MINUTES OF MEETING
ASSEMBLY COMMITTEE ON GOVERNMENT AFFAIRS
Sixty-seventh Session
April 20, 1993
The Assembly Committee on Government Affairs was called to order by Chairman Val Z. Garner at 8:20 a.m., Tuesday, April 20, 1993, in Room 330 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda. Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Mr. Val Z. Garner, Chairman
Mr. Rick C. Bennett, Vice Chairman
Mrs. Kathy M. Augustine
Mr. Douglas A. Bache
Mrs. Marcia de Braga
Mr. Pete Ernaut
Mrs. Vivian L. Freeman
Mr. Lynn Hettrick
Mrs. Erin Kenny
Mrs. Joan A. Lambert
Mr. James W. McGaughey
Mr. Roy Neighbors
Mrs. Gene W. Segerblom
Mr. Wendell P. Williams
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
Assemblyman Dean Heller, District 40
Assemblyman Bernie Anderson, District 31
STAFF MEMBERS PRESENT:
Dana Bennett, Research Analyst
OTHERS PRESENT:
Robert Seale, Nevada State Treasurer; Rick Moos, Executive Vice President; Metropolitan West Securities, Inc.; Tom Collins, Associate Director, Swiss Bank Corporation; Gary Beyer, Executive Vice-President and Managing Director, First Interstate Portfolio Lending Services; Bill Salus, Vice President, Bank of America; Laura Wallace, Investment Officer, Public Employees Retirement System of Nevada; Marc Hechter, Assistant General Manager, State Industrial Insurance System; Judy Matteucci, Director, Department of Administration; J.F. Goodfellow, Earthquake Program Manager, Division of Emergency Management; John Anderson, University of Nevada Seismic Lab; Harold Bonham, State Geologist and Director, Nevada Bureau of Mines and Geology; Craig dePolo, Research Geologist, Nevada Bureau of Mines & Geology; Donald Kwalick, State Health Officer; Ellen Bozeat, Private Citizen; Charles Watson, Consulting Geologist, Advanced Geologic Exploration; Irene Porter, Executive Director, Nevada Homebuilders Association; and Mark Brown, Associated General Contractors of Southern Nevada.
ASSEMBLY BILL NO. 449 -Requires state treasurer to adopt regulations which he deems necessary to carry out his duties relating to public investments and authorizes state treasurer to lend securities under certain circumstances.
ASSEMBLY BILL NO. 450 -Requires state treasurer to adopt regulations which he deems necessary to carry out his duties relating to deposit of public money.
ASSEMBLY BILL NO. 451 -Revises various provisions relating to state treasurer.
Robert Seale, Nevada State Treasurer, explained there were two parts to AB 449. One was to adopt regulations, the second was to allow the state treasurer to do an investment called securities lending.
Assemblyman Dean Heller, District 40, supported AB 449, specifically securities lending. He said, "I ran some numbers, had staff in Ways and Means run some numbers, interest numbers. It is interesting to note that in fiscal year 1993, 1994 and 1995, we will be earning about one third of the interest that was earned in fiscal year 1990. The reason it is one third is for two reasons: one, of course, the principal amount that we have to invest these days is much less than it was in 1990; the second reason, of course, interest rates have lessened. The treasurer's office came in to talk with our staff and reestimated some of their interest earnings over the next biennium. Those interest earning numbers are about $2 million less than had been put in the Governor's budget. I have a concern that, right now, we don't have a balanced budget coming in from the Governor's office. I think this securities lending program is one of the vehicles--it won't make up for the $2 million shortfall--that we can use to offset this shortfall we will have coming out of interest earning from the state treasurer's office. Securities lending is a program that has been done in many states. I support it and I would urge the rest of the committee to support it also."
Mr. Seale added, "Securities lending will add some revenue to our portfolio. Assemblyman Heller is right, as the interest rates have declined over the last two years, we have struggled to find other mechanisms for finding new revenues out of the treasurer's office. I might point out that the language we are using relative to securities lending is the same language which is being used in two other places that we know are doing securities lending in the state of Nevada." He said the two places were in PERS and SIIS.
Rick Moos, Executive Vice President, Metropolitan West Securities Inc., testified, "Securities lending started in the '50s when one broker needed some securities and they lent them to another broker. In the early '70s, Harvard, Yale and Stanford endowment funds, with their large funds, they decided to start lending out their securities. Of course, they're custodians for major banks in New York and New York banks got wind of securities lending and they decided that since these endowment funds were doing it, maybe some of the large pension funds could start lending out some of their securities to the brokers in New York. Therefore, some of the major pension funds started doing it, after that, of course, the public funds. I think you will find that probably more than 60 percent of the larger pension funds and public funds in the United States are now doing securities lending. It has become a very popular way to add incremental income to the portfolio in various different ways. Securities lending itself is something all the public funds have seemed to feel quite comfortable with, and the boards that we've met and discussed it with--after they've gotten most of the details--they understand that is the way to go to add the incremental income. So we are here this morning to give you some of the details of securities lending and how it will benefit and help the treasurer's fund here in the state of Nevada."
