CS FOR SENATE BILL NO. 160(L&C) "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 second hearing for this bill in the Senate Finance Committee. Senator Bunde, the bill's sponsor, moved to adopt committee substitute Version 24-LS0524\B as the working document. Co-Chair Green objected for explanation. 10:12:02 AM Senator Bunde voiced appreciation for today's hearing. This bill would address the State's procurement and electronic (e- commerce) tools pilot program that has been in operation for a year. He determined the State would benefit most by retaining senior procurement specialists to purchase specialty items such as gears needed for the State ferries while using the e-commerce tools for simple, repetitive orders. Thus, Version "B" would limit outsourced e-commerce procurements to $50,000. State procurement personnel would be responsible for specialty purchases exceeding $50,000 as well as the majority of contracts for services. Senator Bunde explained the changes in Version "B" were based on a consensus between the Administration and the private contractors. Private contractors' responsibilities would expand "horizontally" to include more of the small, repetitive aspects of purchasing. State procurement officers would secure services, contracting, and large procurements. The State should use the experience gained through the pilot procurement program [PPP] to advance its procurement activities. He urged the Committee to support the bill. 10:13:55 AM JANE ALBERTS, Staff to Senator Bunde, noted that provisions in Version "B" would address State employees' position that, if provided e-commerce tools, they could match the procurement savings experienced by the private contractor. These provisions would allow each State department to either "contract for both labor aspects and e-commerce tools from the private contractor" or to "pay a licensing fee … for the e-commerce tools" and conduct procurement operations with State employees. Since both these options would utilize "the same e-commerce tools", the Office of Management and Budget could compare purchases made by State employees to those purchased by the private contractor. 10:15:09 AM Senator Bunde stated that Version "B" would also extend PPP's current State procurement code exemptions another three years. 10:15:30 AM In response to a question from Senator Olson, Senator Bunde clarified that PPP's current State procurement code exemptions would be extended until July 1, 2009. After that date, all procurements must comply with the code. Co-Chair Green noted that language in Sec. 9 page 4, line 21 pertained to the procurement code exemption. Senator Olson asked for further clarification. Co-Chair Green read the language. Sec. 9. Section 2 and 3 of this Act take effect July 1, 2009. Senator Bunde stated that, in order to successfully implement the PPP and its e-commerce tools, exemptions to some portions of the State's procurement code were required. Those exemptions would be continued until July 1, 2009. After that date, all provisions of the procurement code must be adhered to. Senator Olson asked whether this bill would affect PPP's "estimated savings". Ms. Alberts deferred to Scott Hawkins with ASCI. Senator Bunde understood Senator Olson's question to be whether eliminating the procurement code exemptions would negatively affect the savings the State might receive from the PPP. 10:17:31 AM Co-Chair Green understood Senator Olson's question to be whether the proposal to allow State employees to purchase large ticket items would negatively impact savings the State might receive were ASCI, with its specified exemptions, to make those purchases. 10:18:06 AM SCOTT HAWKINS, President, Alaska Supply Chain Integrators, testified via teleconference from an offnet site. The affect on savings is "one of the things that the three-year period will tell us". DOT data indicates that approximately 93 percent of all transactions are less than $5,000. Thus, the exemptions to the State procurement code would "streamline, really, a small share" of the overall transactions. The reasons for providing the procurement code exemptions were "more technical than relating to cost savings". Technical compliance issues would include such things as "the implications for having a private contractor" serving as an agent of the State and how do certain "elements of the procurement code apply to a private agent of the State". The three-year procurement code exemption extension would provide "adequate time" in which to address technical issues. Senator Olson characterized the response as "vague". He understood that one of the objectives for implementing the PPP was to save between five and 20 million dollars. Thus, his question was whether this bill would affect that savings potential. Mr. Hawkins recalled that the five to 20 million dollars savings projection was based on implementing the PPP to all State departments. The PPP that was implemented was "so small" it negated the opportunity to save even five million dollars. Senator Olson asked whether the PPP has produced any savings, to date. Mr. Hawkins stated that a savings of approximately $187,000 in procurement-warehouse overhead and operating expenses have been documented over the PPP's two-year operational timeframe. A savings measurement for costs of goods procurement was unavailable, "as the program hasn't been implemented to a degree" that could provide reliable catalog data. 10:21:15 AM BRUCE LUDWIG, Business Manager, Alaska Public Employees Association and American Federation of Teachers, testified in opposition to the bill. The PPP was enacted two years prior "as an experiment". Even though the program was projected to save five to 20 million dollars, "the only documented savings has been negative". Two independent audits indicated that PPP has cost the State at least a million dollars a year because ASCI paid more for goods than State purchasers did. "The final savings in overhead" was in the range of $53,000 after contract modifications were factored in. "In short" the PPP "failed miserably". Mr. Ludwig questioned the decision to continue exempting the private contractor from the State's procurement code, as the code was developed to protect citizens of the State by providing: transparency in the process; competition; and appeal procedures. Continuing the exemptions would provide none of these. He asked the Committee to take no action on the bill at this time. 10:22:57 AM TOM BRICE, Representative, Public Employees Local 71 Labor Association, informed the Committee that Local 71 members are "the blue collar workers of the State of Alaska": they are involved in airport, warehouse, pioneer home, and highway station operations such as snowplow drivers and belly blade truck drivers. These individuals have been some of the primary users of the pilot procurement program in Southeast Alaska. Association members have communicated to him that the "very complicated process" involved in this procurement program has forced many of them to use "credit cards or other alternative means of purchasing, simply because trying to go through and follow the computer system, trying to place an order through the ASCI program, is becoming very cumbersome and burdensome". Mr. Brice also noted that, oftentimes, orders placed through the program deliver the wrong item, or the order is never delivered, or does not arrive in a timely manner. One Association foreman ordered 50 fluorescent light bulbs for a State shop. They arrived one or two at a time over a three-month period. An order for front-end loader oil filters remained unfilled for three months. Such delays impact services provided by the State. Mr. Brice urged the Committee to further investigate this issue before moving it from Committee. 10:25:47 AM JIM DUNCAN, Business Manager, Alaska State Employees Association and former State Senator, spoke in opposition to the bill. Many of the 7,500 general government unit members represented by the Alaska State Employees Association (ASEA) would be impacted by this legislation. Reasons against this legislation include the fact there is clearly "no indication that this is a cost savings of any kind". When ASCI questioned whether the Administration's audit of the program was objective, a third party auditor, Mikunda Cottrell Accounting & Consulting (MCAC), was hired to conduct another audit. Mr. Duncan stated he had not attended the March 24, 2006 Committee hearing about the MCAC audit because he was unaware it was scheduled. The validity of that audit is in question. The MCAC auditor "recognized" that the sample size was too small to be valid and took this concern to the State and ASCI. The decision was made to continue. The MCAC audit concluded that the two-year program produced "a small savings" of $50,000 per year in personnel costs for the two-year period. It also indicated there was a "tremendous" one million dollar per year increase in the cost of goods purchased. Mr. Duncan reminded the Committee that MCAC "clearly" stated to both this Committee and the public that its study was "not a valid study but was a strong indicator of what was happening" with the PPP. The indication was that PPP produced small personnel savings, but increased costs of goods. Thus, there is a "strong" indication that expanding the program beyond the limited application of the initial pilot program endeavor "would cost a whole lot more to the State". Mr. Duncan opined it would be illogical "to expand and extend a program that has a strong indication from a third party auditor" with no vested interest, that the program would increase costs to the State. Mr. Duncan urged the Committee to consider the indicators reflected in the MCAC audit and not expand or extend the program. He also urged the Committee to be "very careful in allowing anyone" making procurements for the State "to bypass the State's procurement code". Such action could be "very dangerous and it could create tremendous problems in the future". The procurement code was developed between 1984 and 1986 by a Legislative commission, which ranked the best interests of the State and the public as paramount. Based upon his experience as a former Legislator and commissioner of the Department of Administration, Mr. Duncan believed the State's procurement code has worked and "would continue to work very well". Mr. Duncan concluded his remarks by reiterating reasons not to further the pilot procurement program: "there is no indicator that it has saved the State any money; there is a strong indicator" that it would cost the State a tremendous amount of money, particularly were it expanded to other departments. Furthermore, "there is no good public policy reason to bypass the State procurement code". Please do not extend or expand this program. 10:30:46 AM CHERYL FRASCA, Director, Office of Management and Budget, Office of the Governor, testified on behalf of "the group that is held accountable for the management results that State government delivers". She appreciated the attention the Committee has provided to evaluating the PPP's success or lack thereof. She has, at times, "refereed" in regards to the "issues and challenges" presented from "both sides of the pilot". Nonetheless, the Administration "believes that these are management tools that are good for government to deploy where it makes sense". She appreciated Senator Bunde's efforts to develop a committee substitute that "is a good reflection of the lessons learned" from the PPP. Forwarding Version "B" would make State government more efficient and would save money. Senator Bunde stated that major technological advances have occurred in the past decades, and, while "change is threatening" it is inevitable. In spite of the "resistance" the pilot program has experienced, "it has shown progress and promise. It is time for the State" to update its e-commerce procurement activities to the level at which private enterprise has operated for years. This would improve efficiency and produce cost savings. He urged the committee to support this legislation. Co-Chair Green withdrew her objection to the adoption of the Version "B" committee substitute. There being no further objection, the committee substitute was ADOPTED. Senator Bunde moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. Senator Hoffman objected. Senator Olson also objected. A pilot program that has cost the State more than one million dollars a year rather than saving the State money "is almost counterintuitive. The five to 20 million dollar anticipated savings have not transpired. 10:34:44 AM Senator Olson asked why the pilot program had not provided the expected results. Senator Bunde responded that "there's absolutely no proof that that million dollar" expense would not have been incurred under the original procurement system. To that point, State personnel costs have increased. "The audit has been pretty thoroughly debunked", and he did not believe that the program incurred additional costs. Costs increase "whether there is change or not". Senator Hoffman, speaking as a businessman, surmised that no business person in making payroll decisions would approve this measure. Senator Olson did not object to the practice of employing another private sector business to assist with the operation of his business, as, in many cases, it is less expensive to contract out some jobs. However, after reviewing the February 28, 2006 study [copy on file] on the MCAC report, he acknowledged "validity, in spite of the previous study" that included invalid variables. A roll call was taken on the motion. IN FAVOR: Senator Dyson, Senator Bunde, Senator Stedman, Co- Chair Wilken, and Co-Chair Green OPPOSED: Senator Hoffman and Senator Olson The motion PASSED (5-2) CS SB 160 (FIN) was REPORTED from Committee with new $650,000 fiscal note dated April 29, 2006 from the Senate Labor & Commerce Committee. 10:37:55 AM