MINUTES OF THE
ASSEMBLY COMMITTEE ON WAYS AND MEANS
Sixty-seventh Session
April 23, 1993
The Assembly Committee on Ways and Means was called to order by Chairman Morse Arberry, Jr., at 7:52 a.m., on Friday, April 23, 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
PURCHASING - PAGE 236
Mr. Tom Tatro, Acting Administrator, Purchasing Division, reported the Senate Finance Committee had appointed a subcommittee to review this budget. The subcommittee requested the division to prepare a new budget based on a number of concerns raised by Mr. Terry Sullivan, Director, Department of General Services. As a result, the division revised the budget to incorporate the best of the current purchasing system and the best of the Governor's recommended changes. The revised budget left every major component of the division's operations in place while reducing the number of staff required to perform purchasing services for the state agencies. Mr. Tatro distributed copies of the revised purchasing budget (Exhibit C).
Mr. Tatro noted revenue would depend on the division's ability to provide services economically and competitively. The major revenue component was the purchasing assessments developed by the Budget Division and included in each agency's budget accounts. The purchasing assessment revenue would fund those activities which agencies would utilize whether or not they placed orders for goods through the Purchasing Division, including fixed asset inventory, excess property disposal and service contracts. An acquisition charge would also be assessed against state agencies as well as political subdivisions. The rate charged to state agencies would be reduced from the current 5 percent to 2 percent. The charge would apply only to the actual purchase transaction. The bidding process would be a service performed by purchasing without charge to the agency. Agencies would have the option to use or not use the services of the purchasing division on a transaction-by-transaction basis. The Purchasing Division believed its automated system represented the most economical way to handle purchasing transactions. The rate charged to political subdivisions would remain 5 percent in order to reimburse the division for the cost of obtaining purchasing contracts as well as to support the actual purchasing transactions.
Mr. Tatro indicated future vendor contracts would require vendors to rebate up to 5 percent back to the purchasing division to support purchasing operations.
Mr. Tatro stated personnel expenses represented the primary expense item. The number of positions would be reduced from 36.5 to 17 rather than to 11 as recommended by the Governor. The revised budget also included funding for up to 2.5 positions to support the Food Distribution Program.
Mr. Tatro noted significant changes would be made to the warehouse program. Bids had been let for a contract for office products whereby products would be purchased by agencies directly from the contractor. Products would then be delivered by the contractor directly to the agency the following day. The division would attempt to secure similar contracts for the procurement of other types of goods currently being stored in the Purchasing warehouse. Only a limited number of products, such as xerographic paper and computer forms, would remain in the warehouse system. The Purchasing Division would pay the Food Distribution Program to distribute those products to agencies rather than co-manage the warehouse facility with the Food Distribution Program.
Mr. Tatro explained agencies would still be required to use the services of the Purchasing Division to conduct the bidding process to select a vendor for all purchases exceeding $5,000. The revised budget did not envision increasing the direct purchase authorization to $10,000. Rather, the Purchasing Division would meet with agency heads to jointly determine direct purchase authorization requirements for the agency.
Mr. Tatro said the Purchasing Division would continue with its current order-processing policy until contracts were rebid or renegotiated. When new contracts were in place, agencies could choose whether to handle their own purchasing transactions or to utilize the services of the Purchasing Division.
Mr. Tatro noted one of the Purchasing Division's objections to the Governor's recommendations was it would be unable to track agency purchases if the transactions did not go through the division. The revised budget proposed development of a purchasing form which would include standard terms and conditions for the agency's protection. A copy of the form would be transmitted to the Purchasing Division for tracking purposes and inventory control. This practice would improve the division's ability to maintain a fixed asset inventory.
Mr. Tatro explained the revenue items in the revised budget were significantly different from those in the Executive Budget. Purchase order and warehouse administrative charges were added back to the budget. Rebates was a new revenue item.
Chairman Arberry asked the percentage and level of the purchase order assessment. Mr. Tatro replied the acquisition charge for ordering items through the Purchasing Division would be 5 percent, with a maximum charge of $800, for political subdivisions. State agencies would be charged 2 percent. The reason for the difference was the purchasing assessment was built into the agency budgets.