Tom Collins, Associate Director, Swiss Bank Corporation, Los Angeles, California, stated, "When a securities lending transaction is consumated, the state lends out a security from their portfolio. In turn, they receive cash as collateral at a value of 102 percent of the security that is put on loan." He then described what was done with the collateral which was received from the borrower.
Gary Beyer, Executive Vice President and Managing Director, First Interstate Portfolio Lending Services, gave testimony describing how income was generated from the lending transaction.
Bill Salus, Vice President, Bank of America, stated, "I am here to address the aspect of the operational watchdog in the securities lending program. Just like any loan that is made, the people who are involved in making the loans have a duty to maintain and watch the parties in the contract." He then gave the various levels of control for borrower and lender.
Mr. McGaughey asked Mr. Salus to explain why the borrower wanted the securities, put up the cash for them, and what was done with them. Mr. Salus replied, "The borrower would want the securities for a myriad of reasons, but typically the borrower needs the securities because he has sold the securities and needs those securities to complete his sale. This supports his trading activity and is looking for securities he can use, for a fee, and fully collateralize to protect his trading activity."
Further discussion followed regarding the return of securities.
Mrs. Segerblom questioned if the broker for the state was a bank. Mr. Seale replied, "Typically, but not necessarily."
Mrs. Lambert queried what the advantage was to the state for doing this. Mr. Seale responded, "The most compelling reason is money." In further explanation he said, "It is one of those kinds of transactions we can do that has very little risk and fits the kind of policy that we have in the treasurer's office. There are opportunities to expand once we get into it and see greater sums of money."
Mrs. Lambert commented on the current treasurer's expertise and asked, "Should we get a treasurer who doesn't have the expertise, is there some danger in this sort of investment?" Mr. Seale replied, "I don't think we have any risk in this kind of a transaction." He then suggested some of the activities his office performed were risky in a market which was volatile but it was allowed. He said securities lending was less risky than things which were currently being done. Mr. Seale added, "One of the reasons I am asking for regulations in several of my bills today is so that we can develop procedures in the treasurer's office that will restrict subsequent treasurers from doing things in a way that is inappropriate."
Mr. McGaughey wanted more explanation regarding the overnight split between the treasurer and the broker. A discussion ensued between Mr. Seale, Mr. Salus and Mr McGaughey.
Laura Wallace, Investment Officer, Public Employees Retirement System of Nevada, stated she wanted to assure the committee it was possible to run an institutional securities lending program well within the boundary of the prudent man rule. She said PERS had run its securities lending program since early 1991 and it had generated $2.5 million in the last year. She admitted it would have been possible to generate $4 million but PERS was very cautious and employed methods of damage control to assure the collateral was properly marked to market, to be sure the cash was reinvested within very strict instruments. In closing she said, "We have a very short list of allowable instruments. So, it can be done, very high quality. Risk adverse program can be run and it's lucrative."
Marc Hechter, Assistant General Manager, State Industrial Insurance System, testified he was also Chief Investment Officer for the system. He said, "One of the things we do extremely well is manage our investment portfolio....We've been involved in securities lending since about 1984. The system has earned well over $2.5 billion in the program. Our portfolio is considerably less than PERS, consequently we don't have the same kind of annual return as they do, but it basically is a risk free investment opportunity." He then clarified a few items for the committee. In conclusion he said, "It's quite a golden opportunity to enhance your portfolio without a lot of risk, either to the state or to anyone else for that matter."
Chairman Garner requested Mr. Seale to explain the purpose of AB 450 and AB 451 before opening the hearing to other testifiers, Mr. Seale did so.
Mrs. Freeman asked if any of the bills addressed the question of the numerous bank accounts that the state treasurer was required....Mr. Seale interrupted and said no, with explanation.
Judy Matteucci, Director, Department of Administration, stated she was not necessarily testifying in opposition to the bills but she was questioning why it was necessary for the treasurer's office to have regulatory authority throughout the chapters affected by his office. She thought the bills were too broad, she suggested the legislature should ask why the regulatory powers were being requested; if the regulations would infringe on other elected officials, particularly the Board of Examiners or the legislative fund; and if the Board of Finance, chaired by the Governor, would be asked for final approval of the regulations. The questions raised by Ms. Matteucci, those which she did not feel were answered in anyone's testimony, were: who was the broker, where was the risk, did Mr. Seale propose to have the expertise to handle securities lending in his office or did he intend to vest it with the firms involved in securities lending and, if so, at what price.
