HOUSE STATE AFFAIRS STANDING COMMITTEE March 9, 1999 8:04 a.m. MEMBERS PRESENT Representative Jeannette James, Chair Representative John Coghill Representative Scott Ogan Representative Jim Whitaker Representative Beth Kerttula Representative Harold Smalley MEMBERS ABSENT Representative Bill Hudson COMMITTEE CALENDAR CONFIRMATION HEARINGS Commissioner, Department of Military and Veterans Affairs Adjutant General, Alaska National Guard Phillip Oates, Brigadier General - CONFIRMATION ADVANCED Brigadier General, Alaska Air National Guard George Cannelos, Colonel - CONFIRMATION ADVANCED * HOUSE BILL 112 "An Act establishing the Alaska public building fund; and providing for an effective date." - MOVED HB 112 OUT OF COMMITTEE * HOUSE BILL 122 "An Act excluding buildings used primarily for office space from the Housing Project and Public Building Assistance Act, restricting state ownership of buildings used primarily for office space, and providing for the disposal of state ownership interests in certain state buildings used primarily for office space; and providing for an effective date." - MOVED HB 122 OUT OF COMMITTEE HOUSE JOINT RESOLUTION 18 Proposing an amendment to the Constitution of the State of Alaska relating to an office of administrative hearings. - SCHEDULED BUT NOT HEARD (* First public hearing) PREVIOUS ACTION BILL: HB 112 SHORT TITLE: ESTABLISH ALASKA PUBLIC BUILDING FUND SPONSOR(S): REPRESENTATIVES(S) JAMES Jrn-Date Jrn-Page Action 2/24/99 301 (H) READ THE FIRST TIME - REFERRAL(S) 2/24/99 301 (H) STA, FINANCE 2/24/99 (H) STA RPT 2DP 3NR 3/09/99 (H) STA AT 8:00 AM CAPITOL 102 3/09/99 (H) MOVED OUT OF COMMITTEE 3/10/99 (H) DP: JAMES, WHITAKER; NR: SMALLEY, 3/10/99 (H) KERTTULA, COGHILL 3/10/99 (H) ZERO FISCAL NOTE (GOV/ALL DEPTS) 3/10/99 (H) REFERRED TO FIN BILL: HB 122 SHORT TITLE: STATE OWNERSHIP OF OFFICE BUILDINGS SPONSOR(S): REPRESENTATIVES(S) JAMES Jrn-Date Jrn-Page Action 3/03/99 342 (H) READ THE FIRST TIME - REFERRAL(S) 3/03/99 342 (H) STA, FINANCE 3/03/99 (H) STA RPT 1DP 1DNP 3NR 3/09/99 (H) STA AT 8:00 AM CAPITOL 102 3/09/99 (H) MOVED OUT OF COMMITTEE 3/10/99 (H) DP: WHITAKER; DNP: KERTTULA; 3/10/99 (H) NR: SMALLEY, JAMES, COGHILL 3/10/99 (H) INDETERMINATE FNS (GOV/ALL DEPTS) 3/10/99 (H) REFERRED TO FIN BILL: HJR 18 SHORT TITLE: CONST. AM: ADMINISTRATIVE HEARINGS SPONSOR(S): REPRESENTATIVES(S) OGAN, Foster, Dyson, Rokeberg Jrn-Date Jrn-Page Action 2/24/99 300 (H) READ THE FIRST TIME - REFERRAL(S) 2/24/99 300 (H) STA, JUD, FIN 2/26/99 328 (H) COSPONSOR(S): FOSTER 3/04/99 (H) STA AT 8:00 AM CAPITOL 102 3/04/99 (H) HEARD AND HELD 3/05/99 377 (H) COSPONSOR(S): DYSON, ROKEBERG 3/09/99 (H) STA AT 8:00 AM CAPITOL 102 3/09/99 (H) SCHEDULED BUT NOT HEARD WITNESS REGISTER PHILLIP OATES, Brigadier General Adjutant General/Commissioner Designee Department of Military and Veterans Affairs P.O. Box 5800 Fort Richardson, Alaska 99505 Telephone: (907) 428-6003 GEORGE CANNELOS, Colonel Alaska Air National Guard Department of Military and Veterans Affairs P.O. Box 5800 Fort Richardson, Alaska 99505 Telephone: (907) 428-6072 JEANNETTE JAMES, REPRESENTATIVE Alaska State Legislature Capitol Building, Room 102 Juneau, Alaska 99801 Telephone: (907) 465-3743 POSITION STATEMENT: Sponsor of HB 112 and HB 122. KEITH GERKEN, Architect Facilities Division of General Services Department of Administration P.O. Box 110210 Juneau, Alaska 99811 Telephone: (907) 465-5683 POSITION STATEMENT: Answered questions on HB 112 and HB 122. ROD WILSON, Architect Engineering Division Department of Transportation and Public Facilities 3132 Channel Drive Juneau, Alaska 99801 Telephone: 465-6962 POSITION STATEMENT: Provided information on HB 112 and HB 122. DEVON MITCHELL, Accounting Debt Manager Treasury Division Department of Revenue P.O. Box 110405 Juneau, Alaska 99811 Telephone: (907) 465-3750 POSITION STATEMENT: Provided information on HB 112 and HB 122. ALISON ELGEE, Deputy Commissioner Department of Administration P.O. Box 110200 Juneau, Alaska 99811 Telephone: (907) 465-2200 POSITION STATEMENT: Provided information on HB 112 and HB 122. ACTION NARRATIVE TAPE 99-13, SIDE A Number 0001 CHAIR JEANNETTE JAMES called the House State Affairs Standing Committee meeting to order at 8:04 a.m. Members present at the call to order were Representatives James, Coghill, Whitaker, Kerttula and Smalley. Representative Ogan joined the committee at approximately 8:45 a.m. CONFIRMATION HEARINGS CHAIR JAMES announced that the committee will be considering two appointees to the Department of Military and Veterans Affairs [resumes were provided]. [Inadvertently recorded over a small portion of Side A] PHILLIP OATES, Brigadier General, Commissioner Designee, Department of Military and Veterans Affairs appeared before the committee. General Oates said that he was drafted into the Army 30 year ago and had served two assignments in Alaska. He said he is interested in this position because he would like to continue to serve the people of Alaska and to continue his military service for the state of Alaska. Number 0049 REPRESENTATIVE WHITAKER remarked that General Oats appears to be very qualified and looks forward having him serve as commissioner of Military and Veterans Affairs. GENERAL OATES noted that he helped build the infrastructure to included telecommunications with cable to the lower-48, and fought in the war of the Pacific in the "Aleutian Campaign." Number 0080 CHAIR JAMES noted that she has a large number of active and retired military in her district. GENERAL OATES said that he has lived all over the world and that no one has a closer relationship between the military, the civilians, and government than is seen in Alaska. REPRESENTATIVE COGHILL pointed out that he saw the National Guard on the beaches in Seward while they were involved in an exercise with the Marines, Air force and the Army and was impressed with their commitment. He asked what needs to be implemented - done differently, and what is the guard's future plan. GENERAL OATES replied that the Alaska Guard is the Alaska National Guard, and not the National Alaska Guard because the guard serves its state first, then its national missions. And in order to get adequate funding for the National Guard, Alaska has to have viable national missions. He said, "Our resources, for about an $8 million state input, we generate $160 million state impact and that's without an economic multiplier." Number 0151 GENERAL OATES stated that his first priority is to be able to respond to the emergencies of the state with the Division of Emergency Services [Department of Military and Veterans Affairs] and other emergency service organizations at the municipal or national level. General Oates said, "In Alaska it's not a question of whether we'll have a disaster, it's when we will have that disaster." GENERAL OATES noted that his next priority is the "Youth Challenge Program" because they are the future of his organization and that