MINUTES OF THE
SENATE COMMITTEE ON FINANCE
Sixty-seventh Session
February 2, 1993
The Senate Committee on Finance was called to order by Chairman William J. Raggio, at 8:06 a.m., on Tuesday, February 2, 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 Bob Coffin
Senator Diana M. Glomb
Senator William R. O'Donnell
Senator Matthew Q. Callister
STAFF MEMBERS PRESENT:
Daniel G. Miles, Fiscal Analyst
Robert Guernsey, Principal Deputy Fiscal Analyst
Joan McConnell, Committee Secretary
OTHERS PRESENT:
Robert L. Seale, State Treasurer, State of Nevada
Forrest (Woody) P. Thorne, Deputy Budget Administrator, Budget Division
Donald Jayne, General Manager, State Industrial Insurance System (SIIS)
John W. Hines, Jr., Assistant Administrator, Jean Hanna Clark Rehabilitation Center
Judy Matteucci, Director, Department of Administration
Becky S. Abba, Budget Analyst, State Industrial Insurance System (SIIS)
Mathew C. Dorangricchia, Assistant General Manager, State Industrial Insurance System (SIIS)
John R. Orr, Deputy Administrator, Rehabilitation Division
State Treasurer - Page 61
Robert L. Seale, State Treasurer, State of Nevada, stated:
One of the things I wanted to achieve in becoming Treasurer of the State of Nevada was to have a challenge. That challenge sits right here next to me in the form of the latest budget. I've had this for about a week. I don't have all of the details, nor do I have a road map that helps me to get through it....We have made some significant accomplishments, I think, in the treasurer's office....
With the budget that you appropriated last biennium, I have reduced my overall expenditures by 13 percent. I have reduced my staff by 22 percent. We have undertaken to create, and submitted to the Municipal Tax Treasurers' Association, a new policy for the State of Nevada in investments, and we are the first state to have received
a certificate of excellence in that investment policy. We're rightfully proud of that accomplishment.
Early on, we had an opportunity that we took advantage of in the municipal bond bank, and we sold a number of those assets, about $156 million worth of those assets, earning for the state approximately $3 million. That one transaction has paid for the operation of the treasurer's office for almost my entire term.
Senator Raggio commented:
I notice, Mr. Seale, in the budget format, those are the kind of items I would expect to see in what we term performance indicators, under the new budget format, and I don't see anything like that in here. Did you submit a budget indicating those items?
Mr. Seale replied:
We have been able to expand the local government investment pool from about $140 million, when I took office, to about $250 million. This is during a period of decline in cash availability. I think that speaks to the confidence that the local governments have in the treasurer's office.
There are several things in my budget that I think are important...I've asked for some increases in my travel budgets. Last year I traveled a number of different places on either my own ticket, or got private donations, or financing, or underwriting, in order to go to various and sundry events. We don't work in a vacuum in the treasurer's office....We're a small agency, and it's important for us to talk to others who have ideas, and so I try to get myself and my staff to these meetings as frequently as possible.
Recognizing that we've got difficult budget times, I still believe that the increase that I've asked for there is reasonable....I've been fortunate to be able to put together a team in the treasurer's office that we have not seen there for many years. I've been very fortunate to get a chief deputy like Brian Krolicki, who has a background in investment banking. I've been fortunate to acquire John Adkins as my deputy treasurer of operations, who is a CPA [Certified Public Accountant] and has been in the private sector, and understands what we need to do there.
I'm fortunate to have been able to continue with our investment officer Diane Vasey, who has survived three treasurers, certainly a compliment to her and her ability, and she does a fantastic job, and is primarily responsible for our ability to receive that award from the Municipal Treasurers' Association. I also ask for a fairly significant increase for my deputy of operations.
Our telephone system was a hand-me-down a number of years ago, and we find it is not a touch-tone telephone. As we do our investments, particularly across the country, we find it very difficult when certain instructions come up that ask us to do a touch-tone operation. We are unable to do it, unless we use the phone booth in the Capitol, which we have been known to do.
Mr. Seale continued:
Also we have a microcomputer specialist position, which appears to be being moved to the Department of Data Processing. This particular microcomputer specialist doesn't do a lot a microcomputing, because we don't have much in the way of microcomputers. His function is more of an accounting function. The primary responsibility being that of doing the interest distribution that we have to do quarterly.
I might add, the way in which we do that distribution is ...unbelievably difficult. What happens in terms of making it super difficult is that we find an agency hasn't gotten their interest distribution for several quarters ago, so we have to go back and recalculate that, so every quarter gets calculated three or four times, always in arrears. It's an incredibly difficult process when you consider doing it by hand. However, if you're doing it on the computer, it's not all that difficult.
Again, we have no substantive kinds of equipment in the treasurer's office. We have three modern pieces of equipment, two of which I own personally. But, managing a $1 billion budget, with the kind of equipment that we have, I think is unconscionable.
Senator Raggio commented:
I think we need to understand where you are, and we are looking primarily, in our budget page [61] on the Agency Request, you have identified the travel increase, and you mention the telephone. Is that under the Operating Expense item, where is that?
Mr. Seale replied, "It's under the Enhancements."
Senator Raggio said:
There was a significant drop in the recommendation, under Operating Expenses, from your Agency Request, which was $118,000 and the Governor has recommended $97,000 in the Base budget. Is that as a result of moving the one position?
Mr. Seale diverted Senator Raggio's question to Forrest (Woody) P. Thorne, Deputy Budget Administrator, Budget Division, and added, "The microcomputer specialist came out of Salaries, under Personnel Expenses."
Senator Raggio stated, "You have about a $20,000 difference each year in Operating Expenses. Can someone enlighten us on what that is?"
Mr. Thorne replied, "The bulk of that difference is $17,000 and change, which was an attorney general cost, which was moved to the attorney general costs."
Senator Raggio asked, "Why does that change?"
Mr. Thorne answered:
That dropped out of the budget, and a portion of it went into the new AG [Attorney General] Cost Allocation Plan.
The bulk of the treasurer's budget is general funded, so most of the cost for the AT [Agency Transfers] services dropped out. The portion of the treasurer's budget is represented by the transfer from the Muni [Municipal] Bond Bank Fund for the support of the treasurer's office in performing that function. That portion of the attorney general's cost allocation was added to the budget in that form.
Senator Raggio commented:
I should alert the committee, I think Senator Callister is aware of it, there's a bill that we had in government affairs that's coming over here, and it changes some of the allocation in the attorney general's office, and then there's a new half-cost allocation proposal in the attorney general's budget. We haven't had an opportunity yet to be briefed on that, so I guess we'll have to wait until that happens.
Mr. Seale mentioned another item on page 63 under Federal Mandates:
There's an item of $62,952 [in the maintenance budget]. That is a position, a cash management position. The Cash Management Improvement Act of 1990, a federal mandate, requires us in state government, either the controller or the treasurer, to comply with certain federal regulations that, in effect, attempts to create an environment where we are not using the feds [federal government] money, and the feds aren't using our money. So, that there is no interest charge either in or out. Interest neutral, if you will.
In order to do that, we have to find somebody to do it, and we also have to find a mechanism to do it.
Senator Raggio asked:
Would you furnish this committee with the example that you furnished the government affairs committee on how that would be dealt with, and how it becomes interest neutral? I think you gave an example where you received the money, and you are charged interest under the new act, which I think becomes effective July 1 [1993]. The state must pay interest up until the time it actually is disbursed.
Mr. Seale agreed.
Senator Glomb stated she was curious, too. "Mr. Seale, you mentioned that either you or the controller need to do this. It doesn't matter...?"
Mr. Seale stated:
There is a logical place for it to sit, and the controller and I have spent a considerable amount of time discussing that, and we both agree...I don't believe that he has it in his budget. Some of that function is being done currently in the controller's office. The technology of acquiring the information will happen, hopefully, in the controller's office, depending on whether or not he gets funded for some equipment and software. But, because the treasurer is the closest to
the bank accounts, it makes sense for his office to do that, so that's why we put it here. And, we look at it as a cost that I can assure you, that the kinds of money, if we continue to do this in the way that we're currently doing it, it will cost anywhere from $400,000 to $800,000 a year.
The CMIA [Cash Management Improvement Act] portion of this person is not a full-time position, but what I'm also asking for is a true cash management position. We have, passing through the bank accounts, all 355 of the things, about $12 billion a year.
Senator Glomb asked, "What percentage is the CMIA position?"
Mr. Seale replied, "I would guess that it's somewhere in the neighborhood of 50 to 55 percent."
