MINUTES SENATE FINANCE COMMITTEE February 12, 1997 9:45 A.M. TAPES SFC-97, # 34, Side 1 (000-590) Side 2 (590-428) CALL TO ORDER Senator Bert Sharp, Co-chair, convened the meeting at approximately 9:45 A.M. PRESENT In addition to Co-chair Sharp, Co-chair Pearce, Senators Torgerson, Phillips and Adams were present when the meeting was convened. Senators Parnell and Donley arrived as the meeting was in progress. Also Attending: Gregory Hayes, Chief, Public Health Laboratories, Department of Health and Social Services; Tom Lane, Juneau Facilities Manager, DHSS; Michael Propst, MD, Medical Examiner, DHSS; Elmer Lindstrom, Special Assistant, Office of the Commissioner, DHSS; Forrest Browne, Debt Manager, Treasury Division, Department of Revenue; Tim Benintendi, Legislative Aide to Senator Kelly; and aides to committee members. SUMMARY INFORMATION SB 51 APPROVE CENTRALIZED PUBLIC HEALTH LAB Testimony was presented by Gregory Hayes and Tom Lane. Michael Propst, Forrest Browne, Tim Benintendi and Elmer Lindstrom addressed various questions posed by committee members. SB 51 was held in committee. SENATE BILL NO. 51 "An Act giving notice of and approving the entry into, and the issuance of certificates of participation in, a lease-purchase agreement for a centralized public health laboratory facility." GREGORY HAYES, Chief, Public Health Laboratories, DHSS, testified before the committee. He gave a brief description of his education and background in public health lab management, then began his presentation for a new consolidated public health laboratory facility. (The presentation closely tracked a handout before the committee and on file.) The facility would be located in Anchorage and would include the functions of the Juneau and Anchorage labs as well as the Medical Examiner's laboratory. Design and construction costs would be paid through debt financing through the sale of certificates of participation/lease- purchase financing. The services of the state public health labs are unique. They are directed toward prevention and control of disease and therefore differ from clinical labs directed at individual patient care. The focus is on communicable disease testing and advanced testing for infection agents not routinely performed in the private sector. Mr. Hayes gave examples of how the labs have benefited the public in recent years by helping to quickly establish the cause of epidemic outbreaks in the state. They also monitor tuberculosis outbreaks and are the only laboratory in the state which performs specialized rabies testing. He continued by describing their mission to provide scientific and technical information for disease prevention, noting they are the state's first line of defense in recognizing and controlling the spread of communicable diseases. Additional functions and responsibilities were listed. Mr. Hayes next addressed the issue of privatization. All fifty states and U. S. territories have public health laboratories, none of which have been privatized because the service they provide is inherently public. He listed criteria commonly used by state governments in determining whether privatization is appropriate, concluding that none of the criteria for privatization fit the state public health laboratories. The presence of Senators Donley and Parnell was noted. Mr. Hayes told the committee why a new laboratory was necessary. Two facilities are in urgent need of repair, having mechanical and structural inadequacies for conducting laboratory testing. They are on leased space, have poor layouts and space limitations for future growth. The Juneau and Anchorage labs were constructed as office space and currently have major health and safety concerns such as inadequate ventilation systems for working with infectious organisms, inadequate electrical wiring, heating system failures, flooding from burst pipes. Another reason for a new lab would be as a permanent location for the Medical Examiner. That office is temporarily occupying space at the Department of Public Safety's Crime Detection Laboratory and they need the space to develop a DNA analysis laboratory. Money could be saved by not having to invest unrecoverable money to repair existing facilities and by consolidating so that staff functions are not duplicated at multiple locations. Problems resolved by building a new lab include fragmentation of services, reduced efficiency, problems associated with leased and temporary space that is not designed for current operations, and the expense of operating four separate laboratories. Mr. Hayes elaborated on the inadequacies of the four existing labs located in Fairbanks, Anchorage and Juneau. He noted that the department has a long history of analyzing the needs and reviewing the alternatives. Fourteen studies since 1985 have looked at the issue and support construction of a new facility. Mr. Hayes addressed the fiscal aspects. During the first year of occupation the new lab would save the state approximately $293,000 ($218,000 in personnel and lease costs from DHSS, $75,000 in lease costs for DOA). The cost of the new facility is estimated at $18.4 million. Annual payments would be approximately $2.4 million for ten years, with a total estimated debt of $24.9 million. Costs from last year's proposal have been adjusted for inflation and the assumption of coroner responsibilities by the Medical Examiner's program. He pointed out the importance that the Medical Examiner's lab be near the DPS Crime Detection lab because of their close operations so alternatives for state- owned land are being considered adjacent to the crime lab. He referenced an overview photograph of the site and urged the committee's support for the project. TOM LANE, Juneau Facilities Manager, Department of Health and Social Services; spoke to a query by Senator Phillips as to whether a firm decision had been made regarding the site, which is currently the DOT maintenance shop. He said they were working with DOTPF and DMVA and they were fairly committed to provide a site at that location. He confirmed that the site is on state-owned land. Senator Adams stated his understanding that centralizing meant to bring all four labs into one according to last year's discussion. He asked why the Fairbanks lab was left out and inquired about the cost saving if it were consolidated. Mr. Hayes testified that the bill was modified in the Senate last year to leave Fairbanks out