MINUTES OF THE
SENATE COMMITTEE ON FINANCE
Sixty-seventh Session
January 20, 1993
The Senate Committee on Finance was called to order by Chairman William J. Raggio, at 8:00 a.m., on Wednesday, January 20, 1993, in Room 223 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda. Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Senator William J. Raggio, Chairman
Senator Raymond D. Rawson, Vice Chairman
Senator Lawrence E. Jacobsen
Senator Diana M. Glomb
Senator William R. O'Donnell
Senator Matthew Q. Callister
COMMITTEE MEMBERS ABSENT:
Senator Bob Coffin
STAFF MEMBERS PRESENT:
Dan Miles, Fiscal Analyst
Bob Guernsey, Principal Deputy Fiscal Analyst
Dee Crawford, Committee Secretary
OTHERS PRESENT:
Robin Bates, Chief of Classification and Planning, Department of Prisons
Robert Buchanan, President, Corrections Partners, Inc., Kansas City, Missouri
Gary Ghiggeri, Principal Deputy Fiscal Analyst, Legislative Counsel Bureau
Lorne Malkiewich, Legislative Counsel
Judy Matteucci, Director, Department of Administration
Brooke Nielsen, Assistant Attorney General
Bruce Rich, President, Correctional Development Corporation,
St. Louis, Missouri
Karl Sannicks, Assistant Director of Operations, Department of
Prisons
Michael Shmerling, Chief Financial Officer, Corrections Partners, Inc., Nashville, Tennessee
John Swendseid, Swendseid and Stern, Attorneys at Law
Senator Raggio requested committee introduction of the following bill draft requests (BDRs):
BILL DRAFT REQUEST S-1277: Makes appropriation to legislative fund for initial financing of l993 Western Legislative Conference.
SENATOR RAWSON MOVED TO INTRODUCE BDR S-1277.
SENATOR JACOBSEN SECONDED THE MOTION.
THE MOTION CARRIED. (SENATORS O'DONNELL AND COFFIN WERE ABSENT FOR THE VOTE.)
* * * * *
BILL DRAFT REQUEST S-48: Makes appropriation to state public works board for payment of expenses for construction of building at Southern Nevada Correctional Center.
SENATOR RAWSON MOVED TO INTRODUCE BDR S-48.
SENATOR GLOMB SECONDED THE MOTION.
THE MOTION CARRIED. (SENATORS O'DONNELL AND COFFIN WERE ABSENT FOR THE VOTE.)
* * * * *
SENATE CONCURRENT RESOLUTION 2
OF THE SIXTY-SIXTH SESSION: Directing the Legislative Commission to conduct an interim study of the feasibility of privatizing the provision of governmental services.
Senator Raggio explained an interim study was conducted by authorization of Senate Concurrent Resolution 2 of the Sixty-sixth Session, which mandated the study of the possibility of contracting out government services. He advised the committee that Gary Ghiggeri, Principal Deputy Fiscal Analyst, Legislative Counsel Bureau, in consort with Bob Guernsey, Principal Deputy Fiscal Analyst, Legislative Counsel Bureau, were the staff members assigned to the interim study committee. He advised that later in today's meeting, Mr. Ghiggeri would provide testimony concerning the recommendations of the study committee.
SENATE BILL 551
OF THE SIXTY-SIXTH SESSION: An act relating to correctional institutions; authorizing the department of prisons to enter into contracts for correctional services at a new minimum security correctional facility for women; and providing other matters properly relating thereto.
Exhibit C, Senate Bill 551 of the Sixty-sixth Session, was distributed to the committee.
Senator Raggio declared one of the primary concerns of the Senate Committee on Finance is the Women's Minimum Security Correctional Facility earmarked for construction in the Las Vegas area. As of this date that facility has not been built, he announced.
Karl Sannicks, Assistant Director of Operations, Nevada State Prison, provided an overview of the status of the Women's Minimum Security Correctional Facility.
Senator Raggio asked when the Request for Proposal (RFP) for construction of the women's facility was submitted by the agency.
Mr. Sannicks declared the RFP was issued in December 199l.
Senator Raggio asked what was the reason for the 5-month time frame to design an RFP for the aforementioned project.
Mr. Sannicks responded:
The primary reason was that I was the designer of the proposal and I was working single-handed....After I drafted two or three drafts, the drafts were sent...to various places like the budget office and the attorney general to get an opinion as to whether or not the information...in the draft was correct. When it was approved, then the Request for Proposal was put out on the street.
Senator Raggio questioned the time involved in getting approval from the attorney general and budget offices.
Mr. Sannicks was unable to answer and explained he had not brought that specific information with him to the hearing.
Senator Raggio explained the main concern of the committee was the time frame involved in contracting out state services. He asked, ..."What were the problems involved in developing the RFP?"
Mr. Sannicks responded:
If we review the record...with regard to the RFP we will find that...within two months after the bill was passed, the RFP was completed as far as being written....I wrote the RFP based on experience and on contact with other states and how they had proceeded and how I had proceeded in another state that I had been involved in (New Mexico).
Mr. Sannicks explained his methodology while in New Mexico was he used a lease agreement rather than ownership agreement. Continuing, he stated:
We found out from bond counsel that would not work in this case because he wanted us to proceed along a straight rental agreement, rather than a lease-purchase agreement, and it was the going back and forth with that particular piece of information that delayed the RFP initially.
Senator Raggio noted, "There came a point in December, however, when the RFP was approved by the budget office and the attorney general's office. Is that what you are indicating?"
