H.B. 405 State Purchasing Reserve Funding: transcript

Thank you, Mr. Chair. Uh, I don't know if, if the, uh, uh, slide is projecting. Is that, is that on? Uh, it's, it's coming up. There you go. Oh, There we go. Good. When, uh, I, I don't know if, if, if anyone else was here, I mean, Mr. Chairman, you may have been in a different capacity. When Speaker Lockhart was here, as she was, as she was ending her service, and we were, uh, kind of having a farewell meeting with her and, and bringing the new leadership team in, we asked her what advice did she have for the incoming leadership team? And she said, uh, my mother always told me that someday you have to pay the piper. And she said, you know, societally, politically, economically that day is coming that we have to pay the piper. And I think we see that on a lot of levels. I didn't intend to be all gold all the time. This session, we had the bill last session, and this bill was to be the one for this session. But with what happened, we're, we're working on this bill is very, very simple. Let me just go through some, some basics, if I can get my, there we go. I mean, we all know the economic situations, C-B-O-G-A-O, others, our fiscal situation is even threatening national security. The Medicare Medicaid trust funds have now projected, this was in 2024, they projected that the Medicare Social Security Trust funds go to zero in eight years. In 25, they upped that to, or readjusted it to six years. We're now five years to the point that the Medicare Medicaid trust funds go to zero. And, you know, 24% cut across the board on Social Security, 11% cut on Medicaid, Salt Lake County has felt the pinch. They, they said they're the dollars have lost more than 20% of the value over the last five years. And they showed a bunch of things that we buy on a day-to-day basis and showing the change. And if you take those same things and, and, and put them in a fixed standard, the prices have actually gone down. If you denominate Big Macs and gallons of milk and gallons of gas, the prices have gone down as much as, you know, 40 to 50, 60%. Same thing in units per thousand dollars versus units per ounce of gold, you get almost a hundred percent more units per ounce of gold over that same five year period. Well, when we translate that into state purchasing, these are some of the goods that we buy on an ongoing basis. We just randomly picked what, what, uh, might be some of the top things units per hundred dollars down 40 to 64% over a period, same units per ounce of gold. We get more units, 400 to 800% more units per ounce of gold. Same thing with gas. We've been talking about that this year. In a 10 year period, uh, gallons of gas per thousand dollars versus gallons of gas per ounce of gold, we get substantially more double. In fact, for the same, for the same, uh, uh, denominator. I think we've seen this graph, a few of us, when we went off the gold standard in 1971, buy a house for $24,000 today, you can't get a down payment for that. But the same amount of gold buys almost six houses today. It, it, it's the nature of our money is changing. What's interesting about that though, as debt is increasing, the price of gold is almost a one-to-one correlation. Same thing with the money supply. It's almost a one-to-one correlation. If we think that debt's gonna continue to increase, the money supply is gonna continue to increase, the price of gold is increasing at an almost one-to-one rate price of homes up substantially. We know, uh, Utah salary increasing, but in gold terms they're flat to down. Uh, same thing. Dow Jones and just industrial average, uh, college tuition up substantially. And yet in gold, they're flat to down. Well, what does that mean for what we might be able to do? What what the House Bill 4 0 5 does is very simple. Our purchasing department, uh, Kanosh I have with me Kanosh Beers, who was the immediate past director of, of purchasing the state procurement officer. They changed our procurement office from being a general fund fee-based or a general fund, uh, purchasing coop, uh, purchasing department to a fee-based cooperative where the vendors pay a small fee to the purchasing cooperative as they make the contracts. It's very, very standard across the nation. Purchasing cooperatives charge a small fee for the work that they do, and it saves the vendors a lot of time and money. So the idea with how House Bill 4 0 5, knowing that we're seeing inflation dramatically, and, and, you know, if we think that debt has grown in the past, it's snowballing and increasing is to take a very small percentage, uh, one half of 1% on the purchasing contracts, put that in a restricted account in gold that preserves purchasing power for the goods that we know we're gonna purchase as a state. We know we're gonna buy desks and chairs and motor fuel and rock salt in perpetuity. This preserves that purchasing power and even increases it in a restricted account, uh, based on a a, a metric of inflation. Jonathan Ball came up with that. If inflation is really, uh, uh, more than usual, then we can tap into the restricted account for purchase for the state. Uh, with that, I'd like to give time to Mr. Beers, who is the, uh, immediate past state procurement officer to kind of talk about the mechanics of purchasing and how this might fit.

Thank you. My name is Kent Beers. I was the former director of state purchasing and also a three term chair of the Nabo Value Point Purchasing Cooperative, which is a purchasing cooperative wherein all 50 states combine their buying power in the NASPA purchasing cooperative. At the time when we transitioned state purchasing from a general fund appropriated state agency to a standalone fee-based agency, an internal service fund, we presented to the governor's office and to the legislature that this action would result in lower prices and cost savings to the state and to taxpayers and lower prices to all governmental entities in the state. We conducted surveys of vendors and asked them the question, if we raise our pri if we increase a fee to half a percent, will you increase your prices to the state of Utah? The survey results came back and said, no, we will not, because we save money by having a central procurement. State of Utah conducts one procurement for all public entities in the state. They don't have to bid the same computers, the same bookshelves, the same carpet, the same lighting for every city, for every county, for every school district, for every service district, for every institution of higher ed and public ed one procurement. It saves the vendors and suppliers money that they can pass on in lower prices to us. After the program was implemented over about a five year period, we did one fifth of our contracts every year, converted them to the fee and re and gave up our administrative one fifth, our administrative budget, one fifth every year. We looked at the prices and on the rebids, the prices were no higher than than what inflation was for the industry. They were no higher than the than the prices we had before. I will also offer as evidence that the NASPA value point purchasing cooperative charges a at that time, a quarter of 1% of an administrative fee. There were others, other purchasing cooperatives out there, several of them that would charge an administrative fee as high as two to 8%. We hired KPMG to conduct a survey of our contract versus the contracts of these other higher fee-based purchasing cooperatives. We found that the NASPA value point cooperative did have lower prices, but they were not substantially lower. So while their fees were 10 to 20 times higher than the fees being charged by NASPA value point, because we were a nonprofit organization, our prices were not that significantly lower. So that should show that other purchasing cooperatives that are charging substantially higher prices have prices that are compar relatively comparable to those of NASPA value point. The other evidence I would show is that we routinely conducted surveys of other states between Utah's cooperative contract prices and other states who also, many of whom charge a higher fee than Utah. And our fees were lower, our prices were very similar, even though the other states were charging a higher administrative fees, their prices were not significantly higher than ours. Ours were not significantly lower than theirs, they were very comparable. And Utah is a relatively small state compared to some of the other states that we would survey. The one thing I think we should all congratulate the state of Utah on is state of Utah does a far better job than any other state in the nation in combining the purchasing power of all governmental entities. Because we get along in the state of Utah, there aren't artificial turf wars and boundaries set up where purchasing agents from higher education, public education cities and counties don't speak to each other. We all cooperate through the state and combine our purchasing power. The last point that I'd like to make is that when vendors and suppliers bid a contract, these are typically five year contracts. One of their risks is that either the purchasing cooperative won't exist in year three, four or five. They'll go away, come insolvent, or that the money won't be there to make the purchases by taking a small percentage and applying the fee to create a dedicated strategic fund set aside to procure the goods and services needed by public entities throughout the state in a time of economic distress. This will, I believe, enhance the supplier's and the vendor's ability to even give us better pricing, better pricing, because they will know that the money is there in year four and five of the contract to make purchases. It'll take time to build up this fund. Uh, this isn't the the thing that's going to happen overnight, but over the next 10 to 20 years, uh, this fund will represent a significant reserve that'll give vendors the confidence to even bid the state of Utah lower prices. And plus we'll have the money there to make the strategic purchases for critical goods and services that are needed by the smallest of public entities in the state who really don't have the ability to set aside a rainy day fund committee. Thank you for your time

With that Mr. Chair. I would just say that, um, we all know the benefit of preparation in Utah. We've all been blessed by those things. Maybe the only last question would be why Gold, na Central Banks are, are going into gold in record rates. It is now the number one, the number one foreign reserve asset beyond the dollar even. And, and we've shown that it, it, it holds value over long periods of time that we could even substantially get more units per, per, per the amount that we set aside. And, you know, I, I spend my service up here thinking about what life is gonna be for my grandchildren and and to have those kinds of reserves. We know that there are stormy days ahead when 2008 hit. If we can show vendors that even in rough periods, we've got the ability to keep moving forward, as Mr. Beers said that that creates even greater value. We may even get lower prices on the things that we bid without. I'd be happy to answer any questions.

