MINUTES LEGISLATIVE BUDGET AND AUDIT COMMITTEE August 15, 1997 8:38 a.m. TAPES BUD-97, Tape 155 CALL TO ORDER Chairman Phillips convened the meeting of the Legislative Budget and Audit Committee on August 15, 1997 at approximately 8:38 a.m. in the Anchorage LIO, Anchorage, Alaska. PRESENT Senator Phillips, Chair Senator Donley Senator Halford Senator Pearce Senator Torgerson, Alternate Representative Croft Representative James Representative Therriault ALSO PRESENT Representative Davis (Anchorage LIO), Mike Greany, Director, Legislative Finance Division; Jim Hauck, Fiscal Analyst, Legislative Finance Division; Randy Welker, Legislative Auditor, Division of Legislative Audit; Annalee McConnell, Director, Office of Management and Budget (Senate Finance Committee Room, Juneau, Alaska); David Eberle, Director, Design and Construction, Central Region, Department of Transportation and Public Facilities; Nancy Slagle, Director, Administrative Services, Department of Transportation and Public Facilities (Fairbanks). SUMMARY INFORMATION ^RPL 25-8-6002 Chairman Phillips asked for a brief description of the RPL. MIKE GREANY, DIRECTOR, LEGISLATIVE FINANCE DIVISION explained that the RPL would authorize construction of a maintenance facility in Soldotna for the Department of Transportation and Public Facilities (DOT) using certificate of participation (COP) financing. The request would use the interim process of the Legislative Budget and Audit Committee (LB&A) to approve funds in the form of statutory designated receipts; funds would arise from a contract between the trustee of the COPs and DOT, which would manage construction of the facility. He detailed that the COPs would be sold in the later part of September and at that point the contract would be executed. He continued that the debt service on the COPs would be due sometime in March of the following year and would require a general fund appropriation to pay for a portion of the project. The Legislative Finance Division had provided an analysis on the funding details. He highlighted that ideally approval of the project would have been handled during legislative session, but LB&A approval was required if the project was to go forward during the current interim. Chairman Phillips noted that Senator Donley joined the meeting. Representative Croft wondered if the problem would have been solved if the bill had included an immediate effective date. Mr. Greany replied in the negative. He explained that there were two pieces of legislation. The legislation that authorized the use of the COPs (in the form of SB 34) was one requirement. He elaborated that the bill did not have an immediate effective date; therefore it went into effect 90 days after being signed. He communicated that the bill did not include authorization for funding the project; expenditure authority needed to be provided to DOT in the form of a bill or through the legislative RPL process. He noted that upon funding and completion of the project DOT would lease the facility. Representative Croft asked for verification that there should have been an appropriations measure with the bill. Mr. Greany pointed to the division's timeline outlined in its analysis. He noted that if the committee approved the RPL it would be acting on faith that everything would come together correctly. The appropriate course of action would be that SB 34 would go into effect on September 10, 1997. Subsequently the contract with the trustee of the COP would be executed in late-September to early- October. The committee was tasked with approving funding for a project where two key events still needed to take place. Senator Pearce reminded speakers to identify themselves for the record. Representative Croft wondered whether there was any possible legal impediment to the bill becoming effective on September 10. Mr. Greany replied in the negative. He believed the more significant leap of faith depended on the signing of a contract related to the COPs later in September. Representative Croft asked what would delay the execution of the contract. He wondered whether an appeal would be cause for delay. Mr. Greany was hesitant to speculate on potential causes for delay. Senator Halford pointed to the analysis provided by the Legislative Finance Division and noted that a supplemental appropriation would also be required in March of the following year to cover the first debt service payment. He had believed that there was a net zero transaction and that the operating cost would be carried as part of the previous budget. He was hesitant to vote for something that would require supplemental funding. He wondered what would happen if the RPL was approved, but the supplemental was not. ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET responded that the first debt payment would not be due until July 1, 1998; therefore, supplemental funding would not be required. Mr. Greany followed up on Senator Halford's question related to the debt service and cost. He remarked that a fiscal note had been attached when the bill had been before the Senate Finance Committee. He explained that the note had been zero for FY 98 because the Department of Revenue's assumption had been that the COPs would not be issued until February 1998 with the first payment due in August 1998 (FY 99). He detailed that whenever the project came along the money for the lease purchase would be included in a section dealing with debt service for lease purchase payments; it would join projects such as Spring Creek, Palmer and Kenai court facilities, and other. Senator Halford asked whether the Legislative Finance Division would back the amount out of the basis when adjustments were made to the governor's budget for the following year. He asked if there would be a savings on the other side that was normally rolled into the operating budget. Mr. Greany would need to follow up. He was not completely familiar with the tradeoff with what was spent on the current facility that would be replaced. Ms. McConnell communicated that the new facility would not be occupied in the next year due to construction. She detailed that the project timing had been moved up since the passage of the bill. She noted that the opportunity had not been anticipated in the budget process in terms of the expenditure authority side of the equation. She would work to develop a mechanism that would allow a project to move forward in the future without needing to come back to the legislature for approval. Senator Halford pointed to the fiscal analyst report and noted that it indicated that unappropriated general funds would be the funding source covering initial work until the COPs were in place. He wondered if the practice was common. Mr. Greany answered that the situation would be similar to DOT going through the federal highway reimbursement process where a substantial amount of work was done on a project up front and the federal government was billed for its portion later. He elaborated that money would be used out of the state treasury to front the costs, which would be reimbursed by an outside fund source at a later time. He acknowledged that unappropriated general funds did raise an alarm bell, which was why the report included a note indicating that the practice should not set a precedent moving forward. Senator Halford asked if there was specific budget language that covered DOT's ability to expend on the future receipt of federal funds. Mr. Greany responded that there was nothing specific. RANDY WELKER, LEGISLATIVE AUDITOR, DIVISION OF LEGISLATIVE AUDIT, reminded the committee that during the past session the statutory definition for program receipts had been modified. Front section language appropriated all additional federal funds and designated program receipts (previous language had referred to all federal funds and all program receipts). He explained that designated program receipts were from a source other than the state that were restricted to a specific use by the terms of a gift-grant bequest or contract. He discussed that there was not currently a contract between the state and the trustee that would hold the receipts of the COP once issued. He reiterated earlier comments by Mr. Greany related to steps in the process that had yet to take place. He expressed concern about whether the RPL was properly before the committee because a contract had not been obtained; therefore, he was unsure the situation fit the definition of designated program receipts. Representative Croft asked what the effect would be "of the stars not aligning." He wondered if there would be no COP funds to reimburse the state in the event of delay. Mr. Welker answered in the affirmative. Representative Croft surmised that it would be more likely items would be delayed than completely falling apart. He surmised that the legislature would be temporarily fronting the funds during any delay period. Mr. Welker responded that the general fund would be fronting the funds. Representative Croft asked if the maximum cost to the general fund would be $3 million. Mr. Welker did not believe the amount for construction could extend beyond the amount specified in the legislation. There was also appropriation for some of the original planning and design; he did not know the balance. He affirmed that treasury would pay the warrants without the benefit of receipts coming in. Representative James believed that the committee's approval of the RPL would only authorize the COP contracting. She asked if any general fund appropriation would be made after the beginning of the next fiscal year. Mr. Welker responded that the debt service on the COPs would be a separate issue down the road. The RPL before the committee dealt with providing DOT with expenditure authority to allow construction to begin in the current season (with the anticipation of the COP proceeds in the future). Representative Therriault stated that the legislature had built into the fiscal note the anticipation that payments would be made in the following fiscal year. He observed that they were now working to jump through all kinds of hoops to move the project up. He questioned whether the move was wise. He pointed to backup provided that detailed continued environmental degradation would occur due to the operation of the facility. He wondered what the degradation was from. He addressed the net zero aspect and did not know how it was possible to move out of something that was owned outright into a facility requiring purchase for no cost. He noted that operational costs may be a wash; however, there would still be a purchase price. He noted that it was helpful to learn that the first 6payment would not be until the next fiscal year. He was not supportive of taking action that would require a supplemental. Ms. McConnell noted that the project had already been approved by the legislature under SB 34. The current issue was related to