Mr. Sannicks answered in the affirmative and explained:
Senate Bill 55l [of the Sixty-sixth Session] was received, the draft...begun, the RFP first draft was sent out...to the Governor's Office, the attorney general, Department of Taxation, Public Works Board, and the budget director on July l2, [1991], which is just a matter of days from the day the bill was passed.
Then on September 6, [1991], a second draft was prepared and the third draft was prepared on September 23, [1991]. The RFP was completed...based on...budget office input.
The RFP was sent to Purchasing [Division] on October 9, [1991]. Risk Management [Division] on October l8, [1991]...The Legislative Counsel Bureau letter from Gary Ghiggeri indicates...presentation on November 7, [1991].
The fourth draft was completed on October 4, [1991]. The fifth draft on October 24, [1991]....On October 25, [1991] was when we had a three-way phone conversation between Janet Johnson in the budget office, John Swenseid the bond counsel, and myself and we were advised the reason the supreme court decision may make the RFP invalid and that is when we really got into whether or not we could put the RFP on the street.
...Three days later we sent a letter to the attorney general referencing these phone calls from the budget office requesting opinion as to the validity of the RFP. At which time at some later date it came back that it was all right to proceed in the form it was in and then it was put out on the street and we had a pre-bid conference on December 23...
Senator Raggio asked what authority permitted the Request for Proposal to be let for bid.
Mr. Sannicks responded, "It came from the attorney general's office and the budget office both telling us that the RFP was correct with regard to form and content."
Proceeding, Mr. Sannicks explained:
Then we had the pre-bid conference....Following the pre-bid conference in December [1991], we had a meeting of all of the agencies or firms that had responded to the Request for Proposal and they had a dog-and-pony show in
which every firm was allowed to present their program and based upon that the current Corrections Partners, Inc. [CPI], was selected as the one the department would negotiate with for a contract.
Senator Raggio asked on what date was the selection made for the successful bidder.
Mr. Sannicks replied he did not have that information readily available. Continuing, he stated, "I can tell you that in July of l992, we met with representatives of CPI to begin the negotiation of a contract and so that followed not too long after the presentation."
Mr. Sannicks distributed copies of Exhibit D, letter dated June l9, 1992 from Ron Angelone, State of Nevada, Department of Prisons, to Mr. Robert Buchanan, to the committee. Reading from Exhibit D, Mr. Sannicks pointed out the document was a confirmation to CPI announcing they had been selected as the primary firm to enter into contract negotiations with the State of Nevada, Department of Prisons, for the design, construction and operation of a l50-bed minimum custody female facility.
Mr. Sannicks advised negotiations with CPI began in July l992. Continuing, Mr. Sannicks expounded on the outcome of the negotiations:
Basically, we met with the CPI to negotiate a contract. A draft management services agreement, which was written by myself, was provided to CPI as a basis for the negotiations. The negotiations lasted all day with CPI leaving with a copy of the draft agreement and notes as to the discussion that took place for the purpose of revising the draft and returning the same back to the Nevada Department of Prisons for review.
Senator Raggio asked on what basis was the RFP structured.
Mr. Sannicks responded, "The Request for Proposal asked for a rental agreement."
Senator Raggio asked if there were any parameters to the proposal as to the terms of the rental agreement.
Mr. Sannicks responded in the affirmative and distributed copies of Exhibit E, page 9 of the Request for Proposal, to the committee and read from Section H, Approval of Contract as follows:
No contract shall be binding or effective on the State until it is approved by the Director Department of Prisons, the Director Department of Administration, the State Public Works Board, the Department of Taxation, the Attorney General, the Board of Examiners and the Board of Prison Commissioners....
Senator Raggio asked what was the time period of the contract term.
Mr. Sannicks clarified that part of the RFP indicated that the contract shall have an initial 4-year term subject to appropriation with renewal options every 2 years.
Senator Raggio reiterated, "So the RFP was based on a 4-year period with an option to renew?"
Mr. Sannicks added, "Every two years."
Senator Raggio asked, "With whose option?"
Mr. Sannicks replied, "The state...and that the first 4-year period of the contract shall be a rental, and it indicates that it is a true lease, not a lease-purchase agreement and at the end of the initial 4-year period the state shall have the right to renew the contract as a rental agreement for successive 2-year periods at the state's sole option and discretion."
Continuing, Mr. Sannicks reported:
...On the 27th of July, 20 days later, we received a revised draft agreement and review of the CPI revised draft revealed two problem areas: the proposed financial instruction which indicated the prison would be financed on a tax-exempt basis. This entailed the creation of a trust by the City of Henderson, otherwise known as the Henderson Trust and the sale of industrial revenue bonds. This would require CPI to enter into a true lease agreement with Henderson and...would require Nevada Department of Prisons to enter into another agreement with regard to the lease. The revised draft indicated the lease would be 6-year intervals, as opposed to 2-year intervals, as proposed by Nevada Department of Prisons.
Senator Raggio reaffirmed there was a revised draft of the agreement and that revised document came back with an extended period of time as a true lease.
Mr. Sannicks replied:
Right....Based upon the fact that lease was not a rental agreement of every 2 years...that memoranda was forwarded to the budget office and...Office of the Attorney General requesting comment and opinion as to whether or not Department of Prisons could, or should, proceed with negotiations considering the CPI proposed financial structure and the periods of 6 years of the contract renewal dates.
Senator Raggio clarified, "So the revised draft was for a 6-year period with some renewal options again, for the state to renew? Or were there mandatory requirements to renew?"
Mr. Sannicks responded:
To my knowledge they weren't mandatory but they were just 6 years in length...in an effort to bring that to resolution.