we should work to put our young men and women on the path of self- esteem and success. GENERAL OATES stated that the Air Guard is taking steps to assume the air sovereignty mission of Alaska, NORAD [North American Air Defense Command], and that the guard will take over the responsibility for Alaska's air defense from the active forces. He noted that this is a significant responsibility. GENERAL OATES reported that he has taken over the space command mission at the Clear Air Station which will bring jobs and technology to the state. He said the Air Guard also participates in war plans in the Pacific and commands and controls the air bridge as it flows through Alaska to the Pacific, most notably to Korea. Our nation has entrusted Alaska's National Guard with the flow of air forces to any theater in the Pacific which is another significant responsibility. Number 0200 GENERAL OATES noted that the search and rescue missions by the Air National Guard, Army, and Coast Guard averages one life saved per day and, should the United States go to war, that they would be great search and rescue pallets for downed airmen. General Oates stated, "On the Army side, we have Army forces here in 84 locations in this state. What a great way to reach the citizens of this state whether it is to establish educational programs, whether it's to establish role models, or whether it's to establish the structure of discipline that we need in our society. So, we have that role that also touches on the emergencies that might occur in remote Alaska. And we need to renew our efforts to push back out into rural Alaska - our numbers and our strength have gone down in rural Alaska and that's an effort we will take." GENERAL OATES pointed out that the Army will have a role in national missile defense because Alaska is the only location where they could protect all 50 states. He said, "And when that comes, our role of homeland defense fits exactly with air sovereignty, with national missile defense, with emergency preparations, with weapons of mass destruction and the preparation to deal with that." GENERAL OATES explained that the guard plays a big role in drug suppression by providing support whether it's with a helicopter, C- 130 aircraft, night-vision goggles, or radios. He remarked that the guard doesn't conduct the raids, but provides support and equipment, and passes on information to the many federal agencies that are involved. General Oates said, "When our success goes up, crime rates go down, so, again, what a great impact that has on our state. So when you look at all those things that we do, our workforce of 4,400 people, the amount of dollars we bring in, what we do for the state, this job is not about wearing these stars, this job is about service to those people and to this state." Number 0263 REPRESENTATIVE COGHILL asked General Oates if he was recently promoted to General. GENERAL OATES responded that he was frocked to Brigadier General, in other words he is wearing the promotion because of his duty requirements before actually receiving the promotion and is currently being paid as a Colonel. REPRESENTATIVE COGHILL noted that the Army and National Guard facilities also share some of the deferred maintenance program problems. GENERAL OATES replied that there are advantages because the department receives significant federal dollars and that they have to make sure that those facilities meet state and federal needs. The guard receives federal assistance for operations and maintenance at a 75 percent federal share and a 25 percent state responsibility which changes at times due to the types of the facilities. General Oates said that the Department of Military and Veterans Affairs plans on building new facilities which are more energy efficient and will pay for themselves over the long-term with reduced utilities. The department will also be looking for a smarter use of their facilities and will be tearing down old facilities that are no longer being used. He said that they will be looking at the maintenance contracts for those facilities. Number 0303 REPRESENTATIVE COGHILL asked if the volunteer's payroll is primarily the state's responsibility and if federal money comes with that as well. GENERAL OATES replied that most of the payroll is federally-funded and that the state's portion is very small. Full-time guardsmen (active guard - reserve) and part-time guardsmen (serve for a period of days each year), and civilians (government employees) are all federally paid. GENERAL OATES noted that state funding includes the DMVA functions which have a state role. For example the commissioner, the director and staff for the Division of Emergency Services, and the director of the Office of Veterans Affairs are state-funded positions. He said, "Of those 4,400 positions, the vast majority of them are federally-funded, so for that $8 million that we invest, we bring in 160 total impact on the state." CHAIR JAMES asked when the space command mission at Clear Air Force Base will begin. GENERAL OATES replied that he can't answer a time frame but is optimistic that Alaska has a great chance of getting the mission because the initiative came from the U.S. Space Command. He said, "We sent our officers down to a U.S. Space Command, in fact we've got a liaison officer that works with them on a full-time basis and are trying to get two more positions for both this mission of the space command and the missile defense mission when it comes." Number 0361 GENERAL OATES pointed out that missions can be transferred such as air sovereignty, the mission at Clear, or ballistic missile defenses - which the active military is trying to divest itself of those. He said, "If you will give us the resources to do it, we'll be happy to do it, but if you don't give us the resources we can't afford to do it." CHAIR JAMES mentioned that the people in Clear and Anderson are excited about the mission because it will bring stability to those communities. GENERAL OATES agreed. GENERAL OATES mentioned that they recently spoke to the Secretary of Defense about BRAC [Base Realignment and Closure]. General Oates said, "The Department of Defense feels it needs to be able to adequately fund its modernization programs, in other words, to close down infrastructure and put money into modernization. And we talked about BRAC and its impact on Alaska - and the question was about the procedures that will be followed if we do go through a BRAC in the future, which I think we probably will at some point in time. But, I also think all of Alaska's installations should be protected and so a big part of my job is to make sure that we have the integration of the active forces and our reserve forces of the National Guard to make us an integrated team that shows our value to the nation." GENERAL OATES continued, "And I argued to the Secretary that when you look at BRAC, the model that you build must address not only