timing and not to the merits of the project. She explained that questions related to additional operating costs were valid, but had been part of the consideration at the time the bill was passed. She stated that there were some important environmental reasons related to Kenai fisheries; the opportunity to have the project completed an entire season earlier than originally projected was positive. She addressed questions related to the state's responsibility for funding if the COP contract fell through. She relayed that the administration was not expecting any problems with the COP process. She discussed how similar issues had been handled in the past and explained that there had been a Public Facilities Planning and Design fund that operated as a bridge mechanism. The administration would look at that mechanism and others to use in the future. She addressed a question on designated program receipts and detailed that there was budgetary authorization for a number of designated program receipts where contracts were not yet in place. She thanked the committee for meeting on the RPL. Representative Therriault agreed the legislature had provided designated program receipt authority to some projects without contracts; however, in those cases the work did not move forward prior to securing the contracts. He stated that the administration was asking the legislature to approve the use of general funds for use on a project prior to obtaining a contract. He asked for verification that the situation was not the same as other instances. Ms. McConnell agreed; however, she pointed to AS 37.10.087 that covered the situation at hand. The statute outlined that when a construction account established to receive the proceeds of general obligation bonds is temporarily exhausted the commissioner of Administration on recommendation of the bond committee and with the approval of LB&A may temporarily transfer money from the general fund to the bond construction fund or account. She referred Mr. Greany's earlier testimony on similar situations related to federal funds. She noted that the situation was not unknown, but it was important to control tightly. The administration was comfortable that it would have the COP process would go smoothly. Representative Therriault noted that in the statute related to bonds versus COPs; he surmised that there may be a fine distinction between the two. He reiterated that in other circumstances where authorization had been provided prior to the signing of a contract the construction work had not begun before the contract approval. Ms. McConnell agreed that the point was valid. Senator Torgerson referred to a legal opinion he had requested from Legislative Legal Services to determine whether LB&A could approve an increase in expenditures prior to the effective date of a bill. He read from the opinion: ...however, it would be more in keeping with the legislative oversight function mandated by AS 37.07.080(h) if LB&A withheld consideration of the approval of any expenditure of additional funds for the facility until at least September 10. Senator Torgerson noted that September 10 was the bill's effective date. He continued to read from the legal opinion: The request and approval of the RLP is clearly premature until this legal authority, the issuance of the certificate of participation... Senator Torgerson noted that the opinion specified that LB&A could only approve an increase in expenditures for the Soldotna maintenance facility based on the speculation by the governor that the money would be available. He noted that the peninsula delegation (Representative Phillips, Representative Hodgins, Representative Davis, and Senator Torgerson) had seen bids and contract proposals and it was not happy with the process related to how things had come together. He relayed that a protest had been filed; an answer to the protest had been received and all claims had been denied. He understood that several contractors were considering filing a legal suit, but would appeal to the [DOT] commissioner first (as required under statute). He stressed that the stars were not lining up in relation to the awarding of the contract. He believed LB&A committee members would most likely have similar concerns if they were to see the contract bids. Representative Therriault asked Senator Torgerson to address the legal opinion that any action should be contingent on the effective date of the legislation. Senator Torgerson replied that the legislature would be acting in good faith in its agreement with the trustees of the COP. He explained that the legal opinion advised the legislature to withhold consideration until the effective date of the bill if no contract was in place. He addressed bond loans and the construction fund and language did not say action could be taken prior to the effective date of an issuance. Representative Therriault asked about a concern expressed related to continued environmental degradation. He asked for more detail. Senator Torgerson believed the key word was "potential" degradation. He surmised there was always the potential for something to happen to the Kenai River due to the substantial amount of equipment, oil, and gas onsite. He noted that precautions were taken. He relayed that approximately $1 million had been spent on clean up at the facility in the past several years; approximately $600,000 in additional funds had been appropriated the prior year to continue cleanup efforts. He did not believe there was an ongoing pollution problem onsite. Senator Pearce wondered if the appeal to the commissioner on the bid award was related to the construction on the new facility. Senator Torgerson replied that an appeal had been filed with the commissioner related to certain provisions of the award of the contract. He elaborated that it had been a design-build bid approach and there were questions on how it had been put together. He shared that the protest officer had issued his opinion and had turned down all portions of the protest. Senator Pearce wondered how long the commissioner would have to address the appeal. She surmised the commissioner may be the appropriate person to address the question to. Senator Torgerson believed the commissioner would be in the office the following day. He relayed that the appeal had been made to the commissioners of the Department of Administration and DOT. Senator Pearce wondered whether the question was related to how the RFP had been assembled. She wondered about the legal question. Senator Torgerson answered that the question was on discrepancies on how the RFP had gone together. He explained that eight contractors had been fairly close together in price and one contractor came in approximately $1 million under the others. The contractor that would be awarded the contract had not followed up on various narratives and did not have clear building descriptions. There were approximately eight items of concern, but the contract officer had determined it was not a problem. The officer noted that the more expensive bids included more bells and whistles. He noted that the question at hand was whether the building would be functional; DOT believed the answer was yes; however, other contractors did not agree. Senator Pearce wondered about the appeal timeline to the DOT commissioner. She asked what the timeline would be if the other seven contractors filed suit. She believed waiting for September 10 may be easy due to the appeal issues. DAVID EBERLE, DIRECTOR, DESIGN AND CONSTRUCTION, CENTRAL REGION, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES responded that the appeal process did not necessarily prevent award of the contract. Statute stated that the award of a contract could be proceeded with unless the contracting officer chose to stay the award on the belief that there was reasonable chance that the protesting party would succeed or if it was not in the best interest of the state to proceed. The department's intent was to proceed with awarding the contract to the successful bidder. He communicated that the appeals process would go forward notwithstanding the award; he believed the commissioner had 15 days to deal with the appeal. Representative James asked if the process had been done in the past. She wondered the approval of the RPL would set precedent for similar scenarios to occur in the future. Ms. McConnell replied that it was valid for LB&A to state on the record that it did not want the current situation to set a precedent going forward. She believed it would be consistent with her intent to establish a mechanism to avoid similar situations in the future. She did not want to lose sight of why there was an effort to move the project forward. In addition to wanting to move quickly with remediation on the current site (which could not be done until a new facility had been built), there was concern that because the building had been designed before understanding environmental protections needed for oil there was ongoing aggravation of leaching towards the river. Representative James was concerned about the validity of a pollution problem and using it as an excuse to move the project forward. Mr. Greany believed they were in unchartered waters. He stated that his sonar was "picking up some underwater rock piles." Representative Davis referred to the legal opinion's statement that "the request for approval for the RPL was clearly premature until there is legal authority to issue the certificate of participation." He asked whether the legislation was itself the legal authority. Mr. Welker replied that the legislation would provide the legal authority on its effective date of September 10. Representative Davis agreed. He did not believe the contract was the relevant issue at hand. He surmised the issue the committee needed to address was the legal appropriation process. Senator Pearce recalled that the $600,000 allocated for cleanup at the current facility was intended to determine what needed to be cleaned up. She opined that the Department of Environmental Conservation (DEC) and the Department of Natural Resources (DNR) would need to come back to the legislature for funds once an understanding of the degradation had been obtained. She believed the biggest concern had been related to salt leaching from an old storage facility. She felt it was important to proceed with cleanup, but noted that money had been appropriated to build a facility on the site. She added that the cart may have been slightly before the horse. She did not believe more degradation would occur if the project did not move forward immediately. She noted that Senator Torgerson had more knowledge of the issue and she would take her lead from him on the appropriate course of action. Senator Torgerson discussed that a debate had occurred over whether to include the environmental cleanup in the project and bonding; it had been decided that the state