Senator Glomb asked if both the treasurer and the controller have to coordinate this position.
Mr. Seale responded, "We certainly do. But, we do on a whole bunch of things. This is not a new concept for us."
Senator Glomb asked to have confirmed the fact the controller is requesting the equipment in his budget, and the treasurer is requesting the position in his budget.
Mr. Seale said:
That is correct. But, what that equipment provides in terms of what it can do for this position, and for the state, is fairly extreme. With the kind of money we have to deal with, it's crucial that we move it, and identify it in those bank accounts, as quickly as possible. With the system that we have now, the two general ledgers that the controller currently processes, we are unable to get the kinds of information that we need to understand where the money is, as quickly as possible.
With both the position, and with the new software, I think it would be safe to say, if we can get our arms around the cash movement in this state, that we could earn up to $3 million more per year. We've got to, and we are submitting legislation to consolidate some of these bank accounts. We have already brought in some large funds that were being managed outside of the treasurer's office.
We have found a bank account in an agency that was contracted for outside of the treasurer's office, and they are paying an incredible sum of money for those banking services. We know that we can roll that bank account into our general account and probably save a couple hundred thousand dollars. These kinds of things are crucial, so I'm very strenuous on needing that position. It will pay for itself several times over, and I would be happy to submit documentation as to what my calculation is for doing that.
Senator Raggio asked Mr. Seale to submit the documentation as to his calculation. Mr. Seale said he would.
Mr. Seale further stated:
And those are more or less the specifics I have in my budget, and I would prefer to be measured on my output and not micro managed in the input. We have worked hard, and will continue to work hard in the treasurer's office.
If I may, I would like to say that what is not in the budget, and what is not seen here, is of a great deal more concern to me, and it goes to the reorganization.
Senator Rawson commented:
We have a great opportunity for reorganization now, and it would be appropriate to give us any input that you feel, as far as anything that would affect your office...Are you aware of any states that...if they have an elected treasurer that serves in a direct line with the Governor, maybe runs with the Governor as part of a platform, or a ticket, and is involved in the financial management of the state. Are you aware of any models of that?
Mr. Seale replied:
There are 43 elected treasurers in the United States. To my knowledge there are none who run on a platform with the Governor, and they generally run independent from a party point of view. I know of no situations where there is an elected treasurer, where that occurs. There are several where the treasurer is an appointee of the Governor, Michigan, primarily, is not an elected position. It's an appointed position, and has very, very broad financial responsibilities. Most of the other states have broader responsibilities than the treasurer of Nevada. And those responsibilities and duties have, over the years, been removed from the authority of the treasurer, and it was to that I was going to speak.
Senator Rawson remarked:
If you have any recommendations in regards to either broadening the powers of the treasurer, or switching to an appointed, something that runs in on direct line authority with the Governor versus independent, I'd just like to hear whatever suggestions you have.
Senator O'Donnell said:
I guess I'd like to substantiate a philosophical point that I have internally. In major corporations, is the same individual responsible for collecting the receipts, receiving the cash that actually goes out and expends the money, who writes the payroll checks. In other words, in business aren't there separation of the person who collects the money versus the person who is spending the money?
Mr. Seale responded:
Not always. But, frequently the treasurer of a corporation will have responsibilities more on the revenue side, and your chief financial officer will have the oversight of the expenditure side, generally down through a couple of routes, a controller, and a budget director on the chief financial officer's side. The treasurer may or may not have the revenue responsibility, but clearly would have the investment responsibility.
Senator O'Donnell commented, "And do you, yourself, believe there should be that autonomy from executive branch, in terms of being an elected official?"
Mr. Seale replied:
If the framers of our Constitution intended for there to be checks and balances, then absolutely there should be that separation.
In the treasurer's office, and in the reorganization, I currently have several duties. One is issuance of debt for the Municipal Bond Bank, revenue collection in some degree, responsibility over all of the bank accounts, a custody function, and certainly the investments of surplus money for the State of Nevada.
What I've found, in the short time I've been able to deal with this budget, is that the revenue collection...first let me say that the Governor's Reorganization Plan, the concept is an excellent one. The consolidation of many of the functions, particularly the financial functions, makes a great deal of sense.
I do have problems with some of the direction that some of those functional activities go to. For instance, we talk about consolidating debt. Debt is issued in several different places, but it would appear to me that function is not going to be residing in the treasurer's office. It most frequently resides there in other states. It's a logical place for debt issuance to go. The [State] Board of Examiners passes judgment on bond issues in this state, and not the [State] Board of Finance. Interestingly enough, in the [State] Board of Examiners, neither of the financial, or the fiscal, officers of the State of Nevada sit on that board. The [State] Board of Finance, on the other hand, which has the Governor, the controller, the treasurer and two outside members, one of which has to have some knowledge of banking, does not pass judgment of the issuance of bonds and debt in the State of Nevada.
I don't think that is logical, and I think that should be changed.
Senator Raggio asked, "Is that by statute?"
Mr. Seale replied, "I think that is correct."
Senator Raggio commented, "Before we lose that point, I'm going to ask staff if they will provide us a memo on that point. That seems to be one we should take a look at."
Mr. Seale continued:
There is the concept of consolidating revenue collection. That's an excellent idea. Again, I don't feel that concentrating that in the Department of Taxation is the most logical place. What we are trying to achieve is getting the money into one of the bank accounts, as quickly as possible, so it can be invested by the treasurer's office. If we are going to do that, then we need to have that...as close to the treasurer as we can get it.
A few seconds ago I talked about the [State] Board of Finance, and who sits on that, and I find in the Reorganization Plan that the [State] Board of Finance structurally is moved and becomes advisory to the new
director of the Department of Finance. And, that the Municipal Bond Bank is folded into that board. It seems inconsistent to me, to have the treasurer and the controller, and the Governor himself, reporting to an appointed official. It would be more logical to either do away with the [State] Board of Finance, fold it into the [State] Board of Examiners, so you would have fiscal officers sitting on that board as well.
There has, for many years, been a function known as unclaimed property, which has resided in the Department of Commerce for many, many years. In this Reorganization Plan, that has been put into motion, for what reason I don't know, but that moves to the Department of Finance about 50 percent of the state and treasurer's deal with unclaimed property. And if, indeed, that is being put into motion that, too, would make more sense to have in the treasurer's office, because it's a function of getting to monies that are going to the state, and they are probably in one of the bank's accounts, or banks that is dealt with in the treasurer's office. And, again, I think that makes more sense to reside there.
And last, it probably isn't last. I haven't been able to get all the way through the budget and understand it. I don't have access to the details....But, there is a creation of a new function, an internal audit function. I think that makes a lot of sense. I would question the functional area that it ends up in. It's in the Department of Finance, or Administration, I can't remember which. One of the things you want to achieve with internal audit is as great a degree of independence as you can. And, that's a function that would logically, in my opinion, reside in the treasurer's office.
So, having said that, I guess what I'm saying is I see some differences in the way my budget should probably be structured, and I would be happy, with the passage of a little bit of time and better understanding of what all is in this budget, to submit back to you what I think the treasurer's office should look like.
Senator Raggio asked if Mr. Seale had the opportunity to provide input on these issues in connection with the proposed reorganization.
Mr. Seale said he had spoken with Peat Marwick for about 45 minutes and did discuss some of the issues he had brought forward today, but not all of them, because he did not know which ones would be in play. He did not, however, have any discussions with the Governor's office, or the budget office.
Senator Jacobsen stated the audit subcommittee of Senator O'Donnell, Senator Glomb, and himself met with Gary Crews, and had a difficult time finding any fault with this operation. There were only about five recommendations. One, the [State] Board of Finance needs to establish administrative controls to insure all events requiring the board's review or approval are brought to its attention. And, the other four deal with the Municipal Bond Bank. It appears that regulations concerning the finance and adminis-tration of the Municipal Bond Bank have never been developed and should be worked on. Also document the cost of operating the Municipal Bond Bank. Lastly, internal controls to insure oversight of lending projects need to be improved.
Mr. Seale stated he was pleased with the results of the audit and thought the comments were "right on." He added, "It was truly a delight, as an auditor, to work with auditors as professional as those in the Legislative Counsel Bureau."
Mr. Thorne remarked:
While the treasurer and others have a variety of opinions on the Governor's Reorganization recommendations, I do want to make a point of clarification, concerning the [State] Board of Finance. The Governor's recommendation is to fold in the responsibilities of the Board for Financing Water Projects into the [State] Board of Finance, thus increasing the [State] Board of Finance responsibilities. You will also note the [State] Board of Finance support remains in the treasurer's office.