efficiency, where you can do it the cheapest, but most importantly it should address effectiveness where you can do it the best. And when you look at Alaska, our strategic location, the training opportunities that we have here, the dollars that have been put in our infrastructure on the training-side and the installation-side, and the very very strong community support, and our growing ability to do experimentation here in Alaska, of this new force that's being built, I said, 'If you put in your model effectiveness, Alaska will do very well in any round of BRAC.' So I see a big part of my job is sending that message very very clearly, if and when a BRAC effort comes in the future." CHAIR JAMES complemented General Oates on doing a good job in explaining his position on the issues. REPRESENTATIVE COGHILL moved to forward the confirmation of Adjutant General Oates, Commissioner, Department of Military and Veterans Affairs. There being no objection, it was so ordered. CHAIR JAMES announced that Colonel Cannelos is before the committee for his confirmation. Number 0431 GEORGE CANNELOS, Colonel, Alaska Air National Guard, Department of Military and Veterans Affairs, said he was originally in the Navy and served 75 missions in North Vietnam, went to graduate school and received a master's degree in regional planning, came to Alaska in 1975 and has been here since. COLONEL CANNELOS stated that he was hired by the Department of Community and Regional Affairs and lived in Juneau for two years. When he moved to Anchorage he discovered the Air National Guard and flew for them until last year. He mentioned that he was able to balance his civilian career with his military career and was fortunate to lead our forces over Somalia in 1992, commanded the airlift squadron in 1994, and less than three years ago was offered a position in the full-time force of the guard as the director of operations and then chief of staff and is now being offered this position. Colonel Cannelos stated that, "This is an incredible opportunity. I'm somewhat spiritual in that you want to do things for the right reasons, that's very important, and I believe in public service and I believe in public trust." COLONEL CANNELOS distributed an article and said that the guard is blessed with almost 2,000 highly educated and technically trained volunteers, two-thirds of which (traditional guardsmen) have to balance their families, employers, and their military career. Colonel Cannelos said he wants to do the job and serve and believes that he can do it well. REPRESENTATIVE COGHILL said that he has a great respect for airmen, and for the many men and women who have worked in the Air National Guard. He asked Colonel Cannelos to explain the global positioning strategy for the Air National Guard and the collective bargaining of the full-time guardsmen for a better understanding of it. Number 0487 COLONEL CANNELOS explained that the Air National Guard has been very careful over the years to develop a strong partnership with the Air Force and that they have been mutually reciprocal. Airlift, rescue, and air refueling missions directly contribute to what the Air Force does in the state every day. For example, they can't do the "Cope Thunder" exercises without the guard's tankers, they can't do their fighter exercises without the guard's combat rescue forces, and they can't do their "Global Reach, Global Power" without our airlift forces. Colonel Cannelos remarked that that's a very strong partnership. COLONEL CANNELOS pointed out that the Air Force is moving quickly with the "air expeditionary force" concept in which Elemendorf is taking one of the lead roles. The 11th Air Force generates a slide monthly which compares how busy the air squadrons are in Alaska and that our three flying squadrons are right up there with the top of the Air Force every month even though they do it on a part-time basis. He said Alaska is fortunate with our strategic position and that we're going to be vital no matter what role the Department of Defense plays. COLONEL CANNELOS remarked who would have thought there would be unions in the military - but the guard is commanded by the governor of each state. He said the Association of Civilian Technicians Union is very active and provides a valuable service. The union has brought things to their attention that the leaders should have known. Colonel Cannelos said he chairs a labor-partnership which meets monthly to discuss candidly the issues facing the bargaining unit, who represent less than 20 percent of the force, but none- the-less have a great deal to say and mutually try to work out the issues. Number 0540 REPRESENTATIVE COGHILL addressed the mission of refueling. He asked how do we get those tankers, who pays for them, and do we need to get more. COLONEL CANNELOS responded that there is a need for more tankers because the unit is vital to a 24-hour-a-day alert operation in which many are classified and that there are not enough tankers to go around. The Air Guard has not turned down any of the vital missions but have turned down ancillary requests throughout the theater force. Other units will have to give up their tankers and it may be that in the next few years, through the BRAC process, that that will happen. He said that the unit has made incredible strides to bolster its credibility, and the guard will be responsible for the air bridge should it kick off over Alaska. COLONEL CANNELOS also mentioned that bombers and forces have been building up in Asia and many of those have reached Asia by overflying Alaska. Colonel Cannelos concluded that, "And it's our tankers that have planned those flights, launched those flights, and refueled those aircraft on the way. We are the only guard unit in the country with launch and execution approval whenever fighter aircraft are moved around Alaska and over the North Pacific. So it's an effort of bolstering in our credibility and working the political process to get those tankers." REPRESENTATIVE COGHILL said that he understood the tankers are Air Force property. COLONEL CANNELOS responded that the tankers belong to the Alaska National Guard and that their missions are for the Air Force. Number 0580 REPRESENTATIVE SMALLEY moved to forward the confirmation of Colonel Cannelos, Alaska Air National Guard, Department of Military and Veterans Affairs, There being no objection, it was so ordered. HB 112-ESTABLISH ALASKA PUBLIC BUILDING FUND HB 122-STATE OWNERSHIP OF OFFICE BUILDINGS Number 0587 CHAIR JAMES, presented HB 112, "An Act establishing the Alaska public building fund; and providing for an effective date," and HB 122, "An Act excluding buildings used primarily for office space from the Housing Project and Public Building Assistance Act, restricting state ownership of buildings used primarily for office space, and providing for the disposal of state ownership interests in certain state buildings used primarily for office space; and providing for an effective date." CHAIR JAMES sated that HB 112 (Plan A) and HB 122 (Plan B) will be addressed together. She said HB 112 establishes an Alaska building fund wherein agencies would pay rent and that the accumulated funds would help meet the state facilities' needs. She noted that HB 112 is the preferred alternative. House Bill 122 would require the state to divest itself of (indisc.