Then on 31 August, CPI forwarded a letter to the Director of NDOP [Nevada Department of Prisons] advising of their willingness to assist NDOP in finalizing the agreements and advising of the need to proceed as soon as possible in order to meet the target construction date. They were advised via telephone that NDOP was making every effort to expedite the resolution which included phone calls to the necessary agencies...Then on l September, as I had not received any response back on the information sent out to the budget office, etc., a memorandum requesting expeditious response was sent out and then contact with the AG [attorney general] office resulted in the set up of a face-to-face meeting with the attorney general, representatives of the attorney general's office, state purchasing, State Public Works Board and NDOP. That was held on l0 September, 9 days later.
Then on l0 September, of course, the Director for the Department of Prisons and the NDOP staff met with the attorney general. The meeting concluded with an agreement that was necessary to meet with CPI representatives and the state's bond counsel in order to resolve the matter on September l6. Later that date was changed to September 23, but ultimately the meeting was held.
Ms. Brooke Nielsen, Assistant Attorney General, interjected to explain the Office of the Attorney General has been working with the Department of Prisons throughout the entire process.
Ms. Nielsen distributed copies of Exhibit F, first letter of opinion directed to Mr. Ron Angelone, dated November 27, 1991, to the committee and explained the letter contained a response to the state debt limit question under the State ex rel. Nevada Building Authority v. Hancock, 86 Nev. 310, 468 P.2d 333 (1969). Ms. Nielsen stated the opinion concluded:
...it would constitute debt of the state if we entered into any long-term agreement with the operator of the women's private prison and we had to structure the agreement on the basis of very short terms with obvious non-appropriation clauses as an out for the state so this would not constitute debt of the state and go against the state's debt limit. Based upon that, the RFP was revised to reflect an initial 4-year term and then 2-year renewals, entirely at the option of the state, which we felt would be appropriate.
Senator Raggio asked if the opinion required the contract be structured toward a 4-year initial term.
Ms. Nielsen responded, "That would be acceptable."
Senator Raggio asked why a 4-year term was acceptable and did not constitute a debt that is credited against the debt limit.
Ms. Nielsen answered:
That is an issue that has to be resolved looking under what the supreme court said in the Hancock case. There is no black and white test to determine what constitutes debt of the state. I think the thing you look at is whether or not the agreement the state is entered into really appears to be a guarantee of the good faith of the state. If that is the case, then the supreme court will find it to be debt that will go against the debt limit...
I defer to John Swenseid who is here this morning, who can address that in more particulars. Considering the whole situation of the Hancock case and what was said in that case, we felt with this structure, any court that looked at it would probably say this is not a case where the good faith of the state has been pledged to back the entire payment of the debt that would be incurred to build the prison by the private developers and that this indeed was something the state could walk away from.
Senator Raggio summarized that any contract exceeding 4 years, which obligated the state to pay, that the amount would be subject to inclusion in the state debt limit.
Ms. Nielsen answered, "I think what we're saying is we think the court, the supreme court in particular, might conclude that."
Senator Raggio expressed his concerns:
When this was debated in the previous session, I think everyone, including state agencies, were aware of what was being legislated. The Governor had this in his budget, it was passed by this legislature after a great deal of deliberation, we were advised by the prison system and the budget office that this was an essential facility that was needed...it was a facility we were going to be using as pretty much a design of similar facilities for male inmates. It was the firm intention of the legislature to utilize the contracting-out procedure and if this issue of preclusion...to court cases or precedent or this debt limit problem was raised, if it was raised at all, was raised in a very minimal fashion because it certainly never became an issue in our discussions. You're now telling us that a case decided in l969, by the supreme court of this state, has bottled up this procedure and we are now almost 2 years down the road with this facility not even contracted for. So that begs the following questions.
...Are we to understand that the state has no authority, cannot enter into contracts beyond 4 years of which the state is obligated to pay? Are there some contracts that have been in existence since l969 that exceed 4 years? Are we in violation? Do we have to collect all those?...Why is it that the State of Nevada has this problem?
Mr. John Swendseid, Swendseid and Stern, Attorneys at Law, serving as bond counsel to State of Nevada, distributed Exhibit G, letter dated November l2, l992, from Brooke Nielsen, accompanied by historical backup documents, testified:
...Nevada, like most states, has a constitutional debt limit with some exceptions....I would say that any contract that the state signs, that unconditionally obligates the state to spend money from a future biennium...is a debt. The obvious idea behind the debt limit is to let the future legislatures decide what gets spent in future bienniums, instead of tying their hands.
Some debts are permitted....Generally we're allowed to incur debts up to 2 percent of the assessed valuation. In addition, contracts that don't involve the expenditure of tax money aren't considered to be debt, it's only if you force the legislature to spend taxes in future years that you have a debt.
Senator Raggio replied, "That would seem to me to limit it to 2 years, why 4?"
Mr. Swendseid responded, "...2 years is correct." Continuing, he explained:
Many states have much more restrictive constitutional debt limits than that....We say you can only go up to 2 percent. These states have developed legal theories that allow them to enter into what are called non-appropriation obligations. What that is, is like a...contract beyond 2 years, which says that I will continue my contractual arrangement with you, my lease or installment purchase, only so long as the legislature appropriates money. If the legislature ceases to appropriate money, then all bets are off and the contract goes away. I believe that has been approved by the supreme courts of about thirty states. And it was proposed here, in the case Brooke [Nielsen] referred to and the supreme court here rejected that theory. I think there are about three other supreme courts in the United States that have rejected it, but Nevada is...the minority on that....Most states have accepted this non-appropriation theory.