The [State] Board of Examiners does, by statute, have the authority and requirement to issue a state debt. With that, the advisory piece of the [State] Board of Finance, that is represented in the Governor's recommendation is for there to be a notice to the Department of Finance when there is to be a proposed new project and issuance. This is a function that occurs now when there's a proposed issuance on the Municipal Bond Bank. From that standpoint, there is no change. There is no intent to make that board report to the [State] Board of Finance.
Senator Raggio asked:
Did you understand Mr. Seale's comment that under the reorganization, as he understands it, the [State] Board of Finance becomes advisory only, and that it would be under the director of that department? How do you reconcile that?
Mr. Thorne replied:
The recommendation from the consultants from KPMG Peat Marwick was broader than what the Governor is proposing. There is still an advisory role, but it's just a continuation of the existing one, with the enhancement of folding in the responsibilities of the Board for Financing Water Projects into the [State] Board of Finance.
Senator Raggio asked Mr. Seale, "Do you understand that distinction?"
Mr. Seale replied:
I hear the words. I'm not sure that I understand. I find the [State] Board of Finance structurally, both in the budget, in the organization chart, I find the [State] Board of Finance reporting to the Department of Finance. I do not see the [State] Board of Finance on any other organizational chart not reporting to the Department of Finance. The water projects that you're talking about, I have to assume that's the natural resources and the Municipal Bond Bank. You can't give me authority I
already have. I'm the administrator of the Municipal Bond Bank, and those bonds, when we bring them to issue, currently go through the [State] Board of Examiners, so we have adequate oversight on that operation.
Mr. Thorne commented:
The Board for Financing Water Projects is a separate board, with separate financing responsibilities. I understand there have been very few issuances through that board. It's apparently a very complex process to go through that. There has been, as a result, as the Treasurer has indicated, a preference to use the resources of Municipal Bond Bank. Because of the similarities of the projects being funded, it makes sense to incorporate that program into the treasurer's responsibility.
Senator Raggio asked, "What about the consolidation of revenue collections and the suggestion, or recommendation, that be in the Department of Taxation rather than the treasurer's office? What's the administration's position on that?"
Mr. Thorne replied:
The Department of Taxation is the largest revenue collector for the state. That is the function of the taxation department. The movement of various tax revenue collection functions into the Department of Taxation makes a lot of sense. That is the Governor's recommendation.
Senator Jacobsen stated in the last session there was a concern about the proliferation of DDP (Department of Data Processing) equipment each agency was acquiring, and now we seem to be on a different mode where we are going to take the authority away.
We're going to leave the equipment, per se, in your office, is that the case, and yet the authority will be transferred over to DDP, for them to more or less be the boss? And, you're going to pay them for the services they render?
Mr. Seale replied:
That's what was being suggested with the one micro-computer specialist I have. As I indicated earlier, that position doesn't do much in the way of microcomputing, because we don't have much equipment anyway....We had a plan we put together some time ago, relative to going out and getting yet more data processing equipment to put into the treasurer's office.
In discussions over the last year or so with Darrel Daines, our controller, I decided not to do that, because what he was, what he is attempting to do will solve my problems far more inexpensively and probably will do a better job than my trying to create yet another micro- computing network in my office. And, so I've held off on doing that.
But, it's truly crucial that we get, for Mr. Daines, the system that he's talking about. The cost of that, again, can be paid for...don't consider anything about what it may do for the controller...what it will do for the
treasurer will pay for itself many times over, because I will be able to understand and see the patterns of the cash flows more easily.
If these authorities move away from the treasurer's office, that leaves precious little for the treasurer to do. I think we need to have appropriate checks and balances in the treasurer's office. I think that's what the framers of the Constitution had in mind. And, to leave an office that has nothing to do doesn't make any sense.
Then, I would argue, if you're going to do that, then get rid of the office. You can certainly make an argument for that now. But, that's a long and laborious process, to go through a couple of sessions, and take that to the people, to change the Constitution. And, after the last election we, I think, saw how little appetite they have for changing the constitution.
Senator Jacobsen asked, "Do you see [reorganization] as diminishing your ability to carry forward your elected duties?"
Mr. Seale responded:
Yes, sir. The reorganization, as I see it, the way it is currently structured...diminishes the officer rather substantially. I might also mention that if you were to do away with the office of treasurer, you have a budget of say $800,000 what would the savings be.
We've looked into that and have done some analysis on that, going through that process. You would save a mere $200,000 approximately. You still have to invest the money. You still have to have people to reconcile the bank accounts. You still have to deal with the custody issues. So, in terms of a cash savings, dollar savings, it's not great.
Mr. Thorne remarked:
There is nothing that I'm aware of in the Governor's Reorganization recommendations that diminishes, or takes anything away from the treasurer. What we have heard from the treasurer today is an indication there are a number of areas where the treasurer would like to add authority to his office, which does not exist now. That is different than the Governor's Reorganization taking authority away.
Municipal Bond Bank Revenue - Page 70
Mr. Seale commented:
This fund is a very simple one. This is where we administer the Municipal Bond Bank, where we take in the revenue from the municipalities and turn around and put it out to the people who bought the bonds that we have sold on the street. There is an amount in there of $115,000 that are the expenses we use to run the Municipal Bond Bank. The Governor's Recommend number is the same on page 70, however in the Operating Budget it is something greater than that, which reflects more accurately the costs of running the Municipal Bond Bank.
The Legislative Counsel Bureau rightfully pointed out that the Municipal Bond Bank should be self-supporting by the participants of the Municipal Bond Bank, so we have taken steps to insure all of the costs of running the Municipal Bond Bank out of the treasurer's office are identified, and that the entities using the Municipal Bond Bank pay for it.
Senator Raggio stated, "So, on page 70, this is recommending an increase in the reimbursement to make it cost neutral."
Mr. Seale remarked, "That's correct. And, I don't think there's any argument there between the Governor and I on this budget."
Senator Raggio asked, "What is the authority now, under this...is it $600 million?"
Mr. Seale replied, "Yes. We did that asset sale. We have approximately somewhere between $150 million and $200 million in debt out there." He added, almost 2 years ago an asset sale had been done out of the Municipal Bond Bank, and he is still looking for those opportunities to continue. The Municipal Bond Bank, particularly with the asset sale, continues to pay for itself.
Senator Raggio asked, "What, generally, is the spread between what the state is able to accomplish in the interest rate than what otherwise would you expect if these entities had to go out by themselves?"
Mr. Seale said an issuance had just been done with the City of Henderson and with Kingsbury General Improvement District. For Henderson, the spread was probably 20 basis points, between the state's double A rating, and what they could get with their rating on the street. Kingsbury General Improvement District is not rated, and probably could not get any money to do the project they need to do. In some instances, literally hundreds of basis points.
In this last sale, we had an opportunity to issue CABs [Capital Appreciation Bonds], Zero Coupon Bonds, which we did, and we created a little savings program for Nevadans. We were able to create $1,000 face value bonds, which we indicated to our underwriter would be sold first to citizens of the State of Nevada, to be used as college savings bonds...and also to use some of these bonds for retirements purposes....It's an excellent mechanism, we think, to provide a really good opportunity for the citizens of the State of Nevada to participate in their own growth.
Senator Raggio asked, "Any of these municipal securities have a problem nature at this point?"
Mr. Seale responded:
We have none of our participants at this point in time that had any problems. One of the recommendations of the Legislative Counsel Bureau was that we take a harder look at the financials on an ongoing basis of all of the participants, and we certainly do as they create new bonding. But, we accept that recommendation with eagerness and have begun to take a careful look at where all of our local governments are.
Municipal Bond Bank Debt Service - Page 73
Page 73 had been discussed along with page 70 and no further testimony was given.
State Industrial Insurance System (SIIS) - Page 1652
Donald Jayne, General Manager, State Industrial Insurance System (SIIS), introduced himself, and John W. Hines, Jr., Assistant Administrator, Jean Hanna Clark Rehabilitation Center, and
requested beginning with the Jean Hanna Clark Rehabilitation Center, page 1657.
Mr. Hines, referring to Account Number 1C86, read Exhibit C.
Senator Raggio stated, "You're making a distinction between what the purpose ought to be, that is physical rehabilitation only?"
Mr. Hines replied, "That is what the purpose is."
Senator Raggio asked, "Are you going to address this concept of dealing with a vocational rehabilitation part of the procedure?"