--paper shuffling) spaces by selling them to the private sector and then leasing them back. Plan B is, if we can't take care of the buildings let's sell them. Number 0609 KEITH GERKEN, Architect, Facilities, Division of General Services, Department of Administration(DOA), said the department discussed structural changes in the way they managed state buildings and space. The department also tried to create a businesslike computation of what the cost of buildings ought to be. MR. GERKEN stated that HB 112 simply creates a fund in the general fund which makes accounting easier. It also allows the state to have somewhat of a "sinking fund" for the replacement of roofs and major equipment because the fund can be accumulated and can then be appropriated by the legislature for capital projects. Mr. Gerken indicated that it is very difficult to collect, in 12 months, the money to both pay the electric bill, put on a new roof, and get that spent before it disappears in a new fiscal year. Number 0651 MR. GERKEN said, if you charge an agency for space, they could pass that onto the federal program or to their user fee base that supports that program. Mr. Gerken stated, "What we believe is that a great deal of the initial money, which we would suggest to be included in rent actually can be found in the leveraging of non- general fund and fund sources. Federal programs, and non-general funded programs currently don't pay any rent ... and would be able to pass that cost along to their program effectively to generate a good deal of the money that's not now being spent." MR. GERKEN said the Department of Administration believes 'renewal and replacement or depreciation,' is missing in today's expenditures for state-owned facilities. And, the things that can easily be put off are the missing ingredients. He stated, "In our discussions of a rental rate, what we've done to try to account for that is we're actually using depreciation. We've established a depreciable basis for eight state-owned buildings, based upon their replacement cost, and then we have taken the life expectancy of those buildings and factored that into a rental rate. It makes a significant difference, it raises what is now being paid and gives you those dollars - now to go back and do that replacement." MR. GERKEN remarked that HB 122 gets you to thinking about "do you own or do you rent." He said the average lease statewide is between $1.70 and $1.75 and at the shortest are three years, and up to five to ten years or longer. He mentioned the state also has a lot of leases that are 10 to 15 years old, and that about half of the leases are based in Anchorage. Mr. Gerken said it was a very good market within the last decade or more, however, it changed a lot in the last couple of years and is getting back to where they were in the early days. So we've got an average lease rate that's lower than a market rate right now which is a good deal for us but, over time that's going to change. He pointed out that the average Anchorage lease right now is about $l.60 and the current market rate is $2.00 or more. Mr. Gerken said, "We just had some appraisals done for space which we leased private tenants in the Bank of America Building and its $2.10 is what the market rate is today." Number 0701 MR. GERKEN further stated that the eight buildings have approximately 575 thousand useable square feet in them. The state is currently spending approximately $4.3 million on them which translates into a rental rate of about 64 cents a square foot - which is close to half of what the market rates are today. He said that the amount spent doesn't include all the things that the state ought to be spending. Mr. Gerken stated, "As I said before, we're missing that depreciation (indisc.--paper shuffling). And if you add in depreciation on the way we looked at it - we've got a depreciable basis in those buildings of about $47.5 million based upon the way we approached that ... but those eight buildings have a depreciable base of about $47.5 million. And, if you put that $47.5 million back into the rental rate, that rental rate goes to about 93 cents. And, I think that more actively reflects closer to an apples and apples comparison of owning versus leasing." Mr. Gerken remarked that the public sector is always going to have some advantages because the cost of capital to government is a lot less and the private sector will never be able to beat that. TAPE 99-13, SIDE B Number 0001 MR. GERKEN said Alaska is not the only state in this position. A number of states have rental rates that make agencies pay, a number of states also have a fund which manages those dollars. For example, the Texas legislature passed a resolution which prohibits non-state-funded programs from occupying state-owned space. In other words, they mandated that the federally-funded programs move out to less-expensive space. Mr. Gerken said, "They're essentially saving state dollars by using their own space as the place to put those agencies, which they can pay for most directly." CHAIR JAMES asked what the cost would be if you had a payment (indisc.) your taxes. MR. GERKEN replied that came up as an issue in the bill which authorized the purchase of the Bank of America Building because we were taking that (indisc.) off the tax roles and that the state pays half the property taxes because it is decreasing, but it is based upon the percentage of private leaseholds in the building. It was approximately half last year, and is about 40 percent this year, and will drop off significantly, eventually the state won't have to pay taxes. CHAIR JAMES said that she believes there are too many pieces of property that are off the local tax roles, for example local police and fire departments, however, she doesn't have a problem with excluding churches. Chair James asked Mr. Gerken if there are private tenants in other state-owned buildings. MR. GERKEN replied that the Court Plaza Building in Juneau was purchased approximately five years ago came with private tenants. The rule has generally been, that for tax-exempt public financing, you are required to have 90 percent of the space occupied by public entities. Part of the sale agreement was that the prior owner reduce the private tenant down below that level, which they did. There are currently three or four private tenants which have valid existing leases in the Court Plaza Building. Mr. Gerken said it his assumption that, as those expire, the private tenants most likely will not renew their leases and the space will be available for state agencies. He said this is the same approach that exists in the Bank of America Building. CHAIR JAMES said that it seems to her that taxes should be paid for that space because of unfair competition. She mentioned that this is not addressed in HB 122 because it is a separate issue. She said she noticed that the State Office Building in Juneau has broken tiles and cracks in the cement and that it is her goal to be sure that the state maintains its buildings. Chair James said that she likes the idea of the state paying rent and having the fund which can be appropriated for maintenance projects. Number 0157 ROD WILSON, Architect, Engineering Division, Department of Transportation and Public Facilities (DOT/PF), said that DOT/PF is supportive of the funding mechanism. He referred to a no- maintenance pilot project that occurred in Nome in 1996 through 1997 in which four agencies combined their forces. If a building went down, another worker from another agency could take care of that facility. MR. WILSON stated that the Department of Military and Veterans Affairs (DMVA) said, "Ok, we're going to become the accountants for all the agencies out there, and we'll go through all these RSA gymnastics, and all this money will come into one pot, and then all these agencies will be able to build against that one pot." Mr. Wilson said he believes the effort began in March or April of 1997 with the understanding that would be in place by July 1, 1997 (when DOT/PF wanted to kick off the field portion of this program). However, it turned out to be difficult to put together. DOT/PF did not receive their first access computer run, on how well they were doing, until December 1997. Mr. Wilson explained that it wasn't that the people weren't trying, it died because of accounting technicalities, not of what occurred in the field. MR. WILSON noted that the field operations were just beginning to show of the pay-back and that option A [HB 112] would have incredibly streamlined the effort in Nome. Everybody that was involved said, "Hey, from a practical standpoint this is the way to do business." Unfortunately, in June of 1998, the program had to be curtailed because DMVA's federal funding mechanism, and due to the risk of forfeiture of federal dollars, they had to step out of the program (DMVA can only do pilot programs for 12 months at a time). Mr. Wilson said that there's no question in his mind that DMVA is the premiere M&O [maintenance and operations] agency in the state. When DOT/PF lost them, the consensus of the group was that it wasn't viable for the three remaining agencies to even attempt to go on. Number 0234 MR. WILSON further stated that he pulled numbers together for option B [HB 122], and referred to it as "surplus funding from DOT/PF" because DOT/PF primarily runs the maintenance and operations of the state's facilities. The Bank of America Building, which probably comprises of approximately 50 percent of the square footage which Mr. Gerken was talking about, is not within the DOT/PF numbers but it gives the same kind of general consequence. Mr. Wilson said, "We looked at 29 facilities that we believe statewide would capture the content of your option B, the applicable square footage is about 850,000 square feet which is about 27 percent of the total square footage that DOT/PF manages. ... These were very quick ballpark kinds of figures, but I think you're looking at somewhere in the neighborhood of about $4.2 million of maintenance and operation costs that are associated with that square footage. That works out somewhere in the neighborhood of around 46 cents a square foot. Keith [Mr. Gerken] mentioned 62 cents a square foot in his costs. One of the things that I did get back from these folks is the cost of the maintenance and the operations. Keith's numbers also include some overhead costs and what not." MR. WILSON stated while the replacement value on the 29 buildings on inventory totals approximately $145 million, the applicable age of these buildings averages about 1972 vintage which makes them 27 years old and are not going to be the hot commodity on the market should the state sell them. In fact, some of these buildings are probably in the category of, "when we build a new building, some of the old buildings should come down." For example, the Griffin Building in Kodiak was built in 1939 and is 60 years old, however, the state can't do without its 7,200 square feet. He said that it's common to find building that are 40, 50, or 60 years old which the state is continuing to maintain. CHAIR JAMES mentioned that she introduced legislation to deal with the deferred maintenance issue and wasn't able to get the legislation passed. Number 0322 DEVON MITCHELL, Accounting Debt Manager, Treasury Division, Department of Revenue, stated that HB 122, in as much as it requires the sale of buildings, there are currently outstanding leases on both the Court Plaza Building ( which will be near being paid off), and the Anchorage Times Building. He indicated that he is not sure how the Anchorage Times Building would fit under the definition because it has approximately seven years left of payments and does not fit within time parameters. MR. MITCHELL noted that the statute, which authorized the purchase of the Bank of America Building, which is currently owned by Alaska Housing Finance Corporation (AHFC), outlines the plan of finance through the state bond committee issuing (indisc.) bonds once it reaches the 90 percent threshold level of occupancy. He said, "There is also a question of how that legislation would enact with this if it was required to sell all state office buildings - that the AHFC has the capability to continue ownership, or if they would in fact have to sell that building." MR. MITCHELL referred to the authorization to the appropriation by the Department of Administration and said that he is not sure if the current definition allowed the payment of debt service and suggested the Department of Law verify that. He indicated that it could be added so that if there were excess funds available that they could be utilized for that appropriation, if there is an outstanding lease, or there is an outstanding bond series, then there is an annual appropriation for that payment. Number 0365 CHAIR JAMES noted that she has thought about that issue. She asked if there is debt on the building, are the folks who are in the building going to be including the debt services. MR. MITCHELL indicated that it could be included in the rent figure, however, it would change the budget request of the agency that was requesting that particular building. It could change the lease payment for them from what they were currently paying. He noted that legislation wasn't introduced for these purchase agreements. CHAIR JAMES explained that she knew that there would be situations that would be affected by the two-year time frame in HB 122 and that she didn't pursue that because she didn't believe HB 122 would pass. But if it did pass, part of the changes in HB 122 would be (indisc.