HB 225-STATE PROCUREMENT CODE  9:36:29 AM CHAIR MENARD announced the next order of business to come before the committee would be HB 225 [CSHB 225(FIN)(Corrected)]. CRYSTAL KINEMAN, aide to Representative Fairclough, said HB 225 makes numerous changes to the procurement code, allowing for more consistency and efficiency. HB 225 streamlines the application of the bidder preferences and eliminates the vendor list as everything is accessed online. HB 225 adds in language allowing for multi-step revised sealed bidding process which is done mainly in the private sector. The House State Affairs committee added a section for reporting language to see the cost savings to the state. HB 225 exempts construction from multi- step bidding and adds conforming language for the (Alaska Energy Authority) AEA and Alaska Industrial Development and Export Authority (AIDEA) exemption. HB 225 directs procurement officers to consider only preferences in statute, essentially eliminating the Alaska offerors preference which is set out in regulation. Vendors and bidders who qualify for the Alaska bidder preference also qualify for the Alaska offerors preference which gives them an additional 10 percent preference. HB 225 increases the threshold for the informal procurement process from $50,000 to $100,000 for goods and services and from $100,000 to $200,000 for construction and increases lease space procurements from 3,000 to 7,000 square feet. HB 225 consolidates the Alaska bidder preference and other related preferences into one section. HB 225 includes a 5 percent preference for Alaskan veterans up to $5,000. 9:40:15 AM HB 225 eliminates the preference for employers of persons with disabilities. HB 225 adds in a $250 protest filing fee and adds a provision for the procurement officer to temporarily delay the award of a contract due to a protest. HB 225 adds in a definition for electronic signature for electronic filing. CHAIR MENARD asked about the renegotiation section, [page 12, Section 27 of HB 225 amending AS 36.30 by adding a new section] which states the procurement officer can go back and renegotiate the conditions. MS. KINEMAN replied that this section has been added and Vern Jones, chief procurement officer, can explain the reasoning. CHAIR MENARD referred to Page 1, Section 1 [amending AS 24.55.275], line 13, and the 5 percent preferences for bidders and said that getting preferences to Alaska companies is of utmost importance. SENATOR MEYER asked if the sponsor's bill was originally a simple veteran's preference. MS. KINEMAN said the sponsor introduced HB 24, the veterans preference, was then approached by Mr. Jones, and thought that updating the procurement code would be a good piece of legislation to carry. SENATOR MEYER agreed that the procurement code needs to be cleaned up and noted some preferences have been abused. He asked how the $5,000 cap for the veteran's preference was settled on. MS. KINEMAN replied that a good balance is needed: to help veterans without burdening the state. Current preferences are "stackable" and a qualified bidder could be awarded several preferences up to about 25 percent. CHAIR MENARD commented that would be ok with her. MS. KINEMAN said the cost to the state has to be rationalized and so a cap of $5,000 was chosen. Projects up to $100,000 would qualify for the full 5 percent. 9:45:21 AM SENATOR MEYER asked if the sponsor favors the cap of $5,000 even though HB 225 gets rid of the offerors and other preferences. MS. KINEMAN replied that the sponsor favors the $5,000 cap. SENATOR MEYER confirmed this was true even with other preferences being eliminated. MS. KINEMAN answered yes but noted it is the will of the committee. VERN JONES, chief procurement officer, Division of General Services, Department of Administration, said a lot of discussion went into the $5,000 cap for the veteran's preference. He explained that most procurements are less than $100,000 and the cap will not come into play for 80 - 90 percent of procurements. The sponsor is sensitive to the cost to the state. 9:48:39 AM SENATOR MEYER asked if preferences are nullified when federal money is involved. MR. JONES answered yes and said that federal requirements, which come with some federal grants, prevent the implementation of state preferences. The veteran's preferences would only apply when state funds are involved. SENATOR MEYER noted that procurement also entails services, such as road building or hiring a consultant. He confirmed that Alaska preferences apply when doing big projects with state funds. MR. JONES confirmed this and noted that Alaska will still have ten accumulative preferences even if HB 225 passes. He noted that HB 225 eliminates one of the three disability preferences. 9:52:13 AM CHAIR MENARD asked if Mr. Jones likes HB 225. MR. JONES responded that he had a big hand in drafting HB 225 and it is a compellation of things that need to be fixed. HB 225 simplifies, streamlines and de-mystifies procurement; it will be good for government and businesses. CHAIR MENARD asked if Mr. Jones feels he's had adequate time to work on HB 225 or if another year would see more changes. MR. JONES answered that he has kept track of needed changes and the procurement code has not been updated in many years. He saw the current code enacted in 1987 and watched it develop. HB 225 has everything needed to modernize and simplify procurement. SENATOR PASKVAN asked for Mr. Jones' thoughts on preferences discouraging competitive bidding. MR. JONES responded that preferences can create a non- competitive situation. HB 225 eliminates the Employers of the Disabled preference, leaving two disability related preferences. The Employers of the Disabled preference, which gives a ten point break on price if 50 percent or more of a workforce is disabled, has benefitted only two individuals who have taken advantage of it. 9:56:02 AM HB 225 also eliminates the Alaska offerors preference which is in regulation but not statute. The offerors preference applies to Request for Proposals (RFP) situations when cost and several other factors are being evaluated. Ten points out of 100 is reserved for the offerors preference and generally 60 percent is allocated to cost. That leaves only 30 percent to evaluate the qualifications, experience, quality of the proposal and other factors while picking the best offer for procurements. The Alaska offerors and bidder preferences can be achieved when a place of business, staffed by the bidder at least 6 months before the RFP issuing date, is in Alaska. Companies man an office in Alaska for six months to get the ten point preference. The original intent of the bidder's preference was to level the playing field for Alaskan businesses as costs are higher here; HB 225 does not affect the Alaska bidder's preference of 5 percent on price. However, the offerors preference goes beyond that and has nothing to do with price. 