Mr. Jayne replied:
If I may, the reason for that type of opening statement would be the vocation rehab [rehabilitation] that's involved with the reorganization plan is within the other areas of the SIIS budget. We have rehabilitation counselors within the SIIS budget that work on getting individuals back to work. The Jean Hanna Clark Rehab Center does the physical, vocational rehabilitation necessary to get somebody to that point. So, there are two separate types of rehab.
Senator Raggio asked, "What has been the situation previously? Has vocational rehab done part of the project up until this point?"
Mr. Jayne stated, "In Jean Hanna Clark they do the physical rehab, always have. The vocational rehab is performed by counselors within the standard claims teams. There are two different groups doing the work."
Mr. Hines, referring to the budget, continued, "I would like to look at the differences that are classified as Enhancements."
Senator Raggio mentioned, "All of the funding, with a small amount of federal funding, comes from where?"
Mr. Hines replied, "There is no federal funding."
Senator Raggio mentioned there is a amount of $97,000 listed under Federal Funds.
Mr. Hines reiterated there are no federal funds. The $97,000 figure is an error.
Judy Matteucci, Director, Department of Administration, offered:
That's the ledger that was used. The ledger...we had a problem with the controller's office classifying ledgers, and we're using them for something else, so the ledger read, federal summer food service.
Mr. Hines remarked, "It would represent revenue from our food service. We have a cafeteria at the rehabilitation center. What's under that category would represent funds, or income to the cafeteria."
Senator Raggio asked, "Other than that, this is funded by what?"
Mr. Jayne responded, "The funding for Jean Hanna Clark is the same as the funding for SIIS in general. It's funded by the employers' premiums and by the invest dollars we can generate on our reserve portfolio."
Senator Raggio said, "The base budget before us recommends 155 positions with minimal change otherwise."
Mr. Hines answered, "There are no changes requested in personnel."
Senator Raggio moved to the Maintenance portion of the budget, and said, "The only significant changes appear to be under ADA [American Disabilities Act]."
Mr. Hines said:
That's correct, Senator. ADA represents an amount of $102,000, which is what we feel would be needed to bring our facility into compliance with the rules of ADA....Braille signs are required, changing our elevator to where it could be used by the blind, changing our fire-alarm system to where it would have a visual alert in addition to a sound alert, changing the height of water fountains, changing stalls in the lavatories....
Senator Raggio asked, "This is all at the center?" Mr. Hines said it was. Senator Raggio further asked, "I assume you have a list to justify the recommendation of $102,000?" Mr. Hines said he did.
Senator Raggio requested the list be given to staff.
Senator Raggio moved on to the enhancement portion of the budget.
Senator Glomb stated, "I'm just curious as to what you felt you needed. What this was for, and what the resource of Other, under Enhancements, where was that going to come from? Is that General Fund money you are asking for?
Mr. Hines replied, "No, Senator. We get all our money either through fees for services from SIIS, or from cafeteria services, or...."
Senator Glomb asked, "Could you explain the enhancement portion of your budget?"
Mr. Hines stated:
Under Expenditures, for Out-of-State Travel, we have historically requested $1,600 in that category, which we feel would cover about one trip to the east coast, should it ever be necessary. We continue to request $1,600 and we have not spent the money if it has not been required. The In-State Travel, in the past the only one that has made any trips has been the administrator of the rehabilitation center.
As SIIS gets more involved in its computerization, it has been necessary for the rehab center to be involved in that, so the additional monies for the In-State Travel
would be to cover trips such as those. Again, we have kept those to a minimum.
Operating Expenses, I would say any differences there ...when we put the budget together we determined the amount that would be appropriate in operating expenses based on the level of activity that we felt would take place with the rehabilitation center.
Senator Raggio said:
I don't think you're responding to Senator Glomb's question. The level of activity would be reflected, generally, in the Maintenance budget if it's just caseload. What's in the Enhancement Request? You had $135,000 and $220,000 respectively. What was your request, I think was Senator Glomb's question, even
though it hasn't been recommended? What was that based on?
Mr. Jayne said:
I think part of the problem is coming at this moment in time, and will continue into the overall SIIS budget with the difference between the base line, the maintenance and the enhancement portions of the budget. The base line, going back into the Fiscal Year 1992 budget has created a problem throughout our budget process, and we, too, received our budget information last week. I'm trying to work through what it is.
Part of the problem comes in is we are a non-General Fund agency. During the Fiscal Year 1992 we had received approval for varying levels of, and I'll save some of that for the general SIIS budget, approvals to hire staff, and for different components of the budget. Throughout the course of the year, working with the administration, there was a review of all the positions. There was a slowdown in the positions being hired, and the positions were not hired in the early part of that year. In fact, most of them were hired during the latter part of that year. Positions approved in Fiscal Year 1993 are also obviously not in the Fiscal Year 1992 base line, as well as additional positions we might have secured from an Interim Finance Committee meeting in June of '92.
So, we felt, in many instances, that the base line of Fiscal Year 1992 was not an accurate reflection of the finances that we needed. As we worked with the Budget Division from there, we have not been able to settle into an agreeable definition of what is enhancement and what is maintenance. Perhaps, some of the difficulties Mr. Hines is having, is some of these programs identified in there may not be perceived by him as enhancements.
John [Hines] can take the general subject of the $135,000 and the type of programs that we see as being an ongoing maintenance as opposed to enhancement.
Senator Raggio stated the impression is 90 percent of the patients are from SIIS and asked if there are other patients from self-funded sources. "Do you receive revenue, otherwise, for those patients?" Mr. Hines replied they did. Senator Raggio asked,
"When you receive revenue, other than SIIS payments, where is that reflected in the budget?"
Mr. Hines replied, "It's all included in the Other information. When we track it, we do track it as two different items, so we are aware what income is from SIIS, and what income is from other sources."
Becky S. Abba, Budget Analyst, State Industrial Insurance System, commented the way the revenue portion on the Jean Hanna Clark budget is set up is 90 percent comes from SIIS. The other revenue comes from private clients, who use the center. Jean Hanna Clark Rehabilitation Center will track the difference between what is being billed to SIIS for our clients, and what is being billed from private enterprise. Agency Transfers, in the work program of 1993, represents the difference of what has been collected from SIIS for the use of claimants, and what the SIIS insurance fund has had to
subsidize to offset, or balance the budget. The $80,530 is what the center collects in the cafeteria.
Senator Raggio asked, "So, the $115,000 in the work program was in effect the subsidy?"
Ms. Abba replied, "Yes, that's projected right now for 1993."
Ms. Matteucci stated:
Mr. Chairman, that's not exactly correct. The $115,000 is the cost of the salary adjustment. And, the projected subsidy from SIIS, according to our records, is about $1.4 million, that has rolled into the $6.7 million, called Others. We have in client charges $5.3 million. In the SIIS appropriation, or whatever you want to call it, it's $1.4 million...The $115,000 is simply a balancing figure for the cost of the salary increase.
Ms. Abba said, "The old format showed the subsidy from SIIS, and I was looking at Agency Transfers and assuming it was the same thing."
Senator Raggio commented:
I guess we have to ask a couple of questions on the center, before we get to the overall budget. Does SIIS send all of the claimants that require physical rehab services, in that area, to the center [Jean Hanna Clark Rehabilitation Center]? What is the policy on referrals?
Mr. Jayne responded:
We would desire to send as many as possible to the rehab center for this type of work. We can encourage them through the claims teams, and the direction of the claim to do that, as far as directing the care. We cannot mandate it, however. The vast majority of the work done in the rehab center comes from SIIS. The vast majority of that comes from the southern regional office, and they charge and collect in their revenues the standard fees, according to the medical fee schedules that are out there generating revenues for the Jean Hanna Clark. We are not able to mandate it all, at least at this point in time.
Senator Rawson referred to the Performance Indicators and said:
I see some of the projections go up, some of the projections go down as we go further out in the next 2 or 3 years. Wouldn't you expect to see more people, to have more injured patients receive rehab services, or more appointments? Why is that heading down as we go into 1994-1995?
Mr. Hines stated:
The number of injured patients, the way this is counted, is the number of patient days, so if a patient is there 5 different days, that patient would be counted 5 times. The number of appointments that we have for injured patients, similar to the number of patients, the appointment represents one time at which a patient is
going to be in a particular therapy. That appointment may represent a number of modalities....
Senator Rawson said:
Let's look at the number of injured patients for a minute. The projected for '92 was 44,700, actual 39,400. Projected for '93 goes back to the identical figure that was projected for '92. Projected for '94 then goes to what the actual was in '92. And then it goes on out that way. Are you at capacity, or do you expect to be able to see more patients, if you have more patients come in?
