MINUTES SENATE FINANCE COMMITTEE March 6, 1997 9:55 A.M. TAPES SFC-97, # 49, Side 1 (000-547) CALL TO ORDER Senator Bert Sharp, Cochair, Senate Finance Committee, convened the meeting at approximately 9:55 A.M. PRESENT In addition to COCHAIR SHARP, COCHAIR PEARCE, SENATORS DONLEY, PHILLIPS, TORGERSON, PARNELL and ADAMS were present when the meeting was convened. Also Attending: SENATOR JERRY WARD; Sponsor, CRAIG JOHNSON, Legislative Aide to Senator Ward; DON ETHERIDGE, Union Local 71; MIKE MCMULLEN, Division of Personnel, Department of Administration; PAM LA BOLLE, President, Alaska State Chamber of Commerce; and aides to committee members. SUMMARY INFORMATION SB 68 TASK FORCE ON PRIVATIZATION SENATOR WARD testified on behalf of the bill. CRAIG JOHNSON answered questions of committee members. DON ETHERIDGE spoke in favor, but expressed concern over fair representation. MIKE MCMULLEN had concerns regarding feasibility study provisions of collective bargaining contracts. PAM LA BOLLE testified in support of the bill. After a brief recess, COCHAIR SHARP announced SB 68 would be HELD for changes. SENATE BILL NO. 68 "An Act relating to the Task Force on Privatization; and providing for an effective date." SENATOR JERRY WARD, Sponsor, called attention to the sponsor statement and back-up information in committee files. Privatization has been discussed over the years and currently, there is consideration for privatizing the Alaska Railroad, prisons, Marine Highway system, and other portions of state government. He contacted other states to see how they handled it. There were two approaches. One was a piecemeal fashion, picking out weak portions of government to privatize. Sometimes it works and provides initial cost savings, but it can create a monopoly that rises to the same level of funding. The approach of SB 68 is to form a task force for the purpose of looking at government. It is broken into two parts because of the extreme size of government. Even though there are only four components in the first year's review of Health and Social Services, Transportation and Public Facilities, Corrections and Contracting, the total dollar volume represented is $1.5 billion. The following year the rest of government will be looked at. Other privatization task forces were not so much for an in-depth look at where dollars go, but to establish guidelines regarding whether it is in the best interest of serving the public and whether it saves money. Just because it saves money doesn't necessarily mean it would be in the best interest of the public. The intention of the bill is to look at every dollar in state government and whether they are being properly spent or could be better spent somewhere else. It provides for a systematic way to look at it via a committee process. SENATOR WARD introduced his staff person, CRAIG JOHNSON, who had researched privatization, and indicated they were both available for questions. SENATOR PHILLIPS asked what the total sum was for implementing SB 68. SENATOR WARD replied it was $26,000, which he believed was a modest amount that could save the state more than that figure. MR. JOHNSON added that there are studies that are required by some of the collective bargaining agreements that probably would not be addressed in the bill. Some of the fiscal notes have asterisks indicating they are forthcoming. Depending how many studies are coming and how they are lumped together, it would be a different number. SENATOR PHILLIPS stated for clarification that they would first be doing DOT&PF, Corrections and Health and Social Services. SENATOR WARD added that Contracting was also included. They selected those because they were the three largest departments. SENATOR PHILLIPS suggested nine task force members would be better than ten. SENATOR WARD said they attempted to make a good balance and model after other privatization task forces that worked. The number ten came from three or four states, although the range was between six and fifty people. SENATOR PHILLIPS wanted to prevent a five/five tie and make sure decisions would be made. SENATOR WARD noted Senator Donley had expressed a similar concern. SENATOR PARNELL asked if the task force would accomplish its work without additional staff. SENATOR WARD confirmed that was the intention. Public members would receive travel and per diem. SENATOR PHILLIPS asked if the findings and intent in the legislation was required because he didn't want to clutter up the statutes. SENATOR PARNELL indicated he would like to strip them out. SENATOR DONLEY pointed out that the language only goes in the Session Laws rather than the permanent statutes. There was additional discussion about the intent of the legislature being followed. SENATOR ADAMS pointed out an updated fiscal note of $16.4 based on changes in the State Affairs Committee. He then expressed interest in addressing other areas in addition to the three departments, such as the Alaska Railroad, Court Services officers, and AHFC. He didn't want the task force limited in its first year. He also suggested the two public members appointed by the speaker and president should be Independent candidates, neither Republican nor Democrat. SENATOR WARD suggested Commerce could be added in the first year to look at the railroad. SENATOR ADAMS brought up the reporting date of November 15, noting that it is normally January 15, after the legislature convenes. MR. JOHNSON responded that