--background noise) of those specific buildings that could be sold within the two-year time frame. REPRESENTATIVE WHITAKER said he doesn't understand why a fiscal note isn't attached to HB 112. Number 0413 ALISON ELGEE, Deputy Commissioner, Department of Administration, testified that HB 112 simply sets up the fund and does not require the expenditure of monies. She said, "In looking at the operations, as Chair James explained, we would initially look at establishing a rental base around existing dollars - leveraging those other funds that would be available to us for that purpose. There could easily, down the road, be the need for expanded funding if we are in fact going to properly maintain buildings. But the legislation you have before you does not require us to spend more than we are spending today and gives us the advantage of leveraging other funds to improve that maintenance position." REPRESENTATIVE WHITAKER remarked that he understands leveraging but doesn't know that it is applicable to this situation. MS. ELGEE stated that there are a number of agencies occupying state-owned space which are funded by fund sources other than general funds. She further stated, "Alternatively we fund the maintenance of state-owned buildings through the Department of Transportation [and Public Facilities] and their maintenance budget is all general funds. So, if we were to establish a rental basis, and an ability to capture those rents, to then put back into the operations and maintenance of the buildings, we would charge each program based on its underlined fund source. And, one of my favorite examples is in the State Office Building. Most of the sixth floor is occupied by the Division of Retirement and Benefits. Their operations are funded entirely from the trust and benefit funds that they administer and support. If we were to charge rent, approximately 14,000 that they occupy, we would be able to pass the cost of that space onto the retirement funds as a part of their operating cost and therefore, increase the pool of monies available to us for the maintenance and operations of the State Office Building." REPRESENTATIVE WHITAKER indicated that it's not a question of redistributing existing dollars, it's a question of infusing new dollars from an outside source. Number 0449 MS. ELGEE pointed out that there are two aspects to this. She stated that, in some cases our federally-funded programs are capped and the state has a limited number of federal dollars that are available for whatever those program operations are. In other cases, the federal dollars will increase as expenditures increase. So, in the cases where we've got programs that are capped in terms of the other funds that are available to them, we will have to make some choices about whether or not to reallocate those federal dollars from program operations to maintenance operations, or whether we should be supplementing those program-costs with the general fund. CHAIR JAMES asked if that automatically allows you to charge rent. Or would the legislature have to statutorily give the Department of Administration that authority, or would we want to statutorily mandate that. MS. ELGEE responded that the Department of Administration presently has the ability to charge rent, however, there is no purpose in charging rent because there currently isn't a collection mechanism for it. She stated that, "Most of the rules that surround the structure, of this kind of an approach, are at the federal level and we have to take any kind of an internal service fund approach ... back to the Department of Health and Human Services at the federal level for approval of the rental rate structure, or whatever the charge-back mechanism is that you are talking about. The federal government is very concerned that, in establishing these kinds of mechanisms, that all programs be treated equitably and that states not make an effort to shove costs disproportionately to the federal programs." CHAIR JAMES said that other agencies which are not federally-funded would have to pay the same applicable calculation of rent for their space as someone who is federally-funded. That it would have to be a calculation based on the value of the building - the value of the space, and the cost maintaining it. Number 0488 MS. ELGEE agreed. She stated that there is quite a bit of work in terms of trying to split up the money that is in DOT/PF - to put it in the agencies and then recapture it. And in setting up that aspect of it, without that being created, we have no ability to realize the real benefits of going through that administrative process in being able to retain the monies that would be - that depreciation piece that Keith [Gerken] spoke to that would allow us to do the adequate renewal and replacement in major maintenance projects. CHAIR JAMES said she believes that statutory delineation would be needed which would be very difficult to do through the budget process. MS. ELGEE said that would be done through the appropriation mechanisms. Once the internal service fund is set up the remaining activity really operates through the budget side. REPRESENTATIVE KERTTULA said, "The problem I'm having with this is that it's (indisc.) money, maintenance isn't happening. And, is it just because you're going to be creating a fund, you're going to see where it all goes, you're going to see how much cost; is that the main reason that you think this will work better." Number 0510 MS. ELGEE stated that there are several advantages to having a rental rate structure. One advantage is that a rental rate structure makes program managers more conscious of the space they utilize. Currently, there is no incentive for them to reduce those costs. There is the opportunity to leverage other fund sources as well as the ability to provide an ongoing mechanism to actually pool dollars for the major maintenance projects. However, a roof replacement, when it is needed can be quite expensive and competes against a lot of other equally necessary projects. MS. ELGEE stated that the internal service funds are similar to what is being proposed in HB 122 for public buildings. The information services fund establishes rates for the support, telecommunications, and data processing operations of the state. The department has about eight years of experience with that fund and it has been very successful in providing an opportunity to recapture costs to depreciate equipment, to have a pool available to provide monies for subsequent upgrades and expansion. MS. ELGEE said, "Again, all of those things are subject to legislative appropriation. And, the charge-back for data processing and telecommunication costs, you see in every agency's budget as you review those and then you look again at the Division of Information Services