Mr. Hines replied, "Yes, we are at capacity. And, the reason to say that is we've had difficulty hiring physical therapists...Our expectation is that, yes, our patient load and patient count will increase."
Senator Rawson said the figures indicate the expectation of falling off in 1994 and 1995 and suggested more time be spent on the figures.
Ms. Abba commented:
Senator Rawson, the figures they have used here in the Executive Budget are not the figures we gave them. They just picked up the actuals and used them again. I do have some figures...and it's not the Performance Indicators that I see.
Senator O'Donnell stated, "You're saying that the numbers that came from the Governor's Office, in the Governor's Budget, aren't the numbers that you provided?" Ms. Abba said they were not.
Ms. Matteucci remarked:
Senator O'Donnell, we're going to check on that. I doubt that. We would not be using someone else's...make up our own numbers, particularly as it relates to a budget like this.
Senator O'Donnell asked, "So, how are we to evaluate a budget that we don't really know...."
Mr. Jayne commented:
My best guess to try to clarify that would be, it looks like it's been moved back to the '92 actual, which as I said earlier, we built our budget on what we felt our best forecasts were, based on the situation we had as a non-General Fund. None of the positions that went away
during the budget freeze, and the revenue crunch that was there, none of those positions that went away in their total went away from our budget. As a non-General Fund agency, we had reasons to build a slightly different budget than the absolute actuals.
Senator Rawson asked, "Do you have any way of telling us how many patients that really represents?"
Mr. Hines replied:
I believe that we now could provide that information. The reason for doing it this way originally was because we were trying to do this on a PC [personal computer].
We didn't have sufficient computing power to be able to carry this over time. We have since, as part of our
computer request, installed a larger system that will give us that capability.
Senator Rawson explained, "I think patient days are relative valuable to you...If it's not a big project to get that out, I think we'd like to know."
Mr. Jayne said the loss of physical therapists to the outside is because the cottage industries that surround the workers' compensation environment today are luring them away with more attractive salaries. With more therapists the capability to handle more patients will be there.
Senator O'Donnell asked if the physical therapists who are leaving have been paid by SIIS, when they put in a claim for an injured worker.
Mr. Jayne stated SIIS is ultimately paying them. The bills are being paid by the insurance company, which is in fact SIIS.
Senator O'Donnell remarked, "So, we could make the analysis that the rehabilitation physical therapists are leaving, getting a higher pay, and working for a privatized individual, and you're still paying the bill."
Mr. Jayne replied:
Indirectly, yes. As the insurer, if there's a selection made by the injured worker, under whatever their guidance may be to go to a different facility, and they incur costs, those costs are picked up by the insurance company, which is SIIS.
Senator O'Donnell asked, "At the same rate? You reimburse yourself?"
Mr. Jayne replied, "No. It's at a slightly higher rate."
Senator Raggio referred back to the Executive Budget page 1652, State Industrial Insurance System.
Mr. Jayne distributed and began a discussion on a document IC-85, State Industrial Insurance System, prepared by SIIS-Budget/Analysis Department (Exhibit D).
Ms. Matteucci distributed a Final 56, replacing a Revised 56, (Exhibit E).
Senator Raggio asked Mr. Jayne, "Do most of the public entities insure under SIIS, major cities?"
Mr. Jayne stated many of the cities, and some of the counties, have looked at self-insurance as an option and have gone self-insurance. Most of the state agencies are with the insurance company (SIIS). Mr. Jayne believed the City of Las Vegas is self-insured, and the City of Reno has looked at self-insurance as well, and most recently the City of Sparks has been looking at self-insurance. There are approximately 125 to 130 self-insureds today, which represents approximately 40 percent of the premium that would be collected if the premiums were projected out to what they would be. There is a very significant volume of premium in the self-insurance arena today. The self-insurance criteria is determined by the Insurance Commissioner's Office, approximately $2.5 million of net worth, in addition to other solvency tests.
Senator Callister mentioned the $377 million shortfall. The KPMG Peat Marwick study says there is a $1.4 billion problem. The most recent figures from our own insurance commissioner indicates it is $2.2 billion. Although only about a year apart, there is a great difference between the numbers. Regarding the fiscal crisis, Senator Callister requested an answer to two questions:
Number one, what is the number today that you presume needs to be generated to salvage the system? Number two, how long do we have to generate that number? I've seen this 1996 calculation from the commissioner of insurance that indicates by 1996 we are broke. We are out of money. I'd like to get your input on that.
Mr. Jayne said he would have to drop back to Fiscal Year 1991 to pick up some of the numbers we are dealing with, the first year where the shortfall, or unfunded liabilities came to light. At that time there was a different actuarial firm, Joseph Flynn, on board, whose contract was eventually terminated. The financial statements filed at the close of the fiscal year, June 30, 1991, reflected approximately a $200 million unfunded liability, which is where the problem began. Potential professional liability is being pursued against the prior actuarial firm and the prior financial firm. Mr. Jayne could not expound on their alleged liability due to pending litigation. He added:
That was the first year that technically this agency was bankrupt....We had unfunded liabilities in the neighborhood of $200 million at that point in time of Fiscal Year 1991. Upon the termination of the prior actuary firm, we hired Tillinghast, which is the number one actuarial firm in the country....We had them redo the Fiscal Year 1991 year, and that's where the $377 million figure...comes from.
Senator Callister pointed out between the $200 million and the $377 million, there is left a $177 million difference in terms of the unfunded liability.
Mr. Jayne said, "The unfunded liability would characterize how much money we should have on hand in our reserves, based on the current trends." He said the next number actually filed would have been the financial reports for Fiscal Year 1992 at the close of June, 1992.
Senator Callister asked, "How do you get from $377 million to $1.4 billion in a year?...That seems to be an extraordinary jump within that 12-month period."
Mr. Jayne explained:
What it is was one more year of accelerating trends ....They look at the past 3 to 5 years, and they look at the trends in there....Also, Tillinghast had, at that point in time, a full year to take a look at the trends and evaluate the data. So, in 1 year, Senator [Callister], we don't necessary lose $1.4 billion.
Senator Callister said:
I understand these are not real numbers in some sense that they equate with tangible dollars. They all presume certain facts that build into the number. But, it's still an extraordinary 1-year change in assumptions about
the depth of the crisis, about the extent of the unfunded liability. It's a billion-plus dollar difference.
Mr. Jayne mentioned he could have the professionals come in and go through the trends and figures in detail.
Senator Callister asked if Mr. Jayne could provide him with a document, perhaps within a Peat Marwick study, that says in some executive summary understandable form what occurred.
Mr. Jayne said he has some executive summaries he could send Senator Callister but perhaps should have the actuary firm produce a narrative executive summary to explain. He added:
I do not attempt to belittle this, because whether the difference in the numbers is significant, we've produced an explanation of why we feel our numbers are appropriate within certain accounting standards. Perhaps the thing to keep in mind would be the insurance commissioner's actuary looked at the total liabilities, as do we, and before you discount how you prepare a financial statement, the total liabilities that the insurance commissioner's actuary came up with was approximately $2.5 billion, that's the total liabilities. The total liabilities our actuary came up with was $2.27 billion [within 10 percent of each other].
Senator Raggio stated it would be helpful if Mr. Jayne could comply with Senator Callister's request and, in addition, submit an analysis as to the different trends, which drove the change in the numbers of the unfunded liability, and the distinction between the accounting procedures utilized by the insurance division and otherwise.
Senator O'Donnell asked, "When, in 1991, did you realize the unfunded liability of $200 million? Was it early in the year, or was it late in the year?"
Mr. Jayne stated he joined SIIS in June of 1991. The financial reporting period comes to a close at the end of June. He added, it must have been October or November, as the financials were being prepared, when it first came to light there were trends to be acknowledged and dealt with.
Senator O'Donnell mentioned, "So, in 1991 you had a widening of two curves. The revenue curve wasn't keeping up with the actuarial trend. Is that correct?"
Mr. Jayne acknowledged, "That's correct."
Senator O'Donnell asked, "Who determines the rate at which employers are going to be charged. Isn't the board the one that usually decides there's going to be a rate increase?"
Mr. Jayne stated:
The board actually plays very little role in the rate-making process. The rate filing for the same point in time, Senator [O'Donnell], that we're talking about there was made for...originally 7/1/91, and a late filing was proposed at that point in time. The late filing is, in fact, brought to the Board of Directors, but it's prepared by the general manager, with advice from the actuarial firms...and a review of the claims' reserves.