the reason was to include the governor's budget. SENATOR ADAMS pointed out that the operating budget was, by law, required no later than December 16. SENATOR TORGERSON stated that all recommendations by the task force would require legislation and questioned any impact on the governor's budget without legislation. He was uncertain whether he favored the legislation because as subcommittee chair he was looking at what could be privatized, but legislation was required. There were a lot of good ideas, but they depend on the will of the body, and the task force report does not give the body any greater will. He was unsure that the bill did anything more than give some people per diem. SENATOR WARD said it was not his intention to form another committee and spend his summer doing this. The frustration of finding spots for privatization in subcommittee and committee process and then "something doesn't come to factor" was the reason for introducing the bill. He believed a formula was needed to get to privatization and that was why he looked at the other states to see how they did it. When it came to looking at government, it always required a highlighting of privatization to find out if, when, and where it should be done. SENATOR DONLEY believed this was a reasonable way to proceed on the issue of privatization, although he shared Senator Torgerson's concern with the necessity of statutory changes. The problem is that it is all through the statutes, "little things spread out through departments everywhere." He envisions the task force giving a list of suggestions and thought it would be helpful to have the expertise of other people to give the legislature something to work off of. The only thing similar were 1985 Budget and Audit suggestions. SENATOR DONLEY had some concerns about resources for the task force because he wanted them to be sufficient to do a good job. He noted the sponsor was trying to be efficient and frugal with the implementation, but felt additional resources would be needed to do it right because it was a tremendous project with a short time line. He looked forward to seeing what suggestions came back from the task force. SENATOR TORGERSON agreed with much of those statements. He pointed out that only about ten percent of Budget and Audit recommendations had been followed. He said there were many privatization suggestions that nothing had been done with. His objections to the bill would be satisfied if there was a commitment to do something with the report. SENATOR PHILLIPS recounted that over the past four years the legislature has implemented every Budget and Audit recommendation they could on the legislative side. What was left was the administrative side. SENATOR TORGERSON clarified that he was speaking only of privatization. SENATOR WARD stated he had another meeting to attend and concluded his testimony. He had no problem with changing the number of task force members. He agreed with Senator Torgerson and didn't want to do something unless it was going make it better. DON ETHERIDGE, Union Local 71, spoke in favor of the bill, but had concern with being fairly represented in the task force. He had seen many times where the state contracted out particular jobs that could be done cheaper but the job wasn't completed or done right and the state had to correct it. He gave an example of maintenance on a Southeast airport runway that air carriers have refused to land on and the state had to come in and grade it. He wanted to make sure that when jobs are looked at, the whole job is considered, not just the bids for the project. Another example was a community that wanted to bid on a project and do road maintenance for the same cost as the state, but they would only grade it, excluding doing the beds, culverts, and everything else that goes with it. He reiterated that the only concern was that they were looked at fairly and when jobs were compared, it was the whole job, not just part of it. SENATOR PHILLIPS asked if Mr. Etheridge's concern was with language on page 2, lines 3-4, "nominees submitted by labor organizations." MR. ETHERIDGE clarified that he would like to see two representatives from the labor group, one blue collar and one white collar, because their jobs are different and don't overlap. SENATOR PHILLIPS agreed and shared the concern that blue collar workers would be outnumbered. He did not want that to happen. SENATOR DONLEY echoed the same concerns. He noted the employees represented by Local 71 were a different group of people from the ASEA group. He thought it was appropriate that there was one of each to represent the separate interests and have input. SENATOR PARNELL saw it differently. He noted that labor is the only public group that is assured representation because they not only have a designated seat appointed by the governor, but they also have the possibility for other seats appointed by the president and speaker. He felt there was more than fair representation. MIKE MCMULLEN, Division of Personnel, Department of Administration, spoke of current restrictions of collective bargaining contracts, and wanted to assure that the committee had an understanding of what it will mean to the process. He handed out copies of worksheets that describe contract provisions of six bargaining agreements regarding contracting. The common thread is the provision for a feasibility study or cost benefit study and that current employees not be laid off