Mr. McGaughey asked Ms. Matteucci to expand on the meaning of her statement, "You should identify who the brokers are." Ms. Matteucci replied, "I would suggest that in the statute, if you felt that this was a viable method by which you wanted the state treasurer to earn additional investment income into the general fund, and we would certainly welcome additional investment income, you should give some broad parameters as to who you think they should be doing business with. You know, some statutory definition of who it is you believe the state treasurer's office ought to be making these deals with." When asked for clarification, Ms. Matteucci responded, "What I am suggesting is you give some definition as to what types of brokers, not name a name. Mr. McGaughey then clarified, "Identify the type of broker in the field that they're in like you would any kind of instruments."
Switching to the area of regulations, Mr. McGaughey cited the legislation which had been heard by the committee dealing with suspending regulations. He referenced all the agencies which had testified against suspending regulations and asked if the treasurer should also have regulations, which were not in the statutes, that would change as times and conditions changed. Mr. McGaughey then asked, "Wouldn't that be fair?" Ms. Matteucci answered it was up to the legislative body to make that determination. She said she was merely suggesting the language included in the three bills was too broad, she had no idea why the treasurer desired or needed the authority to establish regulations, and she believed the Board of Finance was probably the board that ought to be the one vested with final approval authority of the regulations. Further discussion followed pertaining to the qualifications of those elected to office, particularly the treasurer's office.
Responding to Mr. McGaughey's questioning of the composition of the Board of Finance, Ms. Matteucci responded it consisted of the Governor, the Controller, the Treasurer and two appointees who currently reviewed the treasurer's investment policies.
Chairman Garner asked if the tools for securities lending were not already available to PERS and SIIS. Ms. Matteucci agreed that was true based on the testimony but she added, "The treasurer, by historic action of the legislature, has fairly restrictive allowances for how he can and cannot invest which PERS and SIIS is not subject to." She proceeded to remind the committee PERS and SIIS had different investment goals than the state treasury, elaborating on the reasons and the yields.
Mr. Garner clarified that the answer was yes, Ms. Matteucci replied, "Basically." Mr. Garner then clarified Ms. Matteucci's concern , "The way these bills are worded they essentially give carte blanche to the state treasurer's office, again she agreed.
A discussion ensued between Mr. Ernaut and Ms. Matteucci regarding regulatory control, which Ms. Matteucci stated was her primary concern. In further discussion, the topic of securities lending was pursued.
Mr. Hettrick asked if the types of brokers used for securities lending were specified in statute for PERS or SIIS. Ms. Matteucci replied she did not know, with comment. Mr. Hettrick then stated, "My question is if we are not regulating the type of broker that can be used in those two systems, I wonder if it is necessary in the treasurer's office?....A second question I have is how are regulations for the treasurer's office adopted at the present time. Mr. Seale replied his office had some regulatory power, but the bills herein pertained to three chapters where he had no regulatory power, therefore, he had thought to make all chapters even. In answer to PERS and SIIS, Mr. Seale said neither of the agencies had a list of brokers or types of brokers they dealt with, by statute.
Mrs. Augustine countered several of the comments within Ms. Matteucci's testimony saying she had a problem with them.
Further discussion followed.
In closing comments, Mr. McGaughey said, "I think the Legislative Counsel Bureau presently reviews all regulations by all state agencies. They also would review the regulations of the state treasurer's office. Wouldn't that be enough oversight on the type of regulations? These three bills deal only with the treasurer's duties and not with anyone else." Ms. Matteucci seemed to agree otherwise, therefore, Mr. McGaughey said, "Your suggestion probably should be considered."
The hearing on AB 449, AB 450 and AB 451 were closed with no action taken.
Chairman Garner named the subcommittee to hear AB 364, AB 365, AB 366, AB 367 and AB 368. It consisted of Mr. Bennett as chairman, Mr. Ernaut and Mrs. Freeman.
Chairman Garner requested committee introduction of the following Bill Draft Request 23-1960.
BILL DRAFT REQUEST 23-1960 - Allow employee to be represented at certain hearings before personnel commission by person of his own choosing.
ASSEMBLYMAN BENNETT MOVED FOR A COMMITTEE INTRODUCTION ON BDR 23-1960.
ASSEMBLYMAN BACHE SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
ASSEMBLY BILL NO. 445 -Provides for creation of earthquake safety council.
Assemblyman Rick Bennett, District 16, testified he, along with Assemblyman Bernie Anderson, had represented the State Assembly on an advisory group looking at earthquake safety. He gave the various reasons why he supported the proposed legislation, more so since he had personally experienced the Lander earthquake which had convinced him earthquake safety was indeed needed. He then proceeded to give an in-depth explanation of AB 445.
Assemblyman Bernie Anderson, District 31, stated the bill was noteworthy as Nevada was the third most active earthquake state in the United States, but the state was without legislation regarding earthquake safety. He felt AB 445 would clearly send a message to the public the legislature was concerned about public safety in the state.
Chairman Garner referenced section 8, and asked if retrofitting was being discussed by the word "mitigating." Mr. Bennett replied there were many older buildings, particularly in northern Nevada, which needed to be looked at but it was not the purpose of the council to authorize changes, only to suggest to local government they review ordinances regarding earthquakes and buildings in the area. More discussion followed with Mr. Anderson joining in.
Mr. Garner then pointed to the membership of the council and said, "Under (i), you've included the Division of Emergency Management of the Department of Military. My feeling is that this should be the State Emergency Response Commission tied into this because it has operating, local, emergency planning committees. Rather than designate the Division of Emergency Management, I have a feeling it should the State Emergency Response Commission. Mr. Bennett welcomed all suggestions.
Mrs. Augustine queried where the legislation would fit under the Governor's reorganization plan. Mr. Bennett stated the effort to establish an earthquake safety council was commendable and he felt it should be left with the legislative body as a whole to determine if the time was appropriate to establish one.
Mrs. Augustine then questioned if it was feasible to create the council within the CIRC body. Mr. Anderson agreed yes, the legislation should have been handled a long time ago before the Governor's reorganization plan, and yes, it could fit into the current structure within another agency, but the advisory committee felt it was necessary to have a prestanding authorization from the state as there was going to be a shift in funding from the national government.
Mrs. Segerblom said she favored the bill but was curious about Section 11, and asked if there would be matching funds. Mr. Anderson replied there would be testimony to answer the question forthcoming. He then commented on the size of the council.
Mr. McGaughey related his own earthquake experience and asked, "In the council when you go to line 11 you say,....I would suggest that the structural engineer is a critical part in building a building that is going to deal with earthquake protection, and I would think that would be changed. Maybe both of those disciplines should be there, but not one or the other." He also suggested the construction industry should be represented, especially engineering contractors; he recommended the council should not get involved in retrofitting, and questioned how much involvement there was by the insurance industry.
Mr. Bennett relayed how the advisory committee had spent a great deal of time discussing who or who should not be represented on the council.
Assemblyman Marcia de Braga, District 35, gave the committee insight into earthquakes within central and northern Nevada from personal experience and, therefore, supported AB 445.
J.F. Goodfellow, Earthquake Program Manager, Division of Emergency Management, presented Exhibit C, briefly emphasizing four points in favor of AB 445 from his written testimony.
John Anderson, University of Nevada Seismic Lab, submitted written testimony (Exhibit D), summarizing it in support of AB 445. In addition, Mr. Anderson submitted Exhibit E on behalf of D. Burton Slemmons, Consulting Geologist for Seismic Hazard Analysis.
Harold Bonham, State Geologist and Director, Nevada Bureau of Mines and Geology, read prepared testimony (Exhibit F) in support of AB 445.
Craig dePolo, Research Geologist, Nevada Bureau of Mines & Geology, submitted and read Exhibit G in favor of AB 445.
Mr. McGaughey asked Mr. dePolo how far away a building should be built from an earthquake fault. Mr. dePolo stated he was not an engineer, but suggested 50 feet, in general. More discussion followed.
Dr. Donald Kwalick, State Health Officer, proposed an amendment to expand the size of the council to include the State Health Officer.
Ellen Bozeat, Private Citizen, urged the committee to support AB 445 utilizing Exhibit H.
Charles Watson, Consulting Geologist, Advanced Geologic Explorations, referenced Exhibit I and read the testimony into the record. In addition to his written testimony, he gave additional comments pertaining to written testimonials he had received from people regarding earthquake experiences and the real fear people had concerning earthquakes with their effect on the local economy.
Irene Porter, Nevada Homebuilders Association and Mark Brown, Associated General Contractors of Southern Nevada, spoke in support of AB 445. Mrs. Porter stated it was her belief the construction industry should also be added to the membership of the council, stating her reasons why. She also suggested the City or County representative should be a building official.
Mark Brown pointed out the two industries represented by him and Irene Porter were very different. Therefore, he suggested appointing a representative from each faction of the construction industry. In closing, he added his own concern regarding retrofitting and said the chosen representative would watch that area closely.
The hearing on AB 445 was closed with no action taken.
There being no further business to come before committee, the meeting was adjourned at 10:31 a.m.
RESPECTFULLY SUBMITTED:
BETTY WILLS
Committee Secretary
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Assembly Committee on Government Affairs
April 20, 1993
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