The rate filing for 7/1/91 was probably prepared, in reality, in the March/April time period, when they were reviewing reserves and reviewing results at that point in time. The rate filing for 7/1/91 was pushed back until 10/1/91 at the request of various members of the legislature, as well as the board of directors to wait and see the impact of the law passed in the 1991 session.
Senator O'Donnell asked, "Can you give me the names of the legislators who requested that be pushed back?"
Mr. Jayne replied:
I believe it came from a couple different committees working on the workers' compensation issues, but it is my understanding there was a request from some key legislators, as well, to push it back to 10/1/91 to see the impacts of local audit [that] would be passed in that session. The reason why I say that would be, the rate filing made in that point in time would not have had the recognition of the financial problems we discovered.
Senator O'Donnell asked if Mr. Jayne, as general manager, had asked for a rate increase in 1992.
Mr. Jayne replied:
We had asked for a rate increase at a board meeting that I was at. I looked originally for approximately a 22 percent rate increase, and we were backed off of that. I did not have support of my board of directors to do that.
Senator O'Donnell asked, "Who backed you off?"
Mr. Jayne responded:
I had a vote with my board that would not support advancing that rate. It was a tremendous concern that we could not recover in rate all the problems that existed, that there was a need for legislative reform in the future, and it would not be the proper approach to take that burden of what this unfunded liability could be onto the policyholders.
Senator O'Donnell asked, "Would you say that because of the board's inaction in the rate increase that has exacerbated the problem at the present time, since you testified that it was increasing at an increasing rate?"
Mr. Jayne replied:
I can't really say that involvement directly, and of itself, drives the problem. Certainly any additional rate that may have come in would be additional revenue into the entity. But, the difference in the revenue stream and the cash outflow is so dramatic today, that the point being raised that it can't be fixed by rate alone is a valid point.
Certainly if we had to sit down today, and take a look at the levels of rate increases, it would be necessary to balance the ledger and to rebuild this fund over time. We're probably looking at the rate increases in the neighborhood of 60 and 70 percent, based on current trends....We produced pro forma reports, that we can certainly make available to this committee, looking at a number of different scenarios.
Senator O'Donnell commented:
Let me sum this up by saying that I think it was the Governor who was jawboning the board and saying that he didn't think the rate increase was the proper way to grow, and I agree wholeheartedly with him. But, I think on the other aspect, the costs curve, if you will, the actuarial trend curve is where the Governor is really going to spend his time.
I think this committee better realize that if we're going to be taxing, or increasing fees on businesses, I don't think that's where the Governor's going, but I do think he's looking at directly reducing costs involved, and curbing that trend, and that's where I'm going.
Mr. Jayne said:
In the pro forma that I mentioned, one of the things we talk to in there, it's difficult to make a recommendation. We present about 12 or 15 different potential options. The thing we tried to point out with that report would be...called cash-flow solvency. If we can achieve cash-flow solvency, we can take time to rebuild that long-term estimated liability. We can take time to have the unfunded liabilities begin to collapse upon themselves by reversing the trend lines with legislative reform, with regulation reform.
Senator Raggio requested Mr. Jayne supply a copy of his pro forma to the Senate Committee on Finance. He added:
I did get a copy of it, and it seemed to be designed to make a case for a 1 percent tax on payroll, across the board. That seemed to be the primary purpose of that pro forma analysis and obviously isn't being recommended by the Governor. Are you going to speak to that? Is that a proposal that is being made by the SIIS board at the present time?
Mr. Jayne commented it is not a proposal being made by anybody at this point in time. He added there is history showing other states, where a state fund, such as the one in Nevada, has gone bankrupt, and ultimately the liability tracked back to the state, and became an obligation to the state. Montana, for example, handled it with a 1 percent payroll tax.
Senator Raggio asked, "Does the SIIS board, or staff who prepared that pro forma feel there is a necessary need for that, or if not, that the system can't be resurrected?"
Mr. Jayne stated near the end of the pro forma report, there are two scenarios recommended, both of which involve cost-containment measures, such as legislative reform. Also, both involve a reasonable single-digit rate increase projecting into the future.
Mr. Jayne added:
The two scenarios recommended, I believe...are the most palatable and the most reasonable for Nevada. That they would involve getting the agency to the cash-flow solvency that I talked about, through a combination of cost-containment measures, and reasonable rate increases, and allowing the unfunded liabilities and the liabilities to rebuild over time as we correct the trends....No recommendation from myself, nor my board, for a payroll tax.
Senator Coffin mentioned insurance companies do not fail within a year or two, it takes time for the "sickness to creep in." It is usually underpricing of the product for a long period of time in
attempting to buy business or keep business. He also surmised one of the problems has been increased benefits considerably over the years, without an increase in the contribution rate.
Mr. Jayne stated:
The baseline for 1992 we did not believe, when we built our budget, was the most appropriate baseline for us, based on the executive review of the hiring of positions, the amount of time it took to hire some of those folks, in fact, work with the administration to get positions hired. It was the delay in getting them that actually held down the dollars in the baseline year that was desired for use. It also didn't recognize the positions that would come up in Fiscal Year 1993. It also didn't pick up the 48 positions that were approved by an Interim Finance Committee in June of 1992....It does not have those positions.
Ms. Matteucci commented, "That's not true. It does have them in there."
Senator Raggio said, "One of you is not accurate."
Ms. Matteucci remarked:
I think there's a miscommunication with Mr. Jayne. Forty-eight positions have been added, pursuant to the definition of adjusted base....We attempted to adjust the operating expenses for the new positions, or the unfilled positions, in the actual year, where SIIS could make a case if there were additional operating costs charged to it. If they could not make that particular demonstration to us, then the additional operating costs were not added. But, those positions are added in here.
Mr. Jayne said, "In the '94 baseline? That's information that's new to me."
Senator Raggio stated:
If you need to depart from the format that's before us, to some extent, we will allow you that flexibility, but I know it's difficult to get used to it, but we're showing, under the Governor's Recommendation, the equivalent of 853-3/4 positions in Fiscal [FY] '94, and
that goes down to, for whatever reason, 821.5 in the second year.
Ms. Matteucci interjected, "Those are the rehab and the auditors going out."
Senator Raggio asked, "That's only the audit positions and the rehab going over to the other departments?"
Ms. Matteucci replied, "That's correct."
Mr. Jayne stated:
The positions we have on the budget here, I think the difference there because we requested no net additional positions in our '94-'95 from our budget submission. We felt that the positions that we would have gained in the Fiscal Year '93, and the additional positions approved by the Interim Finance Committee in June of '92 would have
given us a sufficient base of positions to operate within the indicators that we saw for our claims numbers.
Senator Raggio commented:
The budget page we're working from we understand, and I would like Judy's [Matteucci] concurrence on this, reflects the actual present positions that are in place, actual...less in the second year, and in the first year ... those positions, the audit positions that are being transferred out to the taxation department [Department of Taxation], and also the proposed vocational rehabilitation positions....
Mr. Jayne interrupted and said, "That would be correct. I don't think we have a difference of opinion there."
Senator Raggio said:
What is SIIS's position on the transfer of the audit positions, and I understand that's a physical transfer, and the transfer of the voc [vocational] rehab function to the new department? What's your position on that?
Mr. Jayne replied:
I'd like to take them as two different subjects if we can to go through. Again this is based on our understanding of the situation based on the information we have as of today.
It's my understanding, as of today, that there would be 39 premium audit positions removed from my budget. These are essentially not management-level positions. There may be a supervisor involved in there. These are primarily people who are working in the field, or the clerical support staff necessary to support the premium audit function.
The premium audit department in Fiscal Year 1992 performed 11,900 physical audits, audits for our policyholders, audits for the insurance company, audits that, in fact, generated an additional premium income, another revenue source of the agency, of $3.2 million for the fiscal year.
We have had meetings with my staff and Mr. Comeaux's staff from taxation to attempt to go through the type of needs that we have as an insurance company for the different types of audits that we have as an insurance company. Working with them, their understanding, and again this is the understanding conveyed to me, as of the 39 people removed from my budget, and the $1.5 million removed from my budget, that approximately...seven people would make it into the taxation department as a result of that staff.
It's my understanding today that 83 individuals in the reorganization were, in fact, targeted for layoffs coming from the SIIS entity. Approximately 33 of the 39 auditor positions are targeted for layoff. In meetings with taxation staff and my staff, they've conveyed to me that they could perform approximately 4,500 audits for us in a year.