of the project, and they reintroduced the same bill. He indicated the current savings of $293,000 would increase to approximately $800,000 by bringing Fairbanks into the project. Senator Adams asked what cost analysis had been done on privatizing the labs. Mr. Hayes said some studies have been done but there were no functions being done that would be amenable to privatization, although they constantly look at activities that can be performed in the private sector, and privatize those that can, such as newborn screening and blood lead screening. Senator Adams clarified that the language in the bill allows everything to be centralized. Fairbanks could be included and the state would save $800,000 versus $293,000. Mr. Hayes informed the committee that there was not enough money, that the project had been cut so that instead of their original request for a centralized lab only a consolidated lab could be built. Co-chair Pearce expressed support for a new consolidated lab, but was concerned with high lease costs. She asked the square footage of the new building. Mr. Hayes replied that it was approximately 23,000 square feet, including the Medical Examiner's program with coroner's responsibilities which accounts for a big portion of the space. Co-chair Pearce compared that to current footage of combined existing facilities (5485 sq. ft. in Anchorage, 4460 sq. ft. in Juneau, approximately 2000 sq. ft. for the leased Medical Examiner space) and pointed out that the size was being doubled. Mr. Lane explained that the existing space was inadequate and they needed more space to bring the lab up to a higher standard. They figured on a 70% net-to-gross factor in computing space and that the actual comparison would be more like 25% to 30% It was noted that training space was also being planned. Co-chair Pearce next inquired who came up with the $18 million figure and how it was decided how much should be paid per square foot. Mr. Lane replied that the figure was a compromise from last year's bill with an inflation factor added for this year and an additional component for the coroner functions being taken over by the Medical Examiner. Through a study, cost estimators produced the estimate, which includes all equipment. Co-chair Pearce noted the cost was about $800 per square foot. She requested the cost estimate information. Senator Torgerson inquired about maintenance costs of the new facility. Mr. Lane responded that costs included are equivalent to the level of existing facilities. Long-term maintenance estimates over the life of the building were not made. Senator Torgerson stated a need for a DOTPF fiscal note regarding maintenance costs. Senator Torgerson next questioned the cost savings related to the bond payments of $2.3 million and the correlation to current rental payments. Mr. Lane explained that the bond payments are higher under ten-year financing but it matches the "Prudhoe Bay curve" relating to timing of financing. Senator Torgerson requested a comparison of lease payments on a thirty-year financing. Senator Phillips confirmed the intent that personnel would move from one location to another under the consolidation. He asked if there was a difference between the standards and the mission and which drove which. Mr. Hayes informed the committee that the square footage estimates were arrived at by the Anchorage architectural firm, Livingston Sloane. Mr. Hayes interjected that there are national architectural standards for laboratories. MICHAEL PROPST, MD, Medical Examiner, Department of Health and Social Services, further explained that the National Association of Medical Examiners has minimal standards for facilities that they will accredit. It was his goal to obtain that accreditation and it was their standards that he gave to the architectural firm to determine the square footage needs. Responding to another query by Senator Phillips, Mr. Propst acknowledged that his office is not currently accredited. He had not sought accreditation because the space is only temporary. TIM BENINTENDI, Legislative Aide to Senator Kelly, sponsor of SB 51, addressed the committee regarding state building codes and federal OSHA codes. He noted that one of the existing facilities has had violations. Senator Phillips wanted to know how the total square footage was arrived at. Mr. Lane offered to produce a preliminary list of the types of spaces that would be needed, some of which were based on national standards. Senator Phillips recalled the Anchorage courthouse which was a fine facility except that it didn't have a lunchroom for the jurors. He wanted to know up front what was being proposed before he okayed it. He expressed disbelief that DOTPF was willing to give up their site for the maintenance shop. Mr. Lane responded that they were willing based on finding equivalent space for equipment parking and a storage shed. In response to a question by Co-chair Sharp, Mr. Lane explained that the original bill last year had a $19.2 million request that was downsized to $16.4 million, then adjusted upward this year. Co-chair Sharp questioned why there was less annual cost for more investment cost. Mr. Lane explained it was because of ten-year financing instead of eight-year financing proposed last year. It has to do with a change in the perception of the Prudhoe Bay curve. The total financed cost is increased but the annual payments are lower. Co-chair Sharp voiced concern that there would be no savings with an increase of $2.1 million per year in operating costs from the general fund for ten years. He also requested that the committee receive a breakdown comparing existing square footage with what will replace it. Co-chair Sharp referred to a previous statement about studies that showed there were no functions that would be amenable to privatization. He asked if the studies were based on economics or the delicateness of the mission. Mr. Lane responded that he would have to investigate because it was before his time with the department. Senator Adams asked what the present construction costs per square foot were. Mr. Lane answered that they were approximately $500 per square foot for the building, the additional costs include equipment and design fees. Senator Adams asked how that compared with a leased Anchorage office building. Mr. Lane responded that an office building would be considerably cheaper. Last year they analyzed costs for comparable facilities