SB 152-DOTPF-RELATED CONTRACT CLAIMS MR. DON SMITH, staff to Senator Cowdery, sponsor of SB 152, explained that the measure relates to the handling and interest on contract controversies involved in DOTPF. The proposed legislation would simply require that when a contract settlement with DOTPF is in dispute and finally settled in favor of the contractor, interest must be paid to the contractor on the settlement amount for the time the contract was in dispute. The interest would accrue at the rate applicable to judgments and interest in state statute. TAPE 01-13, SIDE B  Disputes do occur and many take way too long to settle. There is no urgency to settle on the state's part, therefore interest expenses would increase the settlement incentive. The state earns interest on the money while it is under dispute and, many times, financially strapped contractors end up settling simply because they can't fight the time delay. Contractors have to pay their expenses while the dispute is ongoing. SB 152 would provide fairness. Letters of support from the Alaska General Contractors and others have been placed in members' packets. SENATOR TAYLOR said he met with Dick Hatten (ph), the executive director of the Alaska General Contractors and learned that this would apply to cases that do not go to court. MR. SMITH said that is correct. SENATOR TAYLOR clarified that these cases are arbitrated and involved claims for cost overruns or change orders. VICE-CHAIRMAN WARD said he would have DOTPF staff address the details. SENATOR TAYLOR said he believes if a case is taken to court, the winning party would have the right to pre-judgment interest. Mr. Dennis Poshard, Special Assistant, DOTPF, and Mr. Doug Gardner, Assistant Attorney General, took the witness stand. SENATOR TAYLOR asked Mr. Gardner if SB 152 will apply to matters that are being litigated. MR. GARDNER said the bill applies to administrative claims. He explained that an example would be a situation in which a contractor is building a road and a condition changed. Alaska law requires the contractor to bring a claim before DOTPF under the procurement code. There are a variety of different levels of review and a final decision is made by the Commissioner after a review by a hearing officer has taken place. The party can appeal the decision in Alaska Superior Court. If appealed to the court system, the case will always be considered an appellate case. VICE-CHAIRMAN WARD took public testimony. MR. KEVIN BRADY, an attorney with Olds, Morrison, Rinker and Baker, informed the committee that he has had the opportunity to litigate approximately four claims through the administrative hearing process, even up into the judicial review process. The cases are large and complex involving tens of thousands of documents. The process itself takes anywhere from 24 to 60 months. During that period of time, no interest accrues on the contractor's claim, to the financial detriment of the contractor. Private owners pay prejudgment interest, federal agencies pay prejudgment interest, municipalities and cities pay pre-judgment interest, so there is no legitimate basis for DOTPF, or any other state agency, to withhold pre-judgment interest and treat contractor claimants disparately from other tort or contract claimants. He offered to answer questions. VICE-CHAIRMAN WARD asked if any law exists that prevents DOTPF from paying pre-judgment interest now. MR. BRADY said to his knowledge, there is not. He said sometime in 1998, DOTPF made the decision, based on what he believes is an erroneous interpretation of an Alaska Supreme Court case, that it no longer has to pay. VICE-CHAIRMAN WARD asked Mr. Gardner to elaborate on that case. MR. GARDNER said he is not counsel of record in that case but that case is pending before the Alaska Supreme Court at this time. SENATOR TAYLOR asked what shift or change of policy DOTPF made in 1998 based upon an interpretation of a Supreme Court decision. VICE-CHAIRMAN WARD then asked if the 1998 case is being appealed. MR. GARDNER said the issue that he believes was raised in the case that Mr. Brady was referring to involves a 1996 Alaska Supreme Court decision named Danko Exploration v. State (924 P2nd 432). He noted it has been a fairly long standing interpretation of the state's status of its sovereign immunity that the state only agrees to be sued in capacities where it waves its sovereign immunity. He said: I don't believe that the issue has been raised, at least not to my knowledge, and again the attorney in the case may know more but I don't believe the question of pre- judgment interest has come up very often to the extent that we have begun litigating it in this case is because the claimant, who Mr. Brady represents, raised the issue. But, we believe if the - and I don't want to - I don't think it would be useful to go through the Danko decision here, but I think that if the decision is read, it's my sense that this has been a long standing interpretation of Alaska law. The pre-judgment interest occurs when the state waives its sovereign immunity on that issue and it has not, according to our reading of the Danko case by the Alaska Supreme Court and by the Superior Court judge that visited this issue on two occasions and found that the state had not waved its sovereign immunity on this issue. So, I would say at this point, it was the Department of Law's position that pre-judgment interest wasn't - couldn't be awarded on these claims and that position has now been validated by a Superior Court judge and will be heard by the Supreme Court. So, I wouldn't say it's an erroneous interpretation of the law, it seems to be accurate according to the court. SENATOR TAYLOR asked if, prior to the Danko case when the state paid [indisc.]. MR. GARDNER said he is not aware of any case in which the state paid pre-judgment interest on a disputed claim that was going through the administrative process. He noted there are other cases cited within Danko that suggest that this line of logic has gone back further than 1996. SENATOR TAYLOR asked Mr. Brady if he had any further comment. MR. BRADY said he would like to correct several of Mr. Gardner's statements. He stated the commissioner's office had authorized awards of pre-judgment interest, even up to and including 1998. [Mr. Brady's next statement was inaudible]. He concluded by saying the Department of Law took the position that pre-judgment interest was an inappropriate component of the award, and since then DOTPF discontinued the practice of awarding pre-judgment interest to contract claimants. VICE-CHAIRMAN thanked Mr. Brady. MR. MIKE MILLER, the immediate past president of the Associated General Contractors of Alaska, stated support for SB 152. He stated that in his experience, pre-judgment interest became a controversy in the late 1980s in the Northern region. That controversy was settled at the regional level after almost three years of "butting heads." He pointed out that in public works construction, a contractor has no choice but to complete the work or perform the work that he's supposed to do. Even if there is a dispute, the contractor must complete the work otherwise the contractor will be liable for breach of contract. Given the state's ability to drag claims out forever, contractors are at a huge disadvantage to recover. The time value of money is a basic principle in our economic society and the contractors only want to be treated fairly. SB 152 will quell any doubt as to whether state sovereignty is given up. It corrects an oversight; the wording of SB 152 was in the model procurement code as it was contemplated by the legislature in the 1980s, but fell out for some reason. MS. KATELYN MARKLEY, Development Specialist with the Alaska Industrial Development and Export Authority (AIDEA), said that AIDEA works through DOTPF under the procurement rules. Disputes do arise when construction projects are underway and, in the past, AIDEA has been able to settle those disputes through negotiated settlements. She said it is difficult to estimate a fiscal note for this bill. It could range from zero, if no disputes occur, to the millions. She told the committee that the contractor on the Healy [indisc.] gold project originally had a claim in the millions. The settlement, just based on an 18 month time period, could have been based on a $10 million claim, and could have cost an additional $1.6 million [in pre-judgment interest]. AIDEA settled the claim for approximately $1.1 million. Had AIDEA paid interest based on the dates the claim when filed, the cost would have been an additional $188,000. AIDEA didn't pay interest and once the claim was settled, the claim was paid the following month. Ms. Markley repeated that she cannot provide a fiscal note but should this arise, it could have an impact on AIDEA projects. VICE-CHAIRMAN WARD noted there was no further testimony. SENATOR TAYLOR moved SB 152 from committee and asked for unanimous consent. VICE-CHAIRMAN WARD announced that with no objection, the motion carried and that the bill does not have any further referrals. With no other business to come before the committee at this time, he adjourned the meeting at 2:40 p.m.