budget and their capital programs that are proposed and use the internal service fund as a funding mechanism for those things. So the legislature has an opportunity, I think to look at from both directions in that respect. This is the same design that we're looking at here. The other fund that operates on a similar basis is the highway working capital fund that supports our state equipment fleet." Number 0542 REPRESENTATIVE SMALLEY referred to the examples, from the Division of Retirement and Benefits in being able to access part of their funds for rentals, operation maintenance, and so on. In years past there have been attempts to leverage those retirement funds, to which the board reacted to that. He didn't see the mechanism in HB 112 that would allow for that kind of leveraging. MS. ELGEE noted that she works with the Division of Retirement and Benefits in the Department of Administration. The department would not suggest that trust funds be used in any way different from the department would use monies from any other program. The Division of Retirement and Benefits would not be charged rent if no one else was being charged rent. However, when you have a mechanism that is essentially common in its approach to every program regardless of the fund source, then you have the ability to meet the objections of any concern that you were treating the trust fund in some kind of disproportionate way. Ms. Elgee further stated that the Division of Retirement and Benefits currently (indisc.--coughing) state-owned space. If they were in lease today, they would be paying that cost. CHAIR JAMES said that she believes HB 112 would provide the mechanism where we could get there from here. With good thoughts, good direction, and good accounting this can work. And, maybe over the long-term there will not be fighting over the deferred maintenance issue as in the last six years. Number 0590 CHAIR JAMES concluded that she is very supportive of HB 112, however, HB 122 is just sending a message that if facilities cannot be maintained then those facilities should be sold. REPRESENTATIVE COGHILL moved to report HB 112 out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE WHITAKER objected. He believed HB 112 it is a good idea, however, there may be more of an effect on the agencies involved. He also indicated there is a possibility of starting a bidding war between the state and the private sector. MS. ELGEE recognized the possibility of a bidding war as a fair concern. Establishing a public building fund is merely one more fund in the state statutes until the budget process can accommodate that fund. In terms of implemention, monies presently slated for maintenance in DOT/PF would be dispersed to the agencies proportionate to the space the agency occupies. The money collected from those bills would be placed into the public building fund. Number 0639 MS. ELGEE stated that as the legislators make their budget decisions, the expense of maintenance and any capital projects that would be funded with this money would be reviewed. The legislators would also be reviewing the program operations, the space being occupying, and the rental rates as a part of the program expenses. There is a great deal of administrative work involved in actually implementing something like this through the budget process, furthermore, there is no value to it without the public building fund being in place. Therefore, the department decided to seek support of legislation which created the internal service fund mechanism before proceeding to the next step, the actual implemention of the program through the budget process. Ms. Elgee said, "If this legislation were to pass this year, it would be our intent to have rental structures established and available for your review and appropriation decisions next session." Number 0657 CHAIR JAMES pointed out one of the issues that wasn't considered, in her previous legislation, was a separate line item for the physical part of deferred maintenance. She said the problem that they had with that is that there is only a small amount, and what do you spend it on. For example, the furnace in the Capitol Building has to be replaced in 20 years, and when that time is reached, you only have the annual allocation for maintenance operations. So, the only way that you can be certain that the money will be there, is that a certain amount is put into a fund which doesn't lapse. In other words, when it needs to be replaced, you allocate the funds money, it doesn't come out of the normal budgeting process. CHAIR JAMES further stated, "The more consistent over time, that we can do the budgeting process, the easier it's going to be for people to understand. And the much easier it's going to be for us to rationally see why we should spend a little bit more this year." However, if you allocate ahead of time on a cost basis, then the money is there when you need it for repairs. The money doesn't lapse, it does have to be appropriated by the legislature, and it doesn't effect the general fund so to speak - the ongoing general fund that we look forward to having to meet our overall budget requirement. REPRESENTATIVE WHITAKER said that the goal is very clear, it is the manner in which the goal is being approached. It may be a chicken and an egg. Number 0700 CHAIR JAMES pointed out that this was part of the recommendation from the Deferred Maintenance Task Force from last year. She said she agrees with Ms. Elgee that money can't be placed in this fund without an appropriation. Therefore, if the Department of Administration were to get this calculated, and come back with a program that allocated rent for the various buildings, that would be a line item next year. She indicated that perhaps there should be a statutory requirement for this calculation to be made. Chair James said, "I tend to agree with you, Representative Whitaker that we need another (indisc.) piece here that says just exactly where the money is going to come from to go into this fund that says that during this period of time that the Administration shall determine a rent program and bring it back for approval next year. I think that is a possibility as well, but I can see that it can be done without that too." Number 0716 REPRESENTATIVE WHITAKER expressed concern that once it is passed, it becomes a matter of law. At that point it would seem to be a mandatory function of the budgetary process and the budget process would dictate the mandates of the bill, the effect of which can remains unclear. He reiterated his concern with the uncertainty of where this is heading. TAPE 99-14, SIDE A Number 0001 REPRESENTATIVE WHITAKER added that the preliminary work relates to buildings rather than departments and agencies. He inquired as to the effect on those. He acknowledged that funds will have to be transferred. He asked, "What is the differential and where is that money going to come from? That's the sort of analysis that I would like to see, because to make a decision without that is to hope that it turns out well." REPRESENTATIVE KERTTULA stated that deferred maintenance is a problem and agreed that something must be done. She recommended that the costs be placed in at the beginning so that the costs for the life of the building are known from the start. What happens when there is an older building that is going to need a lot more maintenance and cost? She inquired as to how that money would be dispersed in a fair manner. MR. GERKEN pointed out that HB 122 doesn't mandate any rent. CHAIR JAMES agreed with Representative Whitaker that a fund should not be set up, statutorily. She noted that the Children's Trust Fund was established years before money was in the fund. When a fund is created, the provision of how the money in placed in the fund is not necessarily created simultaneously. Number 0061 MR. GERKEN stated, "It clearly is our intention to try to implement a rental fund, and agencies have been concerned about how does it work, how does it impact them. And, we could set up this fund and charge rent, that is even less than we spend now, and have more deferred maintenance and agencies would make money on the deal. That we can charge tremendous rent..." CHAIR JAMES interjected, "I think you're probably right." MR. GERKEN stated that, "We can charge a tremendous amount of rent and accumulate a lot of cash in the fund, and drive them broke. I mean, the budget and the (indisc.) process is where those decisions get made. In terms of the theory, and Representative Kerttula's question, the federal rules that we would need to operate under do require the assessment of rent to be equitable, to be based on actual costs and to be trued up at the end of the year; if you spend less, your future rate goes down, if you spend more, your future rate goes up. It's a very accurate accounting of what you really do spend." MR. GERKEN continued "But on the expenditure-side, when you're talking about capital investment you don't have to spend the dollar that you collect on building A, on building B, you spend it where the need is greatest and like any other capital expenditure that also is a discussion that we had in a budget. We envision this, there'll be a certain amount of money from the fund which would be the depreciation ... available for reinvestment in those facilities and we would come with a list of the needs for those facilities. The facilities in the pool, though, can share those and the legislature would authorize a certain amount per year, or a certain amount per project, to be put back in based upon the recommendations that the DOA or DOT [/PF] would come back within terms of the greatest need for those buildings. A fair amount of work has already been done on a lot of those through the lists that have been put together for deferred maintenance backlog here in the last couple of years. So, we have a pretty good idea about what some of those needs are right now." Number 0109 CHAIR JAMES noted that rent is not going to serve needs on the deferred maintenance list. There needs to be another infusion of cash, because there is no way to catch up on all of the deferred maintenance and this would only be for providing for future needs. Nothing short of legislative appropriations in the capital budget has seemed to work and that only takes place when the situation is near a disaster. For example, in some of the buildings she has visited in the rural areas water is coming down the inside walls. Chair James said state employees should not have to work under such circumstances. REPRESENTATIVE KERTTULA wondered if different rents would be charged to different agencies. MR. GERKEN replied, no, the rule is that a building has a rate and everyone in that building pays that rate. However, he believes that if you have a totally generally funded program you could charge them more, because the federal rules are different. The rate must based upon the actual costs associated with that building, both operating and depreciation costs. Number 0167 MS. ELGEE stated, "As we've looked at the ways to implement this, we have always looked at it in the context of holding agencies harmless. Agencies would not be asked to come up with rent money that were not already available in their budget. So the rental rates would be developed using the existing general fund dollars and whatever we can anticipate in terms of expanded dollars by leveraging these other fund sources that we spoke of earlier. What happens after we set that all up, in terms of holding the agencies harmless, really revolves around the decision that you as a body make through the appropriation process." REPRESENTATIVE WHITAKER said there currently is a legislative process that could and should deal with deferred maintenance. The concern is that another opportunity is being created which does not fund a very pressing need. He expressed the need to deal with deferred maintenance. REPRESENTATIVE OGAN reminded the committee of the motion on the floor. CHAIR JAMES said the committee can continue to object to the motion, or the motion can be removed. Number 0200 UNIDENTIFIED SPEAKER removed his motion to (indisc.--fading). REPRESENTATIVE OGAN remarked that maintenance is a problem and that the Administration does what they want to do with the budget. If HB 112 mandated that something is used for maintenance he said he would be more supportive of the concept. CHAIR JAMES pointed out that the system does not allow money to be set aside for maintenance, and money cannot be set aside unless there is a place for it. State agencies know they have to set money aside for maintenance, but they also have to convince the legislature that they need that capital expenditure. It would be easier if money was saved for a specific purpose in order to help take the political side out of acquiring money when repairs are needed. She noted that the idea of deferred maintenance as a natural problem of government occurring in every state. She said, "My goal is that when it needs painting, paint it." CHAIR JAMES called an at-ease at 9:55 a.m. and called the meeting back to order 9:56 a.m. REPRESENTATIVE WHITAKER removed his objection. Number 0307 REPRESENTATIVE COGHILL moved to report HB 112 out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, it was so ordered. Number 0326 REPRESENTATIVE SMALLEY made a motion to move HB 122 from committee with individual recommendation and attached zero fiscal note. REPRESENTATIVE OGAN objected because HB 122 is a major change of policy. REPRESENTATIVE SMALLEY supported moving HB 122 as a message. Upon a roll call vote, Representatives Smalley, Kerttula, Whitaker and James voted in favor of moving HB 122. Representatives Ogan and Coghill voted against it. Therefore, HB 122 passed by a vote of 4-2. ADJOURNMENT Number 0349 CHAIR JAMES adjourned the House State Affairs Standing Committee at 10:00 a.m.