Mr. Swendseid referenced page 21 of Exhibit G, State ex rel. Nevada Building Authority v. Hancock, opinion, d, and cited the following excerpt:
...The legislative appropriations for rent may, under Section 8, be for a single biennium as contrasted by a legislative pledge to appropriate funds for rent during the full term of the lease and of the bonds issued by the Authority. Normally, there is no constitutional concern with expenses payable out of current revenue...The constitutional concern is to limit commitment of future revenues...
Mr. Swendsied summarized within the context of the building program whereby the state was authorizing a building be constructed:
I did not think the non-appropriation clause was enough. It is my belief what the court was saying was, if you sit back and look at it, there is no way the legislature would walk away from this lease, even if they technically have the right to do it. The court said under those circumstances they are going to treat the lease even if it had a non-appropriation clause as a debt.
Continuing, he declared:
What the court was saying in Hancock was that a lease- purchase agreement for a state building with a non-appropriation clause every 2 years would constitute a debt under our constitution.
Senator Raggio asked if Mr. Swendseid was disagreeing with the attorney general that a 4-year period was acceptable.
Mr. Swendseid drew the committee's attention to Exhibit G, page 9, and read aloud, "The contract shall have an initial 4-year term subject to appropriation, as described below..." Continuing, he explained:
So we have this 2-year appropriation out on the 4 years. The reason for the initial 4-year term, is that the legislature in the last session...started the process for a constitutional amendment to reverse the Hancock decision....Our constitutional amendment procedure is the proposed constitutional amendment has to be approved by two legislative sessions and then go to the voters. In l99l, the first step of that was taken. The 4-year term was in the hope that by the time the 4 years expired, the constitutional amendment would have passed and the state would then enter into a more traditional long-term lease- purchase agreement with an appropriation out...after 2 years....
Mr. Swendseid pointed out:
...We were faced with this Hancock decision in construing the legislation adopted by the l99l session and attempted to structure the RFP in such a way that if we got a response that complied with the RFP, it would be acceptable under the debt limit. That's why we put the language in the RFP...initial 4-year term, 2 year out and after that 2-year renewals....
The committee's attention was directed to Exhibit G, page ll, draft of Purchaser's Certification. Specifically, Section A, "The State of Nevada is neither legally nor morally obligated to rent the facilities which are being financed with the Bonds after July l, l993 or to make any rental payments after that date."
Senator Raggio asked what was the cost estimate of the facility.
Ms. Nielsen responded $5.6 million.
Senator Raggio asked how would the State of Nevada find anyone to rent a facility if they were only assured the state would rent the facility for a 2-year period.
Mr. Swendseid replied the only practical use would be if they had some alternative use for the facility.
Senator Raggio emphasized, "What do you use an unused prison for?"
Mr. Swendseid suggested, "Rent it to someone else who has a need for housing prisoners."
Ms. Nielsen explained it was not solely the legal issue which has held up finalization of the contract. Distributing Exhibit H, memorandum dated September 2, l992, directed to Frankie Sue Del Papa, she asserted:
The proposal that Karl Sannicks referred to that came back in July or early August, contained many differences from the RFP. I've brought with me an analysis that one of our researchers did. She identified at least 28 differences. Many of them are not significant, these are things we could possibly work out but it would require lots of negotiations and meetings...with representatives of CPI.
Also, the structure of the deal that they propose in order to obtain the financing was so radically different from what we had envisioned that would require this meeting that John Swendseid referred to where they discuss the problems of the 6-year term....
Senator Raggio asked if there were other contracts in excess of 2 years to which the state is presently a party that require the state to pay money.
Mr. Swendseid responded, "I don't know whether there are or not. There are exceptions to the debt if it doesn't involve tax money...if an appropriation is made this year to cover the term of the contract, like if you made an appropriation now to cover payments required over 20-year terms, that would not be a debt...."
Senator Raggio asked if there were other contracts in existence which commit the state to make payments beyond current revenues and which exceed 2 years.
Senator Raggio requested input from Lorne Malkiewich, Legislative Counsel.
Mr. Malkiewich testified he was not involved in the negotiations nor did he consider himself an expert on the debt limit issue.
Senator Raggio stated that assuming Mr. Swendseid's opinion was accurate, what would be the Legislative Counsel's recommendation.
Mr. Malkiewich opined:
The proposed constitutional amendment will, because it will allow lease-purchase agreements with non-appropriation clauses to be exempt from the debt limit, in addition to the natural resources and the protection and preservation of state property. If that constitutional amendment is adopted, this sort of agreement could be entered into without affecting the debt limit. Beyond that, most of the other legislative solutions that relay directly to the women's prison are matters of policy. It would be a simple matter to pass a bill that says go ahead and incur the debt. Commit the state for 15 years. But that is a policy decision for the legislature to make on exactly how they would intend to carry out that contract.
Senator Raggio suggested the alternative would be to "go ahead and do it and have it count against the debt."
Senator Raggio questioned whether the facility was needed.
Mr. Sannicks replied in the affirmative and deferred to Mr. Robin Bates, Chief of Classification and Planning, Department of Prisons.
Mr. Bates responded in the affirmative to the question whether the facility was needed and maintained:
We have 420 female inmates today and we have beds for 425 at rated operating capacity. The custody of those inmates is 231 of the inmates are eligible for minimum custody and we have approximately l98 beds dedicated for minimum custody purposes.
Senator Raggio asked what other recommendations were available other than a constitutional amendment or to count against the debt load. He questioned whether another legal opinion should be sought.
Mr. Swendseid responded:
There are a couple of other alternatives. One is an obligation payable from a source of revenues that is not taxes [emphasis] is not considered to be a debt under the constitution. At one time...it was suggested that perhaps revenues from the prisoners who, I take it were going to work or perform some labor that they get paid for, might be sufficient to pay part of this obligation. If that's a possibility, we have non-tax revenues that you could dedicate to payment, you would not have a debt.
Another possibility is to ask the supreme court whether, indeed, my opinion is too conservative in this case...
Senator Raggio asked Judy Matteucci, Director, Department of Administration, whether she was concerned about any other outstanding contracts in view of the legal opinion.
Ms. Matteucci responded:
To my knowledge there are no other contracts that compromise this particular situation. That is because we require in leases and contracts an appropriation out. It's cancelable if there are no funds provided or within a short period of time...if funding is to become unavailable. The standard contract form has that in it and leases are required to have outs in them. So I am unaware of any contracts that would have that problem.
Senator Raggio asked Ms. Matteucci, "What do you plan to do about the need for the women's facility."
Ms. Matteucci answered:
...We have a recent letter from the NCCD [National Commission on Crime and Delinquency] who, as you know, is the firm we contract with to do our prison projections who have advised that our women's projections probably can be revised downward. The need we had at the time we were discussing this in the l99l session, is not as critical as it was....The City of North Las Vegas has constructed a prison and they are actively seeking people to put inmates in there so if there was a critical situation, I believe that we have a very short-term solution if it should arise. But I do not believe that the need is as critical as we thought it was going to be in l99l, that we needed the facility as quickly as possible....
Senator Callister asked Ms. Matteucci to provide a copy of the revised NCCD projections to the committee.
Continuing Senator Callister referenced Exhibit G, page 6, and commented:
It looks to me like...you provide the five options...that are available...either a judicial clarification of Hancock, which I think I would certainly agree with the chair, it seems to me to be long overdue...more than 20 years since we've had any determination. Is that really part of the problem in Nevada case law on an issue that is so crucial to the state's long-term financing options? Is it time to bring some action...for declaratory relief...to get a determination of what is...the rules that we play by so we...can go forward?
Mr. Swendseid responded, "In the 20 years since Hancock, probably twenty of the thirty other states that have approved this type of financing have court cases that approved it, so a lot has happened in other states since Hancock."
Senator Callister asked what other states do "who use this option as a basis for the legality of this device." Continuing, he asked, "Is it your experience from those other twenty or thirty states that they do it based on an evolving case law rationale? Or would they do it like we're attempting to do, by simply changing the constitution. Which is quicker or should we do both?"
Mr. Swendseid declared the majority of them have gone by case law rather than constitutional amendment.
Senator Callister queried, "How do those cases get brought? Someone does it and it gets challenged, or do they go for declaratory relief?"
Mr. Swendseid asserted the majority of the cases are declaratory relief.
Senator Callister avowed:
It seems to me that would be the quicker remedy and that would give us, in the event that the voters don't support the constitutional amendment; I can imagine there will maybe be a circumstance that is tough to explain to the average voter out there what you're doing. So I would be very concerned if we were to put all our eggs in just that basket. So perhaps one of the remedies we should be recommending is urging someone to bring that action before our board and get a determination...
Senator Raggio asked Ms. Nielsen if she had considered bringing such action for declaratory relief on behalf of the State of Nevada.
Ms. Nielsen responded that she had considered the concept but "reasons for not bringing them was we didn't think we could get a decision in time to meet the building timetable for this particular facility. It's obvious now, this facility is not going to be built on the time schedule that had been planned, so I don't think we need to worry about that time frame. We're also reviewing what our chances are of actually getting a clarification or a backing away from the Hancock decision...."
Senator Raggio declared, "Apparently in other states, notwithstanding this type of judicial precedent, that has been eroded as I understand it from other decisions and it might be timely to find that out. I suggest you give it great reconsideration. Otherwise we're going to be hamstrung on any concepts of this kind until such time the constitution is changed to accommodate this. Following up on Senator Callister's comment, modern day financing has changed a great deal since l969 when this court, and its predecessor's on the court, looked at this...."
Ms. Nielsen agreed to discuss the matter with the attorney general and the state bond counsel.
Senator Raggio asked Mr. Malkiewich if he wished to speak to the issue.
Mr. Malkiewich added:
There were a couple of points I did want to make. First, there is the question of the non-appropriation clause and the issues of the other contracts out there. In Hancock the court rejected the concept the non-appropriation clause would let the legislature out because it says in practical matter, the legislature is not going to back out of something like the construction of a building....There's some sort of an...obligation....In a case like this where you are building a prison, a 15- year commitment, then I think the moral obligation...the state will carry through...
...I believe it was 4 years ago, the late Assemblyman Sedway asked us to look into this very issue in a slightly different context whether we could use different forms of financing....At that time we discussed proposing the use of Certificates of Participation and having a test case. At that time we did little research into this and found some...issues...that very strongly spoke against this type of interpretation. The interpretation that the Nevada courts have applied, so there is reason to believe if we can get the supreme court to take another look at it, either in a slightly different context, or even squarely on point, we might be able to get the supreme court to come up with a different opinion.
