The Committee on Commerce and Labor was called to order at 3:45 p.m., on Monday, May 10, 1999. Chairman Barbara Buckley presided in Room 4100 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All Exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

GUEST LEGISLATORS PRESENT:

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

Following roll call, Chairman Buckley opened the hearing on S.B. 192. She noted the custom on all controversial bills was to divide the time for testimony equally between both sides. She hoped that by dividing the time equally most of the points would be covered.

Chairman Buckley pointed out the publicity S.B. 192 received and wanted it made clear that those involved were there to discuss public policy that had implications for Nevada homeowners and Nevada homeowners associations. The committee was not there to hear special provisions in the bill benefiting one individual or a group of individuals. Such was not the role of the legislature as defined by the Nevada Constitution nor was it what the constituents elected legislators to do. To such an end, she informed the proponents that the committee would not consider the bill in its original form but would consider a bill that affected all homeowners associations. Chairman Buckley reiterated those involved were present to debate in an open forum public policy concerning common interest communities throughout the state. The need to balance the rights of individual homeowners and the responsibilities and authority of homeowners associations had been the subject of several bills during the current session of the Nevada Legislature and the past session. The hearing would be another opportunity to further define policy for all homeowners and homeowners associations.

Senator Ray Rawson, Senate District 6, explained he attended a homeowner’s meeting before the session, and in the process, he saw many actions that violated basic principles within the Nevada Legislature. There was poor notice of meetings, and a proxy provision caused few members to attend meetings creating a questionable quorum situation. He noted the issues discussed were controlled, and an increase in the budget was passed because 51 percent of the people in the homeowners association did not oppose it.

An homeowners association or common-interest community association were the smallest unit of government and levied revenue increases as well as held participants to certain contracts, laws, and obligations.

Because of the above-mentioned situation, Senator Rawson drafted the bill noting the heart of S.B. 192 was in the preamble, which was removed. He proposed there was reason to put the preamble back into the bill because it described his concern. The preamble noted common-interest communities were the smallest unit of government. Therefore, they should act as such providing proper notice, one vote for one person, and a supermajority if revenue was raised. He pointed out the legislature required a two-thirds vote if they were going to increase taxes, and he asked why the situation should be different in other levels of government.

Senator Rawson noted S.B. 192 had been modified and in his enthusiasm for the law, he put items into the bill that would have made it difficult for every homeowners association. He did not know where to set a quorum noting he did not know how many people needed to be available to establish one. He lamented the low number of people who participated in the process and stated whatever number the legislature set for a quorum would be acceptable to him. He thought a proxy vote would be all right if the vote was on a specific subject for a specific meeting. Providing a proxy allowing someone to vote on anything coming up in the meeting violated the one vote for one-person principle.

Senator Rawson thought it was important to provide, by mail to association members, proper notice in an adequate timeframe. In addition, revenue increases should be passed affirmatively noting two-thirds vote of the quorum, whatever the size of the quorum.

Ms. Giunchigliani asked Senator Rawson if he desired the preamble be put back into the bill, and he affirmed her question. She then inquired as to interaction between S.B. 192 and S.B. 451 and inquired if there would be a conflict notice issued.

Senator Rawson thought if there was a conflict, notice would be provided. He stated if she was aware of a conflict, it could be worked out in S.B. 192.

Billy Vassiliadis introduced Morgan Baumgartner, Corporate Counsel, R&R Advertising, and noted they were representing the Lawrence Ruvo Trust. He referenced Chairman Buckley’s comments on commentary involving issues within S.B. 192 and pointed out at times, an issue could create awareness as to broader policy questions involved. The issues were simple and concerned a private property owner having free access to his or her own property, and the ability of a private property owner being allowed to enhance their property and improve it as long as the owner complied with laws and local authorities. The improvement could be a swimming pool, a play set, or even a pier. He believed the bill was global and applied to all areas within the state.

Ms. Baumgartner explained they worked with many groups including counties, homebuilders, homeowners associations, and those involved in the drafting of S.B. 451. She believed the bill addressed a number of problem issues for homeowners as well as potential future problems. Ms. Baumgartner noted homeowners associations were part of Nevada’s growth.

She pointed out Senator Rawson’s concerns were addressed by adding the preamble back into the bill (Exhibit C). A number of the provisions in the original version of S.B. 192 were included in Exhibit C, and there were a few additions made to the preamble to accommodate the needs of those she represented.

Ms. Baumgartner explained section 1 was left intact.

Section 2 would be deleted in its entirety and replaced by language in Exhibit C. Subsection 1 of section 2 said if there was an association that had an island, which was property not designated as part of the planned unit community, the association could not restrict, prohibit, or impede the lawful residential use of the property. The association could not impose its will upon a piece of land that was not a part of the association. It did not mean the association could not go through regular city council proceedings to indicate they did not like what was occurring on a piece of property, but the association could not use their powers as an association to restrict the homeowner or the owner of the land from using the land for its best use.

Mr. Nolan asked for an example of where an island arrangement might occur in a planned community or within an association.

Ms. Baumgartner pointed to Glenbrook as an example and noted she had been informed there were a number of associations in Las Vegas that also had islands interspersed throughout. She would obtain and provide the information to Mr. Nolan at a later date if he desired. Ms. Baumgartner noted the situation was not unique.

Mr. Nolan stated he would like to see the examples.

Ms. Giunchigliani referenced the Lakes in Las Vegas pointing out the lake might not belong to the homeowners association.

Ms. Baumgartner said it could be the lake or anything. In Glenbrook, there was a very large circle of land, and in the middle of the land, there was part of the association that was excluded by the developer from the rules and regulations of the association.

Ms. Giunchigliani noted she did not live in an area governed by a homeowners association and had little knowledge on the subject. She sought clarification as to what property or areas within a development were the purview of the homeowners association.

Ms. Baumgartner explained when a planned unit development was set up, boundaries were established, which could include contiguous or different sets of land. She noted a landowner might not sell a piece of land, which created small islands of land within the planned community that were not subject to the association procedures and rules because they were not part of the community.

Ms. Giunchigliani referenced the list Ms. Baumgartner was going to provide for Mr. Nolan and asked if it could include types of developments that would be segregated. She further inquired if upon purchasing a home, a homeowner would know there were certain areas that were set aside.

Ms. Baumgartner explained a buyer would know about the areas if they looked at the master plan. When a house was purchased, the buyer was provided with the Covenants, Conditions, and Restrictions (CC&Rs).

Chairman Buckley referenced section 2, subsection 1, of Exhibit C, which said, "If the boundaries of a planned unit community include or encompass property that is not designated as part of the planned unit community, an association may not restrict, prohibit or otherwise impede the lawful residential use of such property." She noted every person had the right to complain about what their neighbor did and asked Ms. Baumgartner to define the term impede in that regard.

Ms. Baumgartner explained the intention was to prevent a homeowners association from telling the owner of an island they were landlocked in the association therefore they were subject to the rules of the association and the purview of the association, even if the owner purchased a piece of property not subject to the rules and constraints of the association.

Ms. Segerblom asked if a homeowner in an association could withdraw from it.

Ms. Baumgartner noted she would research the question, as she was not prepared to answer it. She thought such would be very difficult to accomplish, as the property was sold with the condition that it was part of the association.

Chairman Buckley said there were CC&Rs attached to a unit. Once a buyer was in an association, they were set.

Ms. Baumgartner noted section 2, subsection 2, prohibited an association from restricting access to a person’s property whether the property was a part of the planned unit community or not. An association could not restrict a person from getting to their land. It did not prohibit the association from putting up a gate and allowing reasonable access or charging a reasonable fee to gain access to their property.

Ms. Segerblom asked about the closure of a road that was not part of the association.

Ms. Baumgartner said if there was a road that was not part of the association, there would be an access easement by the owner of the property so whoever was on the outside of the property could get inside. Most pieces of property were landlocked with access easements with ingress and egress rights to them.

Ms. Segerblom asked about public roads.

Ms. Baumgartner said in the case of a public road, someone could not put up unreasonable restrictions.

Mr. Vassiliadis explained if a gate was placed on the road, those who owned the islands should have easy and open access to their land. They should have to pay for the gate and help maintain it, but the association should not be able to impede access to the land.

Ms. Segerblom asked if there were any public roads in the associations.

Ms. Baumgartner explained such was rare. It depended on what the city and county wanted to do. Typically counties and cities wanted associations to maintain their roads because of infrastructure costs. Everyone had to have ingress and egress. Ms. Baumgartner noted there would typically be some allowance, whether it was done through a private road or through a public road.

Chairman Buckley said the issue did not come up if the road was public because a public road could not be restricted. The issue typically arose if the road was private.

Ms. Giunchigliani asked what the definition was for a planned unit community.

Ms. Baumgartner said the term "planned unit community" could be a drafting error. The language should be "planned community."

Ms. Giunchigliani noted the common elements were defined such as "real estate within the planned community owned or leased by the association."

Ms. Baumgartner affirmed her statement and noted the unit was the particular structure.

Mr. Goldwater disclosed he was a member of an association and on the board of an association. Mr. Goldwater explained his brother had an issue pending with the association and referenced section 2, subsection 1, of Exhibit C, noting the issue in his association was his brother’s company was buying homes inside the association, fixing up the homes, and renting them as transient units. The CC&Rs did not prohibit such action, but there was an amendment pending before the master association board. The passage of S.B. 192 indicated such could not be prevented because of the restriction of lawful residential use. Mr. Goldwater asked if Ms. Baumgartner also had the same interpretation.

Ms. Baumgartner thought they were dealing with two different issues. One was whether CC&Rs could be amended to prohibit transient lodging, which was a lawful use. If the association permitted such use, access would have to be allowed for individuals to get to their dwelling units.

Mr. Goldwater again referenced section 2, subsection 1, which said it could not be passed that which would "restrict, prohibit or otherwise impede the lawful residential use of such property." He asked if they could have daily or weekly rentals in an association.

Mr. Vassiliadis asked if the homes to which Mr. Goldwater was referring were part of the association. He noted they were discussing property outside of an association.

Chairman Buckley said if the boundaries of a planned unit community included or encompassed property that was not designated as part of the planned unit community, then it restricted the activities of the association. If the association wanted to join together in an attempt to stop rentals within a homeowners association, there was nothing within the bill that would stop such activity.

Ms. Baumgartner pointed out Chairman Buckley’s comment was the intent of the section in question and then noted discussion on section 2, subsection 3, was ongoing with counties, homeowners associations, and homebuilders. The intent of the section was to allow homeowners some input into change in a master plan. If there was construction or improvement that affected homeowners, they would have say in the improvement if it was inconsistent with the master plan. Property owners who were in a 500-foot area should have a voice as to amendments or changes for use that was inconsistent with the master plan. They were still working on the language, but such was the concept.

Chairman Buckley asked if such would apply within homeowners associations as well as within a planned unit community that did not include all homeowners association members.

Ms. Baumgartner affirmed Chairman Buckley’s statement and then referenced section 6 on page 2 of Exhibit C. She noted subsection 3 of A.B. 192 would be deleted in its entirety, which included page 2, lines 42 to 43 and page 3, lines 1 to 7. The section was replaced with language affirmatively stating if a homeowner granted an easement to an association, the homeowner was not prohibited from using servient estate in the manner they lawfully could. In addition, an association who owned the easement or had easement access rights could not dictate the way the servient estate owner used the land.

Chairman Buckley noted the language was already in law and asked why it was needed.

Ms. Baumgartner said the language was common law and noted a number of issues were addressed during current and past sessions codifying common law. She thought the purpose was individual knowledge as to what was considered law and what was not, without having to go through the rigorous procedure of considering what was common law versus statutory law. Ms. Baumgartner noted the situation was becoming a problem because almost every homeowner who was part of an association would probably grant an easement of access or a recreational easement. She thought there would be an increase of easement issues and homeowners needed to be advised of the situation.

Ms. Baumgartner offered a practical example of a homeowner who provided an easement for others to cross their lawn in order to get to a playground area, and the homeowners association denied the homeowner the right to mow the lawn because the easement belonged to the association. The association dictated to the homeowner what they could do with the land even though the association only had a contract to cross the land. Such was the situation with which they were dealing and they were attempting to put everyone on notice as to the manner in which easements were to be governed.

The changes in section 9 were technical making S.B. 192 consistent with S.B. 451. The provisions were residency provisions for members who served on the executive board. She noted there were two other bills being presented, and she wanted consistency within all.

Ms. Baumgartner asked that the changes in section 11 be made consistent with S.B. 451.

Mr. Beers thought language should be included in the bill requiring homeowners associations to notify prospective members they surround the islands.

Ms. Giunchigliani sought clarification in subsection 1 and asked if there was a map available to prospective buyers indicating what authority the association had.

Ms. Baumgartner said there was a map as well as CC&Rs explaining homeowner’s obligations and rights.

Ms. Giunchigliani asked if anyone reviewed the CC&Rs to ensure they would not impede the lawful residential use of such property. She asked how lawful residential use would be defined.

Ms. Baumgartner said lawful residential use could be impeded for the property in an association. The homeowner subjected themselves to CC&Rs that contracted away the rights of the homeowner. The language within the bill said if the property was an island within the association, not subject to association CC&Rs and not part of the homeowners association, the individual could do anything that was lawful outside of the CC&Rs with the land.

Ms. Giunchigliani asked if part of the problem was receiving access from the association to get to property outside of the association’s purview.

Mr. Vassiliadis noted the issues were long-standing in Glenbrook involving previous owners and current owners. Property owners within the association attempted to decide what those outside the association could or could not do. The result was continuing litigation. He pointed out if a property owner was inside the association, they complied with the association rules. If the property owner was outside the association, they complied with the law, local planning authorities, and local approval boards.

Ms. Giunchigliani asked if the issue could stand alone as a piece of legislation.

Ms. Baumgartner noted the legislation was global. There were situations in southern Nevada that mirrored the situation in Glenbrook.

Ms. Segerblom knew of an area in Las Vegas that wanted to become an association but needed 50 percent of the people living in the area to consent to have the area gated. She asked if 51 percent could cause the community to be gated or was the percent greater than 51 percent.

Ms. Baumgartner noted she would have to research the question.

Chairman Buckley said different cities and counties by ordinance considered gating an older neighborhood, which was a different situation from a homeowners association, which were subject to legal CC&Rs. The CC&Rs governed much more, including how a home was maintained as well as other legal provisions.

Mr. Hettrick disclosed he was a member of a homeowners association in Las Vegas and then referenced sections 8 and 11 of S.B. 192. He asked the proponents of the bill to address the issue of the two-thirds vote with regard to approving a budget and raising assessments. He noted language considering 270 days of residency in section 9, subsection 3, and said the issue could be considered as a "taking." He noted he did not reside at the Las Vegas location 270 days a year. The language would preclude him from being involved with the management of the association.

Mr. Vassiliadis explained the two-thirds language was in Senator Rawson’s original draft, and he assumed Mr. Rawson reasoned if significant sums of money were to be spent by the association, with the outcome of a vote adversely affecting many individuals, then the outcome should not be affected by a simple majority. There should be a consensus in the association. Mr. Vassiliadis regarded the 270 days and noted the issue considered individuals who lived in the community should be those who made decisions.

Chairman Buckley asked about individuals who rented their units noting an owner cared about their property and wanted it maintained, even if they did not live in the area.

Ms. Baumgartner said the residency restriction applied to those who were on the executive board. The unit owner could cast an absentee ballot vote and would still have a say in what went on in the association. The only restriction was if they did not reside in the community during the time set forth in the bill, they could not serve on the executive board. The language did not preclude renters from serving on the executive board.

Chairman Buckley asked if the proponents desired all of the other provisions in the bill be retained.

Mr. Vassiliadis noted they were still working with local governments and other interested parties to finish the language in the bill. Exhibit C contained the amendments proposed on behalf of his clients. He stated they supported the bill in its entirety with the proposed amendments.

Chairman Buckley asked if the proponents proposed to retain the sections not mentioned in Exhibit C and asked if the referenced sections in Exhibit C were only language changes.

Ms. Baumgartner said section 3 was specifically addressed in S.B. 451. If there were differences in the two, such would be taken care of in a conflict amendment. She reiterated Mr. Vassiliadis’ comments.

Chairman Buckley asked what the proponents suggested remain in the bill for committee consideration. She noted Ms. Baumgartner suggested the committee should address the remaining provisions and the language reconciled with other homeowner association bills.

Ms. Baumgartner affirmed Chairman Buckley’s statement.

Mr. Hettrick referenced section 8, subsection 3, which considered the two-thirds vote to ratify a budget. He then referenced section 11, subsection 9, which said a majority must approve a civil action. It appeared the two sections were in conflict if they were budgeting for a civil action. He thought the language should be either two-thirds or a civil majority, but not both. Mr. Hettrick noted he understood the reasoning behind the two-thirds vote, which was also a legislative requirement to raise assessments, but it appeared the budget issue was not as significant as raising assessments. He would like to see the language match so there was a simple majority in both cases.

Chairman Buckley said the issue could be considered in the context of S.B. 451 and S.B. 192.

Ms. Giunchigliani hoped there were no longer CC&Rs prohibiting adult group homes, as they were defined as residential areas. She noted the terms "what was lawful or residential" throughout the two above-mentioned bills.

Bud Hicks representing himself as a homeowner at Glenbrook introduced Dr. James Brinton, President, Glenbrook Homeowners Association, and Mark Gunderson, Counsel, Glenbrook Homeowners Association. He noted they did not have an opportunity to look at the amendments presented by Mr. Vassiliadis and Ms. Baumgartner so some of their comments might be disjointed.

Dr. Brinton stated the 228 members of the Glenbrook Homeowners Association were overwhelmingly opposed to S.B. 192. The legislative internet poll showed 88 individuals opposed to the bill and 5 in favor of it as of May 10, 1999. He noted the association sent educational material to members of the Glenbrook community and then conducted an informal telephone poll. There were 228 members of the Glenbrook Homeowners Association and 273 properties in the community demonstrating there was more than one nonhomeowner association resident in Glenbrook. They were able to contact 198 individuals, and out of that number, 185 were against the passage of the bill, 6 were for the passage, and 7 had no opinion.

If passed, the bill would severely restrict the ability of planned unit communities to conduct business on a day-to-day basis and would take away property rights held by members. The association had no problem properly noticing meetings and did such before Nevada Revised Statutes (NRS) 116 came into being. In view of proper noticing and proper education, they still had a problem realizing a quorum at their meetings. If the bill passed, it would be impossible to get qualified individuals to run for office and serve as directors of homeowners associations, especially in resort areas where many owners did not reside on a full-time basis. It was offensive that the law would prohibit many members from serving on the executive board of the association because their primary state of residence was not the State of Nevada. The controls to be imposed on homeowners associations, with regard to approval of budgets and the commencement of lawsuits to protect properties, would cripple all large homeowners associations, make it difficult to conduct routine business, and protect member’s interests.

Like all homeowners associations, Glenbrook’s CC&Rs set out detailed rules and regulations for the management of the community and were tailored to their specific needs. There was no need for additional legislation to govern their community’s operations. Dr. Brinton stated there was deep resentment in the community that one powerful lobbyist, who was promoting his personal interest through S.B. 192, could influence the legislative process to the detriment of planned unit homeowners throughout the State of Nevada. Therefore, the association urged the legislature to "dump" S.B. 192, which was self-serving legislation.

Mr. Hicks read Exhibit D into the record noting the purpose of the bill was to win through legislation that which had not been obtained through negotiation and litigation. The proponents of the bill were angry with the Glenbrook Homeowners Association, and because of their anger, they presented a bill that would adversely affect the rights of every Nevada citizen who owned property in a planned unit community. In addition, the bill would gut carefully crafted provisions in the Nevada-California Interstate Compact regarding the protection of Lake Tahoe and its watershed.

Paragraph 3 of section 6 was particularly onerous as it took away rights and easements property owners in the Tahoe Basin had for years. In addition, it deprived them of the right to contest proposed improper uses of property before local governmental authorities and the TRPA.

Mr. Hicks addressed comments by the proponents of the bill regarding the islands of property within homeowners associations, which were not part of the homeowners association. He noted the island situation at Glenbrook was driving the bill, and Mr. Ruvo owned property that was in and around the homeowners association. Mr. Hicks stated there was no contest that the homeowners association could not impose upon Mr. Ruvo and his properties the association’s CC&Rs; they were contractual. Everyone who owned a home in the homeowners association had signed onto the contract agreeing to the terms and conditions by which they would live. Those in the association understood they could not extend the CC&R’s to their neighbors who were not association members. In many cases, the owner of the adjoining property owned property that was burdened by easements and reservations of right in favor of the homeowners association and in favor of all of the homeowners. It was not that they owned their land free and clear with no relationship to the homeowners association; the land was owned subject to easements.

Mr. Hicks referenced land owned by Mr. Ruvo noting when Mr. Ruvo purchased the property, the land was subject to an easement that had already been granted to the Glenbrook Homeowners Association to use for all recreational uses allowed under the Tahoe Regional Planning Authority (TRPA) rules and regulations. Mr. Ruvo wanted to now use the property for his exclusive use. Mr. Ruvo bought the property at a discounted value because he did not buy the entire property; he bought only part of it. The part he bought was his to use, but the part he did not buy, he was attempting to keep the members of the homeowners association from using.

Through the proposed amendments to S.B. 192, the proponents would win through legislation what they could not win through negotiation and litigation. Mr. Ruvo was attempting to negate the existing easements and rights of access that members of the association had on the properties he owned. The concern of the association was the taking of existing rights of members. Mr. Hicks noted there were many other homeowners associations in the Tahoe basin that were similarly situated as well as other homeowners associations in other parts of the state where the homeowners and everyone in the association had easement rights over adjoining land. The association was very concerned the bill would remove easement rights and provide the adjoining landowner something he or she did not own before. S.B. 192 did not protect the rights of homeowners in planned unit developments.

If S.B. 192 was to pass, it would take away the right of association members to vote for members of the executive board by proxy. He noted shareholders in virtually every other corporation in the state could vote for the members of the board of directors. He thought he should have a right to vote by proxy. In addition, if S.B. 192 was passed, Mr. Hicks would lose his right to elect many of his neighbors who were very qualified. He would not be able to vote for his neighbors because they did not have Nevada as a primary state of residence. Such was a real problem in resort areas such as Lake Tahoe. In a resort area, it was unusual for a resident to reside in a community for 270 days, as many properties were second homes.

Mr. Hicks referenced a maintenance facility at Glenbrook and noted Mr. Ruvo had an ongoing conflict with the association over the facility. Mr. Ruvo’s answer to the problem was to give veto power to a small number of residents for those types of facilities, even when the facility was for the benefit of the entire community.

The bill would make it virtually impossible for large associations and resort associations to approve their budgets and commence lawsuits to protect their rights. He asked why it was necessary to have a supermajority vote to approve a budget. According to Glenbrook’s CC&Rs, a 75 percent vote to levy a special assessment was necessary, and according to the bill, the association would not be able to have a meeting, discuss the budget, or pass it unless there was a quorum of absentee owners present to approve the budget. The provisions hurt many homeowners because it would cause associations to "grind to a halt."

Ms. Berman disclosed she lived in an area that had a homeowners association and noted a situation where a homeowner lived in a tropical climate most of the time and ran for an association office. The individual won the office and desired to redo the southern Nevada desert area into a tropical paradise. She pointed out there were individuals who came from another area and were not full-time residents who at times could not do the job as well as those who were full-time residents.

Mr. Hicks said there were seven members on the board of the Glenbrook homeowners association. The members voted democratically, and no one member had the ability to express his or her views over anybody else. They were attempting to allow democracy to work instead of imposing the will of one individual over the homeowners association.

Ms. Giunchigliani asked if Mr. Hicks testified in the Senate on the bill.

Mr. Hicks did not. He noted he was not a professional lobbyist and did not always find out about an issue until reading about it after the fact. The proponents of the bill knew the association was very interested in the issue, but the association was not notified.

Ms. Giunchigliani referenced the 270 day issue was presented after the original version, and the two-thirds vote on the budget was in the original legislation. She asked Chairman Buckley if they could find out what the committee amendments were in the Senate so as to separate the issues.

Mr. Gunderson outlined the position of the Glenbrook Homeowners Association (Exhibit E). He noted Chairman Buckley’s question as to why it was necessary to have a new law and explained there was no reason for S.B. 192, as it was a matter of special interest legislation crafted to apply to Mr. Ruvo, Harvey Whittemore, and their Glenbrook property. The bill was not one of general application, but a single-issue bill to single issue people, and it should not be adopted.

The public policy did not dictate the rationale existed to do what the proponents wanted to do with S.B. 192. There was a wide body of statutory and common law already addressing the issues. Mr. Gunderson explained there was no reason to micromanage land-use in Glenbrook or any other area in the state considering common interest communities since such was administered at a number of levels. In most homeowners associations, there was a developer and then an association. The developer developed the property, and over time, control passed to the homeowners association under particular and specific terms, conditions, restrictions, reservations, easements, and deed restrictions.

S.B. 192 would supplant well ordered plans of development implemented privately between developers and homeowners and "toss them out the window" because some particular person wanted the plan to be different. The law would also remove local planning authorities, except to provide notice a deal was done, and they had to accept what happened. Such was not the way planning worked.

Mr. Gunderson referenced Exhibit C, section 2, subsection 1, which said "may not restrict, prohibit or otherwise impede the lawful residential use of such property." He noted the piece of property owned by Mr. Ruvo was the subject of litigation between the developer and the homeowners association in which the association succeeded in the litigation. The association succeeded by having a judgement against particular uses of the property that Mr. Ruvo took subject to when he purchased the property. What Mr. Ruvo desired was to throw out the effect of the judgment. Mr. Ruvo bargained away his private property rights, and he took the property as he got it. The issue was the right of an association to govern itself as it thought best.

Mr. Gunderson stated he was aware of associations that had hundreds of members who never had a quorum at any of their meetings. The proxy and voting requirements would make the situation more onerous. The intent of the provisions was to have associations "grind to a halt." It was his opinion, which he advocated on behalf of the associations, that those persons who were in private democracies had the right to govern themselves as they deemed fit. They were in the best position to determine what was right for them and should have the right by the power of the vote. Problems occurred, went out to a vote, and votes were taken.

Mr. Gunderson referenced the pier issue and noted it was not fair or right when a bill such as S.B. 192 came about and attempted to remove publicly and privately imposed land use restrictions and attempted to start over again. Every orderly process was disposed of for the expeditious use of special interest in achieving private goals. He noted Senator Paul Laxalt stating the problem in the State of Nevada, as in the United States, was there were too many laws trying to regulate everybody’s conduct. Such was the case with regard to S.B. 192.

Chairman Buckley referenced homeowners associations and their being able to govern themselves without state intervention and noted the legislature had been dealing with the issues for a number of sessions. Some homeowners associations were "out of control." She took exception to there being no problems in homeowners associations noting other testimony contradicted such.

Mr. Gunderson did not mean to imply there were no problems with homeowners associations.

Chairman Buckley understood the argument if someone bought property subject to an easement or reservation of rights, legislation should not be enacted to void those rights. She noted concerns of others indicating homeowners associations were restricting access regardless of easements or reservation of rights issues.

Mr. Gunderson referenced the situation at Glenbrook and noted there were many individuals who had ingress and egress access easements in the community. No one had any trouble getting in or out of Glenbrook. He noted there was a security gate at Glenbrook where individuals were screened because the community was private, but access had never been prohibited to anyone. Because of the responsibilities for maintaining the roads and the community within Glenbrook was placed upon the homeowners association, they had a reasonable right to take names, which was all that occurred. Again he noted access had never been denied to anyone.

Chairman Buckley referenced Exhibit C, section 2, subsection 3, which said, "An association must obtain the written consent of the majority of the property owners’ within 500 feet." She asked Mr. Gunderson to address the issue of someone within an association who wanted to build a structure that was not in the community master plan in front of a neighbor’s home, and the neighbor thought the structure would ruin their home. She asked what rules should govern such a situation.

Mr. Gunderson stated if someone owned a piece of property and had a neighbor who was 50 feet away, the neighbor did not have a right to say the owner of the property could not build on their property. He noted the reason the provision in question was in the bill was because Mr. Ruvo had a specific application to which he wanted it to apply, and because of the unique circumstance to which he found himself in regard to the construction of the facility. The provision would come over the top of the private land use restrictions that were currently in place. Mr. Gunderson said the circumstances would be best resolved by the local regulations in the county. The county had the ability to regulate land use planning, what was constructed, when and where construction occurred, and notice requirements. The issue was a county issue, not a state issue.

Chairman Buckley referenced section 6 of Exhibit C, which said "unless the terms of an easement in favor of an association specifically prohibit a particular use or a residential use of the servient estate, the owner of the servient estate may use such property in any manner permitted by law, if he has obtained all necessary approvals required by law or any covenants, conditions, or restrictions on the property, without any additional approvals of the association. No contract terms or rights of an easement holder may be impacted by this section." She asked for Mr. Gunderson’s opinion on the section and how did it "square" with his opinion of section 2, subsection 3. She noted his comment that the owner should be able to use the property for anything they desired subject to the local governing bodies and inquired if his answer was the same for section 6.

Mr. Gunderson stated his answer was the same. He noted Exhibit C was a carefully drafted proposal considering a very specific issue, which consisted of Mr. Ruvo wanting to build a pier over property owned and controlled through an easement by the homeowners association. The easement referenced many structures that could not be built, and a pier was not included. Mr. Gunderson explained a court already determined the language meant no structures. He thought they should stay with the law of easements, property rights, and homeowners associations. S.B. 192 was unnecessary to solve anything not elsewhere addressed.

Mr. Goldwater asked if specificity in the language was not beneficial to the people of all associations.

Mr. Gunderson did not think it helped. The law was not a precise science or art and neither were statutes. A drafted statute did not always clarify case law or other statutory law. He thought statute already addressed the issue of easements. Easements were particular to the circumstances for which they were drafted. Often, even if there was a statute involved, the intent of original parties needed to be considered. If there were conflicts in the law, they need to be resolved in the courts.

Mr. Goldwater agreed, but noted the reason the legislature met was to become more specific and clear up issues. There was so much litigation there appeared to be an obvious need for legislative intervention. He asked Mr. Gunderson if he could suggest something the legislature could do in statute to clarify, define, and ease the need to continually litigate the matter and use the courts for what he did not think they were intended.

Mr. Gunderson did not think the presented proposal accomplished needed goals.

Mr. Hicks explained in Glenbrook, Mr. Ruvo owned a piece of property bought subject to an easement held by the homeowners to use for recreational purposes. If the law was passed, Mr. Ruvo could decide to build a parking lot on the property, which the homeowners could still use for recreational purposes. The homeowner’s stance was if Mr. Ruvo built a parking lot and filled it with cars, they could not use it for bona fide recreational uses. The bill would create confusion and litigation on all existing easements rather than eliminate litigation.

Mr. Perkins referenced Mr. Gunderson’s comments as to S.B. 192 being used as a tool to get around past litigation and on-going negotiations between the homeowners association and the Ruvo estate. He asked if there was litigation that was already decided between the estate and the association.

Mr. Gunderson responded negatively noting current litigation considering the recreational easement. Such was not at a stage for resolution when the bill was presented.

Mr. Perkins asked if the issue regarded the pier.

Mr. Gunderson again responded negatively. The issue started with the recreational easement and negotiations, at the association’s request, were to be more expansive. The association requested all issues be brought to the table, and at such a time, they were advised for the first time of the issues concerning the pier and Mr. Ruvo’s commercial entertainment facility.

Mr. Perkins noted his dislike for proxies. He commented on abuses relating to proxies with regard to homeowners associations. Mr. Perkins considered associations as quasi-governmental structures. He asked if the state legislature or a local governing body should use proxies and if such were different than the use of proxies in a homeowners association.

Mr. Gunderson had no experience with such horror stories with regard to homeowners associations but noted there was always abuse by public or private governing structures. He thought it was inappropriate for a public entity or a public body such as the Nevada Legislature to use proxies. However, private and public corporations used proxies since 1912 with very few problems. Remedies existed where abuse occurred. If the legislature could identify a particular abusive process in any private governing structure, then it was appropriate to address the issue.

Mr. Perkins viewed homeowners associations as more of a governmental entity than a corporate structure. Life, liberty, and the pursuit of happiness in an individual’s home was a fundamental belief in the country. He received a telephone call from someone who claimed to have been denied access to Glenbrook at the gate. The person was not connected with Mr. Ruvo.

Mr. Beers noted Mr. Gunderson seemed to use the terms negotiation and litigation interchangeably and inquired as to which it was.

Mr. Gunderson explained litigation involving a recreational easement was started by Mr. Ruvo against the homeowners association. He suggested to Mr. Ruvo that all issues should be presented so they could be discussed. There were two matters involved, which included litigation and negotiation.

Mr. Beers asked how long had they been in litigation.

Mr. Gunderson thought litigation commenced in the summer of 1998. There was a 2-day comprehensive settlement conference before Judge Gamble on February 18 and 19, and they were in the process of rescheduling additional time before the judge in an attempt to negotiate a resolution. In the middle of their attempt to obtain new dates to continue negotiations, they were presented with S.B. 192.

Mr. Beers asked if S.B. 192 specifically addressed the litigation.

Mr. Gunderson affirmed Mr. Beer’s question. He noted if a list of presented issues were compared to the bill, they would be almost identical.

Chairman Buckley asked if there were any recommendations by the settlement judge.

Mr. Gunderson explained they had not gone far enough in the negotiations.

Mr. Beers referenced section 2, subsection 1, which said, "if the boundaries of a planned unit community include or encompass property that is not designated as part of the planned unit community, an association may not restrict, prohibit or otherwise impede the lawful residential use of such property." He noted the language sounded fair and asked how such was bad public policy.

Mr. Gunderson explained the property in the middle of Glenbrook purchased by Mr. Ruvo had a restriction noting whoever bought the property had to conform the development to the existing character and design of buildings currently in or on the property. The property included maintenance sheds, a barn, and small employee housing. Mr. Ruvo wanted to build a large commercial entertainment facility where he and Harvey Whittemore could have political functions. The homeowners association, consistent with testimony of the developer and the holdings of the judge in the original case, stated the facility Mr. Ruvo wanted to build was not allowed; it was not consistent with the character, design, and use of the property. S.B. 192 would throw out the restrictions and prohibitions.

Chairman Buckley explained because the language did not say "subject to easements, subject to reservation of rights, or governing documents" someone might be able to change the rules in the middle of the game without the qualifiers.

Mr. Gunderson affirmed Chairman Buckley’s statement.

Mr. Beers understood the bill prohibited one from impeding the lawful residential use of such property. The bill explicitly said residential and leaves to the existing governing bodies compliance with a master plan.

Mr. Gunderson did not read the language in the same way because a developer would often place restrictions on property within a subdivision that might not be subject to the CC&Rs. S.B. 192, as it was drafted, appeared to eliminate those restrictions, whether the developer, court, or some other restriction placed them. As in his previous example, one would be able to build an entertainment facility, which would be used for business purposes. The law allowed for something to occur that would not otherwise be allowed.

Mr. Beers asked if there were court rulings that superceded the easements.

Mr. Gunderson the court rulings were in addition or supplemented the existing restrictions put on by the original developer.

Chairman Buckley asked if an easement, a court ruling, or a reservation of rights placed the restriction.

Mr. Gunderson said in the case in question, the most applicable was a court judgment.

Chairman Buckley asked on what the court relied in reaching its judgment.

Mr. Gunderson noted the court relied on developer testimony who stated he restricted the use of the property to a very narrow number of ways or circumstances. The developer also committed to a limitation on the use of the property, the court reduced it to a judgment, which was recorded, and included as part of the title of the property.

Chairman Buckley asked if the court’s ruling was based on an oral restriction of the property’s use or a written restriction of the property’s use.

Mr. Gunderson said the interpretation included written and oral representations to the developer.

Mr. Beers asked Mr. Gunderson to meet with committee staff and compile written information as to his testimony. He was surprised a court would expand a specific contractual easement.

Chairman Buckley noted she would keep the record open until Wednesday, May 12, 1999, to allow anyone who did have an opportunity to testify to submit written comments as well as allow individuals an opportunity to comment on amendments and testimony.

Chairman Buckley noted Speaker Dini was excused from the hearing on S.B. 192 and he would be recusing himself because he in the past used the law firm of Lionel Sawyer & Collins.

Bob Maddox, represented the Nevada Trial Lawyers Association and 10 association managers in Clark County who collectively represented about 100 associations. He addressed the issue of the budget being ratified by a two-thirds majority. Association managers wanted the committee to understand they had a difficult time obtaining a quorum. The current rule was the budget would pass unless there was a majority against it. He commented on Mr. Perkins’ statement relating associations to governmental entities and noted a local governmental entity could pass a budget without a vote of the people. He thought the analogy worked in the current situation.

Mr. Maddox referenced the requirement for residence within common interest communities and noted there was a question as to the constitutionality of the provision. He referenced Exhibit F, which was a court case and explained the United States Supreme Court struck down the case as unconstitutional. The case considered a residency requirement and the court applied the privileges and immunities clause of the constitution, which was Article IV section 2. The clause provided citizens of each state should be entitled to all privileges and immunities of citizens of the several states. The court acknowledged in the analysis that there could be substantial justification for a particular provision.

Section 8, subsection 2, taken in combination with section 11, subsection 8, completely changed existing rules. An association could pass an assessment.

Mr. Perkins again noted the use of proxies in a homeowners association. He explained such was not allowed in the legislature. There had to be a constitutional majority of each house to pass a bill. With regard to homeowners associations, there were proxies that stood in for the majority.

Chairman Buckley stated there were a number of other homeowner association bills pending. Some addressed when a civil action could be taken and proxies could be utilized. She noted the language would be conformed to ongoing work with Senator Schneider and others in the Senate.

Mr. Maddox stated he did not take issue with the provision stating an absentee ballot could be used in order to vote for a board of directors. Such was essentially different from a proxy. An absentee ballot enabled the owner who could not attend the meeting to vote for the board of directors. He represented homeowners associations for 23 years, and associations had great difficulty obtaining a quorum. If it were not for proxies for purposes of meetings, the associations would not be able to conduct business.

Mr. Maddox noted his focus was on the issue of a two-thirds majority voting to approve a budget. If those who were opposed could not speak up and say so, then let the budget pass. Another area of concern was the residency requirement.

Mr. Goldwater agreed it was very difficult to conduct business without a proxy. He explained the use and solicitation of a proxy in a homeowners association was not regulated and wildly abused, which was unlike a corporate proxy. The proxy was garnered under surreptitious circumstances in many cases. The use of the proxy had a benefit and there was nothing before the legislature that proposed to regulate the use of the proxy. In its place, was the abolition of the proxy and perhaps a secret ballot or an absentee ballot, which was more democratic.

Chairman Buckley noted the issues might be taken up in the work session and invited Mr. Maddox to discuss it with Mr. Goldwater or submit thoughts for the committee to consider in the context of S.B. 451.

Joan Wright, representing Quintus Resorts and Resorts West, submitted Exhibit G and noted the act was uniform and when changes were made, such as those suggested, the act was taken out of uniformity. Benefits of being a uniform act were then lost with the ability to interpret based on other states interpretation of similar language. She noted such was a loss. Ms. Wright thought there was agreement that time shares should be eliminated from NRS 116, and she would submit amendments. She noted there were provisions in NRS 116 that affected time shares that should not be dropped from the laws. It was proposed that they be added back into NRS 199A. Ms. Wright did not think micro-management of associations was a good idea. Different associations had different problems that could not be anticipated. The more specific the laws became, the greater the problems were created. One problem might be solved, but three more might be created elsewhere.

Ms. Wright explained there was a body of corporate law governing homeowners associations of which she did not believe people took advantage. The law protected against many situations including proxies. Ms. Wright agreed with the comments made by Mr. Maddox with respect to the budget. There were other ways to prevent budget problems such as annual increases without a vote. A budget could be increased by a certain percent or have a certain amount of vote. Such did not have to occur in the manner being requested, and there were better ways of dealing with the situation. She thought proxies were necessary for homeowners associations because of the inability to obtain participation. Assessments should also not be limited in the manner presented in the bill.

Ms. Wright referenced Exhibit G, which was a letter considering additional facts, and a case that relied on the Commerce Clause and equal protection. The case involved an instance of charging higher rates to out-of-state insurance companies than in state insurance companies without reasonable relationship to such a restriction. The court decided charging the higher rates could not be done.

She noted an error in Exhibit G regarding the 2-year restriction. They did not oppose having 2-year terms as long as people were not limited to only serving 2 years.

Gary Millikin representing Community Associations Institute, noted they were opposed to sections 4 and 8 and portions of section 11. They thought the language in S.B. 451 was preferable to language in S.B. 192.

Jim Flippen, representing Associated Management in Incline Village, asked the committee to consider S.B. 451, which addressed all the issues. He noted the amendment was a divergent to S.B. 451.

Foster Mullen representing Art of Nevada, explained Art of Nevada was a resort development association representing all time-share properties in Nevada. There were many issues in S.B. 192 that would affect running a homeowners association for time shares. Residents did not live on the resorts for 270 days. He noted time shares should be excluded from NRS 116 and placed in NRS 119, which governed time-share resorts.

Michael Trundell, Manager, Caughlin Ranch Homeowners Association, noted he attended the Senate hearing on S.B. 192 on February 23, 1999, and stated Exhibit H contained his Senate testimony. Mr. Trundell explained they offered to participate in further discussions on the bill but were never contacted or asked to be involved. Some Senators told him the bill was dead and was being absorbed into S.B. 451. There were many provisions in S.B. 451 superior to the language in S.B. 192. Caughlin Ranch Homeowners Association was a corporation that acted as a business. The board of directors had a fiduciary responsibility to homeowners to enact their budgets, and they needed to be able to continue to do so.

In Caughlin Ranch Homeowners Association, the planned unit development included four privately owned public parks. In response to restrictions placed on municipalities and governments by the Nevada State Legislature regarding increasing general funds in their budgets, Caughlin Ranch Homeowners Association agreed to provide for the maintenance of park facilities within its own master plan communities. Under the language of the proposed law, homeowners would be able to go back and take a second look as to whether they wanted to continue with responsibilities to which they agreed when properties were purchased. The association thought they had agreements with the homeowners, which was part of the Declaration of Protective Covenants. Such made it incumbent on the association to honor their agreements. Losing the authority by the board of directors and giving the authority to homeowners would be detrimental to the general public.

Mr. Trudell thought the super quorum requirements proposed in the bill would make it almost impossible for the association to conduct business. The Caughlin Ranch Homeowners Association had 1790 members.

Duane McPherson, President, Spring Creek Association, referenced section 8 regarding the two-thirds vote for budgets. He noted the language could have a detrimental affect on S.B. 451 and the reserve. There would be many associations that would have to raise their budgets in order to comply with NRS 116 with regard to reserves. S.B. 451 considered many of the issues contained in S.B. 192. He thought S.B. 451 should move forward and S.B. 192 should die.

John Holmes, President, Ridge Sierra Property Owners Association, submitted Exhibit I for the record. The written testimony explained his concern about provisions in S.B. 192 noting time-share resorts were a cross between hotels and condominiums. There were 50 times the number of owners as physical units, and owners lived all over the world. Attendance at board meetings was the exception rather than the rule. He would be thrilled if 1 percent of the members attended the meetings, and if proxy voting was prohibited, they would be "dead."

There being no further testimony or additional questions, Chairman Buckley closed the hearing on S.B. 192 and opened the hearing on S.B. 37.

Pete Ernaut, Chief of Staff, Office of the Governor, referenced the years 1992 and 1993 noting the period was a time when the worker’s compensation system in the State of Nevada was losing $1,000,000 per day. Because of the loss, hearings were established in an attempt to correct a system in crisis. The losses threatened the general fund, its stability, benefits for injured workers, and the fabric of a no fault system.

The system was $2.2 billion in debt in long-term liability with no plan to correct the problem. Due to the diligence of many individuals, the system corrected some of the problems, but there were still difficulties. Through everyone’s efforts, the Employers Insurance Company of Nevada (EICN) was established, which was formerly the State Industrial Insurance System (SIIS). Mr. Ernaut explained legally the company was one company, yet in essence was two companies.

In 1997, the fund was bifurcated into all claims prior to July 1, 1995, and all claims after July 1, 1995. The present company was a product of claims since 1995. Mr. Ernaut noted comments from individuals as to how well SIIS was doing and why the state would contemplate privatizing a system that was improving. He explained the new system had a $423 million surplus as of December 31, 1998, but the old claims were still $1.6 billion in long term liability debt. Six hundred and fifty million dollars in assets was dedicated towards the debt in 1997, but the system was still $1 billion in debt. He further noted the system was still in the range of $5 hundred million to $6 hundred million range in long-term liability over and above the assets.

Mr. Ernaut explained the governor’s plan to privatize the system came after careful analysis of where the system had been and where it currently was and was the best case scenario for relieving the state of liability. The governor’s motivation with S.B. 37 was to take the opportunity to remove a $1.6 billion liability from the state’s balance sheet and remove the state from long-term liability on a company facing competition for the first time in its history.

The privatization of the system allowed for removal of $1.6 billion from the state’s balance sheet and the state and taxpayers from being the ultimate guarantor for a new company that was facing competition for the very first time in its history. The bill provided a fair and equitable post employment package for displaced workers. When the bill was first discussed, there was a great deal of confusion as to whether there would be a great number of displaced employees. Many began to confuse the privatization of worker’s compensation with "three-way." Three-way was set for competition in July of 1999.

Mr. Ernaut explained S.B. 37 did not set rates. The rates were set by a national firm and were set forth in 1995 and again ratified in 1997. The rates were standardized nationally and were not affected by S.B. 37. In addition, the bill did not increase or reduce a single injured worker benefit. S.B. 37 did not create three-way competition, such was already created. The bill simply shaped one of the participants in the competitive marketplace. The marketplace and rules was already defined, deliberated, and passed bipartisanly during the past two sessions of the Nevada Legislature. Lastly, the bill did not destroy the current no-fault system. The system was built on the fact that employers were bound to pay for work related injuries. In return, injured workers did not have the right to sue their employers.

The facts were three-way had already begun, and the loss of workers within EICN was going to happen regardless of whether the bill passed or not. The committee needed to ask themselves if they believed EICN could compete with greater success in a three-way market as a private or public entity. As a public entity, EICN would be sent into competition as the only company having to deal with its personnel through the State Personnel Act. In addition, EICN would be the only company having to consider the State Budget Act, which would require it to come before the state legislature and exhibit proprietary information to competitors.

Mr. Ernaut asked committee members if they were willing to gamble with $1.6 billion, and if EICN failed, would they be willing to levy enormous surcharges, raise taxes, and have draconian cuts in benefits. If the system failed as a public entity, such would be backed by the general fund as the ultimate guarantor. If the system failed as a private entity, such would be covered by the insurance guarantee fund and would be distributed over all insurance policies as would occur with other insurance companies. The bill was about removing the state from hundreds of millions of dollars of liability.

Mr. Ernaut referenced Exhibit J, a letter from Brenda J. Erdoes, Legislative Counsel, Legislative Counsel Bureau, regarding the constitutionality of S.B. 37. He referenced the second paragraph of the letter, which said, "We have also determined that the proposed amendment to Senate Bill No. 37 is constitutional."

Mr. Ernaut noted the state’s assets would be given, and explained that every asset owned by EICN was owned by premium payers, not by the State of Nevada. Such assets included buildings and hard assets. The system currently was, in a sense, a privatized system funded and owned by premium payers not the general fund.

It was explained that small employers would be harmed by an increase in rates. Mr. Ernaut reiterated the bill had nothing to do with rates. In addition, small businesses would not be able to have insurance written for them because the insurance marketplace would not have a place for the small businessmen. He noted to what he was referring was the residual market, which was for those with high risk or who were so small that they were not the most desirable policy to write. The Division of Insurance already awarded two private companies for such.

Mr. Ernaut noted all the above could occur without privatization and then reiterated the bill was about the removal of liability rather than just premiums and benefits. If the system again went under, then the general fund would be left as the ultimate guarantor.

Mr. Ernaut referenced a comment by Danny Thompson, representative of the AFL-CIO, who noted the bill was "union busting." Mr. Ernaut disagreed with the comment stating three-way precipitated the downsizing of SIIS. An argument could be made that S.B. 37 might save jobs because they were competitive. A competitive company would lose fewer employees if they lost less business. He pointed out S.B. 37 was the only plan that allowed for a severance package for employees who would lose because of the downsizing of SIIS. The severance package lifted the hiring freeze, called for $2 million in retaining, and purchased pensions for those who were within 5 years of retirement. He noted painstaking work done to ensure employees were supported, over and above what was statutorily required. With three-way coming about, if S.B. 37 did not pass and jobs were lost, employees would be fired in order of seniority. The bill added protection to labor.

Because of SIIS reforms in 1993, 1995, and 1997, there were certain injured worker benefits lost, and according to Mr. Ernaut, Governor Guinn believed there was a moral responsibility to discuss and restore the benefits. The benefits were a matter of negotiation, and Mr. Ernaut wanted it known that the governor extended his hand from the beginning of the bill’s deliberation to negotiate benefits with injured workers. Governor Guinn’s hand was still out and would always be out until the legislature informed the governor the deliberation was over. The purpose of the bill was to remove the state from liability; it was not about union busting, rates, or benefits for injured workers.

Mr. Goldwater noted the issue was complicated and Mr. Ernaut spoke on a debatable question, which was whether a quasi public company could compete with a private company. He thought such could happen even if the public company were subject to the personnel and budget act but not subject to corporate income taxes or other taxes. Such would make it an effective competitor. He noted SIIS had 50 years of experience and could compete.

The issue of liability was not discussed, and Mr. Goldwater asked to whom the liability belonged. He noted there was considerable debate on the issue in 1993, 1995, 1997, and the current insured who left the system were getting a free ride on the back of current premium/taxpayers.

Mr. Goldwater noted benefits to injured workers, and Mr. Ernaut’s comment about the governor extending his hand. He stated there was a system in surplus, and noted premiums were cut amidst the surplus. Mr. Goldwater asked if the current time was right to create a private system and reward private citizens instead of those who suffered the burdens.

Mr. Goldwater noted his obligation was to offer the ultimate value for tax or premium dollars paid. Turning the system, its assets and liabilities, over to a private company was like any business transaction. He questioned what it was worth and what he was paying. He pointed out Mr. Ernaut never mentioned what the assets were worth and what was being paid to obtain them.

Mr. Goldwater inquired as to whether privatization was a good deal for the state and whether the state was ever relieved of its obligation. Mr. Goldwater did not believe so; the state would never be relieved of its liabilities and obligation to employers or injured workers. If the system was privatized, the reliance would be on the private sector or private insurer to take care of the liability for the state. In order to be supportive of the bill, Mr. Goldwater would need assurances that private companies being relied upon to alleviate the responsibility were sound and responsible enough to alleviate the liability.

Mr. Ernaut referenced Mr. Goldwater’s question as to whether a quasi-public entity could compete with a private business. He believed it could, but noted the budget and personnel acts would be a serious competitive disadvantage for the company if they were not allowed to react to changes in a new competitive marketplace. Mr. Ernaut asked Mr. Goldwater if he was so sure the public company could compete would he be willing to risk the money. If the public company failed, the failure would come back on the legislature. The state had been fighting a battle to get back to even, and they finally were. The state was not relieved of any obligation to injured workers.

Mr. Ernaut explained in the midst of people leaving the system and the subsequent rate reduction in 1986, a snowball affect was started from which it took over 10 years to recover. From his standpoint, there was a current opportunity for balance in the bifurcated system.

Mr. Ernaut referenced the reinsurance issue and noted a $2 billion umbrella insurance policy, which would cause a company to take all the old claims. The purchase price was $775 million. The state was not paying the purchase price; it was the premium payers who paid the amount.

There was an obligation to injured workers, which Governor Guinn understood. He had been involved in many public and private labor issues considering such issues. Through the bill, the obligation could be upheld through the regulatory bodies without abandoning anyone.

Mr. Goldwater noted liability was not being removed; the state was simply relying on the private sector. States who privatized their industrial insurance system found that once there was no state fund to balance a one, two, or three-way environment, premium payers were begging the state to come back into the business. He asked why such would not happen in the State of Nevada and whether the question of privatization should be a question for another legislature years away.

Mr. Ernaut thought the commissioner of insurance should create an environment by which a private company would want to remain in the market and compete. Competition was coming regardless of the bill. He noted automobile insurance and how it was mandated, yet there were many carriers.

Mr. Goldwater referenced Mr. Ernaut’s comment on car insurance and noted those who paid for it felt they were "over a barrel." He noted automobile insurance payers had no choice in the matter of their insurance as with worker’s compensation. The commissioner of insurance could not make someone stay in the state.

Mr. Ernaut pointed out the commissioner of insurance could create a competitive environment where insurance companies wanted to stay.

Mr. Goldwater asked how the state was going to make an insurer offer the insurance and not cater to the higher insured. He noted he was aware of the assessment and the insured risk pools. If there were only a few insurance companies, businesses would have to pay too much for what they received. He noted concern over having to solve complex problems in the next week.

Mr. Ernaut thought there needed to be discussion as to a free marketplace. If a person believed in such, there would be a belief that the program would shape itself. He referenced Rhode Island which reverted back to a state system and pointed out their reversal had more to do with an overly onerous regulatory structure than statutes.

Mr. Beers referenced communications received by legislators who feared the abrupt change. He asked what Mr. Ernaut saw happening to employees if nothing was done with the system. He asked if the individuals would be laid off.

Mr. Ernaut said competition was coming regardless of S.B. 37. The passing of three-way precipitated the loss of jobs. There might be 400 to 600 jobs that were going to be lost regardless of what happened with S.B. 37. He pointed out if S.B. 37 did not pass, those employees had rights prescribed to them in the State Personnel Act, which was firing by seniority or priority on the list for rehiring. He noted there was a hiring freeze, which S.B. 37 lifted. S.B. 37 also provided $2 million in severance pay that could purchase pensions for those close to retiring, retain employees, or lift the hiring freeze. The package was fair, and cases would be viewed individually. If the bill did not pass, there was little for employees who would lose their jobs.

Mr. Beers noted the issue of laying individuals off by seniority at 50 percent of the workforce and asked if the result would be managers doing clerical work.

Mr. Ernaut said losing 50 percent of a workforce would be a draconian measure. He pointed out there were businesses standing in line for the right to leave the system the day it became competitive. Less premium payers meant less revenue. Less revenue meant less ability to pay employees, and less ability to pay meant fewer employees. Such was going to happen. There was no way for the state to absorb 400 to 600 jobs.

Ms. Giunchigliani noted Mr. Ernaut’s comment on the governor’s desire to assist injured workers and referenced A.B. 326, which restored some benefits to injured workers. She asked about restoration of benefits regardless of the outcome of S.B. 37.

Ms. Giunchigliani noted they would pick and choose when the benefits to injured workers would be restored, but they did not pick and choose when employers would be rebated.

Mr. Ernaut thought all was a matter of negotiation. Governor Guinn had nothing to do with the restoration. They were trying to fix what they inherited, and the governor thought there was a moral responsibility to restore some of the benefits. He could not say which benefits.

Ms. Giunchigliani noted there were only 4 days to work out the issues, and it would have been nice to have seen an initiative come forward separate from the issue of whether SIIS was privatized because of the commitment made to injured workers. She referenced the $2.2 billion debt liability in 1993 and noted Governor Miller’s 6-year plan. Over the years, the debt was reduced, SIIS was stabilized, committed benefits were never restored, and several rebates to employers for premium cuts were provided. She asked how the system ended up with the $1.6 billion debt.

Mr. Ernaut explained the issue had as much to do with the management of claims as with the management of money.

Ms. Giunchigliani noted she never believed the $2.2 billion amount and noted she understood the debt was no longer there. She asked why in 1999 there was a $1.6 billion debt.

Mr. Ernaut explained many legislators believed the liability was no longer in existence. The liability never went away, but positive issues within the system received more publicity than negative.

Ms. Giunchigliani asked how much was rebated to employers.

Mr. Ernaut explained current premium rebates had little to do with past liabilities

Ms. Giunchigliani referenced the assets and the issue of the trust regarding the constitution. She asked what Mr. Ernaut interpreted to be the state’s trust and inquired as to the definition of the assets.

Mr. Ernaut explained the trust came about nationally with the social security trust fund and was separated so the legislature could not appropriate the money.

Ms. Giunchigliani said if such was the case, it was in the same position as the Public Employees Retirement System (PERS) Board. She asked how the legislature could raid the PERS fund for up to $20 million.

Mr. Ernaut said the legislature should not have been able to act in such a manner.

Ms. Giunchigliani noted the legislature did act in such a fashion and obviously there was some disagreement as to what a trust was. She noted conflicting interpretations of the issue and inquired as to the state’s assets. Ms. Giunchigliani pointed out there was a commitment made to the working men and women in the state that they would be protected and they would have some assurances if they were injured on the job.

Douglas Dirks, Chief Executive Officer, Employers Insurance Company of Nevada, explained the governors proposal created a mutual insurance company, and a mutual insurance company was owned by the member policy holders. By virtue of purchasing a policy of insurance, an individual became a mutual member of the insurance company. He noted he would take the committee through the transaction of creating a mutual insurance company (Exhibit K).

The first step was the reinsurance transaction. Reinsurance was where one insurance company bought insurance from another insurance company. Under the transaction negotiated through reinsurance intermediaries with four different reinsurers, $775 million in cash would be transferred into a trust. The trust fund would be used for the purpose of paying benefits to injured workers whose date of injury was prior to July 1, 1995. The trust fund would also be used to pay for the cost of administering those claims.

Simultaneous to the transfer of the $775 million, EICN’s financial statement would reflect a decrease of approximately $1.6 billion in liabilities. Such was the estimated amount due to all injured workers with the date of injury prior July 1, 1995.

The reinsurers would assume $2 billion in liabilities. He pointed to the transfer of $1.6 billion and the purchase of an additional $400 million in insurance over what the currently liability was believed to be. The additional insurance was designed to take into account any adverse development with the claims. If there was greater medical inflation in the future than currently assumed, the $400 million was designed to be a cushion. They were buying more insurance than what they currently believed necessary.

The impact of the transaction was the $600 million deficit reflected on the state insurance funds financial statement would go to zero. The State of Nevada would also be relieved of all future liability as a result of the transaction and would never have future liability for any claims with a date of injury prior to July 1, 1995. The State Industrial Insurance System and it ultimate successor, the private mutual insurance company, would have purchased $2 billion in reinsurance. Upon passage and approval, EICN would enter into the reinsurance agreement.

S.B. 37 provided for the creation of a private domestic mutual insurance company, which meant EICN would go through the process of filling out applications and then submitting the company to the commissioner of insurance for evaluation and approval to create a domestic mutual insurance company. The company would be subject to NRS requirements and be able to write all lines of property and casualty insurance for which it was qualified.

As part of the creation of the domestic mutual insurance company, the governor would appoint an advisory panel that would assist in the development of the bylaws that would govern the initial private domestic company. Subsequent to such development, the policyholders, as the owner of the company, would have the ability to adopt bylaws, select the management, and elect the board of directors. Initially, an advisory panel selected by the governor would develop the bylaws, and the bill provided the panel should represent all businesses in the state.

Chairman Buckley inquired as to individuals who participated in the drafting of legislation attempting to be on the new company’s board of directors and profit from mutualization. She asked if the issue was addressed in the bill, and if the proponents of the bill would be averse to putting language into it making it clear that those who participated in the process could not personally benefit.

Mr. Ernaut explained only premium payers could be on the board of directors. None who drafted the bill were premium payers, so they would not profit.

Chairman Buckley did not direct her comment to the governor’s staff, and again asked if there was anything in the bill that governed the issue of profit.

Mr. Ernaut again noted the issue of the individuals being premium payers, and the board of directors could not personally profit. The state ethics laws would cover such an issue. There were significant safeguards.

Mr. Dirks added the board of directors would have a fiduciary duty to the trust fund and to the new mutual company as any private board of directors had a fiduciary duty to its policy or shareholders.

Chairman Buckley asked about employees of EICN and whether one could take over the company and pay themselves a large salary.

Mr. Ernaut explained if EICN became a private company, the salary of an individual like Mr. Dirks would be determined by the board of directors. He could not run the company as a sole proprietorship. It would be out of bounds to pay someone an inordinate amount of money with the fiduciary responsibility all board members had.

Mr. Dirks then explained the next step in the establishment of the private mutual insurance company was obtaining a private letter ruling from the Internal Revenue Service (IRS). Earlier in the year, EICN initiated the process of obtaining a formal written private letter ruling from the IRS as to the affect of the proposed transaction resulting in no tax ramifications. He did not expect to receive the private letter ruling from the IRS within the next 3 weeks.

The bill provided that the governor would "pull a trigger" at a later date, and a requirement for pulling the trigger was the receipt of a favorable letter ruling from the IRS. He expected to receive the letter ruling by mid to late summer.

Step four was a proclamation by the governor. EICN understood the process could not be completed in the next 3 weeks because there were a number of pieces not in place. The first "trigger item" was the consummation of the reinsurance transaction. Prior to the private company being created and the assets and liabilities being transferred, the reinsurance agreement must be in place, and the contracts must be signed. The $1.6 billion in liabilities would be removed, as would the $600 million deficit. Mr. Dirks noted in addition to the above mentioned "trigger items," the private company must be formed, the private letter ruling must be obtained from the IRS, and the commissioner of insurance must approve the creation of the new domestic mutual insurance company. When the four above-mentioned steps were accomplished, the governor, by proclamation, would authorize the transfer of the assets and the creation of the private mutual insurance company. Under the bill, such would occur on January 1, 2000. The private company by an endorsement to the policy would make all of policyholders as of January 1, 2000, the owners of the new mutual insurance company.

The final step was the creation of various protections of employees (Exhibit K). The protections included employee rehiring off of the reemployment list, an extended period of time on the reemployment list, a minimum of 60 days written notice prior to a layoff, the purchase of not more than 5 years of credit for those employees who would be eligible for an unreduced benefit, which amounted to approximately 150 employees, the setting aside of up to $2 million for retraining employees who might have difficulty obtaining other employment either in the public or private sector, the lifting of the hiring freeze, and priority rehiring of EICN employees who would be laid off.

Mr. Dirks noted the above mentioned were the basic steps of the transaction that would ultimately eliminate the liability for the state, transfer the ownership and assets to the policyholders, and protect the interest of EICN employees.

Mr. Ernaut explained the $775 million in assets that would be transferred were almost entirely market driven. A 10 percent correction in the market would render the transaction impossible. The state was in a position where they could "sell high," but the window was limited.

Chairman Buckley asked if the state could not sell high regardless of whether there was a mutualization.

Mr. Ernaut affirmed Chairman Buckley’s question noting the issue of getting rid of long-term liability. He noted the $1.6 billion was a greater problem today but was created by under management for a great many years, and if such was to happen again, the state could find themselves repeating past experiences.

Chairman Buckley referenced concern over how quickly the bill came about. She explained the system was moving towards a three-way system and then in January of 1999, privatization came about. She asked why the state was creating a company that would compete with private insurers. Such was not privatization; it was more like subsidization.

Mr. Ernaut explained the governor’s single motivation was to remove the state from liability, and the privatization was his means of doing such. The reason the issue was presented in January was because the governor was elected in November. The presentation of the issue in the middle of the session was at Mr. Ernaut’s direction. Until there was a preliminary indication on the IRS ruling, the issue would not move forward as it would have been an effort in futility and a waste of everyone’s time if the IRS ruling was adverse. If there was an inordinate tax liability, the governor would not support the legislation. Mr. Ernaut also explained a new governor could not request new legislation until February 1.

If the state was not going to privatize the system, they should consider bringing back the industrial insurance monopoly. EICN would fail if it was sent into three-way as currently structured. He guaranteed that by the next session the state would be attempting to bailout the company, and the crisis would be greater than the current situation.

Mr. Goldwater noted the liabilities outweighed the assets and there was a reinsurance transaction. If anything was liquidated, a liability would still be left. There was insurance up to the level of the estimated liability plus an additional $400 million. He asked if disaster occurred, was the state "off the hook."

Mr. Dirks stated that under the current proposal, the state was off the hook. He offered a hypothetical situation whereby claims amounted to $2 billion and $1. The private mutual insurance company would pay the first dollar after the $2 billion amount. If claims amounted to $3 billion and the private company only had $2.5 billion, at such a point, the guarantee fund took over. The private insurance company participated in the guarantee association, and the State of Nevada did not have the liability. The liability became one of the entire insurance industry. If it appeared there was going to be an insolvency, the commissioner of insurance stepped in prior to the insolvency occurring and took action.

Mr. Ernaut noted if the same scenario occurred and the system was not privatized; he guaranteed the general fund and taxpayers would pay the costs.

Mr. Goldwater had no problem living up to the obligation made to workers and noted difficulty with the concept of the state wiping their hands clean of the obligation, which was what seemed to be implied. The state was "on the hook" regardless.

Mr. Ernaut was not implying the state was washing their hands of anything. He was implying that with a $3.3 billion biannual budget, a $1 billion dollar hit to the state budget was impossible. Such would mean 30 percent tax increases, draconian surcharges for every business in the state, and a sizeable reduction in benefits. He would rather have someone else pay for the problem.

Mr. Goldwater understood what Mr. Ernaut said and may well support the design. He noted the complicated issues involved in S.B. 37 and also noted the bill going through the session in a very brief period of time. Such placed an incredible amount of trust in the governor and his staff. He noted difficulty in obtaining information as to liabilities and the issue of a huge reinsurance contract that could be written. Mr. Goldwater asked if there was anticipation that the state would in the future be involved in litigation, arguments, or disagreement and inquired as to what was covered and what was not covered. He asked if it was possible to write a large comprehensive contract.

Mr. Dirks stated the transaction was large, but not difficult. Negotiating and pricing the transaction was difficult. He noted a provision in the agreement where reinsurers were not responsible for retroactive increases in benefits because they could not anticipate what would happen in the legislature years down the road. The liability did not come back to the state but went forward to the new company.

Mr. Goldwater asked when retroactivity would begin. Would it begin on commencement of the contract.

Mr. Dirks noted retroactivity would begin on July 1, 1999.

Ms. Giunchigliani referenced Exhibit K pointing out language which said, "claims incurred prior to July 1, 1995." She asked what happened to the claims after the period of time.

Mr. Dirks explained the claims transferred to the new mutual company. There was a full transfer of remaining assets and liabilities to the mutual company.

Ms. Giunchigliani asked what assets were intended to be transferred and would they cover costs.

Mr. Dirks said there would be assets in excess of liabilities transferred.

Ms. Giunchigliani asked about the dollar amount. Based on the pricing, Mr. Dirks estimated the amount to be about $300 million

Ms. Giunchigliani noted according to Mr. Ernaut’s testimony, the $775 million was the only asset that would be transferred. She asked if the buildings would still belong to the state.

Mr. Ernaut said $775 million went into the reinsurance transaction. The assets of the new company included the hard assets, which included the buildings and other items such as computers and desks. The state did not own those assets; premium payers owned them.

Ms. Giunchigliani disagreed with Mr. Ernaut and then referenced comments as to coinsurance. Mr. Ernaut said there were about four companies in the midst of negotiation, and the companies did not care as much as from whom they were buying the assets and liabilities, their concern was whether they could manage the claims and invest the assets better and make money.

Ms. Giunchigliani asked who the four companies were.

Mr. Ernaut said they should not disclose who the companies were because of current negotiations.

Mr. Dirks said he was reluctant to provide the names of third parties because of the negotiations.

Ms. Giunchigliani wanted assurance that none of the companies would benefit. She did not want them to be lobbying on behalf of the bill. She wanted assurance that no deal had been cut regarding what sort of monetary gain would come about.

Chairman Buckley asked if any of the insurers were involved in the current political process.

Mr. Ernaut said he was not sure a single entity vying for the business had a registered lobbyist in the building. He had to check it out.

Ms. Giunchigliani asked what would happen if the commissioner of insurance did not certify EICN as a mutual insurance company.

Mr. Ernaut said there would be a three-way system. The situation would remain as it was currently. He assured the committee that the Governor’s Office was ready to answer any questions and reiterated the fact that benefits would be discussed.

Senator Joe Neal, Senatorial District 4, spoke in opposition to S.B. 37 (Exhibit L). He noted his presence in the legislature as the State Industrial Insurance System went through major changes. Senator Neal pointed out the years spent attempting to put SIIS into such a condition so as to compete with private insurers and provide a viable alternative for employers of the state. With the passage of S.B. 37, the very program the state had been working so hard to build up would be sold leaving injured workers without a vestige of the system originally designed to assure proper and fair coverage for injured employees.

Senator Neal discussed aspects of the bill and then presented his concerns regarding S.B. 37 (Exhibit L). He noted the only thing S.B. 37 did, which was not a part of existing law, was transfer approximately $800 million to a reinsurance company. He believed such was wrong, unconstitutional, and a bad use of money.

Danny Thompson, representing the Nevada State AFL-CIO, introduced Bob Gagnier, Executive Director, State of Nevada Employees Association (SNEA). Mr. Thompson stated in 1993, the system was faced, all of a sudden, with a $2.1 billion debt. Governor Miller and his Chief of Staff, Scott Craigie proposed a plan that began in the Senate Committee on Commerce and Labor. Mr. Thompson referenced Exhibit M page 11, which were the minutes of the Senate Committee on Commerce and Labor of March 8, 1993. He noted the minutes contained a plan submitted to consider the $2.1 billion debt. During the hearing, the committee assigned a dollar value to every benefit reduction made. Injured workers’ benefits were reduced 23 percent. Premium paying employers were forced to pay deductibles of $200 per incident, and if the employer had a bad rating, they were forced to pay a $1,000 deductible. The money was supposed to go into a 6-year solvency plan, and after 6-years, the plan was to be solvent. He noted the system was currently $1.4 billion dollars in debt. There were many injured workers who suffered because of reduced benefits in order to get the system solvent.

In 1997, the legislature enacted A.B. 609, which bifurcated the fund separating pre 1993 claims into an account for extended claims and post 1993 claims into another account. The accounts were in the budget. According to the combined financial statement issued on June 30, 1998, total assets of EICN were at $2.88 billion and total liabilities were at $6.2 million.

Mr. Thompson read from the notes of the combined financial statement given to EICN, which said, "as required by A.B. 609, the fund transferred $1.73 million in liabilities for incurred but unpaid claims and claims adjusted expenses through the account for extended claims on July 1, 1997. Assets totaling $650 million consisting of $610 million in investment assets and $40 million of cash equivalents were transferred to the account of extended claims. (the pre 1993 claims) The fund payment to the transferred claims liabilities such assets transferred have been estimated by management to be amounts sufficient to meet the present value of the payment streams to be incurred in the payment of the claims liabilities."

Mr. Thompson pointed out enough money was put aside to take care of claims. Benefits were cut and stripped from injured workers, which amounted to millions of dollars and were reflected in the new financial statement showing the new fund with assets of $1.3 billion and total liabilities of $975 million. There were more unanswered questions than answered questions in the bill.

Mr. Thompson referenced Exhibit M pages 8 to 10 from Paul Brown who was the Assistant General Counsel to American International Group, Inc. (AIG). Mr. Thompson pointed out AIG was the largest insurance company in America and noted the letter said "the scheme to make this become our liability isn’t a new one, it has happened in other states and in states where it has happened, the insurance company just left."

Mr. Thompson noted the constitutional question and stated if the bill went forward and the money was allowed to be taken and set aside, the committee was gambling. They did not have the power to change the state constitution.

S.B. 37 failed to pass on its merit in the Senate Committee on Commerce and Labor. After it failed, it was passed out with no recommendation. The bill went to the Senate floor and it passed on a partisan vote with abstentions.

In addition, the bill was dependent on the IRS saying the state could take $800 million and make such a tax-free transaction. He also referenced the Insurance Guarantee Fund noting there was $8 million in the account. He noted the fund would pass costs along to employers.

Mr. Gagnier, read from Exhibit M, page 2, noting the state should not eliminate the option of a state system. Once eliminated, the system would be difficult to reenact. He referenced the constitutional issues pointing out article 9, section 2 (Exhibit M, page 5). His concern was the legislation might not be constitutional. If the assets of the worker’s compensation fund could be taken and turned over to a private company, then the same could happen with the Public Employees Retirement System (PERS). He encouraged Chairman Buckley to ask for the opinion of the attorney general; he did not believe the attorney general’s opinion had been requested.

Mr. Gagnier read from Exhibit M, page 2, noting the provisions of the amendment had some desirable points for employees who wished to leave the system but would be devastating for those who desired to stay. He commented on Senator Neal's testimony (Exhibit L) which he thought was incorrect. Mr. Gagnier pointed out there was no debate on the bill on final passage but there was on the adoption of the 140 page amendment.

Mr. Gagnier referenced section 20 and stated on July 1, 1999, regardless of anything else, all SIIS employees were out of the state personnel system and no longer eligible for state benefits. Section 20 stayed in effect regardless of what the IRS or Governor did.

Mr. Gagnier continued with Exhibit M noting the bill would be good for older employees who wished to "bailout" of the system. The bill was also good for those who desired to move into another state position because they would get the rights of reemployment. There were extensive questions regarding provisions as they pertained to the reemployment list. The administration was convening a special meeting of the personnel commission on Friday in order to adopt changes to the job descriptions of worker’s compensation specialists. The changes being proposed had only one purpose, which was to make it easier to pick and choose employees to be laid off. There was a layoff rule that had been in affect for over 25 years. Mr. Gagnier explained there were currently about 17 classifications within the worker’s compensation series, and the personnel commission would be asked to expand the classifications to over 50 so the system could be more selective in laying off employees. The personnel commission was holding a regularly scheduled meeting in less than a month. The special meeting was so rare that he could not remember the last time such occurred.

Mr. Gagnier referenced Exhibit M noting employees who had many years vested in the retirement system, but were not yet able to retire would lose the value of their retirement. He explained PERS was a defined benefit plan. An employee could have 20 years of employment service and not be able to take advantage of the buyout provision because they could not retire. Twenty years in the system would give an employee a sizable benefit based on their current salary. The employee could draw a benefit when they were 60 years old. The value would not grow even though PERS had the employee’s money for many years. The employee would be losing their value.

The bill was also not a good deal for employees of other state agencies who might be laid off. They would have EICN employees taking precedence over another employee in their own agencies.

Employees who chose to stay or could not find a position with another agency would go from a structure with guaranteed benefits to an at-will system where much would be promised but nothing guaranteed.

He noted comments as to the governor lifting the hiring freeze for those employees. Mr. Gagnier said there was nothing in the bill stating the hiring freeze would be lifted.

If there was a big reduction warranted, he asked where those individuals would go to work and how many vacancies would be available. There was no problem filling low level clerical positions because with them there was a high turnover. Beyond that, the worker’s compensation classification was peculiar to the system and there were few calls for employees in those areas.

There were many employees who elected to work for EICN, who liked their job, and did not want to leave. The employees were good at their jobs and did not feel that they should have to give up what they had taken years to earn. Those employees were being asked to give up a great deal.

Mr. Gagnier referenced Exhibit M, pages 4 and 5, which were the guaranteed benefits EICN employees would give up. He noted comments in the Senate Committee on Commerce and Labor where a pension plan of the PERS quality would be offered to employees. The director of PERS testified before a committee considering a resolution on Social Security and said an employee could not be covered by Social Security and be offered the same benefits PERS offered, for the same money. Such would cost a lot more money.

Ms. Giunchigliani referenced the state personnel rules and asked when an employee changed from one department to another, did they always start out as probationary employee.

Mr. Gagnier explained under the current regulations if a permanent employee transferred from one agency to another, the employee would not have to serve a new probationary period. Under S.B. 37, as it was amended, the right of reemployment, contrary to current law and regulations, would apply to probationary employees.

Ms. Giunchigliani asked if probationary employees would be treated the same as long-term employees, with the same benefits. Mr. Gagnier affirmed her question.

Mr. Beers asked what would happen if the bill did not pass. Would half of the latest workforce be laid off.

Mr. Gagnier understood there would be layoffs, but it would be less than the amount referenced, which was half to two-thirds the workforce. He thought there would be at least one-third of the workforce laid off. Such would amount to about 300 employees. There was a clearly defined layoff regulation based on a combination of factors, not just seniority. Management had to decide in which classification and in which geographical area they could sustain cuts and have the least detrimental effect on their operation. Within those classifications, the computer determined seniority. Just as important, the employee went on the reemployment list in inverse order, which was a failure in the bill. Everyone would go on the reemployment list with equal status. In addition, there was a clearly defined law on purchasing retirement credit if an employee was affected by a layoff. The bill had a benefit that was better than NRS 286.3007. NRS 286.3007 provided for an employee who was affected by a layoff. The agency must participate with the employee in the purchase of service, up to 5 years, based on a formula on the employee’s years of service. The benefits in S.B. 37 would provide more for employees. Even newer employees could get 5 years of service if they were eligible to retire. The employee would have to be 60 years old or older or have 25 or more years of service to benefit from the provision.

Mr. Thompson read into the record notes from the combined financial statement entitled Liquidity and Ability to Sustain Operations, which said, "through the 1993 fiscal year, the fund experienced several years of continuing severe operating losses and cash flow deficiencies that resulted in accumulated deficit of over $2 billion at June 30, 1993. In reaction, the governor, the state legislature, and the funds management undertook a sweeping plan of legislation and management reforms to address the issues affecting the funds operational profitability. Beginning with the 1994 fiscal year, the fund began a sustained record of profitability and positive cash flow. These changes resulted in improvements that reduced the accumulated deficit from over $2 billion to $602,000,552 at June 30, 1998." Mr. Thompson said the amount was about a $225 million a year savings.

In addition, his concern over the constitutional question as it related to EICN was not just about EICN. The reason the constitution was changed was to prevent a raiding of PERS. He currently represented almost all of the employees in PERS and noted if the transaction took place, he believed a precedent was being established that would allow for the raiding of PERS. He was very concerned about the issue.

Holly Waddell, EICN employee, offered written testimony in favor of S.B. 37 (Exhibit N). She noted as a private company, EICN would be better able to compete in the three-way competitive market by being placed on a level playing field with all other private companies. She saw the passage of S.B. 37 as a win win situation and noted SNEA and AFL-CIO representatives did not represent the point of view of all EICN employees. The employees were not polled in order to find out how they viewed the passage of S.B. 37.

Chairman Buckley recessed the hearing until the following Wednesday and noted there would be a short presentation on the legal aspects of the bill as well as the question of assets. Chairman Buckley adjourned the meeting at 8:10 p.m.

RESPECTFULLY SUBMITTED:

______________________________

Jane Baughman,

Committee Secretary

APPROVED BY:

Assemblywoman Barbara Buckley, Chairman

DATE: