Special Tax Council - 2010

October 1, 2010

Constitutional Amendment #3 and #4 on November 2010 Ballot: A “yes” vote on both amendments has been endorsed by GEA, ACEC/G, and GSPE.

The 2010 General Assembly approved by the required 2/3s majority two proposed constitutional amendments that address multi-year contracting.These amendments will be subject to a statewide referendum on the November 2, 2010, General Election ballot.Their underlying purpose will not be clear to most, but they will provide important contracting flexibility for engineering projects.

Here are the two questions, as they will appear on the ballot:

  • Amendment #3: “Shall the Constitution of Georgia be amended so as to allow the Georgia Department of Transportation to enter into multiyear construction agreements without requiring appropriations in the current fiscal year for the total amount of payments that would be due under the entire agreement so as to reduce long-term construction costs paid by the state?” (SR 821)
  • Amendment #4: “Shall the Constitution of Georgia be amended so as to provide for guaranteed cost savings for the state by authorizing a state entity to enter into multiyear contracts that obligate state funds for energy efficiency or conservation improvements projects?” (SR 1231)

 

Both amendments seek to address the current constitutional constraint that the state may not commit funds unless the full value of the commitment (e.g., a contract) has been approved by the General Assembly.A common description of the intent of this provision goes something like this, “A contract that would be funded in part by future General Assembly actions is not permissible since it would constitute a commitment of future General Assemblies without their consent – or one General Assembly may not commit a future General Assembly”.The constraint means, for example, that an agency must have in hand $90,000 before committing to a $90,000 contract, even if the spending occurs over three years.Said another way, an agency may not sign a contract that is expected to last several years with the intent of paying for out-year costs from future appropriations.

For DOT most contracts are for a period longer than a year, sometimes for many years.It is not uncommon for a road design contract to last for a decade because it includes the environmental assessment, public hearings, concept revisions, as well as the actual design services.For example, a contract may have a value of $1 million, but only 10% is spent in the first year, and the rest may be spent over 5-6 years.The current constitution requires that DOT have “in-hand” $1 million (or at least General Assembly approval of the state’s share of the $1 million), which is set aside for this contract.DOT cannot count on future appropriations to pay for invoices on the contract in future years.This is the root cause of the dispute in 2008-09 over the accounting methods employed by DOT – accrual or cash?In short, the SR 821 referendum simply jumps over that controversy and amends the constitution so that DOT does not have to escrow the full value of the contract.It must manage its cash flow, as would any business entity to fully meet its contract obligations, without having to set aside vast reserves earmarked for out-year contract obligations.

With approval of the SR 821 referendum, DOT would have much more flexibility in managing its resources.It would allow more contracts to be executed and accelerate project implementation.This flexibility is already allows in other states and does not run afoul of any federal constraint.It will certainly not increase costs, and it is arguable that it will reduce costs because projects get start earlier and at a lower costs.

The constitutional amendment dealing with multiyear contracts for energy efficiency or conservation (SR 1231) deals with the same underlying provision in the current Constitution.In this case, it deals with a type of contract generally referred to as “performance contracting.” An example is a high efficiency HVAC system that, if installed in a state building, would reduce energy costs.A contractor/vendor would install such a system and guarantee certain energy performance measures.The contract would call for payments to the contractor based on the energy savings realized by the state building.The exact terms could vary from contract to contract, but the concept is that the agency and contractor/vendor could share in the savings due to the efficiency of the system that is installed, and this could occur over several years.Such high efficiency HVAC systems usually have higher first costs, but lower long-term annual energy costs with, say, a 5-7 year pay back.Performance contracting allows the high first cost to be spread out over several years, thus encouraging investments by state agencies in energy efficiency and other such conservation measures.

If these constitutional amendments are approved, then the General Assembly would be authorized to adopt enabling legislation to guide and direct their implementation.In fact the 2010 General Assembly approved SB 194, which is the enabling legislation for SR 1231 - Performance Contracting.This law becomes effective if the referendum is passed, and is repealed if it does not.SB 194 assigns GEFA the role of chief champion for performance contracting but authorized all state agencies to enter into such contracts.

HB 1135 was the enabling legislation contemplated to implement SR 821 – GDOT Contracting.It did not make it through the 2010 General Assembly.Some form of this legislation will surely pass in the 2011 General Assembly if the SR 821 constitutional amendment is approved at referendum.

To read the text of these resolutions go to www.legis.ga.gov/legis/2009_10/ and enter the resolution number.The ‘official’ summary of these constitutional amendments (as well as three others that will be on the ballot) may be found at http://qual.sos.ga.gov/BallotAmendmentsAndReferendums.pdf .

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