MINUTES OF THE
ASSEMBLY COMMITTEE ON WAYS AND MEANS
Sixty-seventh Session
February 2, 1993
The Assembly Committee on Ways and Means was called to order by Chairman Morse Arberry, Jr., at 8:05 a.m., on Tuesday, February 2, 1993, in room 352 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda, Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Mr. Morse Arberry, Jr., Chairman
Mr. Larry L. Spitler, Vice Chairman
Mrs. Vonne Chowning
Mr. Joseph E. Dini, Jr.
Mrs. Jan Evans
Ms. Christina R. Giunchigliani
Mr. Dean A. Heller
Mr. David E. Humke
Mr. John W. Marvel
Mr. Richard Perkins
Mr. Robert E. Price
Ms. Sandra Tiffany
Mrs. Myrna T. Williams
COMMITTEE MEMBERS ABSENT:
None
STAFF MEMBERS PRESENT:
Mark Stevens, Fiscal Analyst
Gary Ghiggeri, Deputy Fiscal Analyst
Judy Matteucci, Budget Director thanked Chairman Arberry for the opportunity to explain the reorganizational changes within the Executive Budget. Some of the changes were difficult to observe in the Executive Budget because proposed reorganizational changes had been incorporated in the new budget format. Mrs. Matteucci provided detailed personnel information for each agency since it was not included in the new Executive Budget format. Mrs. Matteucci, stated the goals of the Commission on Government Reorganization were to: (1) reduce the Governors span of control; (2) make better use of existing resources and build on current strengths of state government; (3) make government more responsive to those served; (4) group similar functions to improve coordination; (5) shift the focus of governments from inputs to outputs; (6) empower managers and staff to get the job done; and (7) streamline management costs. Mrs. Matteucci asked the committee to refer to "State of Nevada Summary of Net Impacts of Organizational and Operational Changes" (Exhibit C), which was included in the Executive Budget in Brief. She stated the chart provided the final reconciliation showing the results of reorganization. Mrs. Matteucci explained Exhibit C coupled with the detail sheet entitled "Summary of Impacts of Organizational and Operational Changes" (Exhibit D) would provide the committee with a more complete understanding of the reorganization decisions. Mrs. Matteucci pointed out operational charts within the Executive Budget in Brief. The charts listed the departments and their recommended status after the Governor's reorganization. Finally, Mrs. Matteucci pointed out a listing of boards and commissions (Exhibit E) entitled "Reorganization Physical Moves", which indicated the proposed status of the boards and commission: eliminated, consolidated, regulatory, liaison, or advisory, under reorganization.
Mrs. Matteucci instructed the committee by using the "Summary of Impacts of Organizational and Operational Changes Department of Museum, Library and Arts, (Exhibit D). Mrs. Matteucci explained the logic behind "value of" statements within each of the agency's budget accounts. She stated, for example, "value of director" was the cost of maintaining a position which was duplicated or removed because of the proposed reorganization. Each agency would be required to cut this value from its budget. These suggestions were made because the Governor had not appointed the new agency directors to those agencies created by reorganization and with minor exceptions the Budget Division was unable to work with directors in developing specific recommendations for savings. Therefore the Budget Office did not presume on the directors behalf how the new departments would be set up and where the reorganizational savings would come from, so the positions were only recommended for elimination not required.
Mrs. Matteucci stated the Budget Office was proposing directors be empowered to accomplish the agency's missions by allowing, with IFC approval, independent allocation of funds within the agency. For example, divisional oversight would be eliminated, however for budget construction purposes the Budget Office included some structure within Executive Budget such as divisional and operational charts. Mrs. Matteucci stated although it had been recommended directors be given the authority to establish their own division structure, the Legislature had the prerogative to assign duties and responsibilities by division if they wished to do so.
Turning to Exhibit D, Mrs. Matteucci stated as a result of combining the museums, library and arts into a single department the Budget Office had established a director and budgeted travel and operating costs of $75,000 in FY 94 and $103,000 in FY 95. As a result of this consolidation the departments became divisions and the "value of" one duplicated administrative or management position could be eliminated. In this case, Exhibit D, the value of the director of Museums and History and an Accountant II were chosen to be removed because of the economies achieved through the consolidation of services. Mrs. Matteucci asserted directors could chose to remove the "value of" positions from other areas within the department's budget rather than eliminating the suggested positions. However, the amount of the savings would have to be equal to the value of the salary savings from reorganizational consolidation. The resulting reorganization savings in this budget would be $111,418 in FY 94 and 144,457 in FY 95.
Mr. Marvel asked how the new director's salary of $83,906 was determined. Mrs. Matteucci stated all of the new directors salaries were determined by looking at the existing unclassified salary ranges and the additional duties and responsibilities for the new department directors. Most were based on the existing salary range for the directors of the larger departments, such as the Department of Transportation, at $80,950.
Mr. Marvel asked if the director of the Department of Museums Library and Arts was funded by the General Fund or were other private funding sources used. Mrs. Matteucci stated only General Fund monies were used.
Ms. Giunchigliani asked for a definition of the hierarchy of the reorganization within the departments. Mrs. Matteucci stated the hierarchy was department, division, bureau, and section.
Ms. Giunchigliani asked for a general listing of positions which were consolidated under the proposed reorganization. Mrs. Matteucci stated generally the "value of" included accounting, administrative deputies, microcomputer specialists, data processing personnel, and telecommunication functions which were duplicated as a result of reorganization and were proposed for elimination. The "value of" these positions were assigned as position savings within the agencies' budgets. This savings was then listed as reorganization savings within the Executive Budget. For example, all of the data processing personnel were budgeted to be paid from the Data Processing Department's budget account, although they would remain in the same physical location. Mrs. Matteucci stated the centralization concept by combining these positions would result in some economies and a savings would be created. All agencies would be required to contract for services from the Department of Data Processing. Through the centralization process many of the supervisory level data processing positions would be duplicated and therefore these positions could be eliminated. The reorganization would produce a savings of $6,000 per position for each agency through the centralization process.
Ms. Giunchigliani asked what flexibility directors would have in determining job functions for employees and attaining additional funding. Mrs. Matteucci stated a substantial amount of flexibility was given to directors in determining job functions since the positions themselves had not been removed. Instead the "value of" the positions were removed and listed as reorganization savings. The Budget Office had requested the directors have the authority to transfer dollars within the department and to decide how efficiencies should be accomplished, although the total amount of reorganization savings would have to be achieved by the agency.
Ms. Giunchigliani asked if the emphasis could be taken off of the reorganization savings and placed on the efficiencies achieved by the reorganization. Mrs. Matteucci stated this was the intention of the reorganization and the savings were an incidental byproduct. For example it was possible for a director to maintain current staffing levels as long as the agency stayed within its allocated budget and achieved the reorganizational savings subscribed by the Budget Office.
Ms. Tiffany asked how the transfer of the salary of a position from one budget account to another constituted a cost savings. Mrs. Matteucci explained the position transfer did not include a 100 percent salary transfer from one budget account to another. For example, under the current system three different agencies audit the same accounts. By consolidating the audit functions the auditors would look at the books of the businesses only once and complete the audit for unemployment insurance, State Industrial Insurance System (SIIS) insurance, sales tax, and the business tax. Therefore the same function could be accomplished with fewer man-hours and less disruption to the business. All of the audit positions from SIIS and the Employment Security Division (ESD) were transferred to the Department of Taxation. Because the transfer of 59 audit positions was not expected to take place until October 1, 1993, the auditors were accounted for within the SIIS and ESD budgets for one-quarter of FY 93. The director of the Department of Taxation advised the Budget Office how many new audit position were needed, effective October 1, 1993, in combination with audit existing staff to accomplish the team audit. The recommendation was for 14 new audit positions which was a net savings of 45 audit position.
Ms. Tiffany asked how a cost savings could be achieved when one agency contracted services from another agency. Mrs. Matteucci explained with the consolidation of the telecommunications and data processing personnel and the elimination of extraneous personnel and duplicated services, agencies contracting services from Data Processing would have an average salary savings of $6,000 per employee. In order to accomplish this the Budget Office took the "value of" the data processing personnel from, for example the Department of Transportation, and transferred the "value of" the position to the Data Processing Department. The amount of payment for contract service to the Data Processing Department was calculated after the elimination of extraneous personnel, and the payment from the Department of Transportation was approximately $6,000 less per employee than the cost to sustain in-house data processing personnel.
Mr. Marvel asked if sanctions for inappropriate use of federal monies could be levied against the state since the Employment Security Division (ESD) was federally funded. Mrs. Matteucci assured the committee the consultants had met with federal representatives and asked if any problems could arise because of this transfer of funds. They were assured, with particular reference to the Department of Labor, this way of delivering services was not illegal. The Department of Taxation will be required to prove the cost allocations to the other agencies are justifiable. For example, the Department of Taxation will have to show the payment from ESD represents the effort being expended on ESD's behalf. Mr. Marvel stated the employers would likely want the same justification since SIIS would also be paying for these audit services.
Mr. Marvel asked if the former ESD and SIIS federal functions could be identified. Mrs. Matteucci replied as federally mandated functions of these agencies were identified, the Budget Office was in the process of determining who would perform these functions. Mrs. Matteucci expressed the Department of Taxation's audit coverage would remain dependable and less intrusive to the businesses. The Department of Labor had provided a letter of compliance standards to the state and the committee would be provided a copy of the documentation. She stated any time the state used federal dollars there was a risk of non-compliance. However, the state did have measures such as the federal cost allocation plan and the OMB circular 87 to provide some assurance that these mandates were met. The Department of Taxation was well aware of these requirements and was willing and prepared to comply with the service delivery issue. Mr. Marvel asked if there was a way the legislators could track the federal allocation within the Executive Budget. Mrs. Matteucci stated the money was budgeted as a payment from ESD to the Department of Taxation, so the legislators would be able to see the allocation in the ESD account and as well as in the Department of Taxation's budget. Mr. Marvel commented if the money was mixed with General Fund dollars it might get lost in the shuffle. Mrs. Matteucci stated essentially ESD and SIIS were going to be contracting services and would be carefully tracked just like any other contract service payment.
Mr. Humke asked if all of the staff changes would be subject to IFC approval during the interim period between Legislative Sessions. Mrs. Matteucci replied the request within the Appropriations Act stated all movement of appropriations within the department, which would usually include staff changes, would be subject to IFC approval.
Mr. Humke asked how the Fair Labor Standards Act (FLSA) and the new employee classifications would impact the eligibility of employees to join employee associations. Mrs. Matteucci replied this topic had not been discussed. Mrs. Matteucci then gave some background information on the Benzler case which brought about the new employee classification standards. She stated in December 1992 the Attorney General settled the Benzler case for fair labor standards which was brought by employees who could not earn overtime at time and one-half, but were eligible to earn overtime on an hour for hour basis. The Ninth Circuit Court of Appeals found this overtime compensation was in direct violation the FLSA. The Attorney General then strongly advised the executive branch to make good faith efforts to align employees with the FLSA. Mrs. Matteucci then provided FLSA Implementation Alternatives (Exhibit F), which furnished a detailed explanation of the new employee classifications and some general information about the FLSA. Mrs. Matteucci stated she would ask the Attorney General to provide some detailed information regarding the FLSA's impacts on employee association membership.
Mr. Price asked if the Budget Office assisted in writing the position description for a science and technology advisor to the Governor. Mrs. Matteucci stated a group of individuals, which included the first lady, had long advocated the state have a science and technology advisor and they had drafted the position description. She stated the argument for the position was based on the belief that the Governor and the state need to put more emphasis on science and technology. The reason the position was budgeted through the library account was that the library account was neutral territory. Mrs. Matteucci suggested a representative from this group come in and testify before the committee. Mr. Price agreed it would be advantageous to the committee.
DEPARTMENT OF TAXATION - PAGE 205
Perry Comeaux, Executive Director read from prepared testimony (Exhibit G), "...The Department of Taxation currently maintains its central office in Carson City, and two district offices located in Las Vegas and Reno, with staff of 16.5 full time and 8 intermittent positions. Functionally, the Department is divided into four divisions: executive division, compliance division (revenue and audit sections), the division of assessment standards, and the local government finance department. The executive division is made up of the executive director, two deputy executive directors, the department of budget, statistics and agency accounting section, personnel, internal audit, and support services. The compliance division, which is supervised by a deputy executive director, is divided into the revenue and audit sections. The revenue section is in charge of administering and collecting taxes and fees for the agency. Included are cigarette, other tobacco products, motor fuel, jet fuel, liquor, lodging, controlled substance, estate tax, sales and use tax, business tax, and the petroleum products cleanup fee. Within the section are four subsections. The tax examiners are responsible for answering any general public questions regarding sales and use tax and business tax for administering and ensuring compliance with the excise taxes and for registering new accounts. The revenue officers collect delinquent and current sales and business taxes from taxpayers and assist them in any problem areas. Revenue accounting is in charge of depositing all sales, use, business and excise tax revenues and posting the sales and business tax on the computer system. The processing and cancellation subsection sets up and updates new accounts and cancels and refunds bonds on closed accounts. The audit section consists of a chief, three supervising auditors, a principal auditor, and 42 auditors. This section is responsible for conducting a comprehensive audit program to ensure taxpayer compliance. Auditors conduct both in-state and out-of-state audits. The Department currently has four auditors with office locations in the state of California and one auditor each located in the states of New York, Utah and Illinois. The division of assessment standards is managed by a chief and two supervisors. There are three section in this division. The locally assessed section includes appraisers who conduct ratio studies on all counties to ensure the accuracy of the county assessor' appraisals and land factors. The centrally assessed section's appraisers conduct appraisals on utilities, railroads and other multi-county and multi-state located properties, collect and distribute centrally assessed utility property taxes; appraise mining properties, conduct net proceeds of mines assessments, and collect the net proceeds of minerals tax. The drafting section oversees all of the parceling system in the state. The local government division reviews local government budgets, prepares the ad valorem tax rates for certification, advises local governments on budget act compliance and financial reporting matters and review entities' annual audits and plans for the prevention of the recurrence of violations reported therein. Due to the economic recession that began in 1991, cuts totaling $1.6 million have been made in the Department's current biennial budget. These cuts include elimination of 12 positions, all but one from nonrevenue administration areas (executive, assessment standards and local government finance). The exception is one student file clerk. These positions have not been restored in the budget before you. The Executive Budget includes funding for continuation of our remaining staff (161.5) and programs (with the exception of 6 positions and two programs eliminated or reduced in connection with the reorganization plan) plus funding for 12 new audit positions over the biennium (9 in 1994 and 3 in 1995), and data processing development funds for an adequate business tax system. Most of the Departments's responsibilities in the area of local government finance (budget review, tax rate certification, audit report review, etc.) would be eliminated along with the two local government budget analyst positions."
Speaker Dini commented the review committee was established because the local governments were not coping with the enactment of new laws from every legislative session. When new officials were elected to the county, many of them lacked training and many of the counties were not sophisticated enough to follow new legislation which had been passed. Therefore the state provided overview to the counties to ensure compliance with new legislation. Speaker Dini asked if the state was going to get itself back into trouble with local governments unintentionally going astray. Mr. Comeaux replied some risk was involved but the purpose of the recommendation was to lessen the state's oversight responsibility of local government affairs and rely on the local governments to comply with the law. Speaker Dini commented although the local governments were becoming more sophisticated and the training for officials was better, the cost to bail out a county would fall on the state. Speaker Dini commented he did not know if this recommendation would truly save the state money. Speaker Dini asked if there was some other place within the Executive Budget where the commission could be budgeted. Mr. Comeaux stated the local government division was made up of two budget analysts and the reorganization had eliminated both positions. Obviously the only way to restore the service would be to put one or both of those analyst positions back into the Executive Budget. Speaker Dini commented perhaps he needed more of a rationale from the administration as to why this service should be eliminated. The salaries of two budget analyst positions would be saved through reorganization, however many problems may be caused for the 10-12 small counties which are not sophisticated enough to handle such matters. Mr. Comeaux again stated the intent of the recommendation was to lessen state oversight in local government affairs and to rely on the local governments to comply with the law.
Mr. Marvel asked how the proposed shift in responsibility to local governments for tax rate certification would be monitored. Mr. Comeaux explained the law was changed some time ago and the Department of Taxation was responsible for certifying the tax rates, rather than the Tax Commission. Mr. Comeaux explained the current bill draft request recommended local governments be responsible for calculating the proper tax rate, not to exceed the maximum allowable, and the Department of Taxation be responsible for accumulating information for purposes of preparing the red book which outlines property tax rates throughout the state or something equivalent. Mr. Marvel commented when he was on the Tax Commission several of the counties with their combined rates were at the constitutional limit, at that time $5, so the commission had to make adjustments within the counties. Mr. Marvel asked if this could be accomplished internally because the Tax Commission had some tremendous fights trying to make these adjustments. Mr. Comeaux stated these types of situations still arise and in recent years the Department of Taxation has acted as a referee. The local governments would meet to solve these types of problems and he thought internal control was possible. Mr. Marvel asked if the Department of Taxation prescribes a rate for an improvement district or new entities. Mr. Comeaux stated Janice Wright, Deputy Executive Director, was very familiar with the requirements under Chapter 354 and would provide the tax rate information to the counties for new entities. The Department of Taxation would also continue to provide new tax calculations for new entities should this service be necessary. However, extensive review of county budgets and independent auditors reports would not continue.
