The Committee on Ways and Means was called to order at 8:00 AM, on Monday, April 12, 1999. Chairman Morse Arberry, Jr. presided in Room 3137 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. Morse Arberry, Jr., Chairman

Mrs. Jan Evans, Vice Chair

Mr. Bob Beers

Mrs. Barbara Cegavske

Mrs. Vonne Chowning

Mrs. Marcia de Braga

Mr. Joseph Dini, Jr.

Ms. Chris Giunchigliani

Mr. David Goldwater

Mr. Lynn Hettrick

Mr. John Marvel

Mr. David Parks

Mr. Richard Perkins

COMMITTEE MEMBERS ABSENT:

Mr. Robert Price

STAFF MEMBERS PRESENT:

Douglas Dirks, Chief Executive Officer for EICN began his presentation by outlining the company’s function, its organizational structure, the budget process followed by EICN, and the Governor’s proposal to mutualize the state fund.

First, taking up the history and the function of EICN, Mr. Dirks related the state worker’s compensation fund was established in 1913. For over 86 years EICN existed as the exclusive provider of workers compensation insurance in the state of Nevada. The company was a non-General Fund company whose funding was derived from premiums paid by policyholders and investment income earned on assets. Furthermore, the only state funding EICN had ever received was a $2,000 loan, which was granted in 1913.

Mr. Dirks then referred to Assembly Bill 609 of the Sixty-ninth Legislative Session, which created a separate accounting unit for the state insurance fund. As of July 01, 1995, accounting in the fund was split and all of EICN’s experience prior to that date was in an account called the Account for Extended Claims. On the other hand, accounting dating forward from July 01, 1995 existed in the Account for Current Claims.

Mr. Dirks then explained the separation of accounts occurred on the financial statements but was not evident in The Executive Budget. EICN still had only one budget and allocated an apportioned cost between the Extended and Current accounts. However, EICN’s budget was a unified budget that was not broken down according to those accounts.

In the company’s handout (Exhibit C), Mr. Dirks referred to the company’s financial statement, from the independent audit which had been completed by KPMG for the fiscal year ending June 30, 1998. On page 2 of Exhibit C, the separation of the Extended and Current accounts were illustrated for financial statement presentation. The total indicated on that page was the combined experience of the two separate accounts.

Mr. Dirks then detailed the company’s 1-year performance as indicated in
Exhibit C. In total assets, the company had experienced significant growth in the last three years. Growth in assets was derived from premium income and investment income. He emphasized the company’s positive investment performance had contributed to the growth in total assets. Mr. Dirks then indicated some adjustments to the total assets had been made so that the historical comparison would be accurate.

He reported EICN had approximately $2 billion in invested assets, or bonds and stocks, at the current time. Total liabilities, illustrated in a 10-year analysis, had fallen slightly since 1993, which was the period of time where the worker’s compensation program had been reformed. More important though, the total liability figures appeared stable and did not exhibit the same exorbitant growth that had occurred in the late 1980’s.

Mr. Dirks related the accumulated deficit, or the unfunded liability, which had stood at nearly $2.2 billion in 1993, had improved and by June 30, 1998, the unfunded liability was measured at slightly over $600 million. Mr. Dirks explained the deficit was an accounting deficit, not an economic one. He believed the trust fund was fully funded and there were sufficient assets to pay off the liability over the 60 to 80 year period of time that the liability would become due. Mr. Dirks did not have a clear estimate of what level the unfunded liability would reach in the current year, yet he was confident the total accumulated deficit would decrease.

In relation to the Governor’s proposal, Mr. Dirks remarked that if passed the proposal would utilize a series of reinsurance transactions, which subsequently would decrease the unfunded liability to zero on an accounting basis.

Next, Mr. Dirks stated the premium revenue over the past 10 years had steadily increased until 1998. After filing for and receiving a 22 percent average rate reduction effective April 01, 1998, the total premium revenue was expected to decrease on an annual basis by $115 million. Also, the commissioner had approved an overall average rate reduction of 6.6 percent effective July 01, 1999. Thus, as the private market opened, rates would produce a slightly lower premium level.

The company projected the total premium level under that rate filing would total $330 million. Mr. Dirks stated the premium level would then return to the same level it had reached in 1992.

Next, in terms of claims expenses (see page 5, Exhibit C), reforms implemented in 1993 substantially decreased the paid claims expenses. Mr. Dirks reported that number had leveled off and slightly increased at the end of 1998 resulting in an $8 million increase in total paid claims expenses. Through the first three quarters of 1999, Mr. Dirks observed the claims expenses would again fall to levels experienced in 1997. Although the number might increase in the future, Mr. Dirks was confident that it would remain stable throughout the year.

Total operating expenses as illustrated on page 6 of Exhibit C, had fallen each year over the last 6 years. Mr. Dirks explained total operating expenses were the combination of the claims expenses and operating expenses. He thought the company had not expended enough in the past on the operation of the company, thereby causing the company to expend a greater amount on claims due to the mismanagement of those claims. As long as the total operating expenses were falling, he believed the company was performing appropriately.

On page 7 of Exhibit C, the salaries and benefits category of operating expenses was illustrated. Mr. Dirks said that when looking back through the 10-year analysis, one could see that claims expenses rose when the company made staffing cuts. Again, he believed that not enough people had been in place to manage claims and their caseloads were too high. Thus savings made in salary expenses were lost due to claims expenses which were incurred at much higher levels.

Mr. Dirks then pointed out salary expenses had increased slightly at the end of 1998. He claimed the increase was attributed to the company’s preparation for market place competition. For instance the company had incurred a substantial amount of overtime. Also, the company had experienced difficulties with one of their managed care vendors that required a significant amount of overtime to remain current in the payment of medical bills. Finally, in individual cases, outside employees had been brought in to make the company a viable and successful competitor when the market place opened, thereby impacting salary expenses.

Next, Mr. Dirks addressed net investment income (see page 8 Exhibit C) and repeated the company’s investment fund had performed very well. The average return for the last fiscal year was 16.1 percent. He then explained the returns were placed into the invested assets fund, which served as the resource that provided benefits to injured workers. In this case, Mr. Dirks indicated investment income completely offset all administrative expenses.

On page 9 of Exhibit C, realized investment gains which were the securities that had been sold at a gain were consolidated and sold at the highest levels the company had experienced for investment gains. Mr. Dirks was confident the realized investment gains were already higher than the last two years. For FY 1999, realized investment gains were expected to be even stronger as market gains were consolidated further.

The net income schedule for EICN was illustrated on page 10 of Exhibit C. Mr. Dirks said the business was managed to its financial statements and he reported net income would be realized yet again for the sixth consecutive year. Importantly, net income allowed the company to reinvest its investment portfolio to provide gains and to make certain the company would be able to satisfy all of its obligations as they became due.

Next, Mr. Dirks took up the issue of the budget process EICN followed when developing the company’s budget requests. He noted legislation adopted in 1993, removed the company from the state Budget Act and stipulated that the Legislature would review and adopt a budget for EICN every two years. However, under this legislation EICN was given the ability to alter its budget during the course of the year to meet changing business needs. Thus, during the year the company reallocated budgeting authority and sometimes chose not to spend appropriated budget authorities.

Furthermore, Mr. Dirks explained the company managed the day to day operation of EICN from the budget, but the company was managed to the EICN financial statement. Thus, if every budget category was satisfied, yet the financial statement yielded poor results, he averred the company was not doing its job. The budget was only EICN’s day-to-day operating plan. For example, by the end of the day, the company hoped to break even and to return a profit.

Next, Mr. Dirks noted there were not many substantial changes to EICN’s operating strategy and budget plan. EICN provided worker’s compensation insurance to the employers of Nevada for the last 86 years and would continue to fulfill the same function in the future. He remarked EICN’s budget reflected changes as a result of the onset of the competitive marketplace, but the company’s overall business plan had not changed substantially.

Because of the uncertainty of the conditions of the future operating environment for EICN, Mr. Dirks thought the budget was more difficult to prepare for than previous budgets. He felt the future of EICN would be determined by the individual decisions that were made by 45,000 Nevada businesses and whether they chose to continue purchasing worker’s compensation insurance from EICN or an alternate carrier. Therefore because those decisions could not be foretold, the company could not predict with confidence the number of employers who would maintain coverage with EICN. The budget represented the company’s best estimate of what they felt could occur in the following biennium and Mr. Dirks was certain that even that estimate would be wrong.

He then expounded upon how the company had arrived at that budget estimate. He said the company had evaluated other competitive state funds and their subsequent market shares and staffing levels. Based on that analyses the company prepared its budget and assumed EICN’s experience with privatization would be similar to the experiences of the other 22 state workers compensation funds around the country. Again, he repeated that although this estimate was the most accurate assessment the company could make, it would in all probability be incorrect.

Due to the uncertainty, Mr. Dirks said the budget would be managed on a monthly basis. Subsequently budget changes, based upon the amount of business transitioning to private carriers, the speed of carrier transitions, and the claims experience of those accounts, would also be made monthly. He thought that if EICN lost an employer who paid a small premium and had large losses, the company would be impacted differently than if it lost an account that paid a large premium and had small losses. Accordingly, the budget had to be adjusted monthly throughout the next biennium as businesses chose where to purchase their worker’s compensation insurance.

Finally, Mr. Dirks addressed the Governor’s proposal to mutualize EICN. This would mean that the ownership of the fund would be transferred to the policyholders of the fund. Because of potential federal income tax ramifications, the proposal was more intricate than a simple change in ownership and involved several phases.