Thank you, Mr. Chair. Appreciate, uh, this is a fascinating idea. Appreciate you bringing it forward. And I've been supportive in the past of your efforts to work through the treasure to, uh, use precious metals as a, as a hedge or as a diversity strategy in our rainy day funds. I think it's appropriate for rainy day funds. I have some serious concerns in my mind. I look at this as a tax on, on a million dollar tax on purchasing that would be paid by every Utah, Utah. And I, I am, am curious why each department purchasing, you know, or or maybe it's every other, you know, department of Transportation or education, why we should be trying to do, uh, monetary hedging in each department rather than leaving it to our treasurer to do the, the diversification of monetary hedging. Uh, long term this, this seems like a, uh, an unnecessary tax on our citizens. Yeah,

It's a great question. Appreciate the question. Um, the nature of our purchasing department is we do centralize purchasing for all of the other agencies. And, and what we're hearing through all the agencies is inflation is starting to rip through their budgets that they're getting less and less and less for the dollars that we give them. We know we're seeing the wage gaps and we're seeing the dollar spending less far and having to increase things. So this is the only agency that does centralize that purchasing where we would hedge inflation on purchases. We've got the rainy day fund for general government things, but in terms of the goods where we're seeing inflation at a rapid rate, and you know, Salt Lake County's answer to that was the dollar has dropped 20% in five years. They're raising taxes 30%. So rather than raise taxes across the board, as we build that reserve fund through the small fee that is part of these purchasing contracts, it it, it really doesn't end up getting applied across the board to citizens because as Mr. Beers has pointed out in those contracts, it, it, it doesn't get added into it because the value to the vendors of having a one stop shop on having purchasing cooperatives, the evidence is that it does not increase the price more than inflation. Thank you. Mr. May, may I follow up? Yeah,

I, I I agree There's certain value in having centralized purchasing and that that clearly has some good long term value. Why couldn't the treasure, if, if we had a five year contract and somebody was worried about not being able, you know, if we appropriate the money in year one that's supposed to cover year five, why couldn't the treasurer manage this the way they manage? I mean, we manage PTIF, we manage other funds. Why should it be done? Why should the monetary hedging be done in purchasing rather than in via tax rather than the treasurer managing that as part of a long-term strategy?

Yeah, let the expert take that one this time.

So, uh, thank you. The most difficult concept when we transitioned purchasing from a general fund appropriated agency to a fee-based agency was to convey the concept that these fees are paid by the vendors. They're not paid by state agencies, they're not paid by cities or counties or school districts. They are paid by the vendors. It, it is not a tax where we are collecting, uh, uh, tax dollars from governmental entities. The fees are paid 100% by the vendors and they do it willingly, again, because they save money by not having to issue for save for this computer by not having to issue a contract to every city, every county, the the cost to them to administer and submit bids and RFPs. So they are the ones the vendors pay the fee.

Yeah. Respectfully, Mr. Chairman, we have that system in place. It works well, thank you for your work there. I think that's really important and that clearly lowers the cost, but adding an extra tax on top of that great system you've already built to do monetary hedging, I don't see the value in that. It seems like this is the same issue with, with tariffs. If we're gonna put a charge on economically to, to expect that not to eventually flow into the, to the cost of those goods. I I don't see it, but I I definitely respect your opinion and your expertise. Thank

You. May I respond just briefly to that please? Yes. Yeah, the evidence shows that it doesn't increase the cost, but the, to your direct point, it, it's not a tax because it's a competitive bid. No one has to come in and sell goods to the state. It's a completely open competitive bid because it's a competitive bid. They're still trying to compete to get the lowest price. And, and that makes a great distinguish, uh, makes a great distinction.

It's not a tax, it's a fee because Maybe I misunderstood Mr. Chair isn't anyone can, can bid, but every bidder has to include the five, the the 0.5%. Is that correct?

Un under this, the, those certain state contracts, yes. It would roll in and, and that fee would be included.

Th thank you that I appreciate. I bet I have a better understanding. It. It's kind of like the Supreme Court had, has described, there are toll roads and other roads. You don't have to go through the toll road, but you, there are ways to, to go around, but no one is required to sell to the state. But then you have that competitive bid process and, and it's a value to the vendors as Mr. Beers is explained, because then they know there's a reserve amount there that know what no matter what, uh, difficult times we may face, there's a reserve fund there that, uh, has, is creates difficulties in some purchasing cooperatives that they, you know, they'll bid a five year contract and they're not able to perform through the five years.