unless the study showed there would be a savings to the state to have it done through a contractor. The cost of the studies average between $20,000 to $50,000 each. The sequence would be that the task force would be formed, there would be a report in time to draft legislation and influence the budget for the next session. The budget would necessarily have to fund the formal feasibility studies that the contracts require. It was his understanding that the task force would not be doing that level of detail. At the same time the funding for the studies are being requested, legislative changes will be considered. The rub comes after that where a study may come up with a different conclusion than the task force. At that point, the collective bargaining agreements would prohibit the contracting out of work that causes displacement of employees. Meanwhile, the legislation may have changed and there will be a conflict. Mr. McMullen's concern was with a formal study reaching a different conclusion than the task force recommendation and he wanted to make sure the committee was aware of the potential time bomb factor. SENATOR PHILLIPS brought up contractual versus statutory provisions. MR. MCMULLEN referred to the first case that went to arbitration on contracting out. It was when the legislature changed social services in the Kawerak-Norton Sound area and it was provided by pass-through money and replaced state employees. The state said that was the law, that's the way it was appropriated, that's the way we're going to spend it, and did not do a formal study. The arbitrator said they were required to do the study and they had to pay double for a period of time. Agencies are now aware of having to do studies. He noted that Corrections is about to notify unions because of the lease-purchase question in contemplation that it will displace state employees. They need to trigger the contractual processes to make sure there is no conflict down the road. He wanted the committee to take the potential conflict into account regarding different results by the task force and feasibility studies.' SENATOR TORGERSON asked how many state employees were covered under this. MR. MCMULLEN responded there were approximately ten to twelve thousand out of the total of twenty thousand. PAM LA BOLLE, President, Alaska State Chamber of Commerce, spoke in favor of SB 68. Privatization of appropriate government services has been one of the highest priorities of the ASCC for a few years. The last two years they held summer seminars devoted to the subject. The first year they looked at what was happening in other states, what potential there was for privatization in education, transportation, corrections, et cetera. Last year they focused on the Department of Transportation and Public Facilities. She recalled a presenter from British Columbia that discussed privatizing their road maintenance department and she was willing to share that information with the proposed task force. SENATOR PHILLIPS asked if the Marine Highway system was discussed. MS. LA BOLLE replied that they had looked at it. MS. LA BOLLE read a portion of a resolution passed by the ASCC, "ASCC asks the legislature to forge a plan by the end of 1997 and implement a program to privatize all applicable services currently provided by government." The task force is exactly what they were hoping for. She gave the example of an upside-down pyramid with the base being the tax- providing private sector supporting the top-heavy government and that it will all crumble one of these days. There are functions that only government can do well, but there are things that government has taken on as a matter of convenience that could easily be done by the private sector. She had a few words of caution. The ASCC championed the Long Range Financial Planning Commission with the idea that they would come up with recommendations that the legislature would made decisions on based on public input. Instead, the commission came up with THE plan, and one was either for or against it, and it wasn't a pretty picture. She wanted to be sure the duties of the task force were to recommend suggestions only. SENATOR TORGERSON asked Mr. McMullen what the time estimate was for the feasibility studies and if any had been done in the past. MR. MCMULLEN responded that the time varies depending on the size and complexity of the services being considered for privatization. The print shop in the Department of Administration was studied for $20,000. A time estimate would vary between two to six months. The state has done several studies. SENATOR TORGERSON suggested they be dusted off and looked at because they probably haven't changed that much. MR. MCMULLEN explained the sequence of the process that triggers the study. After the study, the union generally has an option to put in their own bid on how they can meet the savings. There were no studies that had been completed that were not implemented to his knowledge. One approach which was rejected by the sponsor was to have the task force perform the studies. COCHAIR SHARP called a five minute recess at 10:39 A.M. He reconvened the meeting at 10:44 A.M. COCHAIR SHARP recommended holding the legislation to work with the sponsor on possible changes to the make-up of the task force. SB 68 was HELD in committee. Upcoming committee and subcommittee meetings were announced. ADJOURNMENT The meeting was adjourned at approximately 10:44 A.M.