did not want to set the precedent to include an unknown amount for cleanup to a project funding. Approximately $600,000 had been appropriated for cleanup. There had been correspondence from DEC and others estimating that cleanup after the building had been demolished would be approximately $250,000; however, the departments were unsure about the estimate. He agreed with Senator Pearce's recollection of the legislature's intention related to the $600,000 funding. He addressed that the only potential environmental problem he could think of was that the building's floor drains flowed to a tank that was pumped out; years ago the contents had been emptied into Soldotna's sewer system; however, that had been cleaned up. He did not know of any ongoing pollution issues. Salt was still used [for roads], but the pile had been moved away from the Kenai River. Representative Davis agreed that enough work had been done to take care of any immediate pollution issues. There were some underground fuel tanks that state vehicles were still being serviced from that needed to be taken care of when the facility was relocated. He believed any degradation to the Kenai River had been taken care of. Representative Croft wondered whether the committee could make an appropriation authority effective on September 10 and only effective if the award of the contract had not been stayed by a hearing officer or the court. Mr. Greany replied in the affirmative. He cautioned against placing conditions on the approval. He pointed to a situation when the legislature had attempted to condition appropriations, which the governor had ignored. Senator Halford wondered about cash flow requirements for the fall if the RPL was approved. He wondered whether the funding could be cut in half to continue moving the project forward, but without setting a bad precedent going forward. Senator Pearce asked if the committee could return to the issue on September 10. She wondered if construction could take place if the construction approval was not given until September. Senator Torgerson believed construction may be delayed if the approval was put off for too long. He added that $400,000 had been appropriated to DOT for site work; he had expected the work to be done the prior April; however, nothing had been done. Ms. McConnell wondered whether an approval could be structured so the contractor could begin preparing for mobilization to begin work on September 10. She wondered if the structure would work in the contracting process. Mr. Eberle replied that the contract had not been awarded as of yet. He would be reluctant to enter into a contract knowing that it could not be awarded based on the offered price that was entirely founded on the schedule that had been offered. He elaborated that if a month or more was lost his inclination would be to not award the contract and to hold it over. He did not believe the situation would be fair to the state or the bidder. Representative Croft believed it made sense to place a condition on the approval that the work would not go into effect until the legal effective date of the bill. He wondered if the September 10 day or other conditional language would cause a problem for DOT. Mr. Eberle replied that he did not believe there was merit in the other bidders' complaint to the commissioner; he did not believe a court would find in their favor. He opined that if the department made the award that it would proceed. He believed that if the project did not begin for another month that the entire construction season would be lost. The delay would provide a dilemma for the department as it would need to negotiate with the contractor awarded the contract to determine cost implications. He would prefer to not enter into a contract if a delay was eminent. He reiterated that the situation would not be fair to the state or other bidders. Senator Halford wondered whether there was cash available to move forward with excavation work in the current season if DOT was faced with re-awarding and redefining a contract. He asked whether there was a way to separate excavation work from building work. Mr. Eberle answered that cash flow could be explored; however, the contractor would have to order building materials immediately in order for the contract completion date to be maintained. He detailed that concrete work and enclosing the structure would need to occur prior to winter to meet the completion date of mid-June the following year. He believed there may be some flexibility on how much would be needed between the present day and September; however, he guessed the project would need between $1 million and $1.5 million between present day and November. Senator Halford asked a question related to the COP. Mr. Eberle deferred the question to Ms. McConnell. Ms. McConnell replied that if the RPL began on September 10 there would be the same situation as with the bill that the days would just march on until the effective date. She could not provide a legal opinion, but surmised that the contract could be awarded with cash being available after September 10. The bill and the expenditure authority would then become effective on the same day. Representative James was uncomfortable with the situation. She believed it was a problem to award the contract prior to September 10. Senator Pearce was concerned about the process. She was concerned that if the committee denied the RPL the 45-day rule would start; she did not want to go in that direction. She would prefer that DOT withdraw its request rather than adding a new layer of confusion. She was uncertain about the best direction to take. Senator Phillips asked about the governor's intention if the committee denied the RPL. Ms. McConnell had not addressed the possibility with the governor. She had been hopeful after a recent conversation with Senator Torgerson that the RPL would move forward. She recognized that the situation was not ideal, but that the situation had arisen due to a slip in the process and not because of anything intentional. She addressed a concern expressed by Representative James and noted that the governor had already signed the bill; therefore, his intentions were known. She recognized the awkwardness of the situation and felt comfortable with a statement from the committee that it did not want to set a precedent and did not want the situation to arise again. Senator Torgerson expressed that he was unhappy with the process. He requested that if the committee moved forward on the RPL that it be contingent upon the commissioner's review of the protests received. He was concerned about the legal aspects; however, he believed there was enough legislative intent to move forward. He opined that the bid process needed to be looked at; the protests needed to be answered before moving forward. Representative Davis believed the RPL should be withdrawn. He stated that approval or disapproval of the RPL was an indication of intent by the committee. He opined that disapproval would be problematic. He believed options existed that could answer questions. He felt that it was a shame to have gotten to the current situation and noted that everyone was aware of the project's importance. Senator Pearce MOVED that the committee ask the administration to withdraw RPL 25-8-6002. Senator Halford asked if the committee was playing a game with the 45-day rule. Senator Phillips replied in the affirmative. Senator Pearce noted that the intention was to not stop the clock. She questioned the characterization of playing a game. She believed the situation was unique and that perhaps unique responses were called for. Representative Croft OBJECTED to the motion. He stressed that there was no power that would prevent the law from taking effect on September 10. He believed the legal opinion was equivocal. He pointed out that another section of the legal opinion stated that the committee did have the authority to move forward on the RPL. Representative James understood Representative Croft's point; however, if the committee moved the RPL forward, she stressed the importance of the condition specifying that the situation should not occur again in the future. Senator Pearce MOVED to WITHDRAW the motion with the hope of an alternative solution. There was OBJECTION to the withdrawal of the motion. Senator Phillips asked Senator Pearce to restate her motion. Senator Pearce MOVED that the committee ask the administration to withdraw RPL 25-8-6002. She understood that the 45-day rule began the day the RPL was submitted and not with any action taken by the committee. A roll call vote was taken on the motion. IN FAVOR: Senator Halford, Representative James, Senator Torgerson, Representative Therriault, Senator Pearce, Senator Phillips, Senator Donley OPPOSED: Representative Croft The MOTION PASSED (7/1). Ms. McConnell asked whether the committee wanted to take action on proceeding with the contract proceeding on September 10. Senator Phillips replied that the action was to not consider the RPL. Senator Donley noted that the committee had voted to ask the administration not to do something, but they could decide to move forward or not. Representative Croft noted that the committee had taken no action on the RPL. Senator Torgerson clarified that if the administration refused to remove the RPL it would remain on the committee's agenda for the August 21, 1997 meeting. Ms. McConnell clarified her interest in understanding the committee's intent related to moving forward with a contract. Representative Croft Moved RPL 25-8-6002 with the amendment that the authority take effect on September 10, 1997. Representative James asked whether the amendment should be voted on prior to voting on the RPL. Senator Phillips agreed. Senator Halford asked whether it was in order to move action on an issue that had already been dealt with in a contrary way. He restated the committee's prior action on the RPL. Senator Phillips asked Representative Croft to renew his motion. Senator Torgerson expressed objection to the motion. He believed the committee had effectively tabled the issue. He did not believe a motion was in order. Representative Croft clarified that the committee had asked another party to take action, but he did not believe it was the same as the committee taking action. He stressed that his motion was not a contrary action. Representative Croft MOVED that RPL 25-8-6002 become effective after September 10, 1997. Senator Donley MOVED to table the motion. A roll call vote was taken on the motion to table Representative Croft's motion. IN FAVOR: Representative James, Senator Halford, Representative Therriault, Senator Donley, Senator Pearce, Senator Phillips, Senator Torgerson OPPOSED: Representative Croft The motion PASSED (7/1). Senator Pearce discussed the upcoming August 21, 1997 Senate Finance Committee and LB&A meetings. ADJOURNMENT The meeting was adjourned at 10:02 a.m.