Mr. Tatro stated salary expenses were greater than recommended by the Governor but less than the original agency request. The revised budget covered 17 positions and included the transfer of 2.5 positions to the Food Distribution Program and 1 position to the Division of Administrative Services. He noted approximately four or five layoffs would occur as a result of the new budget. As many as 20 layoffs would have occurred under the Governor's proposal.
Mr. Price asked whether the $5,000 limit on authority to purchase was a cumulative total or for individual items. Mr. Tatro said there was no specific definition of aggregate purchase level. He noted the State Administrative Manual addressed the issue of circumventing the direct purchase authorization limit by dividing purchases or spreading transactions over a period of several days. Such a practice would not be in conformance with state policy. He said the purchasing procedures proposed by the Purchasing Division would increase the division's ability to detect the occurrence of questionable purchasing activity.
Mr. Marvel added the agencies were also constrained by budget limitations.
Chairman Arberry asked the difference between the current acquisition charge and the new assessment proposed by the Purchasing Division. Mr. Tatro replied the current acquisition charge was 5 percent, to a maximum amount of $800, on each purchasing transaction. Under the new proposal each agency budget included a purchasing assessment based on historical and projected purchasing activity.
Chairman Arberry questioned if the purchasing assessment would be paid regardless of whether or not the agency actually made any purchases through the Purchasing Division. Mr. P. Forrest "Woody" Thorne, Deputy Budget Administrator, Budget Division, answered the purchasing assessments were based on the budgeted amounts for equipment and operating supplies for the various agencies. If an agency ordered no equipment or operating supplies, the assessment would be adjusted in the following biennium to reflect the shift in the purchasing pattern.
Chairman Arberry inquired why the agencies would be assessed an additional charge when they placed purchase orders. Mr. Thorne stated the 2 percent assessment would only apply to purchase orders processed by the Purchasing Division and was intended to cover the cost of the services provided by Purchasing.
Chairman Arberry said it appeared it would be in the agencies' best interest not to deal with the Purchasing Division in order to save the cost of the 2 percent assessment. Mr. Tatro responded the 2 percent assessment represented a reduced charge so state agencies would not be paying twice for bidding services. Agencies could choose to use or not use the purchase order system and incur the 2 percent acquisition charge.
Chairman Arberry asked what dollar amount represented the ceiling on the agencies' ability not to use the services of the Purchasing Division. Mr. Tatro replied there was no dollar limit on the purchasing transaction with the vendor. Agencies would be required to use the Purchasing Division to conduct the bidding process to select the vendor for purchases exceeding $5,000.
Chairman Arberry asked what controls on spending were built into the proposed new purchasing procedures. Mr. Tatro answered the Purchasing Division would establish open-term contracts on products and agencies would be required to purchase the products for which open-term contracts were in place. Additionally, purchases would be controlled by the limited funds available.
Mrs. Evans asked how the purchasing assessment was calculated. Mr. Thorne replied the assessment was based on the amount which would be required in the Purchasing Division budget to support services to be provided. Agencies were assigned responsibility for a percentage of that amount on the basis of their relative budget allocations for equipment and operating supplies expenditures.
Ms. Tiffany indicated the Controller's Office had expressed concern about the Purchasing Division's data processing system. She asked Mr. Tatro to address those concerns. Mr. Tatro stated the original reorganization plan called for discontinuing the Purchasing Division's purchase order processing system on October 1, 1993. The original plan had been revised to allow the Purchasing Division to continue to operate its system. He suggested the Purchasing Division would be better able to track fixed asset inventory under the revised plan since agencies would be required to supply the Purchasing Division with copies of all orders placed independently. Insofar as controls over manual transactions were concerned, the Purchasing Division had attempted to calculate a price point whereby it could provide services to the agencies at a lower cost than they would pay for handling purchasing transactions internally absent their own automated transaction system. As a result, the increased number of manual transactions would be less than anticipated by the Controller's Office.
Ms. Tiffany noted even if the order processing system was not discontinued, it was still an inadequate system. Mr. Tatro agreed. He explained the revised proposal included setting aside .5 percent of the 2 percent assessment to reinvest in data processing development to improve future capabilities.
Mrs. Williams expressed concern about the $5,000 purchasing limit. She suggested some control could be established by setting a threshold number of aggregate purchases. Mr. Tatro replied the division was not proposing any statutory changes. He noted the State Administrative Manual addressed attempts to circumvent direct purchase authorization limits. Mrs. Williams questioned whether the number of purchases could be limited by regulation.
Mr. Thorne noted there was a potential for abuse within the system. He pointed out budget limitations represented a form of control on spending. He said one of the key elements of the Governor's reorganization plan was to develop internal controls within each agency.
Mr. Dini stated the larger agencies, such as the Department of Transportation, needed to retain some purchasing flexibility and he expressed concern about applying controls which might be too stringent.
Mr. Spitler asked which three agencies were the major Purchasing Division customers. Mr. Tatro said the Department of Transportation, Department of Prisons and Department of Human Resources were the largest customers.
Mr. Spitler asked how much the Department of Transportation was assessed. Mr. Tatro said he was unsure of the number. He estimated it to be between $300,000 and $400,000 per year. He noted the Department of Transportation had indicated it was satisfied with the services provided by the Purchasing Division. The Department of Transportation would prefer to continue to use the Purchasing Division rather than to routinely deal directly with vendors.
Mr. Spitler inquired why the purchasing system was being changed. Mr. Tatro replied KPMG Peat Marwick had recommended major changes. Mr. Thorne explained the interviews conducted by KPMG Peat Marwick with state agencies revealed major complaints with purchasing, including the length of time it took to deliver orders and availability of products. He said the revised proposal addressed the potential problem areas which the Governor's proposal responded to as well as control concerns and allowed the Purchasing Division to offer additional services on a competitive basis to the agencies.
Mr. Spitler questioned what would happen if no changes were made to the purchasing system. Mr. Thorne replied the acquisition charge on every purchase would have to be increased.
Mr. Spitler asked how much the acquisition charge would have to be increased. Mr. Tatro was unable to answer the question.
Mr. Spitler said it appeared the problems with the purchasing system were administrative procedures which could be changed. He questioned how the need to change the system was determined without knowledge of how much money the current system would cost versus the cost of the new system.
Mr. Tatro stated the agency's original budget request was based on continuing current purchasing practices. The Executive Budget proposed radical changes to the system. The revised budget was developed to conform to the parameters of the agency concerns. There was no cost comparison between the current system and the revised system.
Mr. Spitler asked if the state agencies would be saving money if the revised system was adopted. Mr. Tatro replied the agencies would save money from the new system because the overall cost of operating the Purchasing Division would be reduced. Warehouse items would be replaced by contract items of a comparable value. He explained products currently distributed from the state warehouse were marked up 15 percent. The cost of dealing with private sector vendors would be comparable.
Mr. Spitler asked if there had been a cost analysis of the impact to state agencies if the purchasing system was left unchanged. Mr. Tatro replied there had been no analysis regarding which agencies would receive the greatest benefit but the Purchasing Division could maintain basic cost levels and reduce its operating expenses. As a result, the cost of providing purchasing services to state government would be reduced. He pointed out if more revenue was collected than was needed to support expenditures, the acquisition charge rate would be reduced. Further, agencies could choose whether or not to pay the acquisition charge and, presumably, would do so only if it proved economical.
Mr. Spitler asked how much the acquisition charge was in the original agency request. Mr. Tatro responded the original agency request was based on a 5 percent acquisition charge. The amount was reduced to 4.5 percent in October 1992.
Mr. Spitler noted the major purchasing customers received revenue from the Highway Fund. He questioned whether the result of the revised purchasing system could be that Highway Fund accounts would be subsidizing General Fund accounts. Mr. Tatro said that scenario was more likely under the current system. Mr. Spitler asked if the assessment to the Highway Fund accounts would decrease under the new program. Mr. Tatro responded affirmatively. Mr. Spitler asked how much the decrease would be. Mr. Tatro said he did not have an answer to the question.
Mr. Marvel asked if federally-funded agencies were subsidizing the General Fund. Mr. Tatro replied the Department of Transportation would probably say that was true. He explained the acquisition charge was assessed on a uniform basis but since the volume of purchasing for projects supported by the Highway Fund was so great, the 5 percent charge represented a strong revenue base for the Purchasing Division.
Mr. Marvel noted the warehouse operation represented a significant portion of purchasing operations. He questioned if the Purchasing Division had made a final determination whether to proceed with the Las Vegas warehouse. Mr. Tatro said construction of the Las Vegas warehouse facility had been discontinued. The Purchasing Division was not considering closing the Las Vegas warehouse operation. It would continue at a reduced staffing level and would continue to provide food distribution, surplus property, excess property and purchasing services.
Mr. Marvel asked how the division warehoused commodity foods. Mr. Tatro said commodity foods were warehoused in contract cold storage facilities in Las Vegas. He explained there was no freezer facility in the Las Vegas warehouse. He noted the Clark County School District was developing freezer facilities and had offered to provide cold storage facilities to the Food Distribution Program at a reduced rate.
Mr. Marvel asked if the Purchasing Division had originally contemplated closing the Las Vegas warehouse altogether. Mr. Tatro responded the Governor's reorganization plan contemplated closing the Las Vegas warehouse. The Purchasing Division believed there were several reasons to keep the facility open and the revised budget proposed doing so. Mr. Marvel asked if the Budget Division had agreed to keep the warehouse open. Mr. Tatro answered affirmatively.
Chairman Arberry pointed out the Governor's reorganization plan envisioned a $1.25 million savings in the Purchasing Division budget. He questioned whether the savings was contemplated under the revised proposal. Mr. Tatro responded the $1.25 million savings represented the dissolution of the purchasing fund. Under the revised proposal, the reorganization bill would propose elimination of the purchasing fund on June 30, 1995. Mr. Tatro explained if the Purchasing Division was as effective as it expected to be in providing purchasing services over the 1993-95 biennium, it would request the 1995 Legislature not to revert the fund. Mr. Thorne added the Budget Division and the Purchasing Division agreed it might be possible to reduce the purchasing fund substantially during the 1995 legislative session. Mr. Tatro explained the purchasing fund supported purchasing transactions and maintenance of the $500,000 warehouse inventory and financed outstanding accounts receivable.
Chairman Arberry asked whether the $1.25 million savings was in the budget. Mr. Thorne stated the $1.25 million was identified in the Executive Budget as a reversion at the end of fiscal year 1993-94. The revised proposal recommended moving the reversion in the Executive Budget to the end of fiscal year 1994-95.
Chairman Arberry asked for a report of the recent Purchasing Division audit.
Mr. Gary Crews, Legislative Auditor, distributed copies of the Purchasing Division Audit Report (Exhibit D, a copy of which is on file in the Fiscal Division). He introduced Mr. Rick Neal, auditor in charge of the Purchasing Division audit. He explained no major shift in purchasing function was contemplated at the time the audit was conducted. Therefore, the audit did not relate specifically to the Governor's reorganization plan.
Mr. Neal stated the objectives of the audit were to determine if the Purchasing Division performed a thorough analysis before deciding to build the new warehouse in Las Vegas, to determine if the division had effective controls over the procurement process to ensure the purchasing of goods at the lowest cost and to determine if the division had an effective management information system to assist in the decision-making process related to the purchasing function. The audit concluded the division should better identify and evaluate all costs associated with the purchasing function in order to identify the most economical and efficient methods to provide goods and services to state agencies. Additionally, the division should improve supervision of the purchasing process to ensure goods are obtained at the lowest cost. The audit also suggested the addition of key elements to the division's management information system could enhance decision making related to the purchasing process.
Mr. Neal reported the audit revealed the Purchasing Division had decided to cancel the Las Vegas warehouse project after $220,000 had been spent by the Public Works Board for planning. The decision to cancel the project was made after the Purchasing Division performed an analysis of the cost to operate the warehouse. Mr. Crews explained adequate cost develop information was not prepared prior to embarking on the project. The Purchasing Division performed a cost analysis during the course of the audit and consequently stopped the project.
Mr. Neal continued his report. He said the audit also found the buyers controlled the $50 million procurement process without sufficient supervisory review to ensure compliance with statutes and division policies and the division's management information system lacked several key elements which could assist in acquiring goods and services in the most economical manner.
Mr. Neal stated the audit report made five recommendations, all of which were accepted by the Purchasing Division.
Chairman Arberry asked Mr. Crews for his comments regarding purchasing controls contained within the revised proposal. Mr. Crews indicated the audit staff had reviewed the revised proposal. He expressed concern about the proliferation of purchasing control. Currently, although the Purchasing Division system of control required enhancement, control was centralized in one agency. The Audit Division had reviewed the internal control systems in other state agencies and found them to be extremely lacking. Over half of the agencies had very inadequate internal control systems.
Chairman Arberry inquired whether the Audit Division had made any recommendations about the revised proposal. Mr. Crews said the Audit Division had made no recommendations.
Mr. Spitler asked how adoption of the proposed purchasing system would impact the scope of future audits. Mr. Crews replied the Audit Division would have to scrutinize the purchasing practices of the individual agencies more carefully if purchasing controls were decentralized.
Mr. Spitler asked if the agencies would be subject to uniform purchasing standards and if purchasing would have to be centralized within the agency. Mr. Crews said the purchasing functions would have to be centralized within each agency. The revised proposal represented a shift of the purchasing function to state agencies and the agencies would have to develop controls similar to those already in place within the Purchasing Division. He reiterated internal controls within the agencies had historically been extremely poor. This shift would impose an additional burden on the agencies.
Mr. Spitler stated the Purchasing Division had not demonstrated to his satisfaction the need to change the current system. He noted the Audit Report recommended better identification and evaluation of all costs associated with the purchasing function. He inquired whether the Purchasing Division had agreed to follow the recommendation. Mr. Crews said he understood the Purchasing Division would be looking at this problem. He noted the Purchasing Division's management information system was inadequate for identifying and evaluating costs.
Mr. Spitler said he could see nothing in the proposed budget which would change the Purchasing Division's ability to track costs.
Ms. Tiffany asked if agencies had developed their own purchasing systems. Mr. Crews said the agencies did have some internal control processes in place insofar as placing orders was concerned.
Ms. Giunchigliani expressed concern that there was no cost analysis required prior to legislative approval of the Las Vegas warehouse project. She inquired whether the Legislature normally requested a cost analysis on capital improvement projects. Mr. Crews stated this issue might be indicative of a larger problem.
Ms. Giunchigliani asked if the Purchasing Division had agreed to improve their procurement methods as a result of the audit. Mr. Crews indicated discussions with the Purchasing Division had been positive and the division had already moved forward with installing recommended internal controls.
ASSEMBLY BILL 430- An act relating to state lands; establishing fees for certain applications and permits; changing the fee for and use of the proceeds from copying certain records; clarifying the authority of the state land registrar to authorize the use of state land; and providing other matters properly relating thereto.
Chairman Arberry asked for comments from fiscal staff. Mr. Stevens reminded the committee the agency had requested amendments to the bill to change the language to read "For making copies of public records and maps in the custody of the state land office, regarding land granted to the state by the Federal Government for educational purposes" at lines 5 and 6 of page 1, to read "If the fee is for any authorization to use land granted to the state by the Federal Government for educational purposes,..." at lines 12 and 13 of page 5 and to change the language of Section 25 to read "The state land registrar may waive the fee for the issuance of any permit, license or other authorization for the use of state land."
MR. DINI MOVED AMEND AND DO PASS AS AMENDED.
MR. MARVEL SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
SENATE BILL 289 - An act relating to state financial administration; correcting a statutory reference to require that certain fees be deposited in the state highway fund; and providing other matters properly relating thereto.
Mr. Stevens noted SB 289 was introduced to correct an oversight which occurred during the 1991 legislative session. He explained some fees had been credited to the General Fund rather than to the Highway Fund.
MR. MARVEL MOVED DO PASS.
MR. SPITLER SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
There being no further business, the meeting was adjourned at 9:20 a.m.
RESPECTFULLY SUBMITTED:
_________________________
C. Dale Gray
Committee Secretary
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Assembly Committee on Ways and Means
April 23, 1993
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