One other point I wanted to make is the standard that bond counsel employs which becomes a problem when you have a case like Hancock. The language in Hancock is a horrible precedent for trying to get around the debt limit. It talks about don't elevate form over substance. So if you try some different mechanism that would have the same effect following the Hancock precedent the court would just throw that out, you're doing the same thing, just calling it something different....With that precedent out there, given the standards that bond counsel applies to approval of bonds, it's very difficult to say any alternative financing scheme will be upheld because generally when bond counsel looks at things, they're not just conservative, they are issuing their opinion that $50 million debt is not going to be ruled unconstitutional or invalid. Down the road, the test they apply is used with something like would it be unreasonable for a court to conclude otherwise. Given a case like Hancock, it's almost impossible to make that determination with this type of financing.
In the case of declaratory relief...we have passed bond issues and required, as a condition precedent to the issuance of the bonds, that the attorney general file an action for judicial confirmation of the bond issue. So you know up front from the supreme court whether that bond issue will be okay. We don't even issue them unless we get the supreme court to approve them. That is certainly another statutory option available to you to require judicial confirmation before such a contract is entered into. The only concern in that area is to make sure you really have a case of controversy, something that is really not a contended matter, you might have a little problem in that area. Here, I think that would not be a problem. We have plenty of controversy involved in this issue....
Senator Callister asked with regard to the proposal to use Certificates of Participation, "Is that essentially much different really than what has been proposed here by counsel on page ll [Exhibit G]?"
Mr. Malkiewich declared:
It's going a step further....When we discuss Certificates of Participation one of the reasons that was an attractive option was it is a little different. It does have an additional argument you could make. So we would not be putting the supreme court in a position of having to overrule Hancock completely. They could distinguish it and say this is okay. What distinguishes Certificates of Participation is you have sort of a board of trustees set up that sells the Certificates of Participation to investors and those trustees manage the institution....If the state backs out, lease it to someone else.
These trustees have the duty of managing the facility for the benefit of the certificate holders. You could at least say in this case it is not set up, depending upon the state being the contracting party, we give the supreme court something to hang their hat on and then could also argue any alternative that Hancock is just out of step with current precedent, try and get it over- ruled. If not overruled, at least using something like that would give us a way to start setting some of the precedent we're lacking....Right now what we have on the books is Hancock and if you read the language of that case, it's horrible precedent as far as trying to come up with alternative financing.
Senator Callister asked Mr. Swendseid if he agreed to the additional option "that perhaps should be considered or is it an option you assign other states, that of Certificates of Participation or some other kind of device."
Mr. Swendseid asserted that Certificates of Participation are frequently used in other states. He explained:
When we sign a lease agreement on a $5 million building...the party that you sign it with, or a trustee, raises the $5 million...or most commonly he raises it by participating out the right to receive payments from the state. What they issue to evidence that are called Certificates of Participation. The certificates just mean you have a bunch of people that you owe your lease payments to instead of just one.
Senator Jacobsen expressed his concern that the use of privatization during this legislative session may not come to fruition until the constitution is amended.
Mr. Swendseid insisted the only thing at issue was the financing of the new building.
Senator Raggio stressed:
We would like an early indication from the attorney general, with the assistance of our legislative counsel, on the practicality of pursuing a declaratory relief action....
Ms. Nielsen agreed and declared it may take a week or so.
Robert Buchanan, President, Corrections Partners, Inc., Kansas City, Missouri, introduced his entourage: Bruce Rich, President, Correctional Development Corporation, St. Louis, Missouri,
and Michael Shmerling, Chief Financial Officer, Corrections Partners, Inc., Nashville, Tennessee. He provided an overview of the achievements of CPI and explained CPI currently manages three male medium-security correctional facilities in the midwest: a 500- bed facility in Minnesota, 500-bed in Oklahoma and a 104-bed boot camp in southeast Kansas. Currently under development are four other facilities in Mississippi, a juvenile detention facility in Indiana, a 1200-bed facility in Massachusetts and an 1800-bed facility in Puerto Rico. He pointed out the majority of the CPI staff are former correctional administrators. Additionally, several CPI staff have managed female correctional facilities in the past, he maintained.
Mr. Buchanan responded to previous comments regarding the need for the facility and stated, "In terms of the NCCD projections possibility indicating the female population will be going down, this would be in direct contradiction in all the national statistics. We work with 47 states right now. I have another company called Correctional Services Group, which is primarily a consulting firm....In 47 of the 50 states, the female population is increasing on the average of 5 to 6 percent a year, while male populations have leveled off or even decreased."
Mr. Buchanan asserted part of the increase is associated with the quality issues of the last decade, females becoming more involved in traditional male-type crime particularly with respect to drug possession and sales, in violent type crime and the closing of many mental health facilities where...females had been confined. Continuing, he pointed out these individuals who would previously have been held in mental health facilities are now finding themselves in state prisons and county jails. He affirmed there is a need for the facility in Nevada. He added, "There also appears to be a substantial need for the confinement of females in the Las Vegas area. The statistics we have reviewed indicate approximately 80 percent of the females are from in and around Las Vegas and right now there is really no confinement capability for females in that area."
Continuing, Mr. Buchanan clarified, "It was commented there were 28 differences in our response to the initial RFP, 27 of those differences were differences that we all agreed. When I say agreed, we agreed in principal the Department of Prisons should be incorporated into the final contract. Those differences were primarily to clarify a issue that has not been clarified in the RFP or additional information that had not been included in the RFP that needed to be included in the management contract."
Mr. Buchanan deferred testimony to Bruce Rich, President, Correctional Development Corporation, St. Louis, Missouri. Mr. Rich highlighted the recent developments of CPI to the committee.
