools are showing worth, "the record is very clear that we are seeing that value". Mr. Hawkins stated that, "the program has accomplished a great deal in its first few months". Procurement procedures and rules have been established. The rules "are hard-wired into the contract" and while being substantially similar to the rules of the State's procurement code in regards to such things as requiring quotes for procurements under a certain amount; "there is a lot less red tape"; specifically in regards to the appeals process. While the current appeals process has some value "or else it wouldn't be in the procurement code", "more often, it is a source of delay and keeps the agencies from getting the goods and services they need in a timely manner". Mr. Hawkins stated that there are several reasons supporting the action of privatizing the procurement process. The activity associated with the process could not be classified as being "glamorous stuff". While "most managers do not wake up in the morning thinking about" how to improve the process, procurement is the nature and focus of ASCI's business. The company has "an on- going desire for excellence in the process". Mr. Hawkins communicated that the State could acquire the technology contusive to improving the process in-house; however, as a condition of the State's collective bargaining unit agreements, there is the requirement that the technology and the associated process "must be deployed effectively and has to deliver cost savings". ASCI must deploy technology, build catalogs, and operate the process "within the existing baseline cost structure and still show a cost savings after that". 10:58:48 AM Mr. Hawkins opined that were the State to invest in eCommerce software and associated technology, it would be unlikely that a reduction in personnel would occur. Cost savings are a requirement under the contract with ASCI. Mr. Hawkins communicated that the pilot program got off to a slow start and is operating at a very small level; however, the program's footwork has now been established. Nonetheless, the current size limitation could be likened to operating "a backhoe in a sandbox". This legislation would allow "the full potential" of the program to surface, as the installation of a massive eCommerce system across multiple departments would provide the most benefits. Mr. Hawkins stated that were the status quo program to continue, there would be insufficient time to implement it on a larger scale were the program ultimately deemed successful. From ASCI's standpoint as an employer, due to the limited time remaining in the Pilot Project, "little assurance" could be provided to employees" that the project would even be renewed. This makes it difficult to retain employees. Mr. Hawkins shared that the company has learned that the entire scope of the procurement operation could not be absorbed. There would still be the need for State employee counterparts, particularly in regards to large projects such as construction. 11:01:22 AM Senator Stedman asked whether the Alaska Marine Highway System (AMHS) would continue to be excluded from the privatization procurement process under the conditions of this legislation. Mr. Hawkins affirmed. The types of procurements required by the AMHS could not feasibly be absorbed; construction and Vessel overhaul procurements would be difficult to manage. Senator Bunde remarked that the loss of a job is not taken lightly. To that point, he asked whether the ten State employees whose jobs were eliminated by the implementation of the Pilot Project were offered employment by ASCI. Mr. Hawkins stated that such action had occurred. Some of the ten employees retired, others were offered other positions at parity. It should be noted however, that there was a difference in the benefit packages offered by ASCI and the State. While none of the ten displaced workers accepted a position with ASCI, it is understood that those individuals obtained other State government employment. 11:03:57 AM Senator Dyson asked how the State could "protect itself" were ASCI services to be withdrawn. Mr. Hawkins responded that this is a prudent consideration at any time a contractor is performing a major task. ASCI recognizes that halting its services without proper notice would destroy the company's reputation. Such action would be unacceptable, and "would be extremely unlikely". The company "would be legally bound to provide these services", and the company would "arguably be legally obligated for the damages" the State would incur "were a breach of contract to occur. Senator Dyson appreciated the response, however, noted that were the contract extended for a longer period of time, procurement staff positions and support would be weaned from State operations. Perhaps a draft amendment should be considered that would mandate that at the end of the contract, electronic files and associated software would be available in order for the State to transition to another vendor or to re-absorb the process. To that point, he asked Mr. Hawkins to contemplate such a proposal. Mr. Hawkins responded that the company "would be happy" to consider such an amendment. The current contract includes provisions requiring that electronic records be provided to the State. ASCI has no "desire to hold someone over a barrel"; the purpose of the software tools is "to automate and streamline and do good things not to cohere people with". The tools currently accompany ASCI services and should ASCI "services be decoupled …. the company would be happy to negotiate a licensing agreement that would allow the tools to continue to operate". Therefore, such an amendment would be acceptable. 11:07:57 AM PETE FORD, Southeast Regional Manager, Alaska Public Employees Association (APEA) Bargaining Unit, provided testimony on behalf of Bruce Ludwig, Business Manager, Alaska Public Employees Association, as follows. The Pilot Program authorized by HB 313 was rushed through in the final days of the 2003 Session. There were no measurements of success included in the bill, no benchmarks for comparison, and nothing to enable anyone to determine if the Pilot Program was a success or a failure. Frankly, there does not appear to have been a lot of thought given to the Pilot Program. There was one hearing in House Finance, and one in Senate Labor & Commerce. The bill title is misleading. When we talked with legislators after HB 313 was passed, we were told it "just enabled e-commerce." In fact, it did much more than that. Alaska Supply Chain Integrators (ASCI), who brought HB 313 forward, was the only "responsive" bidder, and was awarded a contract for Southeast DOT&PF. The State determined that they could save $250,000 per year by eliminating the warehouse, and using fewer employees through the internet purchasing process. ASCI actually began work on July 11, 2004, and 10 state employees were laid off. Since the Pilot Program began, only one quarter of performance has been audited. The second audit is currently in progress, and the third audit should be getting underway soon. The Pilot Program is supposed to operate until June 30, 2006, when it is scheduled to expire. As the Department of Administration has testified, the jury is still out. It is too early to extend, or make permanent, the Pilot Program. This Bill should be held over while sufficient record is established to be able to intelligently make a decision whether the Program has been a success or not. While Mr. Hawkins has been quick to characterize the Pilot Program as a success, we have heard many negative reports regarding the Program and the service it is providing. For instance, we have heard that the actual cost of goods and services purchased through ASCI is as much as 16% greater than comparable costs made through the state's existing procurement processes. If true, this would mean that the state has paid more than $2 million more than necessary for goods purchased through the Pilot Program. We have heard that there are some 1,500 invoices, valued at more than $250,000, that remain unpaid because the Purchase Orders do not match the invoices. This affects the State's relationship with its suppliers, and denies many Alaska businesses timely payment, creating difficulties for those businesses. We have hear that, of the 7 orders for parts ordered through ASCI for the engine overhaul of the M/V Kennicott, 6 orders were shipped to Juneau and had to be re-shipped to the shipyard in Portland where the work was actually being done. Of the original $250,000 projected savings, about half was for eliminating the warehouse. But the warehouse has not been eliminated; there is no savings there. We have also heard that the ASCI employees working the Pilot Program are required to work extreme amounts of overtime; anticipated savings will be further reduced when those overtime bills are paid. It seems likely that the anticipated savings may not be borne out after the final audit - any savings will certainly be substantially less than the grand amounts "anticipated". In addition, since ASCI does not have to follow the State Procurement Code, their procedures do not meet the minimum requirements of federal purchasing, and they cannot order equipment, materials or services for construction projects funded or partially funded by federal monies. All purchases involving federal monies are still worked by state procurement personnel - there is no savings there. There is also the matter of overhead, which was not budgeted. With a zero fiscal note, the State has had to assume the cost of overseeing the contract. The reality of the "anticipated", promised savings seems more and more remote. In summary, it is way, way too early to extend the current Pilot Program. From the anecdotal information we have heard (and formal, official audits are not yet available), instead of saving the State $150,000, the Pilot Program will more likely cost the State additional millions of dollars. We think that the Pilot Program should run its course and have its effectiveness fairly and fully evaluated. We ask that you hold this Bill and check the progress and performance of the Pilot Program next year. We urge you to be sure to obtain direct testimony from the Department of Transportation and Public Facilities, the "customers" of the Pilot Program, and get their impressions and opinions regarding the value of the Pilot Program's performance. 11:13:26 AM Senator Bunde asked "what level of savings" would be required to garner ASEA's support of the program. Mr. Ford responded that he could not "answer that in a vacuum, without being able to look at real life figures"; however, ASEA is not opposed to the State saving money and has supported "the concept" of a State eCommerce program, as it would produce monetary savings. State personnel should be involved in such an endeavor. 11:14:52 AM LAURA LAWRENCE, Procurement Specialist, Central Region, Department of Transportation and Public Facilities testified via teleconference from Anchorage and shared with the Committee that she has been employed in the Department's procurement office for 21 years. She opposed the bill as both an employee and as a concerned citizen. As a condition of her position as a procurement specialist, she must abide by the procurement code; otherwise, she could be guilty of a Class C felony and be subject to prosecution under Alaska Statute 36.30. Her bidding practices have earned her a reputation for integrity with both in-State and out-of-State vendors, and federal employees. The State's procurement code was established "to prevent unorthodox purchasing" that had previously occurred. ASCI has already admitted that its conducting of State business with one of its own supply companies was a mistake. She questioned how many such mistakes would occur absent the State procurement practice obligations. Continuing she questioned how much business would be averted to specific companies or ASCI's "favorite vendors". Such action would be a disservice to the State's entire business community as well as to the State's taxpayers. Competitive bids for purchases under $150,000 are not required under the Pilot Program. Bid competition by both small and large companies for projects under that range are plentiful. Many bids are awarded to small operations, and, to that point, she asked how small companies might fare were the new program implemented. She detailed the many responsibilities that accompany each bid as well as the variety of bids that occur. She also noted that warranty work is also an important consideration, especially when accepting a low bid from an out-of-state company. ASCI, being a private company, would have no obligation to in-State vendors. Ms. Laurence noted that the aftermath that might result were a private contractor to remove their service should also be a consideration. This is a very controversial bill. There is no indication that money would be saved or that better service would be provided. State employees would lose their jobs. Many small Alaskan companies would be disadvantaged; particularly when goods and services under $150,000 would not be required to be put to bid. Ms. Laurence supported the purchase of computer software components that would allow the State to conduct eCommerce activities in- house. Were State employees hands "untied" they could provide all the services and supplies, equal to or better than an out-sourced company could. State jobs would be maintained and the use of in- State vendors would continue to stimulate the State's economy and provide local jobs. This project has not been undertaken long enough to provide sufficient data and should not be advanced at this time. Co-Chair Green asked, in respect of the Committee's limited time, that Ms. Laurence provide her written comments to Members via facsimile. 11:22:10 AM BARRY JACKSON, Resource Data/ASCI, testified via teleconference from Anchorage and informed the Committee that he retired from the State of Alaska Department of Administration, Division of General Services after 31-years of service including service as a contracting manager, deputy director, and acting director. He was also on the Board of APEA and a founding member of ASEA. He informed the Committee that he had assisted ASCI in winning this contract and has since instructed DOT employees how to use the ASCI eCommerce application. Mr. Jackson noted that an effort was made in the Price of Goods reporting to compare the price of goods purchased by ASCI with the price of goods that had been awarded by State employees. To that point, the benchmark report would provide information as to whether prices increased, decreased or held status quo; however, the report would not provide information as to the reason for any change. While the statistics provided might be interesting, the representation is a dangerous one in that "someone might think it was meaningful and base a decision on it. It is a statistic with an overwhelming potential to mask the truth." Mr. Jackson stated that the State's standard practice is to measure "its procurement successes by comparing the prices offered at the moment of bid opening against each other. The State has never judged its own purchasing performance by comparing the price it paid last year with the price it pays today. This kind of benchmarking is an approach that … General Services would never condone having applied to themselves, precisely because of its potential to paint a completely false picture of their actual performance." Mr. Jackson addressed the concern about "potential corruption" by stressing that "in all significant aspects of the existing contract …. the contractor is required to employ competitive practices which are fundamentally the same as those actually practiced by the State. There is not much difference between professionally administered public and private purchasing practices, except for mountains and mountains of red tape, institutionalized delay, antiquated systems and huge performance and efficiency gaps." Mr. Jackson suggested that, "an independent contractor with preservation of investment as its most potent motivation has an unbiased primary interest in simply doing its job as efficiently and economically as possible for the State". He would also argue that, "an independent contractor is in a stronger position to resist pressures to commit bad practices. Such pressures do exist and are difficult for State employees to resist because their jobs or careers can be put in jeopardy. These pressures and consequences are not idle speculation … they are real" as he knows "from long experience". Mr. Jackson characterized the project audits as intense "scrutiny". The quarterly audits are quite frequent and are "questionably conceived and yield such wrong edit interpretations from opponents". They are "significant mechanisms for building resistance to the further implementation of the pilot, especially in the pilot agency". Were the same audit procedures applied to the State procurements, "numerous purchasing violations and bad practices" would come to light. Mr. Jackson countered the union's position that more money could be saved were eCommerce tools provided to State employees by stating that had the unions submitted a proposal to compete for the Pilot Project, he doubted whether their proposal could have won were it to have "preserved every one of those jobs that were lost" in the winning competitor's proposal. "Who's kidding who here?" The unions would have had to implement an eCommerce system as least on par with the one implemented by ASCI, and they would have had to eliminate more jobs than ASCI in order to win. "Enlightened unions have found another perspective, one which is ultimately much more valuable to union members." Co-Chair Green, in recognition of limited time, asked that the testimony be concluded. Further comments, in written form, were welcome. Mr. Jackson stressed that, "the fiscal train wreak is coming"; it is "just around the corner". When it arrived, "it would not magically leave purchasing positions untouched. Failing to enable e-commerce now" would "severely cripple" the State's procurement system in the future. This bill would provide the State "a rare opportunity to look toward the future" and improve the situation. The technology is available and could be implemented; it would save money. "All that is needed is the resolve to do the obvious." Co-Chair Green announced that the bill would be HELD in Committee in order for the bill's sponsor to provide further consideration to the comments that had been offered.