Mr. Price asked if the analysts prepared a non-compliance report after reviewing local government budgets and what percentage of local governments had areas of non-compliance. Mrs. Wright replied the analysts prepare compliance letters, which could be provided to the committee, and 60-70 percent of local governments' budgets did have areas of non-compliance. Mr. Price commented if areas of non-compliance presently existed with oversight, when review procedures were removed local governments were likely to increase instances of non-compliance.
Ms. Giunchigliani asked if Mr. Comeaux had suggested eliminating the two Local Government Analyst positions. Mr. Comeaux replied when the department was given its initial budget targets everyone was scrambling around trying to find ways to operate with the amount of funds the administration indicated were available. The Department approached the problem both from a revenue standpoint to see if the Department was assessing administrative fees correctly for all the tax collection duties performed for non-General Fund agencies, and from an expenditures standpoint to assure the Department would recommend positions which would not affect the agencies ability to administer the tax laws or collect tax revenues. The recommendation for the elimination of the local government review analysts met these criteria and were recommended to the Budget Office for elimination. Ms. Giunchigliani commented she shared Speaker Dini and Mr. Marvel's concern that this was not an issue of local government interference but rather a service which prevented future expense to the state.
Mr. Comeaux continued reading his prepared testimony, "...The responsibility of the Department to conduct a ratio study, over a two year period, as a test of assessed valuations calculated by the 17 county assessors would be changed to allow completion of the study over a four year period. As a result, four property appraiser positions would be eliminated."
Mrs. Williams asked what impact delaying the ratio study would have on General Fund revenues. Mr. Comeaux indicated the proposed legislation would change the time period of the audit, however it would also change the scope of the audit and would not affect the amount of revenue to the General Fund. Previously audits were done on reappraisal properties only. If the new legislation was passed, the ratio study would include a sample of properties the Department of Taxation felt appropriate. The reason for this recommended change was if the Department only audited reappraisal properties of a county every four years, a second audit on the same property would only occur every 20 years. If the BDR was passed audits would be conducted in four counties each year. The Department of Taxation would use the remaining appraiser staff to select a representative sample from reappraisal, non-reappraisal and separate property classes. Essentially the volume of work would remain the same over a longer period of time. Mrs. William commented the methodology was sound, however, the extended time period concerned her because dramatic changes could occur over a four year period in a high growth state.
Mr. Marvel commented over-assessment or under-assessment, caused by the extension of the ratio study time period, could cause problems for a county. Mr. Comeaux stated the statute required the Department of Taxation to report on the ratio of assessed valuation and the taxable valuation of a property. Further, many of the samples the Department selected were individually outside the 35 percent statutory ratio. The sample from a county may have 20 percent of the properties over-evaluated, 20 percent under-evaluated, and the remaining evaluated correctly. Through averaging the ratio study represented an accurate picture of property evaluation. The Department of Taxation used the results of the study to look for a pattern of over- or under-evaluation and reports its findings to the Tax Commission.
Chairman Arberry asked if the recommendation for the extension of the ratio study could be found in the Final Report issued by KPMG Peat Marwick in October 1992. Mr. Comeaux stated he had not seen the recommendation in KPMG's initial report but he had discussed the ratio study with KPMG. Mr. Sparks replied the recommendations were part of the final consultants report.
Mrs. Williams asked specifically where recommendations for the Local Government Finance Division and the Division of Assessment Standards were located in the Final Report issued by KPMG. Mr. Sparks indicated a few things were incorporated through conversation and were not included within the report. Mrs. Williams asked documentation be provided. Mr. Sparks stated he would provide the documentation to the committee.
Speaker Dini commented if the assessments do not keep up with the inflation factor, the resulting revenue to the state and the state's bond rating could directly affect the General Fund. Mr. Comeaux noted if valuation problems developed and went undetected for a number of years, then it could have an effect on the General Fund.
Mr. Price commented an under-assessment of one of the mega-properties in the Las Vegas area could result in a loss of revenue exceeding all the reorganization savings included in the Executive Budget due to the elimination of state oversight.
Mr. Perkins asked what impact the extension of the ratio study would have on the revenues deposited to the Distributive School Account. Mr. Comeaux stated the ratio study was used to verify whether counties were within the statutory range of 32 to 36 percent. Therefore the extension had no direct impact on revenue collections, since an incorrect valuation would only impact the property owners.
Mr. Comeaux continued to read from prepared testimony, "...The Department, effective October 1, 1993, would assume responsibility for implementing combined business tax audits designed to provide more efficient, less intrusive tax audits of Nevada businesses. Specifically, the department would conduct audits for the Employment Security Department (ESD) and the State Industrial Insurance System (SIIS), as well as the usual sales, business tax and other audits performed currently. The Department would receive 14 new positions as well as related operating, travel, training, and data processing expenditure authority. In addition, for budgetary convenience, other audit staff positions from ESD and SIIS would be transferred to the Department's budget for the period July 1, 1993 through September 30, 1993 at which time the positions would be eliminated."