Always as we have, yeah, as we have in the bi in, in the bill it would be 0.5%. It's a policy question that we could, It wouldn't fluctuate. Alright. It, it, it would be, you know, the 5% unless the legislature decides to change that. Okay.

Could I, could I add one thing? Yes, sir. Please. State purchasing has the discretion of issuing up to a certain amount. Okay. So when, when I was here, we went up to a half a percent. There were some contracts that were so small that it wasn't worth our expense internally to administer the contract. So we didn't charge a fee on those other contracts. We felt the, the, they, they were like a community service type contract. And so we felt that we would not charge a fee on those because they were for the good of like a charitable organization type contract. Uh, so not all contracts are charged the same fee. We issued a tier type system based on the volume of the contract, the suspending, the purchasing that went on the contract. So it, it's, it's a staggered fee, a tier based system. So it's just not one straight flat fee. And we would recommend that state purchasing impose Representative Ivory fee in exactly the same manner that they are their own fee.

It it, it does. Mr. Chair, happy to answer any other questions if there are any?

Maryanne Christensen, you, um, executive director of Utah Legislative Watch. I started a lot of years ago trying to figure out why inflation was so bad and why the dollar was losing its value. Started out with a book called The Creature from Jekyll Island. I'd really, um, encourage everyone to read that. If they haven't. It explains how with the adoption of the Federal Reserve, we, um, we adopted a creature that hollows out our dollar and, and causes inflation. And, um, knowing then that the value of the US dollar is zero without the trust that artificially holds it up. I've been watching what has been happening around the world to try and determine why it is that the US dollar still stays afloat even with all of our debt and all of our inflation. And the answer to that is that the US dollar has been the world reserve currency and the currency that all the countries in the world use to buy their oil. And, um, then came the rise of the bricks, currency. Bricks, which stands for Brazil, Russia, India, China, and South Africa. South Africa having vast reserves of gold. Um, their plan was to make the bricks currency backed by gold and then get enough countries signed onto it that they could completely displace the dollar as the world reserve currency, which overnight would cause the dollar to become completely worthless. So therefore, I favor every, every plan for us to, to become, um, to start using a stable kind of currency and everything that Representative Ivory is doing to help us, um, move over to precious metals in the state and to help us as individuals be able to actually conduct business in precious metals. It, it's not, I don't just appreciate it. I feel like it's an absolutely vital move that we make for any kind of financial stability going forward. So thank you for voting. Yes.

Thank you, Mr. Chair. I'll make a motion to favorably recommend HP 4 0 5 as substituted.

Thank you very much. Yep, thank you very much. Appreciate it. All right, um,

Thank Mr. Speaker in Utah, we know better than anyone in the nation. The proverb that is on the handout that we passed out. The prudent See the danger and prepare this bill is about preparing for the dangers that we see coming in inflation and in the nature that we have with, uh, with the dollar and the de de debasement of the dollar that we've seen lately. The bill's very simple. It takes a small percentage of the, uh, contracts that are awarded for purchases. The, the state puts out RFPs, uh, service providers, vendors bid on those contracts. Three tenths of a percent is what's used to pay the purchasing department. Typical vendor fees range from 2% to 8% nationally. Uh, this would put it at 8%. And we take that small difference and use that to, uh, prepare in, uh, uh, restricted fund, put in gold that then, uh, uh, hedges, internally hedges the value of the goods and services that we purchase. If you look on the back of the flyer that you have, uh, the, the units that we purchase as a state, we looked at the top 10 units that we buy as a state. We've got rock salt and, and vehicles and copy paper and whatnot. Units per a hundred dollars, Mr. Speaker, we're going from 30% to 80% less per hundred dollars units per ounce of gold. We would be getting from 400% to 800% more. This is just a prudent, uh, way to prepare for emergencies. We put the fund into a restricted account, uh, only on specific emergencies. I think one thing that was amusing in the, in the hearing we had on this, the former purchasing director that actually set up this fee structure said he only wished that he had thought about this to institute it, uh, when he was here. But Mr. Speaker, with that, I'd be happy to answer any questions.

I, I'd be happy to. Yes. Representative

Ward. Thank you, Mr. Speaker. Typically when we do, we do try and make a distinction between taxes and fees, and usually our habit has been that a fee is to pay for the cost of running a program as opposed to some other purpose. Um, could the sponsor of the bill talk through with me if this fee is just for the cost of running a program or if this fee is just for a general use and why would we call it then not a tax?

Yeah, that's a great question. Thank you, Mr. Speaker. Uh, one of the purposes of a fee is to defray the cost of regulating an activity. And, and we know that we're experiencing inflation five to 10% and more annually. What this does is allow us to defray the cost of purchasing goods year over year because we're getting substantially more units per ounce of gold than we are for dollars.

Thank, thank you for that answer. I do have a second question, which is also it seems we typically have the habit that when the state sets aside money to be used for emergencies, which we do in a number of different circumstances, and which is a good way to prepare, um, we turn the management of that money over to professionals to decide how best to invest it for the short term and long term. What is different about this fund of money that we would depart from that normal process and have the legislature itself directly decide how the money has to be invested? Why would we not trust their judgment in this case the same as we do in other cases?

Yeah. Uh, thank you Mr. Speaker. Uh, this actually would be turned over to the treasurer and working with the treasurer. This is the best way to, to hedge against the inflation that we're seeing, it's how national central banks and, and, uh, those around the world are hedging against inflation is in this very manner.

Thank you. Uh, thank you for that answer, colleagues. To me, the, the description in this bill does seem like a tax. It, it's a general use. It does not seem to me like this money is paying for the specific cost of administering a program. So that is a concern for me. Um, and in general, I would hope that if a case has been made that this is the best way to save money, I would hope that we would be able to convince our professional staff, who in many different instances, make good decisions about how they should invest the money instead of us being the ones to direct them. Thank you.

Thank you, Mr. Speaker. My concerns are similar to my colleague from Bountiful. Um, we have a board of professionals. The treasurer himself is a professional, and when we say you must invest this, maybe today, it's, it's an appropriate tool to hedge against inflation. I don't know. I'm not a professional in that area, but when we put something in statute, it limits their flexibility to adjust. If markets take off one direction or the other, if things head south, if things head north, we need those to not have to wait for us to come back and say, oh, you know, actually we want you to invest differently. So I prefer to give the flexibility to those who are involved. I'm aware that they're currently very skilled at a, at hedging against inflation. They have adequate tools and some of those may include precious metals, but, uh, to tell them that you must invest in this one specific thing seems that we are stepping outside of our, uh, expertise and into somebody else's domain.

Thank you, Mr. Speaker. I appreciate the opportunity to, uh, to speak in opposition to this bill. Uh, I'm concerned about, uh, first of all the precedence that we might set, um, in, uh, taking this, uh, conversation about the fee versus the tax, uh, provision. I think that's been well said. One of the other things I wanted to just mention, there's a very interesting dynamic, uh, that's a very, very long run dynamic, and we've, we talk a lot about, uh, sound money. We can talk a lot about, um, gold, uh, and silver and their role in our monetary system. Um, but one thing I do have a little bit of concern about is over the very long run, when we basically say we're going to use this as an inflation hedge, uh, we're, we're making an assumption that the price of gold will continue to be essentially perfectly correlated in this way. Um, and one of the, the underlying part of my concern lies with the fact that gold is a, uh, it's a commodity that's set by global commodity markets. Um, that price could be influenced by, for example, a major South African discovery of massive quantities of gold that could change the supply of gold, which would then have a huge impact on, uh, our state and its holdings. So I think in terms of, uh, this being the right, uh, the right policy for, uh, the proposal, I'm opposed to the port, the, uh, bill as it sits. Thank you.

You, Mr. Speaker. Great points, great discussion. Compounded annual growth rate of gold going back to 1971 is 8.9%, uh, almost three times anything we have in the rainy day fund. We did work with investors, investment managers on this, this very process. And, and as far as being a tax, the money is set aside so that we can continue to buy the goods and services that services that we need. Should we run into another 2008 type meltdown? And now that's what this is meant for. So the money is, is set aside so we can keep buying motor fuel. We can keep buying the goods and services that we need. In 2008, we were rummaging through the sofa cushions to keep the government open, Mr. Speaker. And as we prepare that sort of thing, uh, we're ready for that. That's the beauty of Utah. We prepare in advance. And I'll just go back to what the, uh, purchasing director Kanosh Beers, the former purchasing director said in the committee. He said he only wished he had thought of this when he was the purchasing director before he re re, uh, retired. With that Mr. Speaker, uh, encourage the body support.