9:59:29 AM Several firms have told Mr. Jones that they did not submit a bid because a competitor opened an office in Alaska and will get a 10 point preference. The Alaskan preferences are not being used as intended. He noted that Legislature never had a say in the offerors preference because it was enacted by the executive branch. SENATOR PASKVAN said preferences by price or rating structure adjust the order of who wins and an imputed price is created that is lower than the bid price. He asked what the difference is between bid prices and imputed prices and how much the state is subsidizing. MR. JONEs said the procurement system is not automated and most procurements happen outside his organization, in the agencies. He does not have a mechanism that tracks that information but can say preferences obviously cost the state money. 10:02:14 AM SENATOR PASKVAN he asked for the "magnitude of the dollars" that the state might be losing due to some companies saying they cannot compete with those that get Alaska preferences. MR. JONES responded that a statewide systems placement procurement is coming up that has been estimated between $35 and $100 million. Firms have told him they will not compete if this preference stays in. Firms spend a lot of money and time to submit a proposal and the stakes are high knowing that your competitor has a ten percent overall advantage plus a five percent cost advantage. The net result is a non-competitive situation. 10:05:08 AM SENATOR PASKVAN said the state is spending potentially millions more than it needs to as the current structure effectively bars bidders from entering a bid. The amount that the state is subsidizing is currently unknown due to lack of a tracking method. MR. JONES responded that Senator Paskvan is right. Some firms don't compete because of the preferences which allow an opportunity to charge more and still win. SENATOR FRENCH asked if the state Chamber of Commerce supports the HB 225. MS. KINEMAN replied that she thinks the state chamber is neutral. She said she has put out emails and phone calls and has been waiting to hear from those who may be affected; pushback has only come in the last couple of days. SENATOR FRENCH said it would be helpful to see a one page break down of how preferences add up and affect the state on a $10 million road project, for example. Seeing how HB 225 would reshape that breakdown and result in better work and prices would be helpful. MR. JONES said he can do that but noted that a road project is a poor example because many receive federal money. SENATOR FRENCH suggested any other sizeable contract. MR. JONES said he can do that. 10:08:40 AM SENATOR MEYER asked the difference between an offerors preference and a bidder preference. MR. JONES answered that the Alaska bidder preference was established in statute and is currently in AS 36.30.170. The qualification for the 5 percent cost preference is six months of operation prior to a bid. The Alaska offerors preference has no basis in statute but was enacted in regulation. It only applies to competitive, sealed proposals or RFP's. The preference is 10 points out of 100, or 10 percent, of evaluation criteria. He reiterated that with RFP's, price and a number of other factors are being evaluated. SENATOR MEYER suggested that some bidders might find it too hard to understand the preferences and not submit a bid. MR. JONES replied that the higher the stakes, the more sophisticated the firms are, the more they understand the preferences and are able to take advantage of them. That has become somewhat of a problem. 10:11:16 AM SENATOR MEYER said he feels that the complicated procurement code has eliminated some small businesses. The procurement department needs to be updated and centralized. Purchase recs and orders should be done electronically and tracked. Prices cannot be negotiated because the dollar value that the state has spent with various firms is unknown. The procurement department does more leasing than procurement. The education department wants to hire their own procurement officer but that should be done from a centralized place. He asked if the same preferences come into play with leasing. MR. JONES replied yes. He noted that his department has a central purchasing section and a leasing section with five contract buyers in each versus 200 out in the agencies. Lease procurements apply all preferences. HB 225 would exempt leases from these preferences because the residency or disability status of the owner of a building is not relevant. 10:14:23 AM SENATOR MEYER noted that the Legislature is looking at leasing or buying the Chevron Texaco building. He asked if they are considered an Alaskan company. MR. JONES replied that the code applies for office space lease procurements but not when buying a piece of real estate. SENATOR MEYER asked if the company would be considered Alaskan if the building was being leased. MR. JONES replied yes, that building would qualify. Its owners have an operation in Alaska. SENATOR MEYER noted that the Legislature is currently leasing the building on 4th Street. He commented that people have asked why AIDEA and AEA are exempt from the procurement code. MR. JONES replied that procurement is unduly complicated for those entities because they procure goods and services under his authority and construction under Department of Transportation (DOT) authority. They buy and procure on behalf of the Denali Commission under federal process. They have four different sets of rules. In many instances they are buying investment instruments and looking at opportunities for development in Alaska and those do not always lend themselves to the competitive process. If HB 225 passes and they are exempted, they will have to, through a public process, develop regulations to govern their procurement. They would have one consistent set of rules to follow. 10:18:05 AM SENATOR MEYER said we should track how they [AEA and AIDEA] are spending because it is state money. That information could be leverage against various lenders and suppliers to get the best rates. MR. JONES said he hopes that his administrative systems replacement project will facilitate an automated procurement system to help capture the volume and be a smart consumer. SENATOR PASKVAN reiterated that some reporting or tracking on what we are "giving away by preference" would facilitate accountability. MR. JONES replied "certainly". 10:20:35 AM CHAIR MENARD opened public testimony. STEVE BOYD, National Electrical Contractors Association, said he is concerned with Section 6 and its interface with Section 36 of HB 225 which seem to exempt AIDEA and AEA from the procurement code. He does not see a compelling reason to exempt AIDEA and AEA; they already have some exemptions and should continue to be defined as agencies, following the rules in place. He suggested [the offeror preference] should be in statute if it is not already. He also felt six months should not be enough to qualify for the Alaska preferences. 10:23:56 AM CHRIS RUTZ, procurement officer, AIDEA and AEA, said AIDEA and AEA are not asking to be exempt from the procurement code but to develop regulations like other public corporations in the state that are distinct, separate, legal entities. SENATOR FRENCH asked for examples of how the regulations that Mr. Rutz would adopt would differ from state law. MR. RUTZ noted that the procurements on behalf of the Denali Commission were exempt from the procurement code and his organization developed internal policies to conduct those procurements. An audit found that his organization should follow something comparable to the procurement code. His organization began establishing internal procedures and he does not see a lot of difference potential regulations, such as these, and the current procurement code. He noted that now, as a public corporation, subject to a board of directors, his organization has statutes to comply with and two different governing entities: DOT governing construction and DOA governing the non-construction. In addition, his organization also has exceptions when doing things on behalf of other entities. 10:27:45 AM He said his organization would develop procedures similar to those used by DOT for construction and DOA for non-construction, with the primary difference being under protests, claims and disputes which would come back to the board instead of DOA. RALPH KIBBY, president, Chatham Electric, said he is opposed to Section 6 and Section 20 of HB 225. He is opposed to anything that would make it difficult to put local people to work. A big portion of the projects that come within his reach in Southeast Alaska and in the bush communities have competition from others outside of those regions and outside the state. He asked the committee to remove Sections 6 and 20 until he has more time to review them; they were not part of the original legislation. The legislation should be no less stringent than [AS] 36 and [AEA and AIDEA] should not be exempt. 10:31:34 AM SENATOR PASKVAN asked how the offerors preference of 10 percent affects his business and how Mr. Kibby's business would be hurt if that preference were removed. He assumed Mr. Kibby agrees with Mr. Boyd who wants to incorporate the offerors preference into statute. MR. KIBBY said he is not prepared to speak to that. He felt that HB 225 is nebulous and did not realize the issue was there until digging deeper into it in the last few days. He does not have an opinion to share, only that there is cause for concern. WAYNE STEVENS, president and CEO, Alaska State Chamber of Commerce, said the procurement officer is recommending a number of changes to clean up issues and conflicts in the state's procurement process. His one concern is that 2 AAC 12.260(e) [offerors preference] is a regulation but is not backed up in statute. The preference should be statutorily in place. SENATOR FRENCH asked if Mr. Stevens had seen the letter, dated April 3, that Mr. Baldwin had drafted on the topic. MR. STEVENS said has seen it but is not prepared to comment. 10:34:14 AM SHELLY WRIGHT, executive director, Southeast Conference, said her organization is a private membership organization that works to advance the collective interests of the people and communities of Southeast Alaska. Southeast Conference believes that hiring within the state is necessary for the survival of communities. The state's procurement preferences exist to provide advantages to Alaska businesses over competing outside interests. The removal of the Alaska offerors preference will put Alaska companies at a huge disadvantage in competing against outside firms. She noted that some smaller companies are aware of Alaska preferences and take advantage of them to get procurements and create jobs. 10:37:00 AM CHAIR MENARD closed public testimony. She announced she would hold HB 225 until Thursday and encouraged the bill sponsor to get together with the state Chamber of Commerce and see if an amendment can be made. SENATOR MEYER apologized to the sponsor because the original legislation was a simple veteran preference bill. He said putting the offerors preference in statute is something he is consistently hearing. He suggested the sponsor talk with Mr. Jones about that.