Continuing, Mr. Rich noted the State of Missouri has used the lease-purchase concept in the past. He explained:
They had a public building commission very similar to your Hancock case that had been extremely active in issuing lease-revenue bonds, Certificates of Participation, all the sort of alternative non-debt financing techniques that had been used around the country and they've been doing it for a number of years for state office buildings. Some of the prisons prior had been done by public building commission. They turned to the private sector in our case under a competitive RFP process because they had no more debt capacity of the state.
The public building commission needed to have a ceiling on the amount and that ceiling had exceeded. Trying to find a site for these facilities is always a political football....They were under court order to do something in a hurry. So we found a site for them, arranged $50 million worth of lease financing, designed and built this project under 2 years with no change orders to the state during that period of time. We think that process is pretty effective.
Another project that we've done is for the State of New Mexico. We thought this was very appropriate in this particular application. The State of New Mexico has a l990 supreme court ruling....The case basically says the same thing that if the state is entering into a lease- purchase transaction...they are, in essence, committed to funding this over the long term. We were able to structure a lease-rental agreement, no purchase, with the State of New Mexico for a $10 million office building and training complex for the Department of Corrections. We did that after that...case was decided. And it was approved, obviously built and occupied and the state is making rental payments every year.
Based upon that precedent, and we looked at your senate bill which was well drafted, the issues dealing with the difference in investment between a building and an operational services agreement was clearly defined, and we looked at the way the RFP was drafted and it said there is an operating contract but there is also a lease- rental agreement in there someplace....After some discussions with the attorney general's office they said we have other rental agreements that we use in the state every day. Here's this rehab services lease, a l5-year rental agreement.
Senator Raggio inquired, "That's the one our budget director was referring to?"
Mr. Rich responded in the affirmative and added:
It has a clause in it that if the funding for this rental agreement ceases, the user of the building must give 6- months notice and then the lease is void. We said that is fine. We can use that lease. That's when we got the surprise from our meeting of September 23...from Mr. Swendseid that said...that lease probably wouldn't pass muster. That probably could be construed as long-term debt and we didn't really want to get into that situation again. So we said okay let's take a look at the New Mexico approach which is a 1-year lease, annually renewable, based upon appropriation of funds.
The response was there was an appropriation in there. We'd rather have the sort of agreement that's defined in the statement that you just read that we have every option in the world to terminate for whatever cause. We said the size of this investment requires something more than the whim of anyone in state government to terminate. We have no problem with the legislature being the determinate of the renewal process....We have reviewed the contract in great detail and I think have resolved all the issues dealing with the contract other than the concept is a rental agreement a debt of the state. If the rental agreement is a debt of the state, we have to go down one track. If the rental agreement precedent is not a debt of the state, we're ready to go, because we would agree to that rental agreement that's been used by Department of Public Works for leasing in all sorts of buildings all over the state.
Senator Raggio iterated, "You say you're agreeable to the rental agreement? Mr. Swendseid, do you have a problem with that, too? I'm not clear on that."
Mr. Swendseid responded, "If it was a 4-year rental, with an appropriation out, and our options to continue on a rental basis...after that 4 years, that would be okay."
Mr. Rich interjected,
The key difference here is, if it is a renewal process, what we understand from Mr. Swendseid is the renewal process is a...process whereby the Department of Prisons would have to agree to renew it. Maybe the Board of Estimate [Examiners] might have to agree to review it and renew it, the legislature would have to agree, the attorney general would have to agree, all those people would have to agree to renew it, as opposed to a transaction where the only determinate to renewal is whether or not the money is appropriated.
Mr. Swendseid interjected, "It seems to me the bare non-appropriation out is what the court in Hancock said was not allowed."
Senator Raggio clarified, "Because it was a moral obligation."
Mr. Swendseid agreed and stated, "We need to have an out here and be able to walk away if we want to...."
Mr. Rich distributed Exhibit I, Southern Nevada Women's Facility - A Privatized Solution For The State of Nevada Executive Summary, to the committee. He referred the committee to page A-46 and summarized paragraph F:
...There is a bond issue that is just going on the street...it's the next bond bank issue for state purchases listed as a general obligation of the state. I presume Mr. Swendseid reviews all these debt issues before they're issued...and approves it basically. Within that official statement is this statement....
Mr. Rich read, "The state is obligated by leases accounted for as operating leases. Operating leases do not give rise to property rights as capital leases do. Therefore, the results of the lease agreements are not reflected in the account groups. Meaning, the statement of state debt...."
Senator Callister interjected, "...We already have language that seems to allow a non-cancelable lease but this is a non-cancelable straight lease, not a non-cancelable capital acquisition."
Mr. Rich added:
Even if a cancelable due to appropriation lease agreement, not an acquisition lease, not a lease purchase, not any place where you build equity in a facility, is acceptable to us.
Michael Shmerling, Chief Financial Officer, Corrections Partners, Inc., Nashville, Tennessee, interjected to add:
From the beginning, the original adapted format that we used to present this lease wasn't originated by us. We took the existing 23-year precedent of leases that are currently being used and said this will be acceptable to us. This wasn't the original format and they were accepted in other projects so we brought that forward and accepted it in this project.
Senator Raggio emphasized:
Our concern is not to judge your performance on this...we are obligated to follow in this state what our counsel indicates...if you can shed any light that will assist us in reaching a point where we can utilize this type of situation, or if you can direct some comment that will help our counsel in the event this is submitted to the court, that is really all we can ask you to do.
Mr. Rich suggested the agreements be structured. Mr. Swendseid added, "Every 2 years there is a renewal. We would ask, however, that the renewal base be based on appropriation."
Senator Raggio countered, "But he's indicated that doing that constitutes a moral obligation, which is a preclusion under the Hancock decision."
Mr. Rich added:
Based upon that we have found, an investor who said if you can give me a 4-year minimum guarantee rent, no outs, I will invest in a warehouse building that you convert to use for what you want to use it for. Now as I understand your budgeting process, you need to appropriate 4 years worth of rent during this upcoming biennium. I understand you do have some appropriations left from this year. So as not to upset your budgeting process...we would offer that you might consider using monies in this year's appropriation combined...approximately $550,000 per year is the cost to use this building.
Senator Raggio declared, "I guess at this point, this committee can accept your recommendation and consider it at that point when we discuss this issue, unless you're able to make some progress in your negotiations. Otherwise, I don't know that we can do anything at this point."
Senator Raggio asked representatives of CPI to submit a definitive negotiation proposal to the committee. He asked that CPI "outline the proposal in more specific and definitive terms that would be helpful for our purpose."
Senator Rawson asked if CPI had considered any drug rehabilitation programs for the women's facility, or if they had considered contracting to provide those types of services for the inmates.
Mr. Buchanan replied in the affirmative and declared CPI has developed drug rehabilitation programs for all institutions with which they have been affiliated. He advised CPI had planned to employ a full-time substance abuse coordinator for the facility.
Senator Callister asked who would be the owner of the facility.
Mr. Rich replied:
We originally considered using the Henderson Public Improvement Trust because they are the only conduit issuer in the state that issues taxes and bonds for a public purpose facility like this. There is no other entity that will do it just like this....So in the restructuring, the owner of the building now will probably be a private limited partnership, a corporation, some other private entity who will borrow funds on a taxable high-risk basis. The impact of that is...a return on investment of about l5-plus percent....
Senator Callister asked:
...Regarding classification of inmates, the provision that only those inmates deemed suitable by both parties will be incarcerated in the facilities...the...proposal does not include this provision. You've got to be able to essentially say we don't want this one, we only want these other ones in terms of inmate selection.
Mr. Rich answered:
In our discussions with Mr. Sannicks with the NDOP, we did want to have the capability to initially reject an inmate that primarily, for mental health or medical purposes, we do not have the capability to respond to their needs. In later discussion, we did not have that concern, both from a security-custody perspective and a programmatic. We were assured by the NDOP that they would screen individuals who would be appropriate candidates for the institution and we would accept the decision made by the NDOP.
Senator Callister declared:
I would be very concerned if that were to not be something that would be resolved in negotiations between the NDOP. Otherwise, I think as we venture into these waters of privatization, unfortunately you folks are the guinea pigs....There's going to be a lot of focus to the extent it looks like you're skimming and taking the cream, if there is such a thing, from the inmate pool and leaving the ones that are really tough to deal with, expensive to deal with, back in the hands of the state....
Mr. Buchanan expressed his concern and provided the example: "...We do not want to take an inmate into the program that ends up having a $25,000 heart surgery the next day, when we were not budgeted to provide for that type of situation. That was more concern than the security-custody issues...."
Senator Glomb asked Mr. Buchanan to expound on his comment regarding the increasing female inmate population.
Mr. Buchanan answered, "I say that on what is taking place nationally. I'm not specifically familiar with the policy decisions that are made in Nevada."
Senator Glomb agreed with the statistical indication of the increasing female population, but disagreed that the rising statistics had anything to do with the "Year of the Woman", as previously suggested. Moreover, she asserted, in hard economic times, women and children are forced into desperate measures which may be part of the problem. Continuing, she asked what it would cost to provide services to the inmate population.
Mr. Shmerling declared the Federal Bureau of Prisons has a facility l5 miles from the proposed women's facility, therefore both facilities would be drawing from the same labor pool. The cost of the Federal Bureau of Prisons is approximately $70 to $80 per day for l,000 beds. Continuing, he said, "Our contract with the Federal Bureau of Prisons to house the same inmates, in fact they swap from one facility to another, is $44.24 per day, which includes debt service on a brand new $28 million facility...." Mr. Shmerling emphasized there have been many studies that indicate privatization does actually save money without compromising the quality of the program.
Mr. Shmerling addressed Senator Glomb's question, "What is in it for investors?" He explained:
...There are two separate issues. One is the management and operations of the facility. You have a management company that does that. Separate...is the investor of the building....Their bet is that the state will need this facility for 20, 30, 40 years....
Senator Glomb requested statistics for reduction in mental health budgets which supports the findings of a parallel increase in the prison population, particularly for females.
Mr. Buchanan agreed to provide the data to the committee.
Gary Ghiggeri, Principal Deputy Fiscal Analyst, Legislative Counsel Bureau, distributed Feasibility of Privatizing Provision of Governmental Services, (Exhibit J - original on file with the Research Library) to the committee and provided an overview of the findings of the study.
Senator Raggio noted for committee information that the S.C.R. 2 of the Sixty-Sixth Session interim committee was particularly impressed with the New Mexico Women's Facility and utilized that facility in its consideration. He maintained the facility is a multi-level security prison, designed, built and operated by a private contractor. He concluded the committee will explore the possibility of a site visit to the New Mexico facility.
Senator Raggio complimented Gary Ghiggeri and Bob Guernsey for the excellent job in serving on the S.C.R. 2 of the Sixty-Sixth Session interim committee dealing with the feasibility of privatizing the provision of governmental services.
There being no further business to come before the committee, Senator Raggio adjourned the meeting at 10:30 a.m.
RESPECTFULLY SUBMITTED:
Dee Crawford,
Committee Secretary
APPROVED BY:
Senator William J. Raggio, Chairman
DATE:
??
Senate Committee on Finance
January 20, 1993
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