The attempt at reorganization...would be to have them, when they're out there performing their other audits, pick up the SIIS information at that point in time.
Senator Raggio queried, "You are saying then that 32 of those audit positions, or the equivalent, would not be on the payroll. How will that reflect the audit responsibilities as you see?"
Mr. Jayne referred to 33 rather then 32 audit positions, and stated:
I would be very concerned that the level of work necessary, and the type of audits necessary to be performed could not be performed by the taxation department. Many of our audits that we perform as an insurance company, if you will, [are] voluntary audits, or optional, what we call demand audits as a result of cancellations, or needs for certificates, or the need to go out there and validate the books.
My primary concern...would be, if we're going to go through a reorganization we need to provide the same level, or better, of services as a result of reorganization, not reduce the level of services.
Senator Raggio stated:
That was also the goal of the Governor under the reorganization, that it would serve two functions. One, they felt that the level of audit...would still be available, and also that it would relieve the taxpayer, businessman, whoever, from the onerous situation of multiple audits....When this was done, why, for example, from the insurance department also included in this audit situation. They're not, are they? Those who do audits for the insurance division?
Ms. Matteucci replied, "We transferred some insurance positions over. But, insurance examinations are of insurance companies, and not general businesses. What we were attempting to do is get to the vast majority of those folks who have the same...."
Senator Raggio commented:
So, insofar as possible their thrust was to try to combine the audit function where it pertains to individual entities, rather than large companies. I understand that. So, with that, do you still have the concern that the level of audit, that is certainly necessary for SIIS to operate and be functional....
Mr. Jayne remarked:
I can merely speak to what I have as far as information, and what I have is my background and my experience. And, the desire to have SIIS operate more like a private insurance company is a good one. And, as a private insurance company my premium auditors going out there, generating additional premium from revenue collection...as I said, in 1992 we generated $3 million- plus in additional revenue. If we cut more than in half the number of audits performed by my premium auditors, we're going to cut the income down from that as well.
The type of audits that taxation performs are not similar to what an insurance company does. The documents they access for the information is.
Senator Raggio said, "I think they envision an intensive training
program to allow these auditors to develop expertise in all of the areas."
Mr. Jayne commented, "I believe it could be accomplished, but my concern would be that we don't have the same level of work done in the field for the insurance company."
Senator Raggio remarked, "And your concern is that could be reflected in the loss of the revenue that is derived from comprehensive audits?"
Mr. Jayne replied, "Without question, I think it will result in a loss of revenue into the insurance company unless we are able to increase the number of audits that are performed out there."
Senator Raggio stated, "The point is well made."
Ms. Matteucci said:
The director of the Department of Taxation is attempting to work with both the Employment Security Department and the SIIS system to deal with their issues, but in a quick calculation of math, if they collected $3 million in audit premiums and have 39 auditors that's about a recovery per auditor of $76,000. You'll remember that the audit recovery over at the Department of Taxation is $400,000 per auditor.
Mr. Jayne remarked, "I appreciate that feedback, and it depends on the type of audit they are doing out there."
Senator Raggio asked, "Did you want to respond specifically with reference to the demand audit?"
Mr. Jayne replied:
I will merely echo my concern. We need to work on the reorganization plan, we need to see what it is. I'm concerned that 33 individuals end up being laid off, but not so much the fact that they're laid off. I'm concerned that the intent of reorg [reorganization] has been conveyed to me, and I support to have at least similar services, or improved services, provided to the customer, if you will, which in this case is the already perceived bankrupt insurance company. And, we need to have whatever revenue sources we can come in.
I also am concerned that we have these moves being made out of the budget, with the $1.5 million removed. On the information I've got, we're also being assessed back $1.5 million.
Senator Raggio stated, "There is an equivalent assessment, but is the assessment based on those positions that are going to remain, or is it based on the total positions that are removed. Wasn't it one-third, one-third, and one-third?"
Ms. Matteucci commented, "The assessment is based on, at this point, the estimated share of the agency of the cost of the audit. Of course, over time we're going to get a better feel for exactly what...."
Senator Raggio stated:
I think the answer was that there was a rather arbitrary...assuming they would spend about a third of their time on each function, and that, I guess, until they derive some history on that, they are not going to be able to allocate it otherwise. So, I think that was the response we got.
Mr. Jayne remarked:
As long as we have similar services provided for us we've got the need to have these audits performed...I understand that, from the meeting with taxation, we can retrain, or enhance the abilities of people who are out there. There's no question in my mind that when they are there they can pick up the same sort of information. Whether they can perform as many and perform on a demand need that we have, they also serve, as an aside, some of the eyes and the ears of the insurance company to be out there to validate the exposure that we have. They can pick up numbers, but we'll have needs along the way that they will have to respond to. Certainly the 11,800 we perform today, I believe, is really not a luxury.
Senator Raggio stated, "Let's go to the second question, the transfer of the vocational rehabilitation function."
Mr. Jayne commented:
We've got a very similar situation to what we just talked about with premium audit. It's my understanding that 129 positions have been identified within the budget. It's my understanding that 74 positions end up with the vocational rehab agency. And, that 55 positions are targeted to be laid off.
There's a lot of information passing back and forth at this point in time, and we don't have a total amount of detail, but...from what I'm hearing here...we'll have 74 positions in voc rehab. We'll ask them to conduct the similar services that our rehab counselors perform today. This would be very different than what Jean Hanna Clark testified about before. That would be the difference between the physical rehabilitation and vocational rehabilitation.
My concerns, simply put again, would be that we are able to perform a similar level of service, certainly within the confines of our own business plan. There's the recognition in the agreement that something has to be done about vocational rehabilitation. I simply don't have enough information at this point of time to have a clear understanding of the type of services that they would provide, whether or not it would be a key element of the insurance element provided. Who would pay the disability payments? We're missing a lot of level of detail here for me to opinionate.
Senator Glomb commented, "According to the narrative on page 1656, there's a 129 full-time employees. Of that, there would be 65 counselors, 67 nurses...."
Mr. Jayne remarked, "I'm sorry, we didn't prepare that page."
Ms. Matteucci said, "Those are the positions that were identified as providing rehabilitation services that we removed. On the other side, in voc, we have the new positions that they have recommended."
Senator Glomb asked if the rehabilitation nurses also did case management.
Mr. Jayne said:
Certainly much more than rehab. In fact the nurses involved with the total component of the team, and working with the team for the overall claims manage, another team. It appears that the 50-plus positions that are targeted for layoff are nurses.
Senator Glomb stated, "Of the 129, 57 are nurses, and your understanding is they are being moved to rehab and then will not be used there.?
Mr. Jayne said, "That is my understanding. Unfortunately I haven't got enough detail to directly answer that. My understanding would be they are laid off."
Ms. Matteucci interjected:
I want to clarify something. Mr. Jayne keeps talking about layoffs...The Department of Personnel is working on those targeted areas that have large masses of positions that are being switched, and they are attempting to find them jobs. There's not going to be a day when all of a sudden we say ta-da, you're all laid off. I want to correct that. That word keeps coming up.
Senator Raggio referred Senator Glomb to the two sheets, Attachments A and B of the Value of Reorganization Savings document (Exhibit F and Exhibit G) previously handed out by Ms. Matteucci.
Senator Glomb stated, "The issue that I'm trying to raise here is, who is going to perform the case-management services when these people are no longer there to do that job. It seems like that's a very important cost-saving component of SIIS."
Ms. Matteucci replied, "It is my understanding that the nurses are a part of the evaluation of clients associated with their rehab needs, and not the case-management issue. And, so they were identified as being part of the rehab unit of SIIS."
Senator Glomb remarked, "Well, my understanding is that only about 20 percent of their work is rehab related, and 80 percent of their work is case management related."
Ms. Matteucci commented:
Well, we were responding to an organizational chart that was supplied to us by the SIIS, showing them as being rehab only. If they're using their nurses for other than rehab, or other than what it appears to us on these functional charts, then we may need to sit down and talk with them some more. You've heard this explanation from the ESD [Employment Security Department] for their auditors. I suspect you'll hear it from everybody that they aren't really doing everything that we said they were on this chart. They're doing all sorts of other duties, too. We'll be happy to sit down and talk with SIIS about what it is that those nurses do.
Senator Glomb remarked:
I know you would need a professional person like a nurse to be able to look through a chart, and make some decisions in terms of case-management issues. That's a lot of positions to transfer out, and those duties are left unaddressed. Who has the information we need in order to sort all this out?
Ms. Matteucci said:
They have teams over at SIIS. There isn't just a nurse dealing with case management, Senator Glomb. If you would like to have an explanation of how voc rehab anticipates the rehabilitation portion coming up, we have Mr. Orr here, who can explain that to you.
Senator Raggio invited both Mr. Orr and Mr. Dorangricchia to approach the witness table.
Mathew C. Dorangricchia, Assistant General Manager, State Industrial Insurance System, introduced himself.
Mr. Jayne announced Mr. Dorangricchia has responsibility for both the premium audit area we talked about, as well as the claims arena.
Mr. Dorangricchia stated the role of the nurse in SIIS always has been one of case management. They were called Industrial Rehabilitation Nurses, by classification, for many years. They have been involved in medical monitoring, medical tracking, home visits, employer visits, coordination of the medical care of the injured worker, see to it that it moves case closure as quickly as possible, maximum medical care, etcetera. He added, "I could provide job descriptions, which would lead to the conclusion that they do case management and little else."
Ms. Matteucci remarked:
Mr. Chairman, also one of the things that I think we need to keep in mind is, remember you're going a managed-care concept. A lot of the things that used to be done by these nurses are going to be picked up in the managed-care concept.
Mr. Dorangricchia commented:
Managed care can mean a lot of different things. The outcome of our managed-care proposals, and there are many of them, can range from a very restrictive health maintenance organization, with very few choices, to something almost identical to what we have today with some rules of treatment. Depending on the outcome, that outcome would dictate the role of case management at SIIS. If it's very restrictive, and requires very little decision-making on the part of the insurance company, then we'll probably have to look at the role of our nurses, and their numbers. If it's more of a free-style
situation, which it could be, then we won't need those case-management people at SIIS to manage the cases.
John R. Orr, Deputy Administrator, Rehabilitation Division, remarked:
One thing that I believe needs clarification immediately is that the administration did not ask us, did not ask the Rehabilitation Division if we could manage the rehabilitation model currently practiced by SIIS. What they asked us is if we had the capability of returning
injured workers to work. And, our answer to that was yes, and has been yes since 1920.
Then the next question became, do you have the capacity to add the injured-worker caseload to your existing caseload of disabled persons in our vocational rehabilitation program. The answer to that was no. The administration asked us to investigate what our capacity would have to look like in order to handle what was reported to us to be approximately 3,600 injured workers in rehab in 1990.
So, we designed the skeleton of a service delivery system, adopting the 70-year-old, federal, state vocational rehabilitation model, which is more of a functional return-to-work model than a medical model. And, that model included, I believe, 47 rehabilitation counselors, 23 rehabilitation technicians, 4 supervisory types, and, I think, 5 accounting positions added to our centralized accounting. We reported back to the administration that given that staffing level, and then given the supplementary resources, in terms of case service budgets, and so on, that then we would have a capacity to handle 3,600 additional clients who are seeking to return to work.
Mr. Jayne stated SIIS had 7,700 rehab cases in 1992.
Senator Raggio asked Mr. Orr, "Do you understand what those numbers are, John? They've been dealing with a classification there of 7,700 rehab cases, and you're referring to dealing with a potential of 3,600 cases. What are we missing in that?"
Mr. Orr replied, "I have to apologize. And, this is becoming a consistent apology on the lack of verifiable and consistent data that has either been made available to us in researching this issue, or...."
Senator Raggio asked Mr. Orr to meet, between now and tomorrow morning, with Mr. Jayne to discuss this very important matter. He added:
There may be adjustments on both sides, if there are two sides to this, and can you report back whether you are in agreement or disagreement, having had the opportunity for some input from each side here, come back to this committee at eight o'clock in the morning?
I want to indicate that's a very crucial part of our consideration of this budget, and the whole reorganization plan.
Mr. Jayne and Mr. Orr agreed to meet and reappear in the morning.
Ms. Abba, per Senator Raggio's request to address the items in the Base budget of Transfer to Benefit Services in both years of the biennium, said she would have to refer that question to the budget office.
Ms. Matteucci replied:
What that is, is a transfer for the rehabilitation services that we just discussed, and it is our understanding that if we simply transfer it to benefit services, and then transfer it back to rehab that they are able to use it for other matching purposes in their programs. Otherwise if it came straight from SIIS they would not be able to use it.
Senator Raggio said, "It's a device to get it into voc rehab and utilize the matching value of it." He requested the claims and adjustment expense be addressed.
Ms. Matteucci said:
As you know, those of you who have been looking at the budget for some period of time, we have never shown the Claims and Adjusted Expenses and the Claim Reserve. And, really what we're talking about in this $2.2 billion deficit is that. It's not really in their administrative account, which is what we've shown. So, this is our attempt to show to you the sum balance in the entire SIIS program. This is based on the insurance commissioner's studies. I believe you have a copy of the assessment that begins with a beginning fund balance of $467.8 million in Fiscal Year '93-'94.
By the time you get all the additional expenditures, plus calculate savings in as a result of managed care, and savings as a result of the rehab, both estimated at 10 percent, the accumulative effect in the first year of the biennium is 5 percent. Because it's going to take some time to get those contracts in place, and get those programs established, you have a remaining fund balance, or claims reserve, of $374.6 million, as opposed to the insurance commissioner's actuary of $345.9 million. Essentially we've managed to put some more money in that ending fund balance, or what they call invested assets at the end of the year.
Senator Raggio asked, "How does that relate to the resources amounts, that you have plugged in here, $972 million and...."
Ms. Matteucci stated, "Of that amount, the balance forward...there's $467.8 million balance forward, which is the amount I just gave to you...insurance premiums of $466.7 million and $37.6 million of investment...."
Senator Raggio asked, "What's the insurance premium income?"
Ms. Matteucci replied, "$466.7 million."
Senator Raggio asked, "And, the second year?"
Ms. Matteucci answered, "$494.5 million."
Senator Raggio inquired, "Does that reflect a premium increase?"
Ms. Matteucci replied, "No. That simply reflects the information that was prepared by the insurance commissioner's actuaries. And, then you've got investment income, Mr. Chairman, of $37.6 million the first year, and $21.2 million the second."
Senator Raggio asked, "What percent yield is that based on?" Ms. Matteucci did not have the information.
Ms. Matteucci continued:
Then as you walk through the second year of the biennium, Mr. Chairman, we've assumed claims and adjusted expenditures down of $597.2 million, with a claims reserve, or ending fund balance, as it were, of $214.5 million. This is opposed to the $113.3 million that the actuaries had estimated. So, essentially, by the actions that we've proposed in the Governor's Recommendation, you essentially buy yourself some time on when it is that the fund runs out of money.
Senator O'Donnell remarked, "We talked about those 33 audit positions that you are going to have going. I don't want to be adversarial here, but you said that there was $476,000 return on each auditor for the taxation department..."
Ms. Matteucci responded, "$400,000 even."
Senator O'Donnell continued, "And with the auditing of the SIIS, it was something like $76,000?"
Ms. Matteucci replied, "I just did some quick math. When Mr. Jayne was saying his audit recover was $3 million, and you divide it by 39...."
Senator O'Donnell asked:
But, isn't the auditing of individuals in the SIIS system, isn't that a little bit differently controlled, or done, than the auditing of sales tax? Because the people who are involved in SIIS, who are going to get audited, are construction people, contractors, roofers, and people get injuries. And, so they're going to be going out doing auditing on construction firms, and so the argument here is that either the....$400,000 is going to go down per auditor, and the SIIS is going to go up, or we're going to have to look at auditors specializing in different areas. I guarantee you, you're not going to have a taxation auditor going out to a construction business and pulling in $400,000 a year. They're going to go out to the retail sales outfits.
I'm wondering if we're not penny-save and pound-foolish ....Maybe some evaluation and some analysis is in order.
Ms. Matteucci said:
That's exactly what's going on right now. The Department of Taxation is trying to sit down and talk with SIIS about what their needs are, because they are somewhat different. With the new business tax, or relatively new business tax, we're all going to start looking at the same piece of books, for the construction worker, and for everybody else, because you've got to look at their payroll, and verify that. I think the concept still is valid....there's going to necessarily be some cross-training.
Senator Raggio asked to meet at 7:45 A.M. tomorrow morning, to complete the budgets discussed today.
There being no further business before the committee, Senator Raggio adjourned the meeting at 10:56 a.m.
RESPECTFULLY SUBMITTED:
Joan McConnell,
Committee Secretary
APPROVED BY:
Senator William J. Raggio, Chairman
DATE:
??
Senate Committee on Finance
February 2, 1993
Page 1