HB 112-ESTABLISH ALASKA PUBLIC BUILDING FUND REPRESENTATIVE JEANETTE JAMES, sponsor of HB 112, explained the legislation will establish the Alaska Public Building Fund as a special account in the general fund and create an agreement whereby occupants of state owned buildings pay rent into this fund. The collected rent money will be held in the fund and appropriated by the Legislature to pay management, operation, maintenance and depreciation costs. One advantage to this approach, aside from depositing money needed for expenses into a special account, is that higher rents could be charged to federal agency occupants. Currently, federal funds cannot be collected for space costs unless all building occupants are charged a rent program. A second advantage is that some agencies may choose to use less space for the sake of efficiency. No additional allocation of funds should occur should HB 112 be enacted. CHAIRMAN WARD announced the arrival of Senator Phillips. Number 53 SENATOR ELTON noted the legislation does not mandate the Legislature to appropriate the collected funds for maintenance and operation costs. He asked whether the funds are dedicated to a special purpose. REPRESENTATIVE JAMES stated the funds can only be dedicated if a constitutional amendment is adopted, therefore the money will be used at the discretion of the Legislature. She added the advantage of creating the fund is that money can be held in it from one year to the next so that enough can accumulate to cover expensive repairs that do not occur annually. SENATOR ELTON said the bill walks a fine line because depositing money into the fund is a discretionary action, however once the money has been deposited, the fund is basically dedicated if the money can only be used for a specific purpose. CHAIRMAN WARD indicated similar funds have been created. Number 93 SENATOR WILKEN commended Representative James for bringing this legislation forward, and as Chair of the Department of Administration Finance Subcommittee, he noted he had discussions with the Administration about this approach and supports it. ALISON ELGEE, Deputy Commissioner of the Department of Administration (DOA), stated support for HB 112 for the reasons stated by the sponsor. She noted the internal service concept provides DOA the ability to retain money from year to year, therefore it provides an incentive, from a budgetary standpoint, to collect and retain the depreciation charge as a funding source for renewal and replacement of buildings. The failure to provide adequate renewal and replacement funds for major building components, such as roofs, through capital appropriations has created the deferred maintenance backlog. While HB 112 will not correct that backlog, it will allow the State to stay on an even keel. DOA also believes that putting the cost of maintenance and operations at the program level will force program managers to look at space as a monetary commodity and to make decisions based on efficiency. DEPUTY COMMISSIONER ELGEE explained, in response to Senator Elton's question, that an internal service fund is not a dedicated fund in that the Legislature could choose to appropriate the entire balance from the fund into the general fund for any purpose. If it were to do so, however, the State would be required to repay the federal government the portion of the monies deposited into the fund from federally funded programs, because the money was not used for its intended purpose. During the budget process, the Legislature would look at the space requirements of every program. Each program will cover its own costs from its own funding source. The rent money collected will be deposited into the internal service fund and appropriated based on the Legislature's identification of building maintenance costs and capital project costs. Number 148 SENATOR ELTON asked if money could be deposited into this fund from other sources. DEPUTY COMMISSIONER ELGEE indicated the same question came up in the House Finance Committee. She said Legislative Finance looked at total spending this year and removed expenses that are duplicated. Those expenses are interagency receipts, which are the internal service fund operations, because the Legislature is essentially appropriating that money twice. In developing the total budget picture, Legislative Finance removed those expenses so that they do not get double counted when looking at the big picture. Number 164 SENATOR WILKEN asked if the depreciation cost is set aside in a sinking fund. DEPUTY COMMISSIONER ELGEE explained the depreciation cost is a component of the actual per square foot rent rate. When the rates are developed, the federal government reviews and approves them. The depreciation component is based on the useful life of each facility. DOA has quite a bit of discretion in setting that rate; it has already set depreciation schedules for most state buildings at between 30 and 50 years. As monies accrue in the internal service fund, DOA will determine the annual operating and maintenance costs and allow a differential to accrue to provide for capital projects which do not occur every year. The federal government does not require that a one-to-one correlation exist between where the depreciation dollar was generated and spent, in recognition of the fact that capital project costs are not annual and that the fund revolves to eventually repair all projects. She added that a majority of the states throughout the nation use this approach to address building maintenance and operating costs. Number 200 SENATOR GREEN asked if DOA could charge a depreciation fee in its leases without this type of legislation. DEPUTY COMMISSIONER ELGEE replied that at present, DOA charges a fee to occupying agencies that are other funded. The fees are represented in DOA's leasing budget as interagency receipts. The fees are directly billed to the federal government for federal programs. However, in state owned buildings, the operating and maintenance costs are paid by the Department of Transportation and Public Facilities (DOTPF) with general funds. DOA could design a rate structure for state owned buildings without an internal service fund in place, but it could not retain the depreciation amount for more than one year to pay for capital projects, and the fund would never contain enough money in any one year to cover the major building replacement needs. SENATOR GREEN asked why HB 112 would make that possible. DEPUTY COMMISSIONER ELGEE said the funds can be held over from one year to the next in the fund established in HB 112. She explained the internal service fund allows DOA to have a revolving fund in which funds, not appropriated by the Legislature for other purposes, could be retained and allowed to accumulate. Under federal rules, funds can accumulate for a specific period of time. If the funds are not used for their intended purpose within that time period, the federal government would expect to be repaid. If an ongoing maintenance program exists so that the federal government is assured that the money is being used for maintenance and operations of all buildings, it would not expect repayment. If DOA allowed the fund to build up over five years and did not appropriate any of the funds for capital purposes, the federal government might question the retention of those funds. SENATOR GREEN asked if the federal government is involved because its agencies are tenants. DEPUTY COMMISSIONER ELGEE said that is correct. She noted two other internal service funds currently exist: the Highway Working Capital Fund and the Information Technology Fund. Both funds work in a manner similar to the fund proposed in HB 112. Number 246 SENATOR ELTON asked if DOA has a working agreement with DOTPF regarding the responsibilities of each department in relation to leasing state owned buildings and the internal service fund. DEPUTY COMMISSIONER ELGEE replied DOTPF is very interested in working with DOA on HB 112. DOTPF helped develop the proposal and Commissioner Perkins would like nothing better than to have more of the building responsibilities shifted to DOA. DOA anticipates signing a memorandum of understanding with DOTPF, so that money from the fund would be appropriated directly to DOTPF to cover its maintenance and operating costs to the degree that those expenses remain with DOTPF. DOA sees merit in consolidating building management functions of leased or state owned buildings under one roof. SENATOR ELTON asked Deputy Commissioner Elgee if she envisions both DOA and DOTPF making deposits into the internal service fund and both being able to withdraw money from the fund for maintenance and operating costs. DEPUTY COMMISSIONER ELGEE said that is correct although any withdrawals would be based on a legislative appropriation; DOA and DOTPF could not directly access the fund to withdraw money. Number 281 SENATOR GREEN asked whether DOA has projected the amount of money deposited into the fund each year. DEPUTY COMMISSIONER ELGEE told committee members that DOA has looked at the largest office buildings throughout the state: the State Office Building, the Alaska Office Building, and the Court Plaza in Juneau; the Bank of America Building in Anchorage; and the Fairbanks Regional Office Building in Fairbanks. DOA developed per square foot costs for useable space and it worked with the federal government on rate approval. DOA could present in the FY 01 budget this kind of rental approach for these office buildings if HB 112 is enacted. DOA's per square foot costs are reasonable compared to the retail market rate. While the fund will not meet 100 percent of the building maintenance and operating costs, it will improve the State's current position. Lease costs for the Fairbanks Regional Office Building are estimated at $1.51 per square foot (with depreciation); the State Office Building rate would be 89 cents per square foot. She noted the Juneau retail space market rate is $2 per square foot; the Fairbanks market rate for retail space is over $2 per square foot. CHAIRMAN WARD asked what the total square footage is, statewide. DEPUTY COMMISSIONER ELGEE replied she does not know the total square foot amount, however the Bank of America building, Fairbanks Regional Office Building, State and Alaska Office Buildings, Public Safety Building and Fish and Game Building in Juneau contain 575,289 useable square feet. SENATOR ELTON asked how these rates compare to the rate charged by the previous owners of the Bank of America building. Number 343 KEITH GERKEN, Department of Administration, said the average lease cost is just under $2 per square foot. SENATOR ELTON asked how much of that amount is for building and depreciation costs. MR. GERKEN replied the State inherited the leases when it bought the building. Those leases were originally based on whatever the market could bare. He stated the rents are collected by AHFC and deposited into a fund to maintain the building, therefore DOA has no direct breakdown of how the funds are spent. He estimated maintenance costs to be about 75 cents per square foot. CHAIRMAN WARD questioned whether the building, now under state ownership, is property tax exempt, and whether that affected the price of current leases. MR. GERKEN answered the statute that authorized DOA to purchase the building requires the State to pay property taxes to the municipality in proportion to the private tenant occupancy of the building. As the private tenant occupancy decreases, so will property taxes. CHAIRMAN WARD asked what amount of the assumed leases is applied toward maintenance costs. MR. GERKEN said all rent checks are deposited into AHFC's bank account. DOA can draw upon those funds for maintenance costs. He repeated that the total maintenance costs for the building are about 75 cents per square foot. He added that the number of private tenants has been reduced by about one-half over the past 20 months of state ownership. CHAIRMAN WARD asked Mr. Gerken if he could provide the total square footage of state owned buildings. MR. GERKEN could not but thought DOTPF office space statewide equals about 1+ million square feet. Number 385 SENATOR GREEN asked Mr. Gerken his definition of maintenance costs, given the 75 cent per square foot estimate. MR. GERKEN said the 75 cents includes maintenance and operating costs, such as utilities, janitorial services, snowplowing, and window washing. He added the maintenance costs comprise less than one-half of the 75 cents. CHAIRMAN WARD said in all of the leases he is aware of, a percentage is set aside for capital improvements. MR. GERKEN agreed with Chairman Ward and said most leases account for a sinking fund for depreciation of inevitable costs. He felt that is one of the missing ingredients in state management of its buildings. He noted HB 112 would correct that. SENATOR PHILLIPS questioned whether any problems have occurred in the transition to state ownership of the Bank of America building. MR. GERKEN said DOA is getting there and has learned a lot. Number 418 SENATOR GREEN asked if this proposal implies there will be an additional fee charged to tenants, or whether the same rent will be charged but part of it will be designated for the internal service fund. MR. GERKEN said HB 112 has nothing to do with numbers, it simply establishes a fund so that in a future budget, DOA can come forward with a rental proposal. DOA intends to put all rents into the fund to pay for operational and maintenance costs and minor capital improvements. SENATOR GREEN asked what the difference is between the scenario described by Mr. Gerken and current practice. MR. GERKEN said right now DOA must request money in the capital budget for building repairs. Those projects do not compete well with projects of an emergency nature and there is no systematic way to deal with building repair expenses. Number 434 SENATOR GREEN asked where the current rent money is deposited. DEPUTY COMMISSIONER ELGEE replied right now the Legislature directly appropriates money to DOTPF in a lump sum for building maintenance. That budget has suffered cuts like all budgets, which has increased the deferred maintenance backlog. She explained that if HB 112 passes, DOA would look at the general fund cost for individual state agencies or federal cost for federal programs, and each program would get a bill for rent. Those agencies currently occupy the space at no cost and depend on whatever DOTPF can provide for operation and maintenance. There being no further questions, SENATOR WILKEN moved HB 112 from committee with individual recommendations and its accompanying fiscal note. There being no objection, the motion carried.