If adopted, Mr. Dirks said the first phase of the proposal would take effect on July 01, 1999 where EICN would evolve into a public mutual insurance company. The company would remain part of the State of Nevada system but would be separated from the Executive branch of government. Mr. Dirks added the new organization of EICN would have a board of directors, appointed by the Governor, who would be responsible for adopting EICN’s budget and for appointing the fund’s management.

Also on July 01, 1999, Mr. Dirks noted the fund’s employees would become non-classified employees of the state of Nevada. The employees would continue to participate in the public employees retirement system and the state’s health and welfare plans.

Mr. Dirks then stated if the fund received a favorable private letter ruling from the Internal Revenue Service (IRS), the Governor would have the authority to proclaim that EICN would become a private mutual insurance company. Then on January 01, 2000, the transition would enter its second phase, as the fund’s ownership would be transferred from the state to the policyholders. The fund’s employees would subsequently become private employees who would no longer participate in the state’s retirement plan or in the state’s health and welfare plans, but in programs the fund’s board of directors adopted for the new private company.

Mr. Dirks said the implications of the change on the General Fund were negligible. Under the Governor’s proposal EICN would enter into interlocal agreements with all of the agencies to which the fund currently paid assessments. Thus there would be no General Fund impact or impact on any of the other state agencies with which the fund had existing relationships, until July 01, 2001.

The third phase of the transition, commenced July 01, 2001. At that point in time, Mr. Dirks explained, an interlocal agreement with all of the agencies EICN did not currently have contracts with would be undertaken. Legislation would provide that those interlocal agreements would survive the mutualization to the private company throughout the biennium. He then mentioned the proposal would not require any adjustments to any of the other General and non-General Fund accounts for which EICN currently provided contributions.

Mr. Dirks repeated that if the Governor’s proposal was adopted the board of directors would adopt a new budget for the fund on July 01, 1999. Therefore the budget considered by the committee would be used by EICN throughout the biennium if the proposal was not adopted. However, if adopted, the board of directors would be responsible for adopting a new budget. He suspected the board of directors would propose a budget substantially similar to the one considered by the committee at the time.

Chairwoman Evans wondered if the newly mutualized EICN would pay the personnel assessment that funded the Department of Personnel during the next biennium. She thought the change would impact the $300,000 contribution paid by the fund to the department.

In reply, Mr. Dirks explained the company would enter an interlocal agreement with the Department of Personnel to provide funding equal to what had been adopted in the current budget and in the department’s budget. This was done in order to avert a General Fund impact. He then remarked that the Governor’s proposal provided for priority re-employment rights for employees throughout the next biennium. So because the fund would continue to receive services from the department after the fund became a private company, a compensatory agreement also needed to be reached.

Mr. Dirks then continued with the fund’s budget and the changes the fund had made over the previous biennium. He stressed the fund’s overall program had not changed substantially. However some changes would occur as a result of the fund’s transition into a competitive private market insurer for workers compensation.

Beginning with decision unit M-200, the demographics and caseload changes, Mr. Dirks called attention to the fund’s projected decrease in total revenues by $155 million over the base budget. This was a 32 percent reduction in total revenues. Mr. Dirks then explained the fund expected to lose one-third of the total premium the fund currently wrote during the first phase of the Governor’s proposal.

In other words, Mr. Dirks said that by the end of FY 1999, he expected the fund’s market share to be 50 percent. But the total premium would not leave instantaneously corresponding to the change in the fund’s operation, however, it would leave throughout the course of the year. Consequently, the fund’s revenue would be impacted by an estimated 30 percent decline, or $155 million in the first year of the biennium.

In the second year of the biennium, he thought the decline in total revenue would amount to $242 million, which at the end of two years would leave the fund with one-third of the total premium written in the market or one-third of the market share.

He reiterated the difficulty which existed in projecting those figures. Typically, though, he felt that when evaluating the privatization of other state workers compensation insurance funds at least one-third to one-half of the market share was lost in the process. Accordingly, EICN expected to lose half the market in the first year of the biennium and two-thirds of the market over the 2-year biennium.

Because of that loss of revenue, the fund would be impacted especially in terms of personnel expenses. Mr. Dirks then called attention to the personnel reduction budgeted at $13.5 million during FY 2000 and an additional $25.5 million reduction in FY 2001. As the fund lost premium revenue, he explicated the fund would have to decrease its operating expenses and subsequently its caseload. In addition, as the fund decreased its staff through lay-off and phasing out positions, the services required of the Department of Personnel would increase as they processed lay-offs throughout the state system.

Chairwoman Evans then interrupted to acknowledge the difficulty in accurately projecting revenue figures during the fund’s transition to a private insurer. She asked what factors a business would consider when faced with the choice of purchasing worker’s compensation insurance through EICN or through an alternate private insurer.

Mr. Dirks responded a variety of factors existed. The most vulnerable businesses EICN expected to initially lose were those national businesses that purchased their workers compensation insurance currently from a private insurance company elsewhere. He estimated that businesses of that type comprised up to 25 percent of the total market. He explained those businesses would be difficult to compete for because there was a certain ease in administration, which those large national companies would achieve by purchasing their insurance from a singular insurer.

After surveying their largest national accounts, Mr. Dirks disclosed some businesses had expressed satisfaction with EICN’s performance and a desire to maintain existing contracts with the newly mutualized EICN, however those decisions would have to be finalized at a national level. He did not think that the fund would even be given the opportunity to propose a bid for that business, but the business would leave early on or, as the policy needed renewal.

He suspected some businesses would also change insurance carriers because following 86 years of required coverage by the state’s plan, they would be given the chance to change. He hoped those businesses would eventually return to purchase workers compensation insurance coverage from EICN.

Next, Mr. Dirks emphasized the fund would be competitive at both the price and service levels. However, given the opportunity to switch insurance carriers, he conceded that some of the funds business would flee to other carriers.

Mrs. de Braga asked if private companies were required to provide compensation for lost wages. Mr. Dirks replied required benefits were statutorily established. Thus, any insurance company that chose to sell workers compensation insurance in Nevada must provide all of the benefits that were designated by statute.

Continuing his discussion of decision unit M-200, Mr. Dirks called attention to a reduction in claims expenses. A $10 million reduction in claims expenses was projected for FY 2000 and a $47 million reduction was projected for FY 2001. Although those figures did not seem significant at first, Mr. Dirks explained that during the first year of the claims experience, the fund only paid $40 million to $45 million out of what could have been a $350 million claims liability. Therefore during the first year of the competitive market, he said the fund would still be making payments on claims made in earlier years amounting to almost $200 million. Then after the first year of the open market, the fund might pay out $30 million in claims expenses versus the $40 million the fund would have otherwise paid had the market remained closed.

Mr. Dirks reiterated the fact that claims expenses would fall much more slowly than revenue expenses. This did not create budgetary problems for the fund because the monies necessary to fund the early years had already been set aside in the fund’s investment portfolio. Thus, the fund could actually experience negative cash flow without causing concern because the fund was in the process of liquidating its assets. Once the market leveled out, the fund would return to a period of positive cash flow, during which the fund would reinvest in its portfolio.

Finally, Mr. Dirks said the largest change, which impacted the budget was the Division of Industrial Relations (DIR). Mr. Dirks explained the DIR assessment was the portion of funds EICN paid to DIR to cover their operating budget. DIR was responsible for regulating the marketplace. So as the fund’s claims and revenue expenses diminished, the fund’s share of the DIR assessment would also decline. He noted the other private carriers who joined the marketplace within the state would pick up the portion the state would lose from EICN’s mutualization.

Mr. Dirks concluded discussion on decision unit M-200 by stating the figures used in EICN’s budget account were driven by the potential loss of business that might occur once a competitive marketplace was established.

Next in terms of maintenance items, Mr. Dirks cited M-525 which requested funds in support of the Americans with Disabilities Act (ADA). He pointed out the largest change within M-525 was $300,000 requested for FY 2000 and $100,000 requested for FY 2001. He noted those requests were related to ongoing changes that the fund needed to make its facility on 1700 West Charleston in Las Vegas, ADA compliant.

Next, M-590 represented $42,000 in both years of the biennium to ensure that EICN’s fleet vehicles were compliant with the Clean Air Act. As existing vehicles were replaced, the fund was required by federal law to purchase vehicles that satisfied the conditions set forth by the Clean Air Act. The costs represented the additional costs of purchasing alternative fuel vehicles over the purchase of standard vehicles.

In regard to enhancement units, Mr. Dirks first turned to E-175, which requested funds to improve the maintenance of the company’s fleet vehicles. In the first year of the biennium, $47,000 was requested whereas $27,000 was requested for the second year of the biennium. Recently, Mr. Dirks noted the company had replaced vehicles that were nearly 20 years old and no longer safe for employees. He then contended that it was far more cost-efficient for the company to improve the maintenance of their fleet than it was to purchase new vehicles. In addition, the company had also requested several thousand dollars to replace existing Buildings and Grounds equipment.

Within data processing, Mr. Dirks reported an enhancement had been added to the company’s budget requests to purchase computer software and supplies.

Next, Mr. Dirks said there was an increase of $235,000 in FY 2000 and $35,000 FY 2001 in funds allocated for training. The company’s training budget had been increased because as the company moved into a competitive environment, employees would be asked to perform new functions, in which they had yet to be trained.

Mr. Dirks explained that with the company’s transition, the business rules, which the company had followed for the past 86 years would no longer be applicable. A national plan, which was adopted by the commissioner and which was presented by the National Council on Compensation Insurance, changed the workers compensation business rules for the state of Nevada. Thus, since employees would operate under new conditions, they would have to be retrained.

Mr. Dirks argued that although the company had completed most of the retraining over the last several years, there was still additional training needed in the first and second years of the biennium to ensure that employees were fully qualified to perform their job responsibilities accurately.

Moving to decision unit E-250, consumer treatment and management, Mr. Dirks disclosed substantial changes had been made over the existing budget. Beginning with out-of-state travel, Mr. Dirks stated the company requested an increase in their budget by $21,500 per year for that expense. He argued the increase was needed to lobby the national accounts which the company had hopes of retaining after the mutualization occurred. Those accounts represented significant amounts of premiums; some national businesses paid up to $1 million in annual premiums. Mr. Dirks then insisted that if EICN had any hope of retaining those businesses, it would need to be more aggressive in its marketing strategies. Therefore, the increase in out-of-state travel would allow EICN to provide a higher level of customer attention and service for those national accounts.

Within operating expenses, Mr. Dirks stated EICN proposed increasing its advertising and public relations budget by $985,000. That increase would bring the total public relations and advertising budget to approximately $1.5 million and would represent 1 percent of the company’s total revenue. Mr. Dirks felt this amount was substantially below the advertising budget for a private insurance company, but that it was an amount the company felt was adequate enough to continue to advertise its product in a competitive environment.

Mr. Dirks added that some of the company’s future competitors had already started to advertise their workers compensation products. He thought that if EICN hoped to maintain a portion of its market share, EICN would have to advertise its products and services in a similar manner.

In addition to the host fund, Mr. Dirks stated the budget had added $124,000. This change had been implemented in order to help operate EICN more like a private business. EICN’s competitors had spent similar funds to travel to Nevada and introduce themselves to Nevada’s businesses and EICN’s policyholders in an attempt to persuade them to move their business elsewhere. Therefore, EICN needed those funds to compete.

In terms of dues and registration, Mr. Dirks said the company had requested several thousand dollars in budgetary support as well. He stated the company would have to implement new strategies in order to deal effectively with the newly competitive market that they previously had not used. Additionally a small amount of funds was also requested for construction supplies, which would support the company’s expanded training activities.

Finally, Mr. Dirks addressed agent commissions. He thought the biggest change EICN faced upon transition was the fact that their products would be sold through insurance agents throughout the state of Nevada. If EICN did not provide the ability to purchase insurance through agents, he believed two things would happen. First, EICN would lose more revenue than the budget anticipated. Second, EICN would not be able to provide the service at the level it felt was required for a competitive marketplace. Thus, $9.4 million was allocated in the company’s budget for FY 2000 to support agent commissions.

Mr. Dirks added that cost was not unfunded. When the insurance commissioner adopted rates to be effective July 01, 1999, the rate level included a charge for production costs and agents commissions. As a result, he repeated the agent’s commissions were already funded. Although he conceded the amount was large, he maintained it was necessary to allow EICN to compete effectively.

Moving on to replacement equipment, decision unit E-710, Mr. Dirks stated $266,000 in FY 2000 and $188,000 in FY 2001 had been budgeted for vehicle replacement. He again indicated that because the company’s fleet of vehicles was substantially aged and because employees needed to travel to spend time with policyholders, injured workers, and medical care providers, such a request was justifiable. He then questioned the safety of some of the vehicles by noting that some had been used in excess of 100,000 miles.

Mr. Dirks reported the company was beginning a replacement schedule of the company’s 90-vehicle fleet. The company was also exploring the cost-effectiveness of having employees use their own automobiles as opposed to maintaining a fleet of vehicles. He thought the company would continue to have at least a partial fleet of vehicles. Should that occur, he thought the amount budgeted would be moved into a different category and budgeted at a slightly lower amount. He suggested leaving the amounts proposed in the current budget as they were, but if the Legislature chose not to replace vehicles the amount authorized would be moved into a new category to compensate employees for personal vehicle usage.

Mr. Dirks added small amounts of funds were included to replace existing equipment. For instance, within the buildings and grounds category, the company needed to purchase a new floor buffer.

Within data processing, Mr. Dirks said $991,000 in FY 2000 and $269,000 in FY 2001 was requested to replace existing software. He thought those costs were associated with the costs of doing business in an age of technology. In fact in the company’s strategic plan, one of the key areas where EICN had chosen to compete most effectively was through technology. He believed EICN could provide a higher level of service at a lower cost by being on the cutting edge of technology. Also, the company had already invested in infrastructure and in software. Mr. Dirks concluded the budget request would maintain the company’s strategic decision to compete at a higher level of technology.

Chairwoman Evans then interrupted to ask why EICN’s expenditures in data processing for the last biennium, which totaled $17.7 million, exceeded the legislatively approved amount of $11.9 million in the company’s 1997/1998 budget. She wondered if the expenditure was the result of the company’s strategic decisions regarding technology.

Mr. Dirks answered by explaining that a portion of the expenditures represented a contract EICN had made with Amgrip, the company responsible for developing computer systems that rendered EICN compliant with the new business rules, which the insurance commissioner had adopted. He stated the systems the company had previously had in place would not have been able to continue past
July 01, 1999 due to the change in business rules. Furthermore, he contended the old system could not have been modified or changed to reflect those changes and they were not year 2000 compliant; a new system had to be developed to give the company the ability to function as intended.

Another component to the company’s over-expenditure in data processing was attributed to EICN’s imaging project. Mr. Dirks admitted the project had cost the company more than it had anticipated and had taken 18 months longer to implement than had been originally planned, but he believed that the project would help create a more efficient claims operation within EICN. Moreover, he thought the imaging project was worth the expense, as it would give the company a competitive edge in the market place. Currently, he reported the system was fully operational and was providing an excellent product for the company’s customers.

So although those expenditures had been higher than what had been budgeted for that category, he maintained the company’s revenues were higher than had been anticipated as well. That increase in income was then used to reinvest in the company’s operation, believing the investment would provide substantial returns on a forward basis.

Next, Chairwoman Evans similarly questioned the company’s over-expenditure in the new equipment category during the last biennium. The category had been budgeted for $688,000, whereas actual expenditures were over
$4 million.

Mr. Dirks replied that within the new equipment category the increase in company expenditures was attributed to the purchase of a new telephone system. EICN’s old system was not compatible with the new computer system and thus needed to be upgraded to a model that would be. He then reported call centers had been established which could provide almost an immediate response to customer questions. Moreover, Mr. Dirks thought the telephone system purchase was part of the company’s greater strategic plan concerning technology that would make EICN more competitive because policyholder and claimant concerns could be more efficiently and promptly processed. He then added the request had not been included in the budget for the previous biennium because the company had not yet completed its strategic plan. The company had been advised that if the system was not purchased, the company would pay substantially in terms of premiums.

Mr. Dirks then added that the company had also invested in sophisticated mailroom technology. The company processed documents 45,000 policyholders and had out-sourced mailroom activities until a cost-benefit analysis had been completed. As a result, the company had been convinced that it was more cost-effective to purchase mailroom technology and operate the system internally. Thus, mailing costs had been reduced.

Next, Chairwoman Evans acknowledged the company’s need for marketing, but she wondered how much EICN had expended for marketing purposes in the current biennium.

Mr. Dirks responded the advertising category for the company’s budget account had been legislatively capped at $400,000 during FY 1998 and $600,000 in
FY 1999. He divulged the company had spent almost the entire amount that had been allocated for advertising towards that purpose.

Mr. Dirks then continued his presentation by taking up decision unit E-720, which was the new equipment unit. Within the first category he disclosed EICN had requested funds to support the industrial hygienist within the Loss Prevention Department. Mr. Dirks explained the equipment requested was necessary for the hygienist to perform as expected. Also within the Loss and Prevention department, he added the company had requested new equipment to be used to prevent workplace injuries.

Next, Mr. Dirks said the equipment requested for the Buildings and Grounds category was fairly small. A substantial investment on the part of EICN, Mr. Dirks held EICN’s ownership of their buildings necessitated equipment for their maintenance and upkeep.

Finally in the data processing category, Mr. Dirks reported $28,000 for FY 2000 and $19,000 in FY 2001 was requested for the purchase of new software. Mr. Dirks said the request was related to the alteration of the business environment and that it was not an optional expense. For instance, new software would be required to interact with rating agencies. Also in terms of computer hardware, $919,000 was requested for FY 2000 and $560,000 for FY 2001. He then commented that as new software was developed computer hardware became obsolete. Since the company had to purchase new software to meet vendor specifications, new hardware also had to be purchased. Although he admitted the lifecycle for software and hardware was short, he thought that the company was obligated to continually re-invest in hardware and software.

Mr. Dirks then noted the computer hardware within the claims department was almost 3 years old. In order to upgrade to the Office Automation software, he stated the company was required to either replace all of the hardware or to make certain changes in computer processing chips. He contended that it was more cost effective to replace the central processing unit entirely rather than to replace the processing chip.

In regard to new equipment category for building maintenance, the company had requested $633,000 in the first year of the biennium and $350,000 in the second year of the biennium. Mr. Dirks related the company’s current office building was 40 years old and remodeling projects had been undertaken for portions of the building already. He thought if EICN were to continue using that building, heating and ventilation units needed to be upgraded as well. Mr. Dirks argued remodeling the old buildings was more cost effective because the amount of money used to remodel the existing facilities represented the cost of 6 months of rent if EICN moved to a new facility. Thus, he hoped upgrades to the old buildings would add at least another 5 years to their lifetime.

Chairwoman Evans interjected with several questions. First she asked for the status of Senate Bill 37. Second, she wondered what the effects of the privatization of EICN would be. Third, she asked for a description of the advantages and disadvantages to privatization, including the challenges and/or obstacles faced by the privatization process. Finally, she asked Mr. Dirks to provide an estimate of the fiscal implications of the privatization of EICN.