and found they were within the "ballpark." Special utilities, water lines, gas lines and ventilation systems, cold rooms and warm rooms are needed which make laboratories an expensive endeavor. Senator Parnell asked if the difference of $300 per square foot was for the special features the lab requires. Mr. Hayes replied that it includes design, equipment, project management. New equipment would be a big portion of that amount. Senator Parnell asked if current equipment would be used. Mr. Hayes said it would be used as much as possible, but there would be some equipment built into the new facility. There was additional discussion about the value attributed to the building. Mr. Lane said their original financial analysis done in 1994 was a consortium involving Livingston Sloane of Anchorage and Coopers Lybrand of New York. Senator Parnell asked for a copy of the report. End SFC-97 #34, Side 1 (000-590) Begin SFC-97 #34, Side 2 (590) Mr. Lane continued by describing the three options that were looked at: the status quo, the consolidated option being proposed now, and the fully centralized option. He noted the numbers have changed considerably and the analysis did not include the Medical Examiner's lab. Senator Torgerson inquired if part of the consideration for the new facility had anything to do with capturing additional federal funds, making themselves more efficient so that they could bill the private sector, or increasing any other receipts they might get for their operations. Mr. Hayes responded that they get very little federal funds, some for the TB and STD programs, but none for construction purposes. Senator Donley asked if there were any local government health labs in the state. Mr. Hayes replied that there were some laboratory activities at the Municipality of Anchorage and they work closely with them, but they don't do much lab work. Co-chair Sharp brought attention to a fiscal note that shows a flat projection of the lease costs and asked if there was no anticipation of CPI adjustments to the lease costs. He noted they adjusted for CPI on the savings but not on the expenses. He then asked if no services would be required in the ten year lease period. FORREST BROWNE, Debt Manager, Treasury Division, Department of Revenue, addressed the committee on this issue. He stated that the department was looking at it as a financing lease rather than an operating lease. The state would borrow the money for construction and the lease would be subject to annual appropriations. The financing is structured as a lease, but in reality it is a form of state debt. They felt they would get a fixed-rate interest for the ten year term and used current rates in one of the schedules. In another, he added 75 basis points, figuring that interest rates could fluctuate within the year, before funding is approved. Co-chair Sharp asked who would own the building during the ten year lease period. Mr. Browne explained that a trustee would own the facility and hold it as a security interest for the bondholders. The trustee distributes the principal and interest payments to them. The state assumes ownership of the building at the end of ten years, free of obligations. Because it is a financing lease, it does not have any cost of living adjustments, it is fixed-rate for the term negotiated. Co-chair Sharp had concerns about maintenance and operation costs for the first ten years. Senator Torgerson asked how many other state projects are funded this way. Mr. Browne replied there were a half-dozen including a couple courthouse facilities. Co-chair Sharp asked if the leases on the existing labs were amenable to termination synchronistic with a new lab. Mr. Lane answered that the leases were year by year, and one was on a monthly basis. Co-chair Sharp asked if this project was included in the governor's capital budget. ELMER LINDSTROM, Special Assistant, Office of the Commissioner, Department of Health and Social Services, explained to the committee that no FY98 capital funds were contemplated at this point. There would be no repayment on the bonds until FY99. The legislation would be the authorization that allowed issuance of the debt. In FY99, it would appear in the front section of the operating budget along with other projects in debt service. Co-chair Sharp reiterated his opinion that this would be a major capital item that obligates the state for $24 million. Mr. Lindstrom added that the project is contemplated in the governor's six-year capital plan which is essential for the debt financing. Senator Adams inquired if consideration had been given to the Bank of America building the state is looking at for lease purchase. He said it could be a "one-stop shop." Mr. Lane responded that they are trying to avoid office buildings in general because that is part of the problem they are dealing with currently. He added that one of the reasons they were able to go along with maintaining the Fairbanks laboratory was because that building was built as a laboratory. Senator Phillips asked what fees were charged to use the lab facilities. Mr. Hayes responded that they have fees for services which are somewhat less than medicaid rate, plus there are various exemptions. Senator Parnell asked what other states have built public health labs in the last ten years. Mr. Hayes listed Hawaii, Tennessee, Georgia, Indiana, Texas and Florida. Co-chair Sharp announced that he wanted to examine the legislation to see how it fits in with the five-year fiscal plan. He brought up a proposed amendment that would bring the annual charges in sync with the total estimated cost and asked if it was a proposal suggested by the agency. Mr. Browne explained that if interest rates remain the same one year from now, they could stay within the limits established in the proposed bill. Their concern is with the volatility of interest rates over the past twelve months that have seen changes of about 75 basis points. It was his suggestion that the committee consider setting a maximum limit on the construction and financing amount but allow some flexibility if interest rates go up in the next year, otherwise it would not allow them to go forward because the payment would be higher than what is proposed. Co-chair Sharp called for additional questions or comments. There being none, he adjourned the meeting. SB 51 was HELD in committee. ADJOURNMENT The meeting was adjourned at approximately 10:47 A.M.