Chairman Arberry asked what criteria were used in selecting 39 field audit position from SIIS and 20 audit related positions from ESD for transfer to the Department of Taxation. Mr. Comeaux indicated the Budget Office requested information on required staffing levels and other funding needed to provide the combined business tax audits. The Department of Taxation gathered preliminary information from SIIS and ESD in terms of the average timetable for audits and number of audits performed. The request submitted to the Budget Office included a request for 14 new positions, 10 field auditors, two clerks, and 2 supervising auditors. That request was based on the assumption the Department of Taxation would provide a uniform level of audit coverage to ESD and SIIS as was provided by the Department of Taxation currently. This coverage included the sales and business tax. The staffing levels were designed to produce audit coverage of 7-7.5 percent a year (Exhibit H). This could furnish, over a 3 year period, audit coverage of 21-22 percent of the accounts. The audit-related positions the Budget Office identified at SIIS and ESD were simply budgeted to the Department of Taxation effective July 1, 1993. Then all of the transferred positions were scheduled to be eliminated September 30, 1993 and on October 1, 1993 the 14 new positions would be instituted. Therefore no specific positions were identified for transfer to the Department of Taxation.
Mr. Marvel asked with all of the ESD transfers, who would be responsible for the ESD audit-related but non-payroll functions. Mr. Comeaux stated the preliminary information from ESD indicated the auditors did perform non-audit related functions. Ron Sparks, Budget Division, explained the selection process was based on the field audit staff only. As those decisions were being made, the Budget Division discovered SIIS auditors perform other duties which needed to be addressed and the Budget Division was currently seeking a solution to this problem. A preliminary investigation of these extra duties was underway although assignment of duties had not been done.
Ms. Giunchigliani asked if the directors of ESD and SIIS were consulted regarding the transfer of the audit staff. Mr. Sparks replied the directors had been consulted and asked to provide job descriptions. He would provide copies of these descriptions to the committee. Ms. Giunchigliani question how the directors proposed to accomplish the non-audit function formerly provided by the auditors after the transfer. Mr. Sparks asserted the auditors probably should not have been performing the non-audit related tasks, however some of the 45 auditors displaced by the reorganization could be reassigned to pick up the non-audit duties from these two agencies. Mr. Sparks stated it was not the intent of reorganization to eliminate jobs, rather the goal was for a more efficient use of man-hours. Ms. Giunchigliani commented directors should be commended, not penalized, for working out agreements with their employees to take on additional duties thereby avoiding the need to hire additional personnel.
Ms. Giunchigliani asked if auditors might need additional training since many of them were performing non-audit functions. Mr. Comeaux indicated the Department of Taxation attempted to hire the best person available for an audit position, and he was not aware of the qualifications of the other agencies' auditors.
Ms. Giunchigliani asked when the audit positions were terminated, September 30, 1993, would ESD and SIIS auditors have the right to "bump" or replace auditors currently working at the Department of Taxation. Mr. Comeaux stated it was possible under the existing law.
Ms. Giunchigliani questioned if the department discovered the difference between a payroll audit and a performance audit. Mr. Comeaux stated he had consulted with the other agencies to define the kind of tax auditing ESD and SIIS performed. The Department also understood ESD and SIIS were concerned with proper employee classification and payroll auditing. Mr. Comeaux stated he had not been informed of any other types of auditing done by the agencies.
Ms. Giunchigliani asked after the audit positions were transferred to the Department of Taxation, what would be done to cover the work load loss in the non-payroll audit functions for the other agencies. Mr. Comeaux stated he assumed if the combined tax audit team was to have any validity, the team would assume the complete audit responsibility of the agencies. If not the state would lose the main advantages of this combined audit team which were efficiency and reduced disruption to businesses.
Ms. Giunchigliani commented on the impact a bill draft request (BDR) for the consolidation of fee collection forms for the business tax would have on the Department of Taxation. Ms. Giunchigliani commented the BDR lends itself to the team audit approach, but the problem arises when the state attempts efficiencies at the expense of services thereby diluting the intent of the reorganization.
Ms. Giunchigliani asked the budget division to provide a breakdown of how the reorganization savings were calculated in SIIS and ESD and whether those savings were derived from federal grants or the
General Fund.
Ms. Giunchigliani inquired if there were specific restrictions on the federal dollars allocated to ESD and would those restrictions be complied with by the Department of Taxation. Mr. Comeaux stated unless the reports were strictly audit related, his department would not be responsible for producing the reports.
Mrs. Williams asked where the auditors would be located during the three-month overlap before the proposed transfer is completed. Mr. Comeaux explained the positions would continue to function in the same agency and be paid through the Department of Taxation's budget account. Mrs. Williams commented in essence this was three-months notice for termination. Mr. Comeaux stated the positions were vital to the close coordination and transfer of duties between the three agencies involved. Further the administration had a plan similar to the plan for the layoffs as a result of the budget cuts. On October 1, 1993 the positions would be eliminated although these employees would have priority status when applying for other state positions.
Mr. Heller asked since the Governor's reorganization plan provided for a State Demographer in the Department of Administration, and the current Demographer was located within the University system, where and how many state demographers would the state have under reorganization. Rochelle Summers, Budget Division, indicated to consolidate all of the projections intended to come out of the Department of Administration, it was considered essential to have direct access to the State Demographer. Since a final decision to move the position had not been made, she would provide information to the committee at a later date. Mr. Heller inquired if the Budget Office was currently denied access to the information provided by the State Demographer. Mrs. Summers stated the administration did not have full-time access to these services.
Mr. Perkins asked since it appeared that the Governor's recommendation for creating tax audit teams would result in the loss of 45 positions, which was a net loss of 1800 man-hours per week, how would this loss impact audit services. Mr. Comeaux stated some of the 45 position were involved in other duties aside from strict auditing and the Budget Office planned on addressing this issue. However in terms of the audit coverage the 14 new positions were expected to provide the same level of service, 7-7.5 percent audit coverage currently provided by the Department of Taxation, to ESD and SIIS. Since the audit recovery rate at one of the agencies was high and the other low, the Department of Taxation planned to evaluate the selection criteria of both agencies and develop standards which would maintain the same audit recovery rate with fewer audits.
Mr. Humke asked if the Department of Taxation would meet the federal mandates for the use of federal funds since ESD auditors would no longer be performing these non-audit functions. Mr. Comeaux stated he had received a letter addressed to Mrs. Matteucci from the Department of Labor which indicated which specific criteria had to be met to stay in compliance with federal mandates. Mr. Comeaux believed his department would be able to stay in compliance with these mandates. However, the letter cited OMB circulars and a number of other publications which he had not received, therefore he was not prepared to directly assure the committee the Department of Taxation was completely prepared to meet all mandates. He could assure the committee it was the intention of the Department to meet these mandates. Mr. Comeaux stated this use of federal funds was currently used in other states which were not having any trouble staying in compliance with the federal mandates.
Mr. Humke asked if the state had completed payment for the KPMG study. Mrs. Summers indicated the contract was expanded at the end of December by the Board of Examiners, but their services to the state were terminated. Mr. Humke asked what amount was paid to KPMG. Mr. Stevens, Fiscal Analyst, stated the amount of payment was $135,000, a $50,000 contract for the study paid for through private funds and $85,000 for an extended contract with the Budget Division.
Mr. Comeaux read from prepared testimony, "...The responsibility for administration of the Insurance Premium Tax would be transferred to the Department of Taxation. The Department would receive three positions and additional operating equipment and data processing funds to accomplish the task. The transfer would be effective July 1, 1993."
Ms. Tiffany asked about the status of the business tax data processing system; who was involved in designing the system, the cost of the system, and what types of statistical reports were available for analysis of the revenue collected. Mr. Comeaux indicated the contract was going to be awarded within the week. The amount of the appropriation, $500,000, would be used to purchase a customized business and sales tax software system to be used on the state's mainframe computer. Mr. Comeaux indicated a highly detailed software specifications study had been completed in cooperation with the Department of Data Processing and State Purchasing and was included in the Request for Proposal. However, the current software program used by the Department of Taxation verified the accuracy of the collections. The time period for the customization would be four to five months because the applications software was written and in use on another system.
Ms. Tiffany inquired about the $200,000 appropriation in the maintenance section of the budget. Mr. Comeaux indicated the appropriation was an estimate, provided by the Department of Data Processing, of the service charges to operate the collection system on an annual basis.
Ms. Tiffany asked what types of statistical reports were available for analysis of the revenue collected and would the system assist the agency in determining if all employers had paid the correct amount of business tax. Mr. Comeaux indicated these functions were currently included in the sales tax accounting system. The new software would extract accounts receivable and delinquency information from the existing sales tax system so the Department could make more effective and timely collections. Ms. Tiffany asked if the current data collection system would be removed. Mr. Comeaux stated the original plan was for the automated collection system to include an interface which would extract information from the existing sales tax system. However the Department of Taxation would still need a system with a tax return processor. One of the vendors indicated they could provide an integrated revenue system which would replace the existing sales and business tax systems, and the new system would not require an interface with the automated collection system. Mr. Comeaux stated the Department of Taxation was still evaluating the qualifications of all of the vendors, and this particular vendor did not have considerable experience.
Mr. Spitler stated it was his recollection the $500,000 appropriation was for the entire system, both hardware and software. Mr. Comeaux stated the appropriation was not for an overall accounting system, it was for an automated tax collection system.
Mr. Spitler asked if the system was not functional at this time, was the $200,000 maintenance appropriation necessary for each year of the biennium. Mr. Comeaux stated the vendors indicated they could have the system up and running by July 1, 1993, and the department would need the full amount of the appropriation. Mr. Spitler requested Mr. Comeaux provide a breakdown of the maintenance costs associated with the system. Mr. Comeaux indicated he would provide the information he had received from the Department of Data Processing about the maintenance contract.
Mr. Spitler inquired if the additional sum of money provided for the business license was an integrated or stand-alone system. Mr. Comeaux indicated the proposed automated tax collection system was a stand-alone system. If the Department of Taxation was able to use the vendor with the integrated revenue system, the Department of Taxation would end up with one revenue system which would be used to account for the sales and use tax and the business tax. This integrated revenue system would also lend itself to easily and economically add other taxes as necessary. The department was appropriated approximately $200,000 for the business tax and approximately $199,000 was to be used to develop the accounting system. The estimates were made on a certain set of assumptions as to how the business tax was going to work. When the Department of Data Processing started to develop a complete tax accounting system, which would include a tax return processor, statistical analysis, and billing function, they discovered the appropriation was substantially low. Therefore the Department of Data Processing developed a system to account for the collection of taxes and a modest amount of additional information. The system was not a complete tax accounting system and did not contain a tax return processor. Mr. Comeaux indicated staff had detailed information on the system.
Mr. Spitler asked what type of statistical reports would be available from the new business license system. Mr. Comeaux indicated at the present time the department could get certain basic reports. When the business license system was running, the reports would be similar to those produced by the sales tax system currently. The completed business license system would have a tax return processor so the computer would verify the tax calculation. Currently the accounting clerks were completing the calculation manually which could lead to undetected statistical errors.
Mr. Spitler asked for the projected cost of the final system. Mr. Comeaux stated $431,000 for the development of the system.
Ms. Giunchigliani questioned if computer specifications for insurance premium tax collection needed to be added to the RFP since the Department of Taxation would now be performing this collection. Mr. Comeaux indicated the development of the RFP was completed before the proposed reorganization transfer of the insurance premium tax collection. However, it was possible to amend the RFP to include all of the needed tax collection functions.
Ms. Giunchigliani asked how bill draft requests on the business license tax might impact the final RFP to the vendor. Mr. Comeaux indicated the potential changes from the proposed BDR had been discussed with the vendor, and these proposed changes could simplify the RFP considerably.
Ms. Giunchigliani stated it was difficult to understand why the Executive Director's salary resulted in a reorganization savings since the net effect of the two salaries was an increase of $8,829. Mrs. Summers stated the reorganization savings calculations were explained in Exhibit I.
Mr. Comeaux read from prepared testimony, "...The other significant change in the Executive Budget is the source of funding. The General Fund appropriation has been reduced from the FY 93 level of $7,383,720 to $5,850,066 for FY 94, and $4,746,158 for FY 95. This is accomplished through the creation of new administrative fees to be charged for our valuation, billing, collection and distribution functions in connection with centrally assessed property taxes and the net proceeds of Minerals Tax, and by transfers from ESD and SIIS relating to the combined business tax audit program."
Ms. Giunchigliani questioned what impact the new administrative fees would have on the counties. She noted the maintenance section of the agency's budget provides for nine new audit positions in FY 94 and three additional new audit positions in FY 95. The budget narrative states these positions are to be funded by the Net Proceeds of Minerals administrative fees and centrally assessed property administrative fees. She asked what effect the new administrative fees would have on the Counties. Mr. Comeaux stated this was a direct reduction in the amount of revenue distributed to the Counties in connection with the Centrally Assessed Property Taxes and Net Proceeds of Minerals Taxes. The Department of Taxation had for several years been valuing the properties, generating the tax bills, collecting tax, and distributing taxes back to the local governments without charge. The administrative fee would be calculated on an allocation of the cost to collect basis (Exhibit G). Ms. Giunchigliani asked the committee be provided with a schedule of the administrative fees contained in the this budget and the justifications for the recommended levels, as well as who pays these fees.
Mr. Marvel inquired whether there was a direct relation between the 12 new audit positions and the administrative fees. Mr. Comeaux replied there was no direct relation. The budget office showed it in this manner so new revenues could support new positions. The cost to collect for the Centrally Assessed Property Tax would be $281,000 in FY 94 and $320,000 in FY 95, and for the Net Proceeds from Minerals Tax would be $197,000 in FY 94 and $233,000 in FY 95. Mr. Marvel commented all of these proceeds currently go to the counties, and he was concerned about the impact the additional fees would have on the Counties.
Mr. Marvel asked if any benefit was derived from joining the Multi-State Compact. Mr. Comeaux replied he was gathering information at the present time.
SENIOR CITIZENS' PROPERTY TAX REBATE - PAGE 212
Mr. Comeaux stated the amount recommended by the Governor, $2,479,785 for each year of the biennium, was equal to the actual expenditures in FY 92. This allocation would provide funding, assuming no increase in the number of applicants, at a level of approximately 80 percent of the amount senior citizens were statutorily entitled. If the number of applicants increased or decreased the percentage would fluctuate according to the trend.
Ms. Giunchigliani inquired whether this allocation included the "Rent-to-Rebate" program. Mr. Comeaux stated the program did provide 80 percent of the statutory entitlement for rebates in FY 92. Ms. Giunchigliani asked why only 80 percent of the statutory entitlement was rebated. Mr. Comeaux explained a 26 percent increase in applicants in the last biennium caused the statutory entitlement to be prorated.
Ms. Giunchigliani asked what the projected increase in applicants was for the next biennium. Mr. Comeaux stated the percentage increase was projected at an 8.5 percent growth rate over the next biennium. The resulting average refund would drop from $298 in FY 93 to $225 in FY 94 for homeowners and $188 in FY 93 to $138 in FY 94 for renters.
Mrs. Williams asked if the decrease in the average rebate shown in the projections for FY 94 and FY 95 was a direct result of an increased caseload. Mr. Comeaux stated assuming the level of funding recommended by the Governor was the only steady source of funding and the number of applicants increased, then the amount of rebate per applicant would decrease. Mrs. William commented the percentage rebate was set by statute. Mr. Comeaux stated the statute declared if sufficient funds were not available, the rebate must be prorated.
Mrs. Williams asked if the rebate was prorated before or after the budget cuts. Mr. Comeaux asserted all appropriated funding was used for refunds. These funds were prorated because the number of applicants increased over the amounts originally projected. Although the rebate was prorated, the amount of the rebate was larger than the amount the seniors had received two years before.
Ms. Giunchigliani asked the Department of Taxation develop a minimum percentage rebate and submit the findings to the committee.
PUBLIC EMPLOYEES RETIREMENT - 1647
Wilbur Keating, Executive Officer, Public Employees Retirement System (PERS), introduced George Pyne, Operations Officer, and explained Mr. Pyne would be giving the budget presentation.
Mr. Pyne stated the amended budget maintained the same level of funding as actual expenditures in FY 91-93 with a few exceptions. These exceptions were: (1) an increase in the salary category from $1.5 million in FY 92 to $1.7 million in FY 94-95 as a result of merit increases and an occupational study conducted by the Department of Personnel; (2) operations and postage which increased because of a 6 percent per year increase in the number of benefit recipients; and (3) contract services which increased due to the escalated costs of actuarial, legal, and external audit services.
Chairman Arberry asked how many years were left until PERS attained the 40 year plan to fully fund actuarial liabilities. Mr. Pyne indicated the plan was still on course and would be fully funded in the year 2024.
Ms. Giunchigliani stated for the record although she was a public employee, she was on an unpaid six month leave of absence, was not contributing to the PERS system and would participate in the debate.
Ms. Giunchigliani asked if an early retirement incentive would have any effect on the projected date for the full funding of the actuarial liabilities. Mr. Keating responded early retirements were up in the near-term, but actuarial funding was set for long-range trends and would not be impacted. Further, PERS was well aware of these trends as they were monitored in yearly actuarial evaluations.
Ms. Giunchigliani asked what effect a fluctuation in the amount of employer contribution into the PERS system would have over the long term. Mr. Keating stated legislation was being introduced this session to stabilize the amount of employer contributions. This legislation, if passed, would allow for a .5 percentage point range of fluctuation before any adjustments would be made to the contribution rates.
Mr. Heller asked since the return on investment was 10.2 percent in FY 92, what were the projections for FY 93. Mr. Keating stated projections were not made on an annual basis, rather they were made over 32 years. The yearly rates as projected were anticipated to be 3 percentage points over the rate of inflation.
Mr. Heller inquired about the average payout per month per retiree. Mr. Pyne estimated $800 to $1000 per month and stated the exact amounts were listed in the annual report.
Mr. Heller asked what the current unfunded liability was for the state. Mr. Keating stated the liability was approximately $1 billion, which reflect the system being about 70 percent funded. The contribution rate structure would amortize the remaining 30 percent over the next 32 years.
Mrs. Chowning asked if the budget sustained the Las Vegas PERS office. Mr. Keating stated it was funded by the budget and would remain open.
Mr. Heller queried how the actuarial liabilities of the state measured against public employee retirement systems nationally. Mr. Keating stated the PERS system was right on track. The retirement systems at risk nationally were threatened because the states used the retirement fund to supplement other programs within the state.
EMPLOYMENT SECURITY - PAGE 1074
Stan Jones, Director of Employment Security Department (ESD), passed out some background information (Exhibits J and K). Mr. Jones introduced Martin Ramirez, Principal Accountant, who then gave a brief overview of the budget. The base budget was funded in accordance with the agency's requests. However, modifications were made to the budget to reflect the Governor's proposed reorganization. The modifications were in the transfer of the data processing function of ESD to the Department of Data Processing, and the audit functions of ESD to the Department of Taxation. These major changes were reflected in the personnel expenses category which was reduced in three areas: (1) vacancy savings; (2) audit staff salary savings; (3) data processing staff salary savings. The data processing line item had been augmented to pay for the contract services from the Department of Data Processing. A new item had been created, Transfer to Taxation, to allow ESD to pay for the auditing from the Department of Taxation. The maintenance items increased due to inflation. Also included in the maintenance category were five approved positions to meet the demands of an increasing caseload. Under Enhancements there were increases in contractual services for security, maintenance, equipment and postage. There was also an allocation of $671,000 for data processing equipment enhancements.
EMPLOYMENT SECURITY SPECIAL FUND - PAGE 1081
Mr. Ramirez explained the ESD Special Fund was referred to as the Penalty and Interest Account. Mr. Ramirez stated this account was used to fund expenditures not covered by federal grants such as buildings, maintenance, and repair. Enhancement 700 reflected funding for a new building and this funding was balanced forward into reserve for future acquisitions. The maintenance item $116,400 consisted entirely of required building alterations to comply with the Americans with Disabilities Act. Enhancement 710 of the budget, recommended at approximately $422,000, included items which were removed from the base budget and recategorized as enhancements. Also included in this section were miscellaneous building repairs: (1) roof repairs in Las Vegas and Reno, $155,000; (2) Reno Industrial Office parking lot and office space expansion; and (3) Elko needed new stairs.
CLAIMANT EMPLOYMENT FUND - PAGE 1065
Mr. Ramirez stated the budget was funded exactly as the agency had requested with the exception of the personnel category which showed a vacancy savings and one position dedicated to reorganization savings. Caseload personnel expenses were increased for two new positions and associated costs for increased unemployment services caseload. Client services expenses were being increased to provided for additional on-the-job training and classroom training for local office clientele. The increase in personnel expenses was due to an occupational study performed by Ernst and Young which suggested salary and fringe benefits increases. Enhancements to Data Processing would be used to test equipment and software. An increase in administrative overhead is an allocation of ESD's indirect costs to those agencies who derive benefit from ESD programs.
Ms. Giunchigliani asked if the transfer of the auditors would impact ESD's ability to comply with federal fund mandates. Mr. Jones read an excerpt from the federal restriction guidelines: "... and cost may be charged to the federal grant only if to the extent that benefits are received and cost must be necessary and reasonable for the proper and efficient administration of the grant." Mr. Jones stated ESD must comply with federal cost allocation requirements and only pay for work required by the U.S. Department of Labor. Mr. Jones stated under the original reorganization cost allocation arrangement, the money was to be split evenly between the Department of Taxation, SIIS, and ESD. This type of cost allocation would not comply with the federal requirement.
Ms. Giunchigliani asked Mr. Sparks how the administrative cost would be allocated since the federal requirements do not allow for equal division of the cost as recommended in the Executive Budget. Mr. Sparks explained KPMG had looked into the matter and the Department of Labor had indicated there would be no problems with non-compliance. Ms. Giunchigliani asked the Budget Office to provide documentation stating there would be no mingling of federal funds with General Fund dollars. Mr. Sparks stated he would provide documentation in support of these claims to the committee.
Ms. Giunchigliani asked how the non-audit functions of the ESD auditors would be completed after the transfer of this personnel to the Department of Taxation. Mr. Jones asserted ESD would request additional positions to comply with the federal standards. The precise number of position required was not known at this time. Ms. Giunchigliani asked Mr. Jones to prepare a request for the number of positions required and which duties would be transferred to the Department of Taxation. Mr. Jones stated he felt the reorganization could work if these questions were answered.
There being no further business before the committee Chairman Arberry adjourned the meeting at 11:27 a.m.
RESPECTFULLY SUBMITTED:
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Courtnay Berg
Committee Secretary
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Assembly Committee on Ways and Means
February 3, 1993
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