Mr. Dirks first commented upon the status of S.B. 37. A week earlier, he explained the Governor’s proposal for EICN had been amended into S.B. 37 and had been granted emergency status and therefore was not subject to the normal legislative deadlines. He then noted the bill was scheduled for hearing in the Senate Committee on Commerce and Labor the following morning at 8:00 a.m. and on April 14, 1999 at 8:00 a.m..

Next, Mr. Dirks explained the effects of mutualization were many. He then related the Governor’s desire concerning the proposal to mutualize EICN. He said the agency’s comprehensive annual financial report currently reflected a $600 million deficit as a result of the agency’s previous experiences. Concerned that the listing of the deficit on the financial report would harm the state’s bonding authority and bond rating, Mr. Dirks stated the Governor had created his proposal to eliminate that risk. He repeated that the fact that EICN’s deficit was disclosed in the opinion letter of the state’s financial statement was not favorable.

Also adversely impacting the state’s bonding authority, Mr. Dirks stated a qualified opinion had been drafted in regard to the state’s health and welfare programs too. He reminded committee members the certified public accountant (CPA) could not even opine on the state’s financial statements as related to that item because the figures were poor.

In relation to EICN, Mr. Dirks said the figures on the agencies financial statement were not altogether poor, as the CPA was able to formulate an opinion concerning EICN’s financial status. However, the opinion indicated the $600 million deficit was not being dealt with effectively.

Next, Mr. Dirks stated the Governor had also focused on the fact that the account for extended claims had a $1.6 billion liability juxtaposed with its
$600 million deficit. So if invested assets ceased to grow or declined, the deficit would accumulate.

Therefore, the Governor had requested the agency to develop a financial transaction that would first remove the deficit and the liability from the state’s financial statement. Second, Mr. Dirks said the Governor wished EICN to enter into a financial transaction which would assure the transfer would not appear on any other state agency’s financial statements. Third, the Governor expected this transaction to occur while EICN made certain that all injured workers, who were expecting benefits for the duration of their situation, would be satisfied.

Upon the passage and approval of the Governor’s proposal, Mr. Dirks repeated EICN would enter into an reinsurance transaction that would completely eliminate the deficit and the liability from the state’s financial records. Also, the agreement would assure through A-type carriers and large national/international re-insurers that the agency’s obligations would be fully financed.

Moreover, Mr. Dirks explicated the employees of EICN would be properly supported throughout the process. He then conceded the agency would operate as a smaller entity in a more competitive environment and that no provisions had been formulated to address the difficulties which employees would face during the mutualization and subsequent downsizing of EICN.

In regard to EICN employees, Mr. Dirks explained the Governor’s proposal addressed certain items. First, the proposal called for giving EICN priority re-employment rights within state service in case of lay-off. In other words, those employees, who as of June 30, 1999 had attained permanent status with the state of Nevada, would have priority re-hiring rights extended an additional year.

Chairwoman Evans interrupted to inquire how many persons were under EICN’s employ currently. Mr. Dirks answered EICN employed approximately 900 employees. If payroll numbers were evaluated for the next biennium, Mr. Dirks related 350 employees would be laid off each year for the next two years. Thus the proposal took into account the needs EICN believed that some of the employees would have in order to be transitioned to other state jobs.

Continuing, Mr. Dirks said EICN had also asked for expanded buy-out rights, which would allow the agency to buy-out those employees who through the purchase of five years of service would be eligible for an unreduced benefit upon retirement. Under a seniority lay-off system, Mr. Dirks stated those estimated 150 employees would be laid off last.

Chairwoman Evans asked if the agency had calculated the costs and fiscal impacts of mutualization in terms of employees and deficit liabilities. She remarked that she did not understand the costs of the re-insurance contract process.

Mr. Dirks replied the re-insurance contract would cost hundreds of millions of dollars. He guessed the contract would cost $700 million to $800 million. Competitively bid, Mr. Dirks said the reinsurance process would transfer, for example, $800 million cash, from EICN to the re-insurer in exchange for the assumption of up to $2 billion in liabilities. The re-insurer would begin paying on those claims immediately.

Mr. Dirks said he believed the actual cost of those claims would amount to roughly $1.5 billion and he disclosed the agency was purchasing an additional $500 million in coverage in case of adverse developments on those claims. He then noted that if no adverse developments occurred, profit sharing arrangements were in place where the profit would return to the company. The purchase of the ancillary insurance was purely a precautionary measure.

In an exchange of cash for liabilities, Mr. Dirks indicated various international re-insurers who had thoroughly analyzed the agency’s actuarial profiles had analyzed the re-insurance process for EICN. He thought that in all likelihood, the re-insurer would compensate EICN for the management of those claims. Thus, more jobs could be preserved.

Aside from retaining a portion of its workforce, the re-insurance process was advantageous to the re-insurer because EICN could manage their claims at a lower cost than the re-insurer.

Also, Mr. Dirks related the agency had set aside $2 million for retraining programs for agency employees. If there were employees who through lack of training had difficulty in obtaining further state employment, they would have the opportunity to enter into an agreement with the Department of Employment Training and Rehabilitation (DETR) to provide re-training skills.

Mr. Dirks was optimistic that as former EICN employees became employed elsewhere in the state or private sectors, employers would find them to be well-trained employees. He thought the agency had done its best to insure that EICN employees were properly skilled according to current demands and responsibilities within the marketplace. In addition, Mr. Dirks mentioned vacation time and leave time would be rolled over first into the public company and then into the private company.

In regard to the financial advantages of mutualization, Mr. Dirks noted there were many. First, he stated that from an insurance standpoint, someone else would assume the risk of an adverse development, like the inflation of medical costs, on claims in the future. The state fund would no longer be responsible, as it would be paying a premium for the possibility that an adverse development could occur.

Mr. Goldwater interrupted to ask if the agency purchased a re-insurance policy would the state still be ultimately responsible should the re-insurers become insolvent. He wondered how the agency measured the quality of its re-insurers.

Mr. Dirks replied that under the Governor’s proposal the state would be completely removed from that liability. The agency had already purchased $500 million worth of additional coverage against a potential adverse development, which he believed was more than adequate. If the agency had overestimated the amount of protection it needed that amount would be returned to EICN in a profit sharing agreement.

Next, Mr. Dirks stated that because EICN would be mutualized into a private entity the liability would not return to the state but to the future private company. In the event that the company was unable to meet the needs of the claimants Mr. Dirks related the liability was then transferred to the guarantee fund.

He then stated the new company chosen to re-insure EICN would be very well capitalized. He thought the potential for claims to exceed $2 billion 80 years from the current time was improbable. Regardless, the state was completely absolved from any liability and the private insurance industry was satisfied because EICN had purchased $500 million in additional insurance, going beyond the current loss level.

Mr. Dirks related that some of the finest actuaries in the world did not have significant difficulty in pricing the re-insurance contract. Their greatest difficulty was that the tail for the claims liability for workers compensation went further out into the future than they had ever previously witnessed. He thought the reason the tail was so lengthy was attributed to the fact that Nevada’s workers compensation program had lifetime re-opening. Claims could then be opened 20 years to 30 years down the road.

He stated the actuaries and the agency had been able to quantify the magnitude of the claims liabilities. There was no question that the agency would have a number of re-insurers who were interested in participating in the re-insurance contract.

In regard to Mr. Goldwater’s security concerns, Mr. Dirks maintained the agency would only complete a contract with A-rated re-insurers who were some of the strongest and finest companies in the market. Also, the money transferred to the re-insurance company would be held in trust and the company would not be able to use those monies for any purpose other than to satisfy EICN’s claims liability. So even if the re-insurer failed, the state’s funds would still be held in trust. Mr. Dirks emphasized that was the highest level of security that could be built into the contract. He repeated the agency had purchased more insurance than was needed and was holding the re-insurance premium, used to fund the liability, in trust.

Mr. Goldwater then asked Mr. Dirks to provide examples of other states who engaged in similar re-insurance processes. He thought that some states who had privatized their workers compensation systems ended up reversing the process and regaining state control of the system. He thought the issues, which affected those states should be explored in depth.

Mr. Dirks replied that the newest state workers compensation insurance funds in the country, located in Maine, Rhode Island, Kentucky, and Louisiana, were created because the residual market mechanisms in place did not work effectively. This meant that that the pool of businesses which were deemed high risks and unattractive to workers compensation insurance companies were not insured in the residual market.

He explained the way the residual market operated was that two companies who were paid to be responsible for servicing residual market accounts insured those unattractive businesses. All companies licensed to do business in the state then shared the losses or claims incurred within the residual market. So if the residual market was under-priced, all of the insurance companies were assessed and if the market was over-priced the assessment was not required.

Mr. Dirks expounded upon the reason why those newly privatized state workers compensation funds were reverted back to state stewardship. In those states the prices compensating the private companies in the residual market were inadequate thus causing a flight from the residual market and the markets eventual collapsed. In other words, diminishing employer premiums combined with exorbitant assessments caused private companies to leave the state, as it was no longer financially advantageous for them to conduct business. Thus, only one or two private companies were left writing workers compensation insurance.

In Nevada, on the other hand, the state fund would not act as the residual market. Mr. Dirks stated the state fund would not even act as a servicing carrier because it did not bid for that business. He then admitted that a similar situation could occur within Nevada, but because the state fund could be the only carrier left in the state to provide workers compensation insurance, the assessment would be completely assumed by EICN. He thought that such a situation would immediately place EICN back into a deficit situation.

Mr. Dirks stressed the fact that retaining the structure under which EICN currently operated the fund would be the sole company unable to withdraw from the residual market. Consequently, an adverse development would cause EICN to incur another deficit or unfunded liability. He said the present state of laws in Nevada would do nothing to prevent such a situation from occurring.

In order to avoid that circumstance, Mr. Dirks suggested greater oversight on the residual market mechanism to ensure that rates would be fully adequate be put into place. In fact, he stated oversight was provided for in the Governor’s proposal, as the law would require that the residual market be actuarially funded and self-sustaining. Thus, legislative oversight and administrative oversight would prevent the underfunding of the residual market and private companies, including the newly privatized EICN would have no reason to flee the state’s insurance marketplace.

Mr. Goldwater acknowledged Mr. Dirk’s explanation as critical to the understanding of the issue at hand. He then pondered the pros and cons of the re-insurance aspect of the proposal. Specifically, he asked if other states had purchased re-insurance and if companies were experienced in underwriting policies such as state Medicaid insurance and workers compensation insurance.

Mr. Dirks replied he was unaware of any other state fund of a similar size that had entered into a loss portfolio transfer like the one being proposed. He then commented the Governor’s proposal was different from most re-insurance proposals because of its structure and size.

A common insurance transaction, Mr. Dirks attested that re-insurance made economic sense for the state and noted he had studied the issue since 1993. For example, re-insurance was reasonable because the market was a soft market where re-insurance pricing was extremely competitive. Nevertheless, he thought the global events, which made re-insurance companies more aggressive in terms of seeking policies to underwrite, might not be present 6 months into the future. So as the opportunity was unlikely to present itself to the state in the future, Mr. Dirks argued the state should avail itself of the advantages of re-insurance immediately.

Chairwoman Evans commented the re-insurance plan appeared to have certain advantages for the state. Regardless, she thought inherent problems in the transfer process might exist.

Mr. Dirks thought that given the decisions which had been made up to that point, the disadvantages to the proposal were negligible. He indicated the most important decision had been made in 1995, when the state of Nevada opened its marketplace to competition. In regard to the proposal’s impact upon the agency’s employees, he thought the most significant impact had already occurred as a result of that decision made in 1995.

He maintained that the proposal would be advantageous to employees because it would allow the company to write other lines of insurance and to administer its affairs less like a state agency and more like a private insurance business. He noted the company should be structured similarly to its competitors in order for it to be successful. Thus, he concluded employees would benefit rather than lose from the proposal because of the intensified competition in the marketplace and the more efficient administration of the company. In other words the more successfully the company operated, the more employees it would hire in the future.

Then Mr. Dirks conceded changes would be made to the company, which would affect employees. For those employees who worked for the state solely to participate in the Public Employees Retirement System (PERS), the program would be augmented. He reiterated that the Governor’s proposal gave employees the time to search elsewhere in state government for other employment opportunities.

Chairwoman Evans then restated a comment she had received from a state employee. She said, "Insurance companies take as much as they can get and give back as little as they can get away with."

Mr. Dirks stated EICN had been a very profitable agency, especially to its employees who had received a 3 percent cost of living raise in the last year. He argued employee welfare was directly tied to the health of the state General Fund and from a competitive perspective this made it difficult for EICN because he did not have the capacity to reward employees for excellent performance. On the other hand, when the General Fund performed well and EICN performed poorly, the merit increases and the cost of living increases provided by EICN did not occur. Therefore, state employees were denied pay raises in both situations.

However, he said that should the Governor’s proposal be adopted, employees would be rewarded based on their performance rather than the performance of the General Fund.

Mr. Goldwater asked if the $800 million needed to purchase the reinsurance would come from the company’s reserves. Mr. Dirks replied affirmatively. Assets would decrease by $800 million while current liabilities would decline by $1.6 billion.

Ms. Guinchigliani asked if an exemption had been given to the Senate Committee on Commerce and Labor to deal with the privatization issue. Mr. Dirks answered affirmatively, stating the committee had to take action by
April 19, 1999 when the exemption expires. Ms. Guinchigliani then remarked the committee was dealing with similar privatization issues concerning the Department of Prisons and she thought the agency should hold its employees in high regard considering the fact that it was they who helped establish EICN initially.

Mr. Goldwater asked if the $800 million was held in trust, who would benefit from its use. Mr. Dirks replied the re-insurer received the beneficial use of the trust. The $800 million dollar amount had to have investment earnings sufficient enough to offset the $1.6 billion liability. However, he noted the ultimate beneficiary was the injured worker.

Mr. Beers asked who valued EICN’s liability. Mr. Dirks stated every re-insurer who considered underwriting EICN’s business had valued the unfunded liability. Initially, those companies reviewed EICN’s actuarial reports as well as reports made by outside actuarial firms on the re-insurers behalf.

Mr. Beers thought the actuary, realizing the $800 million figure was a fixed amount, might state the liability higher than it was so as to mislead EICN into thinking it was receiving an advantageous offer. Therefore, he wondered what EICN’s actuaries determined the unfunded liability to be.

In reply, Mr. Dirks related the unfunded liability had been found to be $1.675 billion. He then stated the agency booked the re-insurance amount at the midpoint of the range provided by the actuary. He was certain all of the actuarial figures would be proven incorrect because the range used by the actuary was fairly large. To be comfortable within that range, a profit sharing mechanism had been added to benefit the company when the range was high and to benefit the re-insurer when the range was low.

Regardless, Mr. Dirks assured Mr. Beers the estimated liability was the best estimate the company could make. Also, he noted that because the actuary had spent time and resources developing the estimate, consensus pricing was used. Furthermore, he stated the agency had turned down re-insurance in years past because he had thought re-insurers were overcharging. Thus, Mr. Dirks said he had structured the agreement to ensure that if the re-insurer overcharged, EICN would receive its money back.

Mr. Beers asked if the reinsurance and the unfunded liability amounts were set in stone. Mr. Dirks replied affirmatively. Mr. Beers wondered if the future value of the $800 million, calculated in perpetuity, was less than the
$1.6 billion liability.

Mr. Dirks related the only risks the re-insurer would take would involve timing risks. Thus, the re-insurer priced the re-insurance at a risk free rate of return and the cost was insulated from market swings by investing in risk free securities. In that manner, market changes would not affect the $800 million amount because the re-insurer would have an asset liability match over the length of the liability.

Mr. Goldwater questioned why the agency wanted to shift its risk to an alternate party if it better understood why the liability had been incurred. Mr. Dirks answered re-insurance was beneficial at that point in time because of the soft character of the market. Pricing was calculated very attractively. Also, he explained that because the money was held in trust, the re-insurer would lose in the margin by taking a timing risk in a soft market environment. If the market hardened in the future, he did not think re-insurance pricing would appear as attractive.

Chairwoman Evans closed the discussion on the EICN budget account.

Mr. Dirks indicated EICN operated their rehabilitation center, the JHC health Center like a subsidiary of a parent corporation and thus it was accounted for in a separate budget.

Next, Vera Smith-Kamna, Administrator for the JHC Health Center, mentioned that when she had testified before the committee two years earlier, the center had been undergoing a dramatic change. The center had been in the process of beginning a 5-year plan that changed its management and clinical structures. Presently, Ms. Smith-Kamna stated the center had made progress.

She related that in the last 2 years, the center had changed its approach to providing clinical care and implemented a new medical technology system, which included a scheduling, billing, and collection system. Also, the center had introduced a new medical tracking system, which would help JHC extract more accurate outcome results and data.

In terms of its medical staff, Ms. Smith-Kamna explained the center had also expanded its staff to include physicians in different specialty areas to represent multi-specialty clinics. Furthermore, the center had developed new products and implemented new services to better meet the needs of the community. For example, programs like Health and Wellness, Fitness, Cardiac Rehabilitation, and Community Outreach were added. Finally, Ms. Smith-Kamna noted the center had expanded its administrative staff to include specialty areas in fiscal management, marketing management, program development, collections, and billing. As a result of those changes and staffing increases, Ms. Smith-Kamna indicated the community received many positive benefits.

She then remarked that as the provision of health care changed, JHC’s operation changed to better fit the new environment of managed care and health maintenance organizations (HMO). Unfortunately, she thought JHC had not implemented its changes quickly enough.

Chairwoman Evans had two questions. First, she mentioned her concern about the subsidy the center received through what had formerly been called State Industrial Insurance System (SIIS). She wondered what JHC needed in terms of subsidization for the future. Secondly, she asked what role the center would take in the future, given the changes in the health care environment and the changes being made to EICN.

Ms. Smith-Kamna replied JHC should have privatized its operations years ago. She thought that in order for the center to employ the best care managers within its facility, the center needed to work outside the state system. Finding specialized professionals to manage the center’s programs had been difficult due to obstacles inherent in state management.

She then referred to page 6 of Exhibit D, which illustrated the wide-ranging effects of the JHC Health Center upon the community at large. She maintained the community was in drastic need of JHC’s programs and that it would be a disgrace for JHC to be separated from EICN due to its prevention, safety, health, and wellness activities.

Furthermore, she related that the center worked with employers to teach stress management and fitness, as well as other programs needed by employees. The only health center of its kind in the state, Ms. Smith-Kamna insisted the JHC Health Center was vital to employee needs in the state.

Chairwoman Evans questioned if the center could operate without the support of a subsidy. Ms. Smith-Kamna answered the center would not be able to operate as effectively without the subsidy. However, she did not think the center needed the subsidy as it was received currently. The subsidy could be lowered in order to meet the financial need of the health center.

Mr. Dirks added that initially the JHC Health Center had not operated as planned. He explained the repositioning within the marketplace had been a lengthier process than had been anticipated. Currently however, he stated the strategic plan for the center was being executed properly. Nevertheless, he did not think JHC would ever operate self-sufficiently and would continue to need a subsidy, albeit reduced from its current level. As long as the center was a value add from the perspective of its policyholders, Mr. Dirks felt the center’s existence was justified. Moreover, he noted that as the center had been structured, a profit motive was not necessary.

He stated that if the accounting for the JHC Health Center were re-structured, the subsidy could be eliminated. Still, Mr. Dirks maintained that the center was a value-added program much like loss prevention, which did not necessary pay for itself, yet prevented future claims thereby adding value to the company.

Mr. Dirks admitted that the current level of subsidy to the JHC Health Center could not be sustained. However he emphasized the need to maintain a diminished level of support.

Chairwoman Evans inquired about the level of the subsidy during the current biennium. Ms. Smith-Kamna replied the center had received a $4.5 million subsidy in the previous fiscal year.

The Chair wondered what level of subsidy the center anticipated in the forthcoming biennium. Ms. Smith-Kamna answered the JHC Health Center expected to receive a subsidy of $3.5 million in the next biennium.

Chairwoman Evans asked if the newly privatized environment of EICN would significantly alter the operation of the JHC Health Center.

In reply, Ms. Smith-Kamna explained that following privatization of EICN the JHC Health Center intended to transfer its present vacancies into revenue producing positions. Currently, the way positions in the center were classified made such a transfer impossible. For example, if additional physical therapists were needed the center did not have the positions to hire additional staff. However, after privatization, the center would be given the flexibility to manipulate positions in each program area as needed.

The Chair asked Mr. Dirks to explicate the effects of privatization upon EICN’s relationship with the JHC Health Center.

Mr. Dirks explained the relationship would exist as a parent/subsidiary relationship where the center would be legally separated from EICN. The center itself would continue to operate as a health facility serving market niches that were not served by other entities. He added that the employees of JHC would undergo a similar transition process as employees of EICN.

Mr. Dirks viewed the JHC Health Center as a significant asset to EICN because no other insurer had a relationship with a facility like JHC. However he stressed the need for the center to produce an added value to the company. If that added value could not be realized, changes to the relationship would need to be made.

The Chair then asked if EICN had considered selling the center. Mr. Dirks replied affirmatively. He related that potential buyers found it more cost-efficient to build their own facility rather than purchase JHC. Moreover, he indicated structural problems within the JHC facility made it difficult for the center to be remodeled.

Due to time constraints, the chair Adjourned the hearing at 11:15 a.m.. She stated the hearing would reconvene at 12:30 p.m. in order to discuss the bills remaining on the day’s agenda.

Reconvening at 12:30 p.m., the hearing commenced discussion on the proposed legislation.

Dennis Colling, Chief Administrative Services Officer for the Department of Motor vehicles and Public Safety (DMV & PS) presented his testimony concerning A.B. 661.

He began by stating the bill requested $1,359 to pay an insurance premium that had not been paid for an employee of DMV & PS for 1995. He explained an insufficient amount of funds had been reverted from the Highway Fund during that fiscal year.

Chairwoman Evans clarified the amount requested was $1,359. Mr. Colling replied affirmatively.

George Pyne, Executive Officer for the Public Employees’ Retirement System of Nevada presented testimony in support of A.B. 189.

Presenting the Retirement Board’s technical or housekeeping bill, Mr. Pyne indicated there were some cost elements contained in the bill, however he noted they were not significant enough to require an increase in retirement contribution rates. He promised to highlight those elements as he proceeded through his review of the bill.

Under Section 1, subsection 3 Mr. Pyne stated the definition of "compensation" subject to retirement contribution was modified to clarify that contributions would not be paid on any type of payment not specifically enumerated in the Retirement Act as subject to contribution. Prior to 1975, contributions had been paid on almost all forms of compensation, which resulted in abuses and unpredictability of plan costs. For example, he stated many public employees worked significant amounts of overtime in the final years prior to retirement in order to "spike" their retirement benefits.

Mr. Pyne related legislation had been passed in 1975 to address this problem by allowing contributions to be paid on an employee’s base pay, and specifically excluding contributions on overtime pay. Clearly, limiting this definition of compensation was made in an effort to guard against abuses that drove plan costs upward. Currently, Mr. Pyne noted the Retirement Act enumerated those items that both were and were not subject to contribution. For example, contributions were paid on an employee’s base pay, but not on fringe benefits. The problem with current language however was that it was difficult to determine whether many new forms of compensation were contributible. Often questions concerning whether or not contributions should be made on such things as educational incentive pay or lunchtime pay was asked.

Mr. Pyne explained that by specifically stating that compensation subject to retirement contribution did not include any type of payment not specifically stated as such, the department was keeping up with the stated intent of past legislation to guard against abuses that could drive up plan costs. PERS also eliminated any question as to whether a particular form of compensation was subject to contribution.

The Chair then interjected to remark her concern over the issue of the calculation of the benefits based on standby and callback status. Although, those situations were not frequent occurrences in every agency, it seemed to amount to very significant amounts of funds in some agencies. She wondered whether or not the bill gave consideration to that issue.

In reply, Mr. Pyne explained that issue had not been addressed in A.B. 189. Historically, he explained the statute had been narrowed down in 1975 to have contributions subject to PERS focus on base pay. Later on in the early 1980’s, the police and firemen had successfully argued that contributions on callback pay should be made.

From their perspective, the issue was not subject to abuse because situations involving callback status were uncontrollable. He admitted there had been abuses in some agencies in the past, however he emphasized that those abuses were not ubiquitous in the system. Furthermore, Mr. Pyne stated PERS auditors evaluated public employers with respect to those types of contributions.

Chairwoman Evans remarked that in a few cases the standby issue was a concern. She mentioned instances where an employee’s normal pay was less than their standby pay.

Agreeing with the Chair, Mr. Pyne suggested the employer should control the callback status more extensively. Regardless, he maintained abuses were the exception not the rule.

The Chair then concurred the agency should be monitoring employees on that status closely.

Next, Mr. Pyne addressed Section 2, subsection 1 (d). He related the section of the bill added the position of gaming commissioner as eligible for participation in PERS. He divulged that the Nevada Gaming Commission had requested the item. Historically, Mr. Pyne explained the members of the gaming commission had not been PERS members and according to research, he reported it appeared that had been based upon the assumption that the position was not equivalent to full-time employment.

He then disclosed gaming commissioners currently received a base salary of $40,000 annually. The chairman of the gaming commission earned $55,000 per year. By contrast the average annual salary of a regular PERS member was $32,714. The pay level of those positions strongly suggested they were more akin to full time employees of the state than board or commission members receiving a per diem income. For that reason he believed it was more appropriate for all members of the commission to be included within the membership of PERS on a going forward basis.

Then Mr. Pyne noted there was a marginal cost associated with the inclusion of commissioners, should all elect to participate in PERS, the employer cost would be $5,680 annually.

In regard to Section 13 of the bill, Mr. Pyne stated the section allowed any member of the commission appointed before July 01, 1999, to decide whether or not to participate in PERS. New appointees after that date would participate in PERS.

Also, he reported under Section 2, a new subsection 2, was added to allow the board to establish standards for what determined a full-time work schedule for retirement reporting purposes. That recommended change was being requested as a result of recommendations in A.C.R. 15, the System’s interim legislative study of service credit and average compensation. That study found that certain public employees who worked non-traditional workweeks (12 hours per day, 36 or 48 hours per week) had not received full-time service credit in PERS for what was equal to or greater than a standard 80-hour bi-weekly period. This change allowed the board to establish standards for full-time reporting.

Under Section 3, Mr. Pyne called attention to a new subsection 3, which was added to allow cash rollovers from various retirement accounts for the purchase of service credit. Accordingly PERS would be able to accept pre-tax contributions for the purchase of service credit from a qualified trust under section 401 (a) of the Internal Revenue Code (IRC) in addition to rollovers of pre-tax contributions from an individual retirement account or individual retirement annuity.

Then under Section 4, he pointed out that a new subsection 3 was added regarding the calculation of retirement benefits for certain locally elected officials. The Retirement Act provided for the separate calculation of benefits for members with both regular service and elective service as a county commissioner, councilman, or mayor. This separate treatment of service for purposes of benefit determination was based on the policy that part-time service should not result in a full-time retirement benefit. This was felt to be necessary from both a public policy as well as funding perspective.

Currently, Mr. Pyne said many elected officials claimed that elective offices in certain jurisdictions had evolved into the equivalent of full-time employment. There was a strong argument for this given all of the boards and commissions on which certain council members served. Although there was little information available to formally substantiate the issue, the amount of pay received by officials in some jurisdictions strongly suggested their positions were equivalents of full-time. In Clark County, for example, county commissioners received a base salary of $52,000. Similarly, councilmen in the city of Las Vegas earned $36,407 per year. Again as with the gaming commissioners, described above, Mr. Pyne said those amounts exceeded the average income of a PERS member.

Next, Mr. Pyne disclosed that a survey had been conducted which calculated the range of pay received by locally elected officials throughout the state. The amounts indicated that while some of those might be full-time equivalent positions, others were not likely to be full-time. For example, he remarked the Churchill County Commissioner received $18,000 per year while a Wells City Council member received $480. He felt this was a large discrepancy. Currently, PERS treated all county commissioner, city councilmen, and mayoral positions as the equivalent of part-time employment. To continue their practice of calculating benefits separately for service in some locally elected positions did not recognize the evolution of those positions into full-time employment. The problem became one of where PERS drew the line.

Mr. Pyne believed the best approach was to treat elected service as regular service only if the average salary for the entire period of elective service was equal to or greater than the average salary of a regular PERS member for the corresponding time frame. If the revision was made there would be no additional employer cost as PERS received contributions on the salaries of the above positions. The issue was one of calculation of benefits.

Under Section 5, subsection 4, Mr. Pyne stated that language was deleted that stated the school year should be September 01 to August 31, for computing service credit for school employees. This removed outdated language given that many school employees worked both traditional and non-traditional school years.

Mr. Pyne then indicated that local governments had requested the addition of Section 6, subsection 4 to the bill. He explained that retirement law allowed for retired employees who were elected or appointed to an elected public office to receive their PERS benefit in addition to their pay as an elected officer. They did not participate in PERS. Language was added to allow their employer to pay into a separate retirement fund on their behalf. The amount of contributions could not exceed what would otherwise be paid in to PERS. Furthermore, he said this had no fiscal impact on PERS. In fact it would allow a county, for example, to pay the same amount into a retirement equity among commissioners by allowing the county to pay a similar amount for retired public employee commissioners as it did for active members who had not yet retired.

Moving to Section 7, subsection 3, Mr. Pyne explicated the section was amended to allow a re-employed retiree who enrolled in PERS for at least 5 years to have his current service added to his previous service to determine his new retirement benefit. Currently, the benefit earned from the current service was computed separately from the previous service to determine the new benefit amount. Several retirees requested that both periods of service be combined because oftentimes the pay from the second period of employment or current service was greater than what had been earned prior to their initial retirement. Thus, by combining all services together with the higher earnings from the "second career" a higher benefit resulted.

He thought that be requiring re-enrollment in PERS for a minimum of 5 years before both periods of service could be combined to determine the new benefit, the actuarial integrity of PERS would be maintained. At the same time, individuals who continued their careers after retirement would receive a benefit reflective of their entire career service.

Next, addressing Section 8, subsection 2, Mr. Pyne commented that the section deleted certain language regarding spousal benefits from the police and firemen’s retirement fund. He cited NRS 286.667, which stated

1. A retired employee whose service or disability retirement allowance is payable from the police and fireman’s retirement fund is entitled to receive his allowance without modification, and
2. Upon the death of such a person, a person who was his spouse both at the time of his retirement and the time of his death is entitled, upon attaining the age of 50 years, to receive a benefit equal to 50 percent of the allowance to which the retired employee was entitled.

Mr. Pyne related the language to be deleted related to the requirement that the spouse still be the spouse on the date of death of the retired member. The only purpose this seemed to serve was to foster continued marriage for police and fire members, and could be viewed as social engineering. In fact, he said the benefits consultant advised PERS that those types of provisions were being removed from plans around the country, as there was no actuarial impact to the plan. As there was no pension policy impact, rather merely the social impact of the continued marriage requirement, Mr. Pyne stated it was the Board’s position that the requirement bore no relationship to the underlying purpose of the retirement system and therefore removal of his language was appropriate.

Next, Mr. Pyne addressed Section 9 and Section 10, which increased the base amounts dependent children and certain surviving spouses received when a member died prior to retirement.

Periodically, Mr. Pyne explained the System reviewed benefits paid to flat rate survivor benefit recipients. Those were the surviving spouses and children of deceased members with less than 10 years of service. Unlike other benefits of the plan, which were tied to a member’s average compensation, those benefits were for a fixed monthly amount. Currently, there was a benefit of $400 per month for the spouse and $350 per month for surviving children. Since those benefits were not tied to a member’s average compensation, the base amount did not increase over time with inflation.

Then Mr. Pyne informed committee members that 1995 was the last legislative year where an increase had been made to the base amount of pay for flat rate survivor benefit recipients. The consumer price index (CPI) increased approximately 12 percent since December of 1993. That was the year used to justify the increases granted by the 1995 legislature. Based upon the 21 percent increase, he recommended a prospective increase to $450 monthly for surviving spouses and $400 per month for surviving children.

Also under Section 10, Mr. Pyne explained that the removal of language which stated the benefits for certain surviving spouses which ceased upon remarriage had been removed.

He stated that Chapter 286 carried a restriction within the survivor benefit provisions that limited spouses of deceased members who received the flat dollar amount described earlier in his testimony. Mr. Pyne then quoted NRS 286.674, which stated

Mr. Pyne explicated the remarriage restriction set forth in NRS 286.674 applied only to the flat dollar amount and did not penalize the very population the survivor benefits were designed to assist; those with an interruption in income due to the death of a spouse. The provision penalized individuals for remarriage. We believed the pension system should be neutral to issues of public policy when there was no impact on the underlying pension policy for the retirement system.

The actuarial cost of those increases in survivor benefits and removal of the remarriage restriction were not significant enough to trigger an increase in the rates of retirement contribution as defined in the Retirement Act.

Finally, Mr. Pyne spoke to Section 11 of the bill. He said the section allowed surviving spouses of a deceased vested PERS member of the System with at lest 15 years of service to receive benefits under retirement option 2 rather than retirement option 3.

He noted survivor benefits were intended to address the financial difficulty experienced by the surviving family of a deceased member. The option 2 benefit provided the maximum financial protection to a surviving spouse under PERS. The option 2 benefit was then paid in recognition of career service by a Nevada public employee. Mr. Pyne commented that he felt that moving the threshold from 20 to 15 years was consistent with the intent of the statute.

Next, he mentioned that the actuarial cost of the plan was also minimal and when added to the other proposed benefit improvements would not result in an increase in retirement contribution rates.

Additionally, Section 12, which was similar to Section 9 and Section 10, provided for a $50 monthly increase to the dependent parents of a deceased active member with less than 10 years of service. Those benefits could only be paid if there were no other eligible survivors. Furthermore the cost of the increase was minimal.

Chairwoman Evans then asked if a retired employee, who returned to work, could they return to work full-time and continue to receive benefits.

Mr. Pyne replied that several rules applied. First, if an employee returned to work on a less than half-time status, the employee could earn up to $16,000 per year and not impact their benefit. Individuals who returned to work full-time would have their benefit plan suspended for the duration of their employment. He then explained that those individuals had the option to voluntarily re-enroll in the system.

The Chair then asked how the benefit plan would be affected if a retired employee who was receiving benefits returned to work on a part-time basis. Mr. Pyne reiterated that as long as the employee did not earn over $16,000 per year, the benefits were not affected.

Chairwoman Evans then asked if additional benefits within the retirement system would accrue to the individual. Mr. Pyne answered that when a retired state employee was working part-time no additional benefits were accrued. If the employee returned to work full-time, their benefits were frozen and the employee had the option to re-enroll in PERS. Subsequently, the individual would be on a new benefit based on the new period of enrollment. Thus when the employee re-retried a new pension benefit was calculated and added to the old benefit they had originally received.

Mr. Pyne explicated that A.B. 189 proposed that after a period of 5 years, the individual who returned to full-time employment could combine their years of service together into one benefit plan. This would benefit the employee by giving them a higher overall benefit if the second career was a higher paying job. He noted the 5-year requirement would preclude any abuse of PERS.

The Chair clarified that an employee who worked less than half time would continue to receive their benefit, however nothing new would accrue to the employee in terms of pension benefits unless the employee worked for a period lasting longer than 5 years. Mr. Pyne replied affirmatively.

Mr. Perkins then questioned how the benefit would be calculated for a retired employee who returned to work for less than five years in the second career.

Mr. Pyne stated PERS would calculate the average wage and pension benefit for the period the employee worked in the second career. That pension benefit amount would then be added to the pension benefit the employee had earned during their initial employment.

Finally, Chairwoman Evans asked Mr. Pyne to provide copies of his testimony to committee members.

As no other testimony was presented before the subcommittee concerning
A.B. 189, the Chair closed discussion on the bill.

Mr. Perry Comeaux, Director of the Department of Administration, testified that A.B. 416 provided for the balance of the bailout of the benefit services fund, or the EICN program that had not been provided for in A.B. 176.

He reminded subcommittee members that A.B. 176 in its original form provided for an appropriation of $16 million from the General Fund, $2.3 million from the Highway Fund, and then contained authority for assessments from a variety of other budgets, which were neither General nor Highway Fund, in the amount of $7.7 million. The total amounted to $26 million; this was to be funneled into the Benefit Services Fund.

Mr. Comeaux remarked those funds had been expected to cover an accumulated shortfall of $15 million through the end of the current fiscal year in addition to funding an incurred, although not reported reserve for the Benefit Services Fund amounting to $11 million.

Mr. Comeaux then related that A.B. 176 had been amended to provide an infusion of cash and to leave a portion of the problem unresolved until such a point in time that progress had been made with alternate legislation that had been designed to change the fund’s operating structure. Therefore the amended version of A.B. 176 appropriated $9 million from the General Fund and $1 million from the Highway Fund.

In regard to A.B. 416, Mr. Comeaux explained the bill contained the difference between the amounts requested in the original and amended versions of A.B. 176. Section 1 of the bill provided for an appropriation from the General Fund in the amount of $6,963,440. Section 2 of the bill provided for an appropriation from the Highway fund in the amount of $1,334,472. Finally, Section 3 of the bill provided for authorization for the Department of Administration to assess the other budgets that contained employees whose salaries were paid from other sources. That amount was not to exceed $7,700,932. The act itself would not become effective until passage and approval.

On March 10, 1999, Mr. Comeaux said that his office had submitted a proposed amendment to those amounts to the chairs of the Assembly Committee on Ways and Means and the Senate Committee on Finance. The proposed amended amounts were based on the re-review of the allocation to the various budgets and the distributions between the funding sources.

Therefore, the department recommended that the numbers be changed to a General Fund appropriation of $6,970,765, a Highway Fund appropriation of $1,797,547, and an authorization to collect assessment of $7,230,494 against federal and other funded budgets. This changed the calculation of the distribution between state and federal Highway Fund dollars in Budget Account 4660.

Chairwoman Evans then asked Mr. Comeaux if there was a timeframe in which the department required the passage of A.B. 416. He replied the latest projections indicated the Benefit Services Fund would begin having cash flow problems in May 1999. Although he thought the bill needed to be passed, there was no rush.

Speaker Dini asked how predictable the Benefit Services payments being made were. Mr. Comeaux responded the payments were at a predictable level, similar to the projections made by the actuary.

Assemblywoman Barbara Buckley, representing the Assembly District 08 in Clark County, next presented testimony in support of
A.B. 337.

She stated her sponsorship of the bill was made in conjunction with Southwest Gas Corporation, Nevada Power, and other utility providers within the state. She related that in many states, the unclaimed property fund was used creatively to fund different programs. One of which was the creation of an emergency assistance fund. She felt there was a dire lack of emergency assistance funds in Nevada’s communities.

One source of emergency assistance funds in the state was the Federal Emergency Management Assistance (FEMA) fund, which was provided by the federal government and block granted to each of the local communities. Those funds only lasted for a month. She thought there should be more monies to assist people with emergency rent, where an individual could provide proof that they had the ability to pay the following months rent. Also, she thought monies needed to be available for emergency utility expenses so that an individual could provided compensation for services while awaiting other income or assistance funds.

Ms. Buckley stressed that programs providing emergency funds for rent and utilities were good programs and needed legislative support. She indicated that southern Nevada would have some additional emergency assistance funds through the creation of an endowed fund with the Nevada Community Foundation. She elaborated that a provision had been created in a private legal settlement that allowed leftover funds to create an endowment for additional emergency assistance money in southern Nevada. Regardless, she did not feel that money would stretch throughout the year.

She then acknowledged the tight monetary situation in which the state had found itself for the forthcoming biennium, yet she maintained the emergency assistance fund needed proper consideration.

She then disclosed that representatives from the Welfare Division were present at the hearing to propose an amendment that would make the bill compatible with the division’s computing system.

Ms. Buckley explained the bill allowed for individuals under a certain income level to apply for funds not to exceed $600. The bill was also proposed to be administered either through the Welfare Division or contracted out through a private, not-for-profit entity such as the United Way. She explained that in southern Nevada most non-profit organizations had partnered with the federal, state, and local governments to administer programs cost-efficiently.

Mr. Goldwater commented that utility funds had been created in several areas to serve several purposes. He observed that as the funds were set up, it became increasingly difficult to access those funds because no entity wanted to take responsibility for providing assistance. He thought this created animosity that did not benefit the consumer.

Although Mr. Goldwater liked the overall concept of the bill, he wondered how the fund could overcome the operational obstacles faced by those other utility funds.

Ms. Buckley replied that she was unfamiliar as to the issue Mr. Goldwater had referred. She stated that with a scarce amount of resources available to fund assistance projects like the one being proposed, assistance projects could only operate 1 to 2 months per year. She thought the problem was not of animosity but one of scarcity.

Furthermore, she thought the most effective way to eliminate friction between constituents, state and local agents, and assistance funds would be to continue and further partnerships with the non-profit community. The non-profit agencies were willing to administer those assistance projects at no administrative cost to the state or local governments. She maintained that non-profits could better identify those who needed the services and would prevent gross abuse from occurring.

Speaker Dini asked how much money the emergency assistance fund had reverted back to the General Fund during the last biennium. Mark Stevens, Fiscal Analyst, answered the fund had reverted $4.5 to 5 million per year during the previous two years.

Ms. Buckley suggested that for the purposes of a pilot program, the proposed fund in A.B. 337 would only use a very small portion of those monies.

Speaker Dini then asked how much money was absolutely needed to get the program started and running as was intended.

Ms. Buckley answered the program could start with a couple of hundred thousand dollars. She believed the program could return during the next legislative session and illustrate the program’s performance. That way the Legislature could re-evaluate the program’s financial support.

Mr. Marvel then asked if the program would be included in the Nevada Operations Multi-Automated Data Systems project.

Ms. Buckley commented that the Health Committee, which first heard the bill, suggested that the eligibility requirements be amended to 185 percent of poverty so that it could be compatible with NOMADS. In the amendment being proposed by the Welfare Division, she thought the eligibility requirement was changed to utilize the "standard of need" rather than the poverty line.

Mr. Marvel then asked how long it would take for the program to be made compatible with NOMADS. Ms. Buckley replied that as long as the language for the two programs was similar, programming could be completed automatically. She said a similar limited assistance program was already programmed in NOMADS.

Chairwoman Evans wondered if the administrative entity would determine the mix of allocations distributed to clients. Ms. Buckley replied that she envisioned the Welfare Division entering into memoranda of understanding with appropriate non-profit entities. She felt that although the state should provide guidance, the non-profit organizations should determine the level need and should determine who needed assistance.

The Chair then asked if there was a mechanism in the bill that transferred funds from the Welfare Division to the managing entities. Ms. Buckley answered that money would be transferred through a contract mechanism.

Ms. Guinchigliani asked if there would be no more than $250,000 set aside from the unclaimed property fund to get the program running. Ms. Buckley replied affirmatively.

Next, Debra Jacobsen, a representative of Southwest Gas Corporation, testified in support of the bill and described the need for the proposed emergency assistance program by Nevada’s communities. She thought the program could provide the services the Southwest Gas did not provide to their customers.

She indicated that Southwest Gas Corporation served 435,000 customers throughout most communities in the state of Nevada, with the exception of the City of Reno. She said that approximately 15 percent of their customers needed some sort of billing assistance. Internally, the corporation had developed payment arrangements, but as a regulated utility, their scope was limited.

In 1997, Ms. Jacobsen said the corporation had developed a fuel fund program called Energy Share. Energy Share collected $100,000 annually through one-time donations and monthly pledges in order to assist low-income customers. She explained the Salvation Army, at no administrative cost to Southwest Gas, administered the program. Subsequently, all decisions on eligibility and fund distribution were made by that entity.

In the last year, Ms. Jacobsen disclosed Energy Share was able to assist 545 customers statewide. Unfortunately, the need for billing assistance was much greater than the program could alleviate. She noticed that when customers made late utility payments, other payments were also late indicating a type of emergency. Thus she commented the need for emergency billing assistance went beyond the realm of utilities.

Additionally, she noted Energy Share had received Low Income Home Energy Assistance (LI-HEAT) money. LI-HEAT was able to assist 2,000 Southwest Gas customers with utility bill payments. However, those aid dollars were only one-time assistance payments, as families were only eligible to receive LI-HEAT assistance once a year.

Next, Ms. Jacobsen said Southwest Gas had forwarded $60,000 to the unclaimed property fund. As representatives from Nevada Power Company and Sierra Pacific Power Company were unable to attend the hearing, she confirmed their support of the bill as well. She mentioned that each of those companies operated fuel fund programs to assist low income customers. Those programs collected $300,000 annually.

Chairwoman Evans then commented that the need seemed substantial in the area of utilities alone. Even with the adoption of the bill, a significant amount of the need would remain unmet.

Ms. Jacobsen added that the bill would serve as an additional tool that those companies could use to serve their low income customers.

Next, Jeannette Hills, representing Myla Florence, Administrator for the Division of Welfare, Department of Human Resources, testified that during testimony given before the Assembly Health and Human Services Committee, the Welfare Division had indicated the purpose and use of those funds resembled two programs administered by the Welfare Division. The first was the Low Income Home Energy Assistance (LIHEA) Program, which provided assistance to low income families with heating and cooling utility costs. LIHEA served individuals with income under 150 percent of poverty.

She stated he second program, included in The Executive Budget, was the Self-sufficiency Grant, which intended to provide a one-time assistance payment to low income families who had emergency needs. The grant worked to prevent families from being enrolled in public assistance programs like the Temporary Assistance for Needy Families (TANF) program. Specifically, Ms. Hills explained TANF served individuals with incomes under 185 percent of the TANF need standard.

Additionally, she pointed out that A.B. 337 closely resembled Senate Bill 89 which allowed for an annual transfer from the abandoned property trust fund used by the Welfare Division to help low income families with heating and cooling costs.

Next, Ms. Hills reminded the subcommittee that during a Health and Human Services Committee hearing, the division had suggested that the eligibility income limit be tied to either the LIHEA program at a 150 percent of the poverty line or to the TANF Self-sufficiency Grant standard of 185 percent of the need standard. Then during a work session on March 24, 1999, two amendments were adopted. She explained the first amendment changed the maximum benefit to $700 a year. The second amendment changed the income eligibility limit to 185 percent of the poverty line.

She was unsure if the second amendment had a drafting error, as the amendment had been offered to make the limit consistent with computer systems already in place. Therefore she explained the amendment needed to state that the income eligibility level should be calculated by a 185 percent of need rather than 185 percent of the poverty line. She reiterated the use of the 185 percent of the poverty line standard was not consistent with the division’s computer systems.

Chairwoman Evans then asked Ms. Hills to explain the difference between the use of "185 percent of need" and "185 percent of the poverty line" as standards for assistance.

In reply, Ms. Hills referred to a chart (Exhibit E) which compared the two standards. For the purposes of the discussion she stated a three-person household would receive slightly more than $1,500 per month at a level of 185 percent of need. The same family would receive $2,140 per month at 185 percent of the poverty line.

Ms. Hills then stated proposed language that had been distributed should the subcommittee choose to amend the bill in order to make it more consistent with the division’s computer system. She read " the monthly household income that is at or below 185 percent of the "Temporary Assistance for Needy Families Need Standard," should replace the phrase "federally designated level signifying poverty."

As the subcommittee had no other questions concerning A.B. 337, the Chair closed the hearing.

The hearing was then adjourned at 2:00 p.m.

RESPECTFULLY SUBMITTED:

Janine Marie Toth,

Committee Secretary

APPROVED BY:

Assemblyman Morse Arberry, Jr., Chairman

DATE: