The Committee on Government Affairs was called to order at 8:15 a.m. on Thursday, April 15, 1999. Chairman Douglas Bache presided in Room 3143 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:

Mr. Douglas Bache, Chairman

Mr. John Jay Lee, Vice Chairman

Ms. Merle Berman

Mrs. Vivian Freeman

Ms. Dawn Gibbons

Mr. David Humke

Mr. Harry Mortenson

Mr. Roy Neighbors

Ms. Bonnie Parnell

Ms. Gene Segerblom

Ms. Sandra Tiffany

Ms. Kathy Von Tobel

Mr. Wendell Williams

COMMITTEE MEMBERS EXCUSED:

Mr. Kelly Thomas

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

Henry Etchemendy, representing Nevada Association of School Boards

Ted J. Olivas, Purchasing and Contracts Manager,

John Balentine, Chairman, Public Purchasing Study Commission, and

Danny L. Thompson, representing Nevada State AFL-CIO

John Sande, representing Nevada Bankers Association, testified. He explained the legislature previously granted the state treasurer the right to engage in securities lending, and S.B. 14 extended that right to other governmental entities. Section 1 of the bill allowed only those cities and counties with a population in excess of 100,000 and an investment portfolio greater than $1 million to engage in securities lending. In addition, it required the treasurer of the city or county to establish an investment policy and established a governmental entity which lent securities, to ensure its protection, must receive collateral equal to at least 100 percent of the value of the securities borrowed from it.

Mr. Sande explained S.B. 14 also applied to the state treasurer in his dealings with the local government pooled investment fund, as set forth in section 2 of the bill. Section 4 extended the ability to lend securities to the Housing Division of the State of Nevada’s Department of Business and Industry. Section 5 applied to the director of the Department of Business and Industry in connection with a certain program of revenue bonding for financing the exportation of goods.

Mr. Sande deferred to Mark Meyocks to explain "securities lending."

Mark Meyocks, Vice President, U. S. Bank, testified. Mr. Meyocks explained securities lending was an investment strategy which utilized an existing portfolio of securities held in a custodial relationship. The securities most frequently utilized were either treasury or agency issues of the Federal Government. He said, "Envision, if you will, that an investment strategy called ‘laddering,’ where you have varying maturity dates, starting within a very short period of time and extending out to a longer period of time, would be managed by the portfolio managers for the governmental agency, that they are then held in the custodial account. In a securities lending relationship, approved broker-dealers have a need to cover short-sales or have a fail-to-deliver because they’re getting securities in a large, jumbo certificate that need to be broken by the registrar. A securities lending agent is hired by the government agency to then provide and seek out these broker-dealers to lend these securities out. In most instances, it’s 102 percent collateralized by cash or a like security." He said the assets were then placed in a very conservative investment vehicle, for a period not to exceed 90 days. Revenue thus generated was shared by all parties involved, the governmental agency, the broker-dealer, and the securities lending agent.

Mr. Meyocks cited an example of why the ability to engage in securities lending was important. He said in 1987, Clark County School District put its custodial services out for bid. The cost of those services was approximately $75,000. Had the school district been able to engage in securities lending, it would have been receiving in excess of $300,000 net from its portfolio.

Assemblywoman Freeman asked whether there had been occasion for a local government in northern Nevada to engage in securities lending and whether it would have been advantageous for Washoe County to do so in any recent circumstance. Mr. Meyocks replied there had been no such occasion recently because current law prohibited local governments from engaging in securities lending.

Mrs. Freeman said she understood that. However, she pointed out, Mr. Meyocks mentioned it would have made things easier for Clark County School District if the school district had the ability to engage in securities lending. Mr. Meyocks responded that was correct, and the same would be true for the city of Reno, whose portfolio would certainly qualify for securities lending.

Mrs. Freeman asked for confirmation the state treasurer was required to be involved in local governments’ securities lending activities. Mr. Meyocks responded the state treasurer currently utilized securities lending for ". . . the state insurance pool."

Chairman Bache asked in how many states, other than Nevada, it was legal for governmental agencies to engage in securities lending. Mr. Meyocks replied he was surprised Nevada did not permit it. U.S. Banks were located in 17 western states, and to his knowledge U.S. Bank had (securities lending) relationships in all 17 states except Nevada.

Assemblywoman Berman pointed out if the ability to engage in securities lending had been available to Clark County School District (in the situation previously cited by Mr. Meyocks), the school district could have ". . . given them $300,000 up front." She asked where, since the school district did not have that ability, was the $300,000 and was it earning interest. Mr. Meyocks replied $300,000 was an estimate of earnings (the school district could have realized) on securities lending transactions. In most instances, such transactions would generate revenue in an amount greater than $300,000.

Ms. Berman asked for how long a period of time securities lending had been utilized. Mr. Meyocks replied securities lending was instituted as an investment strategy during the 1970’s.

Ms. Berman said securities companies were informing clients they could lend against their portfolios, a relatively new concept to people with money in securities companies.

Mr. Meyocks observed the strategy of margining securities as an individual, by borrowing on one’s portfolio, had been utilized since the 1920’s. A securities lending transaction was slightly different. In securities lending, one was not borrowing against his personal portfolio.

In an attempt to explain securities lending, Mr. Meyocks posed a hypothetical situation in which a governmental agency resided on one side of a neighborhood street, a broker-dealer who wished to borrow resided on the other side of the street, and a securities lending representative, in the form of a policeman, held a position in the middle of the street. He said, "We have a 26 foot extension ladder in our garage. The broker-dealer wants to borrow it to wash their windows. They go to the policeman and say, ‘I want to borrow the neighbor’s ladder.’ So, the policeman goes over there and says, ‘O.K. First of all, give me 102 percent value of the ladder in cash. I will invest that in a very conservative investment.’ I go into your garage. You don’t even know I’ve gone in there because I’m a policeman, and I have access to your garage. I go in there and grab the 26-foot ladder, take it across the street, and your neighbor’s able to borrow it. Now later on that afternoon, the Internal Revenue Service comes in and says, ‘Do you have a 26-foot ladder in your garage.’ You can safely say, ‘Yes, I do.’ It doesn’t really show there, but to you it is still there. It is your ladder. It does not disappear, and it’s jut being borrowed by your neighbor. So you do own the ladder."

Ms. Berman said she understood. Brokerage companies were using a person’s account like a house. A person could borrow using his account as a mortgage, and " . . . it is not on a margin account." She said, "So, I was wondering if you could do that. If you had the possibility of doing that also." Mr. Meyocks replied, "We can’t do anything that’s not allowed by the law, and we can’t do anything that’s outside of the guidelines put forth in the investment policy statement specifically represented by the securities lending agreement." U.S. Bank had an investment policy statement which applied to lending agreements entered into with the bank’s approved vendors as well as with its clients.

Assemblyman Mortenson referred to Mr. Meyocks hypothetical example and asked how the person who borrowed the 26-foot ladder would use the ladder to make money. Mr. Meyocks asked Mr. Mortenson to assume the person had ordered a ladder from Home Depot, which had not yet been delivered. The person was awaiting delivery of the ladder but needed to clean his gutters; therefore, he borrowed his neighbor’s ladder in order to proceed with his work.

Mr. Mortenson suggested Mr. Meyocks analogy was falling down. He asked whether he was correct the ladder was analogous to a portfolio. Mr. Meyocks replied affirmatively.

Mr. Mortenson asked whether the person who borrowed the portfolio would borrow money against that portfolio. Mr. Meyocks replied, "No. What happens in that, in fact, the broker-dealer has probably already had a client of their own that has said that we want to sell that ladder."

Mr. Mortenson asked whether Mr. Meyocks was referring to "short-selling." Mr. Meyocks replied, "They may be short-selling or they may have a – let’s say for example, they’re dealing with the government of Japan, and Japan owns a jumbo certificate for a treasury bill that matures in 2,005, and they only want to sell part of it. The broker-dealer needs to borrow to have delivery within 3 days, and the government of Japan cannot deliver in that kind of a timeframe. So, they would be borrowing security to match up with a good delivery of the sale and completion of it."

Mr. Mortenson indicated he understood.

Brian K. Krolicki, Treasurer, State of Nevada, testified. He expressed support for S.B. 14. He maintained securities lending was not a simple transaction but one which was very complex. The Treasurer’s Office had engaged in securities lending for several years, and on a $1.2 billion general fund portfolio earned, approximately, between $500,000 and $600,000 per year through lending securities. He reiterated securities lending was very complex. It involved the need to track assets, ensure investments were properly made, and have a "matched book." It was not appropriate for the unacquainted, which was the reason S.B. 14 established the population and portfolio thresholds it did. He believed those thresholds ruled out participation by counties and cities who might not have the sophistication necessary to engage in securities lending.

Mr. Krolicki explained the state treasurer’s particular interest in S.B. 14 pertained to section 2 of the bill, which referred to the local government pooled investment fund. That fund consisted of approximately $400 million to $500 million and was managed by the Treasurer’s Office. Through that fund, local governments who wished to utilize securities lending could use their assets to do so.

Mrs. Freeman referred to Mr. Krolicki’s testimony securities lending was complex and not something with which the unacquainted should become too involved. She asked whether Mr. Krolicki was comfortable with treasurers of those city’s and county’s who fell under the population parameters established by S.B. 14 engaging in securities lending. Mr. Krolicki replied affirmatively. He explained the thresholds S.B. 14 established would rule out nearly every local governmental entity in Nevada other than Clark County, Washoe County, school districts, and airport authorities.

Mr. Krolicki asserted securities lending was a very appropriate and prudent activity. If someone with a large portfolio was not engaged in securities lending, he was " . . . really leaving safe money on the table." It behooved those who understood securities lending to engage in it.

Mrs. Freeman observed the training and expertise of individuals who served on boards was becoming an increasingly greater issue. Often, the legislature was required to establish an educational process for board members to undergo before they undertook their positions. She asked whether the Treasurer’s Office would be available to assist local governments who wished to learn how to engage in securities lending. Mr. Krolicki replied it would.

Mrs. Freeman said she wished to feel comfortable local governments understood how to accomplish securities lending.

Mr. Krolicki said he spoke with Laura Fitzpatrick, Clark County’s treasurer, and Ms. Fitzpatrick fully supported S.B. 14 in its current, amended, form.

Mr. Mortenson inquired what a school district’s or county’s portfolio might hold. Mr. Krolicki replied, "The portfolios of the governments are, essentially, entirely fixed-income, and certain securities are more prone to be lent. Certain treasuries and agencies are more attractive than commercial paper or certain corporate debentures . . . there’s a market for these." He said at times, no more than $100 million or $200 million worth of the state’s $1.2 billion general fund portfolio might be loaned out through the securities lending program.

Chairman Bache said as he understood S.B. 14, it applied only to cities and counties with populations of 100,000 or more and, therefore, would apply only to Washoe and Clark counties and to the cities of Reno, Las Vegas, Henderson, and North Las Vegas. The bill did not address school districts or other governmental entities. He asked whether he had missed something in the bill.

Mr. Krolicki replied he did not believe Chairman Bache had missed anything. If the language of S.B. 14 did not qualify a school district as a governing body, the school districts would not fall under its provisions.

Alvin P. Kramer, Treasurer, Carson City, testified. Mr. Kramer declared he supported S.B. 14. However, he would like Carson City to be able to engage in securities lending, which would necessitate amending S.B. 14 to reduce its population threshold to 50,000 and its portfolio threshold to $50 million.

Mr. Kramer referred to Mrs. Freeman’s previous comments and indicated he believed he had the necessary education and experience to engage in securities lending. He said, "In some cases, they may not be there, but I would reassure you that the county treasurers, when they get into these things, do use the assets of the state Treasurer’s Office on questions along this line."

Assemblyman Humke asked whether Mr. Kramer had provided the same testimony and proposed the same amendment in the senate. Mr. Kramer replied had had not. However, he spoke with Senator Ann O’Connell, chairman of the Senate Committee on Government Affairs, who indicated she had no problem with the S.B. 14 being amended to establish a population figure of 50,0000 and a portfolio requirement of $50 million.

Mr. Kramer explained the amendment he proposed was not proposed previously because representatives of Nevada’s smaller counties understood " . . . there really wasn’t a market . . . " absent a portfolio of at least $100 million. However, members of the banking community informed him some banks established a portfolio threshold of $25 million to manage a portfolio for securities lending. That threshold easily qualified Carson City. The city held a $30 million portfolio with a bank that engaged in securities lending management. If only a portion of the city’s portfolio was eligible for securities lending, the city would still realize $25,000 or $30,000 per year from that activity, which would pay the salary on one person on the city's payroll.

Mr. Humke asked whether there was any legal precedent for smaller governmental entities to enter into a pooling arrangement to engage in securities lending. Mr. Kramer replied affirmatively. He explained S.B. 14 would permit local governments to engage in securities lending through the local government pooled investment fund. However, he explained, " . . . the local government investment pool is designed more as a shorter term, more liquid pooling arrangement, which earns us more than we, individually, can get on shorter term money; but our longer term money would get another 50 or 74 or 80 basis points more than what the local government investment pool does. So, it behooves us to have two pots of money, that which is short-term, which we in Carson City invest with the local government investment pool, and that which is long-term, which . . . in my case, we ladder it out 3, 4, 5 years security, government agency and T-bills and that sort of thing."

Mr. Kramer stated Carson City’s portfolio was in excess of $50 million and its population in excess of 50,000, and the ability to engage in securities lending could be advantageous for Carson City. He pointed out Carson City’s treasurer’s office was directly across the street from those of the state treasurer, and there was a good line of communication between the two. Therefore, he did not think Carson City would be in trouble.

Mr. Humke asked whether establishing a population limit of 50,000 would make the ability to engage in securities lending available only to Carson City or, instead, would make that ability available to certain other counties and certain school districts. Mr. Kramer replied he believed the language of S.B. 14 would have to be expanded to specify school districts in order for school districts to be included under its provisions. However, he was not certain.

Mr. Humke pointed out school district was included in the statutory definition of "local government."

Mr. Kramer said insofar as Nevada’s counties were concerned, he believed Douglas County and Elko County would be the next counties, after Carson City, to become eligible to qualify for the provisions of S.B. 14.

Mr. Humke observed given Douglas County’s growth rate, if S.B. 14 was amended as Mr. Kramer suggested, it would be only a short time before Douglas County achieved the bill’s population threshold.

Marvin Leavitt, representing the city of Las Vegas, testified. He said when S.B. 14 was originally introduced, he was concerned because he believed it did not establish sufficient safeguards with respect to the "methodology to be employed" in securities lending. He reiterated previous testimony that securities lending was a good investment if the investor properly understood it and expeditiously followed up on such investments.

Mr. Leavitt explained the Senate Committee on Government Affairs asked him to prepare amendments to S.B. 14 which would address some of the things being discussed. The committee adopted his amendments, and he now felt S.B. 14 was relatively safe.

Mr. Leavitt concurred with Mr. Krolicki’s testimony securities lending was a complication process. He contended local governments needed the necessary expertise before they engaged in securities lending; they could not always rely on the expertise of others.

Mr. Leavitt suggested if there was a desire to permit school districts to engage in securities lending, S.B. 14 should specify only school districts over a certain size could do so. Although in some counties, the county treasurer handled investments on behalf of the county’s school district, he did not believe that was the case in all counties. He believed the addition of school districts was as far as it was desirable to go in including additional local governmental entities under the provisions of S.B. 14.

Mr. Leavitt asserted there were many ways a local government could get into trouble " . . . in this kind of a bill." He explained, " . . .if a local government lends securities and then invests money in securities that go out – have a much longer duration, maturity date, than the securities that they’re lending, so that they have to redeem those, and the interest rates have gone up between the time they bought the securities and the time of redemption, then you could have a considerable loss on that transaction." He said such an eventuality was one reason S.B. 14 established a 90-day maturity period. The limitations imposed by S.B. 14 were placed in the bill in an attempt to ensure only those local governments with the necessary expertise would become involved in securities lending.

Chairman Bache pointed out S.B. 14 was drafted to allow any local government with a population of less than 100,000 to participate in securities lending through the state treasurer’s management of the local government pooled investment fund.

Mr. Mortenson asked how Mr. Leavitt felt about amending S.B. 14 as proposed by Mr. Kramer. Mr. Leavitt responded his feelings were somewhat divided. There was probably no problem as far as Carson City was concerned, but he was concerned about involving some of the other local governments. He pointed out county treasurers were elected, and one could be elected who had very little experience with investments. County treasurers of small counties had a minimal staff of professionals; therefore, one individual with little expertise might be the one handling securities lending transactions. Such transactions had to be watched continuously, and if someone did not have the necessary expertise, time, or the staff to do so, he could get himself into trouble. To make the ability to engage in securities lending available to small local governmental entities would be to invite trouble.

Chairman Bache asked whether he correctly enumerated the governmental entities who could take advantage of S.B. 14. Mr. Leavitt replied affirmatively.

Chairman Bache closed the hearing on S.B. 14.

Jean Botts, Senior Program Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, State of Nevada, testified. She explained she was testifying in her capacity as a legislative staff member solely for the purpose of explaining S.B. 48 and not for the purpose of supporting or opposing the bill.

Ms. Botts stated S.B. 48 was recommended by the Legislative Committee on Education, which was authorized to review and comment upon issues related to methods of financing public education in Nevada. Senator Raggio, the committee’s chairman asked Neil Stevens, superintendent of Eureka County School District, to appear before the committee in March 1998 to explain the impact on Eureka County School District of the decrease in the price of gold and the resultant decline in revenue from the tax on proceeds from minerals.

Ms. Botts explained Eureka County School District received no state aid under the Nevada Plan because for the previous 10 years, the school district’s revenues from local property taxes and the local school support tax had exceeded any amount of money it would have been guaranteed under the Nevada Plan. Although the school district currently drew sufficient revenues from local property and sales taxes to fund its operations, a decline in mining revenues had dramatically affected its budget.

Ms. Botts said Superintendent Stevens testified to the Legislative Committee on Education that mining revenue in Eureka County had decreased by $3.4 million over the preceding 2 years, and Eureka School District’s budget was expected be $1.5 million less in FY1998-99. To help protect its budget against an inevitable downturn in Eureka County’s mining economy, the school district placed $.5 million in a revenue stabilization fund or "rainy day fund." When the school district subsequently tried to place additional monies in its revenue stabilization fund, in order to deal with declining revenues, the question was raised whether the school district could add more money than an amount equal of 10 percent of its prior year’s expenditures to the fund.

Ms. Botts explained existing law allowed a school district to establish a revenue stabilization fund; however, money from such a fund could be used only when revenue in the governing body’s general fund fell short of anticipated levels. Money remaining in a revenue stabilization fund at the end of a year could neither revert to another fund nor be utilized as surplus money for another purpose. However, under current law, the balance in the fund must not exceed an amount equal to 10 percent of the school district’s general fund expenditures for the previous year. Eureka County School District wanted to increase that amount in order to provide a cushion against staff layoffs and appeared before the Legislative Committee on Education in May 1998 to ask the committee to consider the bill draft which became S.B. 48. S.B. 48 would increase the cap on the revenue stabilization fund to 30 percent of the amount of expenditures during the previous year. School districts surrounding Eureka County suggested in addition to the 30 percent limitation, the bill establish a cap of $2 million.

Ms. Botts said Superintendent Stevens indicated it was not school districts’ intent to "stash" money; they merely wanted enough money on hand to avoid mid-year reductions. S.B. 48 allowed school districts to add to their revenue stabilization funds " . . . an amount not to exceed 10 percent of the previous fiscal year’s general fund expenditures up to a cap of 30 percent of the previous year’s expenditures of $2 million . . .." That provision applied only to school districts and counties with populations of less than 100,000.

Henry Etchemendy, representing Nevada Association of School Boards, testified. He said Neil Stevens requested he testify on S.B. 48 on behalf of Eureka County School District. He submitted a copy of a letter from Mr. Stevens (Exhibit C). He pointed out in his letter, Mr. Stevens said Eureka County School District was forced to cut more than $3.8 million from its budget the preceding year, and was forced to reduce its staff by 6.5 employees and eliminate several noteworthy educational programs. In his letter, Mr. Stevens also said for FY 1999-2000, the school board allowed Eureka County School District to transfer $250,000 of the $500,000 balance currently in its stabilization to its general fund to avoid even greater staff reductions. In the current year, the school district was faced with eliminating up to 10 additional teaching and classified positions.

Mr. Etchemendy contended a stabilization fund in the amount requested by Eureka County School District would permit the school district to " . . . more evenly flow with their programs and not have all the ups and downs with respect to the collections of net proceeds of mines . . . " and preclude its having to consider making the drastic personnel cuts it had discussed. He contended a staff reduction of 6.5 employees was a drastic reduction for Eureka County. A further reduction of 10 additional staff members was even more drastic.

Mr. Etchemendy explained S.B. 48 would not provide immediate assistance to Eureka County School District because the school district would not be able to place additional money in its revenue stabilization fund as long as its net proceeds were low. However, the school district anticipated its net proceeds would increase, at which time it would be able to place more money in the fund to assist it at a later date.

Mr. Etchemendy urged to committee to give full consideration to S.B. 48, which he maintained would truly help school districts, such as Eureka County School District, which were heavily impacted by net proceeds from minerals.

Assemblyman Lee indicated mines made payments to counties based on an estimate of their net proceeds. He said one county had to repay $700,000 because of an overpayment. He asked whether Eureka County was the county which received the overpayment. Mr. Etchemendy replied it was Humboldt County which received the overpayment.

Assemblywoman Segerblom asked whether Eureka County School District received " . . . the per pupil funds . . " from the state. Mr. Etchemendy replied for the past several years, it had not. Since the mining boom occurred, in order to make the distribution formula work, the legislative money committees established an arbitrary distribution sum for Eureka County School District, and the school district received only $100 per year. It received nothing whatsoever from " . . . the per pupil apportionment."

Ms. Segerblom observed it appeared Eureka County School District might be in need.

Mr. Mortenson said he did not know what criteria were used to determine how state funds were allotted to school districts. He asked, " . . . is there any possibility that this fund, rainy day fund, could be used to throw money into it, and the because the school district is low on money, the state would then have to – in other words, can it be used for some kind of shenanigans in that way?" Mr. Etchemendy responded the purpose for which the money in a revenue stabilization fund could be used was fairly well restricted by existing statute. It could be used for no purpose other than to compensate for monetary deficits resulting from a shortfall in a school district’s revenues.

Mr. Mortenson indicated Mr. Etchemendy’s reply was not responsive to his question. His question was what basis was used to determine whether the state would contribute to a school district under the Nevada Plan. Mr. Etchemendy replied the Nevada Plan was a funding formula under which all school districts in the state were funded.

Mr. Mortenson said his question was what determined whether or not a school district received money pursuant to the Nevada Plan. Mr. Etchemendy said he believed Ms. Botts was better able than he to answer Mr. Mortenson’s question.

Ms. Botts explained the Nevada Plan was a formula which took many factors into account in determine how much money was required to educate a pupil. It took into consideration both historical expenditure patterns and geographic considerations. For example, remote, rural school districts required more money to educate one of their pupils than a large, urban school district required. The formula also took into consideration a school district’s wealth, transportation costs, and a number of other factors.

Ms. Botts said because Eureka County School District was a small, remote, rural school district, the amount of money it required per pupil, pursuant to the Nevada Plan formula, would be rather high. However, revenues the school district received from two local sources were even higher. Therefore, for the past 10 years, Eureka County School District had received no state aid. However, based upon the Nevada Plan formula and declining revenues from net proceeds of minerals, it appeared Eureka County would again be eligible for state aid in the upcoming year.

Mr. Mortenson asked whether because of the increased amount of money S.B. 48 would allow a school district to place in its revenue stabilization fund, a school district could place a great deal of money in that fund, and then say its revenues were insufficient, and it needed more money pursuant to the Nevada Plan. Ms. Botts replied it could not. Money a school district placed money in a revenue stabilization fund was placed there to guard against future shortfalls in revenue. The state could not decrease its aid to a school district because the school district had a revenue stabilization fund.

Chairman Bache asked whether adjusting distributions under the Distributive School Account might be a more appropriate way of resolving Eureka County School District’s problem than S.B. 48. Ms. Botts replied the school district would receive some state aid to bring the level of its per pupil expenditure up to the amount prescribed by the Nevada Plan formula. However, the school district had been spending more than that amount because of the wealth it had experienced over the previous 10 years. At times, the school district had been able to spend anywhere from $12,000 to $19,000 per pupil. Even Nevada’s poorest school district was not guaranteed that amount of money under the Nevada Plan.

Al Bellister, representing Nevada State Education Association (NSEA), testified. He declared Nevada State Education Association opposed S.B. 48. NSEA believed the bill was too broad. It was intended to assist Eureka County and some other counties which were fairly heavily dependent on net proceeds of mines for revenue. However, S.B. 48 applied to any county with a population of less than 100,000 and, therefore, applied to 15 of Nevada’s 17 counties. Of those 15 counties, only 4 derived 10 percent or more of their total assessed value from revenues from net proceeds of mines.

Mr. Bellister said in addition, NSEA believed it unnecessary to create a revenue stabilization fund of the size permitted by S.B. 48. Current law allowed school districts to establish a revenue stabilization fund in an amount equal to 10 percent of their prior year’s general fund expenditures. However, since that law was passed, only two school districts, Clark County School District and Eureka County School District, had established such a fund, and even with its recent wealth, Eureka County School District had set aside only $500,000. Under current law, Eureka County School District could have set aside as much as $800,000. Therefore, the school district had been unable to take full advantage of the law. Some school districts received as little as $500 " . . . outside the formula, based on net proceeds." S.B. 48 would allow them to set aside $2 million, allegedly to stabilize a volatile tax like net proceeds from mines. NSEA believed it unnecessary for a school district to set aside that much money.

Mr. Bellister pointed out school districts were permitted to set aside 3 percent of their current budgets for contingency funds. Eureka County School District did so, and he believed the school district set aside $150,000.

Mr. Bellister concurred putting Eureka County School District back into DSA’s formula was a better solution to the school district’s financial problems than S.B. 48. He said as recently as approximately 1995, Eureka County’s net proceeds from mines were $474 million. However, it was projected those proceeds would amount to only $50 million in the upcoming year. In FY1989-90, Eureka County School District received $1,000 per pupil in state aid while its local wealth exceeded $13,000 per pupil. Mr. Bellister estimated in the upcoming year, Eureka County School District’s local wealth per pupil would be $10,000, and the state was providing no aid to the school district. He believed it was time to again provide the school district with a more stable funding source but believed that should be accomplished through DSA not S.B. 48.

Ms. Segerblom asked whether Eureka County School District would automatically fall back under the DSA formula if the legislature took no action. Mr. Bellister replied it was his understanding there was no automatic trigger for DSA assistance. It would be up to the legislative money committees, when they reviewed DSA, to determine how Eureka County School District fit into the formula.

Assemblywoman Tiffany asked what would be wrong with requiring Eureka County School District to do as other school districts did and function with its current revenues. She declared, "They’ve been excessive forever." Mr. Bellister responded NSEA did not take the position a teacher’s salary of $60,000 per year was excessive. He suggested it might be necessary to discuss Ms. Tiffany’s definition of "excessive;" however, NSEA was not opposed to Eureka County School District " . . . living within its means." NSEA was not demanding the state fund the school district’s current level of expenditure and recognized the school district would have to make adjustments. NSEA suggested the legislative money committees consider placing the school district back in the DSA formula and fund the school district accordingly.

Ms. Tiffany said she saw nothing wrong with the current DSA formula and believed Eureka County School District needed to begin behaving like " . . . another school district with what you’d call an equal amount of funding." She had no problem with the school district being required to reduce spending and have the same number of staff and pay the same salaries as any other school district. However, it sounded as though NSEA did have a problem with that. Mr. Bellister responded NSEA would be concerned if the school district decreased salaries. NSEA was not concerned about the current law which allowed a school district to establish a revenue stabilization account to the monetary extent currently permitted; however, it believed S.B. 48 was too broad and created an unnecessarily large fund.

Chairman Bache asked whether he was correct, although NSEA had no desire to see people laid off, if layoffs were accomplished in accordance with contract terms, that was acceptable to NSEA. Mr. Bellister replied affirmatively.

Mrs. Freeman asked whether the legislative money committees had discussed establishing a trigger " . . . related to this type of an issue." Mr. Bellister replied he was not aware of any such discussions.

Mrs. Freeman suggested it might be appropriate for the legislative money committees to discuss a trigger mechanism in light of the financial condition of many of Nevada’s smaller counties. Mr. Bellister said he believed NSEA would request the money committees do just that, with respect to Eureka County, when they reviewed DSA on the 20^th of the month. He believed Nevada’s school districts had reached a consensus concerning a better way to handle revenues from net proceeds of mines and attempt to even distribution of those revenues and establish a practice of relying more on actualities than estimates.

Mr. Mortenson asked whether he was correct the money in the increased revenue stabilization fund permitted under S.B. 48 could not be considered in salary negotiations. Mr. Bellister replied it was his understanding under the terms of S.B. 48, that money would be exempt from consideration in salary negotiations.

Chairman Bache suggested some of the committee’s questions concerning DSA and whether or not Eureka County School District would automatically fall back under that account could be answered by Ms. Botts.

Ms. Botts gave further testimony. She explained when the school funding bill was drafted each legislative session, the legislative money committees considered educational funding based on a broad, statewide picture and established a statewide, guaranteed, average amount of funding per pupil. That amount was factored into the funding formula to determine the amount of funding each county would receive. She said, "At that time, if the amount is a need after you subtract the estimates of local revenue, then of course, the school district is put into the funding bill." For the past five legislative sessions, a "dummy amount" was established for Eureka County, merely as a place-holder, to address the fact the county did not need revenue from the state to have the amount of money per pupil established by the funding formula. However, because net proceeds from mines was estimated to be very low for the upcoming year, it appeared Eureka County would again fall under the funding formula.

Chairman Bache asked whether Eureka County would automatically receive money from DSA if the county’s revenues fell below a certain amount or whether legislative action was required to make that happen. Ms. Botts replied it was fairly automatic; however, the legislature established the amount of money per pupil each school district was guaranteed to receive through a combination of local and state revenues.

Mrs. Freeman asked whether there was a proposal before the legislative money committees to provide assistance to White Pine County with respect to its schools, as well as other things, and whether Ms. Botts could provide an update on White Pine County’s situation.

Ms. Botts stated there was currently a bill to provide a school district which experienced a severe, financial emergency and was "taken over" by the state’s Department of Taxation an amount of money, in addition to that it received from DSA, for its use in paying off any-long term debt incurred as a result of its financial emergency. In 1995, the legislature arranged for White Pine County to receive a bank loan. She believed that loan was in the amount of $2.8 million. In order to repay the loan, approximately $328,000 per year was deducted from White Pine County’s DSA allocation.

Ms. Botts said White Pine County refinanced the loan in an effort to reduce its payments for a year or two after which its payments would increase to approximately $360,000 per year. White Pine County School District’s superintendent argued the repayment arrangement reduced the school district’s funding by 4 percent and requested the school district be given an amount of money equal to that 4 percent in addition to the money it received from DSA. The school district would then receive 104 percent of the amount of money DSA would normally provide it to enable it to pay off the loan without experiencing a reduction in its DSA allocation.

Mrs. Freeman asked, "So, then they’ll owe the state that much more money over the period of time?" Ms. Botts replied the money was not owed to the state. The loan being paid off was made by a bank, and the additional money White Pine County School District requested would not constitute a loan with which to pay off a different loan; it would be an outright grant.

Ms. Tiffany asked whether Ms. Botts testified on S.B. 48 before the senate. Ms. Botts replied she did not.

Ms. Tiffany asked whether Ms. Botts was present when testimony on S.B. 48 was given in the senate. Ms. Botts replied she was.

Ms. Tiffany asked whether the issue S.B. 48 was too broad was raised before the senate. Ms. Botts replied it was not.

Ms. Tiffany asked whether Ms. Botts believed S.B. 48 was too broad. Ms. Botts responded, "Originally, we had . . . talked about limiting it to revenue from net proceeds, but that is not how the bill came out; but, it could be limited if that’s a concern."

Ms. Tiffany asked, " . . . would you agree that it should be, maybe, just to define to a net proceeds and maybe the percentage should be adjusted . . .?" Ms. Botts replied, " I believe that the legislative committee on education . . . were primarily thinking or intending that it be revenue from net proceeds because that is so volatile, but that definitely could be considered."

Ms. Tiffany asked whether the senate had considered what she suggested. Ms. Botts replied it had not. She reiterated the issue of S.B. 48 being too broad was not raised before the senate.

Ms. Tiffany asked, "And the too broad just meant that it was from net proceeds and maybe too much?" Ms. Botts replied she believed Mr. Bellister’s concern was that a school district which received relatively little revenue from net proceeds of mines would use the mechanism provided by S.B. 48 to build a rainy day fund for use when revenues decreased.

Ms. Tiffany asked whether Ms. Botts believed there was anything wrong with a school district having a stabilization fund. Ms. Botts replied she didn’t believe there was. The legislature provided for stabilization funds during the 1995 legislative session; however, she believed only three school districts had established such funds.

Chairman Bache closed the hearing on S.B. 48.

James E. Keenan, Purchasing and Contracts Administrator, Administrative Services Department, Douglas County, Nevada, representing Nevada Public Purchasing Study Commission, testified. He explained the chairman of the Senate Committee on Government Affairs suggested Nevada Public Purchasing Study Commission submit an omnibus bill to make various corrections to existing law, and S.B. 341 was the result of the commission’s efforts. The intent behind the bill was to improve the efficiency and effectiveness of public purchasing in Nevada, and the bill applied only to Nevada Revised Statutes (NRS) 332.

Ted J. Olivas, Purchasing and Contracts Manager, General Services Department, Clark, County Nevada, representing Nevada Public Purchasing Commission, testified. He asserted S.B. 341 provided government purchasing departments the flexibility necessary to better serve the business community and allowed them to function more like private industry purchasing departments. Some changes to law effected by the bill would provide purchasing department directors with authority to make certain decisions. However, the bill maintained the checks and balances currently in place to ensure compliance with NRS 332. The bill would assist government purchasing departments to operate more efficiently and reduce both their costs and their "cycle time."

John Balentine, Chairman, Public Purchasing Study Commission, and Director of Purchasing, Washoe County, Nevada, testified. He submitted a 7-page handout (Exhibit D). He stated S.B. 341 was essentially a cleanup bill. However, the bill was also a consistency measure and caused the term "authorized representative" to be utilized consistently throughout NRS 332.

Mr. Balentine explained currently, purchasing departments of Nevada’s larger counties were required to permanently retain records of informal bids for contracts of between $10,000 and $25,000. S.B. 341 would allow those purchasing departments to retain such records for only 7 years and then dispose of them in accordance with the state’s record retention law.

Mr. Balentine pointed out currently, under NRS 332.115, only hospitals were exempted from the bidding process with respect to perishable goods. He asserted there was no difference between perishable goods purchased by hospitals and those purchased by other governmental entities, and perishable goods should be exempted from the competitive bidding process for all local governments. S.B. 341 would provide equal treatment for all local governments with respect to purchase of perishable goods.

Mr. Balentine said under NRS 332.065, only hospitals were permitted to re-award a contract without re-bidding in the event the person or entity originally awarded the contract failed to perform. Re-awarding a contract without re-bidding in such circumstances was a common practice within both the public and private business sectors, and the Public Purchasing Study Commission did not believe authority to do so should be limited to hospitals. If passed, S.B. 341 would reduce procurement time by 6 to 12 weeks and minimize interruptions and delays in the receipt of products and services. The bill was permissive, and each governmental entity had the option to re-bid a contract in the event of default.

Mrs. Freeman said she had no problem with the specific provisions of S.B. 341. However, several years previously, she was involved with a large public entity in Washoe County which was in a very bad financial state. Initially, no one knew where the entity’s money was going, but it was ultimately discovered the problem lay in its purchasing department. She wished to ensure safeguards were in place to be certain elected officials responsible for purchasing knew what was happening. Mr. Balentine responded the Nevada Public Purchasing Commission believed all necessary safeguards were in place.

Ms. Tiffany said she had a question unrelated to S.B. 341. She explained she was a member of a national committee on electronic commerce and was interested in seeing purchasing done on an electronic basis through the Internet. She asked whether Mr. Keenan, Mr. Olivas, and Mr. Balentine had looked into electronic purchasing, whether they wished to see it established, and whether the believed it should be done statewide so everyone could take advantage of it.

Mr. Balentine replied Bill Moell, director of the Purchasing Division of the State of Nevada’s Department of Administration, was in a position of leadership with respect to electronic purchasing, and Washoe County was making progress in that direction. For the past 3 years, the National Purchasing Institute had offered an award for excellence in procurement to public purchasing entities who were on " . . . the cutting edge of that sort of thing . . .," and for the past 3 years, Clark County and Washoe County had won that award. He maintained there were certain pitfalls inherent in electronic purchasing, and those pitfalls were being examined very carefully.

Ms. Tiffany asked what those pitfalls were. Mr. Balentine replied if government purchasing agencies began putting contracts out for bid on the internet, they might receive bids from all over the world, and one major concern was the ability to do business with local businesses which might not be up to date on computer use.

Mr. Olivas said Clark County was actively involved in examining the possibility of electronic commerce. However, the county was taking a cautious approach because it wished to ensure safeguards were in place to guarantee purchasing was accomplished in accordance with NRS 332. He referred to the concern expressed by Mr. Balentine and said Clark County held the philosophy it wished to do business with businesses in Nevada if enough competition was available. Therefore, Clark County was cautious about making some of its bid opportunities available over the internet. The county viewed electronic purchasing in terms of the ability to purchase products through computer, rather than by telephone, once contracts were established. However, the county had an initiative in place to ensure it purchased products from Nevada businesses.

Ms. Tiffany asked whether Clark County had the necessary infrastructure in place to engage in electronic commerce and what it would cost an entity such as Clark County to engage in such commerce. She also asked whether the fact local governments engaged in electronic purchasing would be inclined to encourager vendors to go online, as opposed to discouraging them from doing so. She asked whether, although bids by local business were preferred, it might not sometimes be better to have wider competition if it would save the county and the taxpayers 20 or 30 percent in costs.

Mr. Olivas responded obtaining the best prices was part of the decision-making process for which local government purchasing departments were responsible. He said Clark County had computer systems in place through which to engage in electronic purchasing but did not wish to preclude anyone from doing business with the county because he did not have the necessary mechanisms in place to engage in electronic commerce.

Ms. Tiffany suggested Clark County could encourage vendors to go online so they could continue doing business with the county once the county went online. Mr. Olivas concurred.

Mr. Keenan explained the Public Purchasing Study Commission was comprised to two subgroups, one in northern Nevada and one in southern Nevada. As a first step toward establishing electronic commerce, those subgroups were developing web pages for every small municipality in the state which had both a computer and access to the internet.

Ms. Tiffany asked whether the legislature needed to effect anything in statute to remove barriers to electronic purchasing. Mr. Balentine responded the only provision in the local government purchasing statute which might affect the ability to engage in electronic purchasing was the requirement for sealed bids.

Mr. Balentine referred to Ms. Tiffany’s previous question regarding what it would cost an entity such as Clark County to engage in electronic commerce and said Washoe County set aside $40,000 solely for software costs to make electronic commerce a reality.

Ms. Tiffany asked whether the requirement for sealed bids was established by local ordinance or, instead, by a state statute which should be modified and whether S.B. 341 could be amended to ensure sealed bids were not the only acceptable form of bid. Mr. Balentine replied the provisions pertaining to sealed bid were contained in NRS 332. He said S.B. 341 could probably be amended to deal with the requirement for sealed bids. However, when the legislature met again in 2 years, local governments would be able to more knowledgeably discuss the safeguards, checks and balances which would be necessary if the statutory requirement for sealed bids was eliminated.

Mrs. Freeman asked whether technology was available to ensure the type of confidentiality provided by sealed bids. Mr. Keenan replied some such technology was available. For example, there were facsimile machines which would allow only a person with the necessary code to print out a fax sent to such a machine’s memory bank. However, more research was needed before a change to the sealed bid requirement was recommended.

Assemblyman Neighbors asked how Clark County handled situations in which it needed to purchase an item manufactured by only one company. Mr. Olivas replied NRS 332.115 provided the flexibility for sole source procurement.

Mr. Neighbors pointed out sole source procurement was not addressed by S.B. 341. Mr. Olivas concurred. He said sole source procurement was not one of the things being changed through S.B. 341.

Mr. Neighbors asked whether he was correct no bid was required when procuring items from a sole source. Mr. Olivas replied affirmatively. He said there were exceptions to the competitive bidding requirement. Those exceptions were defined in NRS 332.115, and S.B. 341 did not change them.

Danny L. Thompson, representing Nevada State AFL-CIO, testified. He stated because of the deadlines the legislature imposed on itself, he did not testify before the senate on S.B. 341; he had just recently become aware of the bill.

Mr. Thompson submitted a proposed amendment to S.B. 341 (Exhibit E). He said Republic Silverstate Disposal was awarded a contract to provide garbage service for Clark County. Republic Silverstate Disposal recently opted to contract out the hauling of garbage, the work it had been awarded a contract to perform as a local government franchisee, and it was laying off nearly 80 drivers. A representative of Republic Silverstate Disposal informed him the company did not have the expertise necessary to haul garbage. However, the company had been hauling garbage in Clark County ever since it was awarded the contract to do so. The proposed amendment (Exhibit E) would require, in counties with a population of 400,000 or more, local government contracts state a franchisee awarded a franchise for collection and disposal of garbage could not sell, lease, or transfer that franchise nor could it contract out the services provided under that franchise without first explaining its reason for doing so to the governing body of the local government which awarded the franchise.

Assemblywoman Von Tobel asked whether Mr. Thompson requested the senate to amend S.B. 341 as he proposed. Mr. Thompson replied he did not become aware of the proposed amendment until after the bill was passed out of the senate.

Chairman Bache asked whether he was correct Mr. Thompson testified the issue addressed by the proposed amendment (Exhibit E) arose after S.B. 341 was processed by the senate, and because of the legislature’s timelines with respect to bill draft requests, he was unable to request a separate bill. Mr. Thompson replied affirmatively.

Mr. Olivas gave further testimony. He pointed out S.B. 341 addressed NRS 332. Franchise agreements were discussed in a different section of NRS, and if a statutory change was to be made regarding franchise agreements, it should be made to that section of NRS.

Chairman Bache pointed out the proposed amendment (Exhibit E) addressed NRS 244.187. He asked whether he was correct Mr. Thompson’s intent was not to alter anything proposed by those who requested S.B. 341 but, rather, to make an addition to the bill. Mr. Thompson replied he did not intend to change the proposals in the bill; however, the bill addressed the same issue, local government contracting, as that addressed by his proposed amendment.

John Pappageorge, representing Republic Silverstate Disposal, testified. He said the proposed amendment (Exhibit E) became available only that morning, and he had not had an opportunity either to "digest" it himself or send it to his client. Therefore, he was uncertain what position he and his client would take on the proposed amendment. He explained the issue addressed by the proposed amendment arose from a labor dispute between Republic Silverstate Disposal and the teamsters union. Republic Silverstate Disposal decided to contract out the service of hauling garbage from the company’s transfer station to the dump site, and the company did so under authority of its current labor contract.

Mr. Pappageorge said he was not certain a change to state law was needed as much as more awareness during the course of labor negotiations was needed to alleviate problems such as that addressed by the proposed amendment (Exhibit E).

Mr. Humke asked whether there was any prohibition against subcontracting at the time Republic Silverstate Disposal entered into its contract with Clark County. Mr. Pappageorge replied there was none at that time nor was there currently any such prohibition.

Mr. Humke asked whether Republic Silverstate Disposal’s current contract with Clark County affirmatively stated subcontracting was permissible. Mr. Pappageorge replied when the labor dispute arose, the issue of subcontracting was reviewed, and it was determined there was no prohibition against subcontracting in either the company’s contract with the county or its labor contract.

Mr. Balentine gave further testimony. He explained pursuant to NRS 332.095, which was addressed by a portion of S.B. 341, no subcontracting or assigning of a contract could take place without permission of the governing body which awarded the contract. However, the section of NRS which addressed franchising might contain a flaw in that regard.

Chairman Bache pointed out the proposed amendment (Exhibit E) dealt with NRS 244.187 and NRS 168.081.

Chairman Bache closed the hearing on S.B. 341.

There being no further business to come before the committee, Chairman Bache adjourned the meeting at 10:12 a.m.

RESPECTFULLY SUBMITTED:

Sara Kaufman,

Committee Secretary

APPROVED BY:

Assemblyman Douglas Bache, Chairman

DATE: