The meeting of the Joint Subcommittee on General Government of the Senate Committee on Finance and the Assembly Committee on Ways and Means was called to order by Chairman William O’Donnell, at 8:00 a.m., on Friday, March 19, 1999, in Room 2134 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

SENATE COMMITTEE MEMBERS PRESENT:

Senator William R. O’Donnell, Chairman

Senator Lawrence E. Jacobsen

Senator Joseph M. Neal, Jr.

ASSEMBLY COMMITTEE MEMBERS PRESENT:

Mrs. Vonne Chowning, Chairman

Mr. Bob Beers

Mrs. Marcia de Braga

Ms. Christina R. Giunchigliani

Mr. David E. Goldwater

STAFF MEMBERS PRESENT:

Gary Ghiggeri, Principal Deputy Fiscal Analyst

Rick Combs, Program Analyst

Jim Rodriguez, Program Analyst

Judy Jacobs, Committee Secretary

OTHERS PRESENT:

As Senator O’Donnell opened the hearing on housing, he reminded the committee there was a floor session scheduled for 10:30 a.m.

Charles L. Horsey III, Administrator, Housing Division, Department of Business and Industry, explained the Housing Division operates like a financial institution in that it is charged with the responsibility of assisting the private sector in the creation of affordable housing. He reported this is the sixth consecutive year of record volume, and that has helped alleviate housing shortages statewide while improving the financial position of the division.

Mr. Horsey turned to the first page of a handout (Exhibit C) distributed to the committee containing an excerpt from Moody’s Outlook and referred to an article regarding the A1 rating of the division. Mr. Horsey expressed pride in the rating and the outlook reported by Moody’s. He explained Nevada’s housing financing agency was the first in the country to achieve a rating of AAA without benefit of outside credit enhancements. He stated higher ratings mean lower mortgage rates for first-time homebuyers. He noted nearly 17,000 Nevada families have been assisted.

Mr. Horsey said budget account 503-3841 reflects the accomplishments achieved by the division. He drew attention to the third performance indicator regarding the number of multifamily apartment units produced, which he opined is the greatest accomplishment of the division. He said the program for single-family dwellings depicted in the first performance indicator is a very successful program because of the number of years the program has been in existence, and it continues to flourish. Mr. Horsey noted the division had predicted 620 multifamily units would be financed, but 1,172 were actually financed. He asserted this was a major feat.

Mr. Horsey stated Nevada is in the top two or three housing-financing agencies in the country. He said every financing package for low-income apartment complexes is unique. He noted the financing must be structured and the bonds must reflect the various cash-flow considerations and the composition of the various types of units in each project. He explained the project financing is not referred to the division until after it is first reviewed and approved by local governments.

Mr. Horsey introduced Lon DeWeese, Chief Financial Officer, Housing Division, Department of Business and Industry. Mr. DeWeese said there have been approximately 9,000 apartment units produced since the multifamily program was initiated.

Mrs. Chowning requested information regarding the reduction in single-family home mortgages because she believed the object of the Housing Division programs should be to encourage more families to become home owners rather than home renters. Mr. Horsey responded that historically the number of single-family homes financed by the division has been very consistent. He said the division receives $150 million in tax-exempt authority each year. Of that amount $75 million is under the control of the director of the Department of Business and Industry, and the other $75 million is at the disposal of local governments until September 1 of each year. He explained that for the past 2 years local governments have made multifamily housing their top priority. He noted that leaves the Housing Division with direct control over the other $75 million.

Mrs. Chowning noted the number of mortgages for single-family dwellings appears to be declining in the projected indicators. Mr. Horsey responded the division does not have control over those. He explained that in order to stretch the ability to issue tax-exempt bonds, the division has added taxable-bond financing to every structure. This results in an increase in the authority by 15 percent. He said the division also has taken advantage of every opportunity to refinance old bond issues to increase the authority, but even so the authority has been declining. He stated the division is making very conservative projections until such time as additional funding is found.

Mr. DeWeese interjected the single-family program still receives the major portion of the state’s funding cap. He said the cap that is going into the multifamily program flows to the division from local governments, but local governments have made multifamily units a priority. He added the number of houses is shrinking even though the number of bonds issued is increasing because more subsidies are being used for loans through use of the down-payment assistance program. He noted the cost per unit for a house has risen, meaning the same number of dollars is being spread over a lower number of people due to the cost of housing.

Senator Neal wanted to know whether funds are being loaned by the division to developers who build apartments, and whether that was the intent of the program. Mr. DeWeese responded that was the intent of the legislation. He said cities select which projects they want financed, and those are submitted to the Housing Division to obtain underwriting and for the issuance of the bonds.

Senator Neal asked for the statutory reference. Mr. DeWeese replied it is found under Nevada Revised Statutes (NRS) Chapter 319 which gives the authority, with severe restrictions, to loan to developers who are building apartments. He noted the division must apply to the State Board of Finance for permission to lend funds to multifamily builders.

Senator Neal remarked that when the program started he understood it was to assist people in the purchase of single-family dwellings in order to increase private home ownership. Mr. Horsey responded there were two equal purposes in the legislative intent. He acknowledged the first intent was to create affordable housing for first-time home buyers, and that has remained the primary activity of the division. The second intent of the statute, he said, was to produce affordable housing for tenants.

Senator Neal wanted to know how the division ensures that the intent is complied with in terms of what tenants pay. Mr. Horsey explained the division operates under a mandate to audit apartment projects that the division has financed in order to ensure the tenants residing there do not earn more income than permitted by law.

Senator Neal repeated his understanding the division uses funds earmarked for people who lack the means to buy homes to provide financing for those who build apartments, which the builders then can rent to low-income persons. He asserted, "Something seems wrong with that scenario." He argued against giving state money to individuals to build apartments to "rent to people who are most in need." Senator O’Donnell pointed out the funding comes from investors who receive a return on their purchase of bonds.

Mr. DeWeese explained the Housing Division is like a financial institution except that the division does not have savings accounts to provide the source of funds that can be loaned out. The funds come from the sale of tax-exempt bonds, and the proceeds are loaned to first-time homebuyers or to developers.

Senator Neal asked who issues the bonds. Mr. Horsey replied they are issued by the Housing Division. Senator Neal inferred the state’s full faith and credit stands behind the bonds since the bonds are issued by the state. Mr. DeWeese said no. He indicated that neither the state nor the Housing Division guarantees payments on the bonds. He said the first security for the bonds for single-family dwellings is the mortgages themselves. He said the second security comes about because every loan made by the Housing Division is insured by the Federal Housing Administration (FHA) or the Veteran’s Administration (VA) or has some other form of private mortgage insurance. He said the people who buy bonds look to the real estate and the mortgage insurance as a guarantee. He stated it is made very clear on the bond documents that the state carries no obligation, although there is some obligation by the Housing Division; but there is no guarantee of payments except under certain circumstances.

Senator Neal pointed out the bonds are tax-free, which would give the federal government an interest in how the funds are disbursed. He asked whether the federal government has audited the program. Mr. Horsey replied there is a requirement that the program be audited by several entities. He said every time the division goes to market with a bond issue it is audited, and also twice a year regular audits are prepared. Mr. DeWeese said a December 31 audit is being completed, and he agreed to provide copies as soon as the audit is complete. Mr. Horsey interjected all members of the Legislature are provided copies of the division’s financial statement.

Senator Neal reiterated his concern and explained he voted for the measure under the assumption it applied to private ownership only. He suggested he may have misunderstood, and it did not occur to him the funds could be provided to developers for construction of apartments.

Mr. Horsey pointed out the housing market includes single-family residences that are owned by the person who takes out the loan, as well as rental units. He reiterated the primary focus has been on home ownership, but local governments, especially in Clark County, have determined there has been a greater need for affordable rental units than for single-family dwellings.

Senator Neal asserted Las Vegas is "flooded" with rental units. He said there are signs up "all over the place." Mr. Horsey stated a market study indicated the upper end of the market has been met, but not the market for affordable housing. He explained the division restricts the amount of rent the owner can charge every time the division finances a project, thus providing a benefit to tenants.

Senator Neal wanted to know why the division has to make appearances before the committee if the funding is not derived from state funds. Senator O’Donnell responded the division administers the funding. Mr. Horsey pointed out that as a state agency the division must obtain legislative authority, and a state affiliation is required to obtain a tax-exempt status for the bonds.

Senator Neal paraphrased that the exempt status the state provides makes it possible for a private party to use the funding to build apartments to rent to persons needing assistance.

Mrs. De Braga asked how rental rates are determined in order to protect the apartment owner and provide affordable housing at the same time. Mr. Horsey replied the maximum rental rates are determined by the federal government. He said that in 1986 the U.S. Congress changed the law through a tax reform act to give developers two options as to setting rates. One option allows 20 percent of the units in a project to be rented out at 50 percent of median income. The other option allows 40 percent of the units to be rented to individuals at 60 percent of median income. Mr. Horsey noted rents on recent projects are almost entirely restricted.

Mrs. Chowning referred to several projects in North Las Vegas offering one month’s rent free, which she suggested means the owners have been unable to rent out those units. Yet, she said, a new three-story apartment complex is under construction very near the others. She indicated this would cause her to infer the lower end of the market may also be saturated. She commented she would dislike being responsible for filling the new building.

Mrs. Chowning stated she would like some statistics showing how many of the existing units are occupied, and when it is anticipated the new units will reach full occupancy. She asserted it is irresponsible to fund new projects when the existing units are not filled. She opined home ownership should be stressed, even though it is necessary to provide shelter for everyone. She declared the Housing Division is not doing any favors if it is not allowing people to become homeowners. She noted there are many programs available that provide for ownership with no down payment but with the obligation to refinance within 2 or 3 years, which she avers is a setup for people to fail. She stated those people could be included in the low-interest program and become homeowners rather than renters.

Mr. Horsey voiced agreement and added the Housing Division has been the greatest proponent of home ownership by providing financing. He boasted the division has provided home ownership for 17,000 citizens at no cost to the taxpayers. He noted the division believes affordable housing should be dispersed throughout the entire Las Vegas Valley, but zoning issues and the responsibility of local government place some restrictions on the division. He reiterated the division is a financial institution that responds to developers and projects approved by local governments.

Senator O’Donnell suggested there has been a misunderstanding regarding the Housing Division because it has no authority to set or determine the market. It can only help the market in terms of financial capability. He pointed out any developer who believes he can make a profit by building apartments takes a risk based upon the developer’s belief the market can absorb more units. He reiterated the division has no authority to deny the developer based on a rate of tenancy.

Senator O’Donnell pointed out that if the rate of occupancy drops, it provides an advantage to renters through various incentives such as a month’s free rent or a lower rental rate, which tends to equalize the market. He asserted withholding financing based upon the number of projects would drive up the price of rents. He stated the intent is to provide affordable housing, not to drive people into shelters for the homeless. He explained the premise is based upon economics.

Senator Neal requested a list of units funded by the Housing Division, including their addresses and locations. Mr. Horsey agreed to provide the list.

Ms. Giunchigliani asked whether the division has the authority to dispute a determination by a local authority if the division believes the use of the funds is inappropriate. Mr. Horsey replied, "I have not said that."

Ms. Giunchigliani repeated her question whether the division has the authority to deny a project if it does not fit into the housing plan of the state. Mr. Horsey responded, "I suppose, technically." He opined local governments are the experts, and he observed local governments are very reluctant to have the state dictate to them.

Ms. Giunchigliani stated the goal of the state is to promote single-family dwellings and not simply to provide access to funding for private parties. She agreed it would be helpful to know the number of empty units. Agreeing to provide the information, Mr. Horsey remarked multifamily financing is very cyclical. He explained the division controls the single-family program to the extent of timing, participating lenders, and mortgage rates to some extent. He asserted, "We are the engine behind single-family financings."

Mr. Horsey stated multifamily financing is a much more complicated vehicle requiring a developer. He said the division has been attempting to foster the development of not-for-profit construction. He stated the division will not go to market unless the bonds will be rated at least AA, and most of the financing has been rated AAA. He explained the division requires an entity such as the Federal National Mortgage Association (FNMA, Fannie Mae) or the Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac) or other financial institutions to review not only the cash flow, but also the vacancy ratios. He said those are the entities that are at financial risk, not the state nor the Housing Division.

Ms. Giunchigliani asked whether condominiums and town houses qualify as single-family dwellings. Mr. Horsey answered the division has financed every type of home that either the FHA or VA will insure or guarantee.

Ms. Giunchigliani wanted to know whether local entities give the division an explanation as to why they support higher densities in some locales when they present a plan, or whether the division is made aware of the surrounding area when a project is presented. Mr. Horsey responded the division only sees the project, not its place within an area. Ms. Giunchigliani suggested it might be helpful for the Housing Division to have a vision of what the local entity is trying to accomplish.

Senator O’Donnell wondered whether Ms. Giunchigliani was assuming that government agencies are the ones who determine whether the buildings can be constructed. He said it is not the decision of government as to which projects are built, but rather it is the decision of developers who make application and purchase the land. He asserted it is not local government "that drives this engine," it is the entrepreneur who responds to the demand.

Senator O’Donnell pointed out it is the developers who decide whether there is a demand for single-family homes or for apartments. Ms. Giunchigliani opined part of the driving force is local government, which may actively seek entrepreneurs to develop according to the government’s vision. She agreed there must be impetus from the development community, but she expressed doubt as to "what’s driving what."

Senator O’Donnell countered that a government agency might decide what would be best, but if nobody thinks it will be fiscally sound to do so, no development will take place. Ms. Giunchigliani asserted that her scenario often takes place, especially regarding government growth plans which include incentives to entice developers to invest in such projects. Senator O’Donnell agreed the key may be incentives. He pointed out many jobs in Las Vegas do not pay enough to support home ownership, and he surmised it is better under such circumstances for the entrepreneur to drive the market and not the government in order to avoid "winding up with projects."

Ms. Horsey added both Reno and Las Vegas are involved in downtown revitalization that includes rehabilitation of housing which has been run down. He said the division has recently financed a substantial number of projects in both downtown centers.

Senator Neal said he understood the Housing Division came into being to fill a need for funding at a time when banks refused to lend and a vehicle was needed to create affordable housing. He asked what relationship the division has with FNMA. Mr. Horsey responded FNMA is one of the largest purchasers of bonds, and it also guarantees payments to other bond-holders on several multifamily projects.

Senator Neal asked whether FNMA places any restrictions on builders. Mr. DeWeese responded the restrictions in regard to rental rates and rates of return come from the federal tax law under which the bonds are issued. He said FNMA has its own set of underwriting restrictions regarding occupancy and cash flow. The occupancy in a project must be maintained at 90 percent over a 12-month period, and the project must have sufficient cash flow to cover the debt 1.15 times.

Regarding down-payment assistance, Mr. Horsey drew attention to maintenance decision unit M-210. He said the division has been aware that, in spite of overwhelming demand which has been met during the past several years, there is an even greater need for down-payment assistance. He said the average age of the head of a household of the 17,000 persons who bought homes through the program is 37 years. He noted that is at least 3 years older than experienced by many other states. He said the division has been working on a down-payment assistance program to enable a greater number of families to participate in the program. Mr. Horsey called attention to the last page of Exhibit C showing the basics of the down-payment program.

Ms. Horsey turned to decision unit M-597 regarding the IRS (Internal Revenue Service) tax mandate. He stated the division must audit a very large number of projects monthly, which is one consequence of the tremendous growth in housing. He said the division is attempting to look at every project at least once every 3 years, and the two field auditors requested will enable the division to make physical inspections of the projects and ledgers of those financed by the division. He reported he was informed earlier in the week there may be two projects which are not in compliance. He said developers’ books will be checked again and the division will consider legal action if residents with incomes above the requirement are inhabiting projects designed for lower-income tenancy.

Mrs. Chowning inquired whether the Budget Division has factored in the additional cost allocations under unit M-210 for the attorney general’s office, since the problem arises in many budgets, and whether the request will provide for an additional half-time position. Mr. Horsey responded the cost for the deputy attorney general was addressed last year, and there will be no additional personnel. Mr. DeWeese pointed out there was a large jump of nearly $70,000 between 1998 and 1999 reflecting approval given by the Interim Finance Committee (IFC) for an additional half-time deputy attorney general. He said the costs for that person are now built into the base, not into the enhancements.

Mrs. Chowning asked who performs the audits conducted under decision unit M-597, and why new positions are needed. Mr. Horsey replied the division performs the audits, but there are so many new units coming on-line that the division must act to maintain its tax-exempt status by complying with IRS requirements.

Mr. Horsey maintained the Housing Division has been very successful in serving affordable housing needs of the general low-to-moderate income population, but the division has barely begun to provide financing for special needs groups. He said that includes people such as those with physical disabilities or single-parent households. He said neither the state nor local governments have addressed those special housing needs for which there has been a lack of quality data.

Mr. Horsey said the division started making a survey to establish a database to determine vacancy factors, needs of tenants, rental rates, and similar factors. He suggested the current demand may slow one day, and the division must have a better understanding of housing needs. As an example, he pointed out there is a wealth of information regarding the number of senior citizens moving into southern Nevada, but whether they need assisted living, congregate living, or nursing home facilities is unknown.

Mr. Horsey stated the division would like to contract with an individual or company that would be able to give the division and all local governments in the state an estimate of affordable housing needs for special groups. He said development of a database would show where there is a proliferation of affordable housing units in one area, or a lack of housing, and the division could supply the data to local governments and assist them in their decisions regarding priorities.

Ms. Giunchigliani asked to be provided with the division’s policy and what kinds of restrictions are imposed on owners of apartments.

Senator O’Donnell stated information was just received this morning that the division may have to expend an additional $22,000 each year for data processing charges. He wondered whether the division was aware of that. Mr. Horsey responded he was not aware of the specific amount, although he was aware the assessment was coming. Senator O’Donnell said a survey was made by the Department of Information Technology (DoIT) and each agency utilizing data processing services will be assessed. He noted the budget contains $1.5 million and $2 million, respectively, over the biennium to cover the Housing Division costs, and the data processing costs will have to be built into the budget in the future. Mr. Horsey responded the division has the ability to do that.

Mr. DeWeese drew attention to decision unit E-720. He said the division has close to 60 bond issues which heretofore were managed on an accounting basis. He said the data processing system, which he described as "woefully inadequate," cost the state approximately $120 in 1988. He explained it is impossible for the division to interface with banks and it cannot monitor the mortgage portfolios adequately. As a consequence, the division may have to seek additional personnel or upgrade the system to enable an interface with existing electronic data processing.

Mrs. Chowning referred to decision units E-175 and E-275 and noted they include large expenditures for travel and training. While voicing great approval of the down-payment assistance program, Mrs. Chowning questioned the reasoning for the expenses for travel and training. She noted the more funds spent on those, the less that will be available for down-payment assistance. Mr. Horsey noted the division is limiting travel to one person as often as possible.

Senator Jacobsen asked for an explanation of the training offered by the Housing Division and whether a central training center would suffice. Mr. Horsey responded the division intends to send one person to training who will then train the other personnel. He pointed out the division is responsible for administering the Federal Home Loan Bank program, the federal tax credit program, and the low-income housing trust fund, and most of the training is to keep up with changes in the federal tax code that pertain to those programs.

Senator Neal wondered why the figures for the down-payment assistance program expenses appear to be low. Mr. Horsey replied no new positions are being requested, and the program will be limited to those who obtain their first mortgage through the Housing Division. He opined there are nonprofit entities that will perform much of the screening and interviewing of applicants, and rather than adding a large staff it will be more efficient for the Housing Division to contract with the nonprofit entities.

Mr. DeWeese interjected the figures are based on making enough profit to fund the expenses, with a limited growth rate for generating the profit. Second, he said, the amount to be loaned for each down payment is limited to $5,000, and many of the loans are considerably less. As a consequence, he said, the amount of money related to the program, as well as the number of applicants, is limited.

Senator O’Donnell wondered whether it is necessary for the division to move its offices. Mr. Horsey responded there has been general growth and an addition of staff in southern Nevada in order to maintain the principal office there. He noted other agencies within the Department of Business and Industry need the space being vacated by the Housing Division. He said various new sites are being explored. Mr. DeWeese interjected the department has notified the division that it has inadequate space for the employees under the department’s formula.

Mrs. Chowning asked how much additional space is needed. Mr. DeWeese replied that depends upon "the benevolence of this committee and both houses" regarding the addition of two inspectors. With the addition of those positions, he said, the division will seek an additional 800 to 1,500 square feet. Senator O’Donnell wanted to know how many square feet are needed in total. Unsure, Mr. DeWeese offered to supply the information to Fiscal Analysis Division staff.

Mr. Beers asked for comment on the software for general ledger cash management and its relationship to the integrated financial system (IFS). Mr. DeWeese responded the general ledger software being requested is unique because it will interface with bank systems that collect all the mortgage payments for single-family dwellings, and it will interface with the loan-servicing tax credit and home allocation projects. He stated it does not interface with IFS except insofar as the actual administrative costs. He said $50 million to $70 million flows through the general ledgers of the division each year which will not be interfaced through IFS, and the division is not proposing any change in that policy.

Senator O’Donnell closed the hearing on the Housing Division and opened the hearing on the Department of Information Technology (DoIT).

DEPARTMENT OF INFORMATION TECHNOLOGY

All of the DoIT budgets are in Volume 1 of The Executive Budget.

DoIT Director’s Office - Budget Page DOIT-1

Budget Account 721-1373

DoIT Planning & Research Unit - Budget Page DOIT-7

Budget Account 721-1370

DoIT Application & Design Development Unit - Budget Page DOIT-16

Budget Account 721-1365

DoIT Computing Division – Budget Page DOIT-24

Budget Account 721-1385

DoIT Data Communications & Technical Services – Budget Page DOIT-41

Budget Account 101-1386

DoIT Telecommunications – Budget Page DOIT-43

Budget Account 101-1387

DoIT Communications – Budget Page DOIT-45

Budget Account 101-1388

Marlene Lockard, Director, Department of Information Technology, recalled she had discussed the budgets for the Director’s Office (budget account 721-1373) a month earlier. She asserted the planning section for the department is the key to providing essential technical support for state agencies, and for that reason additional staff and support are requested for the planning and research units.

Ms. Lockard stated the department has had great success in attracting "very good talent" to the planning section. She said the chief of the department has a Ph.D. in economics and a minor in computer science; there are two individuals with masters degrees, one an electrical engineer and one with computer science and business administration background. She said the department has replaced almost the entire planning section with similarly talented people having a combined total of 162 years of private sector experience and 66 years of public sector experience. She said the department is requesting three additional Planners.

Ms. Lockard noted the planning section addresses emerging technology, and decision unit M-200 contains the request for three information specialists. She said unit M-201 requests an additional database manager, and unit E-126 will allow the state to join into the State Information Technology Consortium (SITC), the technical arm of the National Association of State Information Resource Executives (NASIRE). She explained NASIRE was formed to foster greater collaboration among the states regarding information technology, and SITC is independent and is a nonprofit consortium which provides invaluable services to state governments. She said SITC makes site visits to help with the implementation of project management competency and to help the programming staff.

Ms. Lockard said decision unit E-129 requests an additional support person for the Department of Business and Industry to integrate systems. She indicated decision unit E-175 will provide funding for the next 27 months to train the planning and programming staffs for the Capability Maturity Model. She said decision unit E-177 consists primarily of requests for training for the planning section.

According to Ms. Lockard, training is the most essential element necessary to bring the department in line, because changes in technology are so rapid, and because continuous training is critical for the department to provide good technology solutions to customer agencies. She stated training is offered as an incentive to employees to stay with DoIT because the demand for information technology professionals is 30 percent higher than the number of professionals available. She said training is cited in surveys as one of the items important to retention of personnel.

Ms. Lockard stated that because those who achieve project management certification become very marketable, the department should be provided with some assurance that employees will stay with the department if sufficient training is offered. She said she has requested an opinion from the attorney general (AG) whether DoIT could require a refund or payback of training funds if an individual leaves within a 6-month period or other prescribed period after receiving training. She added the request to the AG also seeks information whether there are any statutory barriers regarding the bonus proposal made by the department. She said she received a response (Exhibit D) which says the department cannot require a payback for training, and there is no statutory authority to implement a bonus program.

Ms. Lockard indicated she met with Senator Dean Rhoads, Northern Nevada Senatorial District, who is proposing legislation to offer a bonus program. The senator has offered to amend his bill to clear any statutory prohibitions to the offering of bonuses.

Ms. Lockard continued, noting that enhancement unit E-710 reflects requests for upgrades to equipment and unit E-805 represents an upgrade to the entire planning section. Citing the importance of the unit to the overall structure of the department, Ms. Lockard said the department is beginning to attract a high caliber of employees in the section.

Mr. Goldwater noted the opinion says there is no statutory authority to require repayment for training, but authority could be enacted. Ms. Lockard responded that is why an amendment to Senator Rhoads’ bill is being sought to provide enabling legislation.

Senator Jacobsen commented training often is provided on a different type of equipment than the type in use by the agency, which he opined undermines the value of the training. He asked whether Ms. Lockard would feel it advisable to have a central training center. Ms. Lockard responded the training for DoIT can be very specific, and her practice is to develop a comprehensive training plan. She explained the department made a staff analysis and inventoried skills available from each person and then made an analysis of what was required for each position. From that, she said, the department made a skill-gap analysis which is targeted for training.

Ms. Lockard said DoIT directed employees to keep current in order to support existing infrastructure and technology, and to learn emerging technology in order to offer the latest to customer agencies. She reasserted that technology training is different from other types of training due to the rapidity of change. She stated the key for DoIT is to decide which innovations will have staying power so that department employees receive the appropriate training. She said department employees who do not keep up with change lose their marketability and their ability to offer current solutions. She added training is often performed in-house.

Mr. Beers commented his company spends nearly twice as much per employee on training as what is being requested by DoIT. He agreed the technology changes very fast and requires the most "rapidly moving training front that America has ever seen."

Mr. Beers remarked it does not appear the training contract will require enabling legislation, but he asked whether it would require adoption of new regulations by the Department of Personnel. Ms. Lockard replied yes.

Referring to the opinion from the Office of the Attorney General, Mr. Beers surmised the practices are not prohibited, they are simply not authorized. Senator O’Donnell voiced agreement with Mr. Beers’ supposition and noted there are places in the law that allow incentive programs for hiring, but he agreed the legality of the practice needs to be addressed. Ms. Lockard stated she would "like to be on solid ground" before implementing a new policy.

Ms. Lockard reminded the committee the data networks were discussed during the hearing a month earlier and only the computing and communications budgets were left to review. She drew attention to a flip chart showing the projects scheduled for completion by the end of the biennium, and to another chart showing the enhancements requested in the communications budget.

Senator O’Donnell asked her to address the budgets briefly. He noted there is a federal government mandate to review the allocation process of DoIT’s charges throughout all the agencies, which he suggested should be addressed. Ms. Lockard assumed he was referring to the funding study discussed briefly a month ago. She said that the department was at that time awaiting final figures from the DoIT fiscal department and the state budget office prior to transmitting the information to the Legislative Counsel Bureau. She explained the agencies were told when they were building their budgets that this funding study was under way and the adjustments would be coming from the fiscal and budget offices. She said the information transmitted this week was the result of the final allocation and the adjustments of what currently existed in their budgets and what adjustments need to be made to implement the funding study already under contract.

Ms. Lockard acknowledged some departments will come before the legislative committees requesting supplemental funds to support information technology needs within their departments. Other than the federal compliance issue, she said, that is why the funding study was necessary. She stated it was very difficult for DoIT and the agencies to accurately forecast their needs and estimate costs because those factors are not based upon historical data and use.

Ms. Lockard explained:

Ms. Lockard explained the funding study will find a way for DoIT to get off the convoluted billing system, and it will tie an agency’s billing to its actual use. She asserted billing should not be dependent upon the activities of other agencies.

Senator O’Donnell noted the prison system, which uses very little CPU time, is being faced with an assessment of $200,000 because the study was based upon the number of full-time employees (FTEs). Ms. Lockard responded the study addressed a number of issues. She asserted a number of agencies which have experienced successful project development have attributed the success to a good contract. She said the department has changed the request-for-proposal (RFP) process. She stated the funding study cost-allocates the contract administration and planning section of the department across the board.

Ms. Lockard reported the department has several very important RFPs out for the prison system including the inmate telephone system, which generates a lot of revenue. She pointed out not all the prison charges are based upon the facilities. She explained, "The cost-allocation fees . . . apply to all of state government uniformly. We provide that service much like a personnel department."

Ms. Lockard explained the CPU charges are fee-for-service charges based upon actual usage, and that portion is not cost-allocated. She state an agency that does not use the mainframe will not be charged for those services, and any assessment is attributable to the cost-allocation portion.

Senator O’Donnell inquired whether all the agencies subject to adjustments have been notified. Ms. Lockard responded DoIT has been working with the Budget Division, which has distributed the adjustments to the budget analysts for each agency. She said DoIT does not determine the amount for each agency, but rather the Budget Division allocates the amount necessary from each agency to support DoIT.

Mr. Beers pointed out a letter dated March 15 outlining modifications to the budget (Exhibit E) will add nearly $8 million in expenses to other programs in the state over the biennium, and he asked whether that means there will be $8 million in new revenue.

John P. Comeaux, Director, Department of Administration, responded the administration made a provision in the General Fund for $2 million in reserves from fund balances in each year of the biennium as reflected in The Executive Budget. He said an additional sum will be required from the Highway Fund and the federal funds line item will reflect a negative figure, but the greatest concern is the amount attributable to other funds. He concurred with Ms. Lockard there is concern that other agencies may not have adequate resources to handle the charges.

Mr. Comeaux said his department has identified just one problem so far in a small budget within the Department of Business and Industry budget accounts. He acknowledged there is a possibility additional charges to the Department of Motor Vehicles and Public Safety (DMV&PS) could be problematic since there is a cap of 22 percent. He said the total sum to be charged to state agencies is driven by the total DoIT budget. He indicated most of the charges to other funds will come from reserves on hand.

Mr. Beers noted the letter indicates there will be nearly $8 million not reflected in The Executive Budget in new debits to be charged to expenses for the various agencies. There will also be $8 million in credits described as DoIT revenue, also not reflected in The Executive Budget. He observed DoIT is supposedly presenting a balanced budget, but he wondered whether the budget is actually out of balance.

Senator O’Donnell responded that when the funding study was made, it included how to properly allocate charges to the various agencies. He said the agencies all have funds included in their budgets to pay DoIT, but because the funding study was under way, the Budget Division reserved $2 million in each year of the biennium to cover any added charges for DoIT. As a result, Senator O’Donnell said, the report indicates there is nearly $4 million available in each year of the biennium, and the question is, How much is necessary above the amount budgeted?

Mr. Comeaux drew attention to the summary on the front page of Exhibit E showing the funding changes according to source. He reiterated $2 million has been reserved in the General Fund. He pointed out there will be an additional requirement from the Highway Fund, there is a negative net figure from federal funds, and the concern is whether there will be sufficient reserves or resources from other sources to provide the additional funding delineated. He said if there are sufficient reserves, the entry should show a decrease in reserves and an increase in fees.

Mr. Beers said he had expected to see a reallocation of existing expenses. He noted there are expenses incurred on behalf of the state as a whole, and there is a mechanism to allocate the expenses. Additionally, he said, a new allocation scheme would be reflected in the expenses and there should be a zero effect on the overall budget, since it is a redistribution of funds. He opined the letter reflects new spending of nearly $8 million over the biennium, not a reallocation. He wondered whether he was seeing just half of a double entry.

Mr. Comeaux responded Mr. Beers was correct from the standpoint there will be a significant increase in the DoIT budget. He said, "This really is a combination of reallocation and an allocation . . ." Mr. Beers responded, "So if I add up all the DoIT allocation expenses in all of the non-DoIT departments in The Executive Budget as presented, it will fall short of the revenue that shows up in the DoIT budgets, which is driven off of spending." Mr. Comeaux replied, "It will, and it will fall short by the net of these two amounts and the $4 million that we reserved from the General Fund."

Senator O’Donnell indicated the DoIT budget has increased substantially, partly due to the desire to buy an R36 mainframe computer costing approximately $6 million. He said the reallocation is predicated upon a new budget, not on the old budget.

Mr. Beers wondered whether the prisons had not been subject to a proper allocation in the past since the prison phone system or e-mail are part of DoIT. Mr. Comeaux stated there are only two information technology service centers that are assessed on allocations based upon FTEs. He said the Budget Division viewed those as "availability assessments." He said the two service centers are the planning section and the contract administration section, and all the other service centers are billed based on anticipated usage.

Mr. Beers asked whether overall infrastructure planning is a separate service center from specific project planning. Ms. Lockard replied the department is incorporating the concept of the project management competency center into the planning section. Mr. Beers suggested the potential impact on the General Fund could be minimized through segregating specific project planning from overall infrastructure planning, because specific project planning is a service that should be allocated as used.

Mr. Comeaux commented that in devising ways to implement recommendations from the funding study, the Budget Division hopes to find an equitable way to distribute costs of information technology. He pointed out a long-standing difficulty with agencies who did not budget for information technology services, and they found during the biennium if they needed help they could not obtain those services without approval from IFC. He noted funding on the availability assessment method will provide direct access to DoIT.

Ms. Giunchigliani asked whether every agency responded to the Budget Division while the assessment planning was in progress. Mr. Comeaux responded the only problem appears to be within the Department of Business and Industry. Ms. Giunchigliani voiced concern there may not be sufficient time for proper planning and there could be unplanned impacts. As an example, she suggested the Store Fund should have been charged for the assessment on the Department of Prisons based upon FTEs.

Ms. Giunchigliani asked what options are available. Ms. Lockard suggested it might be helpful if she provided the committee with a complete copy of the funding study showing the methodology used by the consultants for the assessment. She explained DoIT selected the firm because of its expertise regarding federal requirements. Mr. Comeaux voiced doubt there is any practical way to implement the assessment in pieces and still meet the federal requirements. Ms. Lockard agreed and noted the other part of the funding study requires annual assessments. She said this will be a onetime adjustment, because in the past DoIT had to budget to achieve a fiscal year ending balance of zero. She explained the funding study provides for a yearly adjustment at which time DoIT will assess historical usage, fee for service, and cost allocation as needed.

Ms. Lockard stated the adjustments may be across-the-board because the appropriation total of $2 million each year will be required to fund the DoIT operation. Ms. Giunchigliani asked whether it is anticipated that will cover the new allocation plan plus the yearly adjustments. Ms. Lockard answered that it should.

Mr. Comeaux expressed doubt any assurance could be given for the yearly adjustments. He said there are estimates involved regarding future usage as a basis for funding for the service centers. He suggested Ms. Lockard was referring to the adjustment between estimated usage and what the usage actually is.

Ms. Giunchigliani suggested there will be no need to seek approval from IFC. Mr. Comeaux stated he does not believe DoIT will have to do so. He asked whether the adjustment will be made every year or on a biennial basis. Ms. Lockard indicated the adjustment will be made each year. Mr. Comeaux noted that if an agency were to have a much higher usage than estimated, the Budget Division would have to gain approval from IFC or the agency would have to find revenue from another source. He said the value of service is tied to the level of the budget of the agency. He offered to arrange for David M. Griffith & Associates (DMG) to explain the study to the committee. Mr. Comeaux noted DMG performed the study and the statewide cost-allocation plans for the Budget Division and for the Office of the Attorney General.

Ms. Giunchigliani wondered whether there is any flexibility built into the plan. Mr. Comeaux stated the problem appears to be with some of the federally funded agencies because the costs of information technology were not being allocated equitably. He said the federal government views that with great concern and could deny reimbursement for costs. Mr. Comeaux noted there has been no problem so far.

Ms. Giunchigliani wanted to know whether there are agencies that believed they were charged too much for services. Mr. Comeaux stated the summary included in Exhibit E includes a small net reduction, which he surmised means yes.

Senator O’Donnell commented the allocation plan includes both variable costs and threshold costs; if an agency uses more service it will be charged more, but the other budgets will not be charged more. He pointed out an agency being charged an additional sum has no funding available in its budget to pay for it. He wanted to know what the source of that funding will be. Mr. Comeaux responded the agency would have to find another source or receive an appropriation from IFC.

Senator O’Donnell surmised the other agencies suffer when DoIT allocates resources to an agency whose services usage was underestimated. He suggested a reserve be set aside within the DoIT budget for such contingencies. Mr. Comeaux responded DoIT has a fixed budget, and the cost is allocated to those who use the services. He said if the plan does not work properly, at the end of the year those agencies that used more service will have to pay more, and it will be the agencies’ problem to find the funds.

Mr. Beers voiced the understanding there are some fixed costs which are being allocated on an FTE basis, and all the other costs, including programmers’ time, are being allocated on a fee-for-service basis. Ms. Lockard stated that is correct. Senator O’Donnell agreed but commented that when the final budget comes in there is no more funding for variable costs, so DoIT is forced to reallocate resources.

Senator O’Donnell noted DoIT has no additional staff, so staff has to be reallocated. He asserted that is the fundamental problem with centralization of data processing. He stated it is not possible to manage one agency from another agency without "the scheme of robbing Peter to pay Paul." He said, "When you rob Peter, he gets a little angry," and eventually all the agencies become dissatisfied because they feel they did not receive the service anticipated.

Ms. Lockard asserted there is a need for more staff support, but the staff support is a separate issue from the funding issue. She said DoIT currently has 60 Master Service Agreements (MSAs) distributed throughout the state government agencies. She stated, "If we were to staff to replace those MSAs, I would be asking you for 60 more programmers today." She agreed DoIT does not have a staffing level sufficient to service the customer agencies, creating a huge public relations problem. If DoIT had adequate staffing, she said, it would be allocated on a fee-for-service basis for planning and contract administration through the cost-allocation process.

Senator O’Donnell asserted an allocation process based upon variable costs is apt to be flawed from the onset. He opined the proposed plan will not work.

Mr. Beers restated his understanding as to how the process would work. He surmised an underbudgeted agency needing extra help would receive that help at the expense of another agency, thus requiring an accounting entry to receive approval from IFC to decrease the latter agency’s allocation and increase the first agency’s allocation. Senator O’Donnell responded that is what occurs at present and it is "a nightmare."

Mr. Beers asked how the crisis could be addressed for the agency needing help. Senator O’Donnell replied that 2 years ago he attempted to institute a roving crisis-response team but the proposal failed. Ms. Lockard interjected the department does have such a section within the programming unit which is called a "combo team."

Senator O’Donnell asked Ms. Lockard to address NOMADS and the problem in Douglas County. Ms. Lockard distributed two pages of charts (Exhibit F) showing the capacity for growth with and without expansion of the servers.

Ms. Giunchigliani asked whether Ms. Lockard considered the proposal as the forecast plan or the cost-allocation plan. Ms. Lockard replied, "Both." She stressed that the funding study only takes care of one portion of how DoIT is funded. She said DoIT is trying to address the problem incrementally.

Ms. Lockard told the committee the funding study validated DoIT’s concern that it lacks a depreciation expense, although there is a fund for major equipment acquisitions, ongoing upgrades, and maintenance and support. She declared the fund should replenish itself. Seeking clarification, Ms. Giunchigliani asked whether next session Ms. Lockard would prepare not only a cost-allocation plan, but also a separate forecast plan regarding the future on which to base the budget. Ms. Lockard replied, "Absolutely."

Referring to the top page of Exhibit F, Ms Giunchigliani asked, "Can we resolve the issue of whether it’s a big box or separate boxes?" Senator O’Donnell responded the additional $6 million in costs, reallocated throughout all of the agencies, is partly a function of the "box" they are going to buy. He said the question is whether or not NOMADS will still be in existence in 6 months, whether or not the "box" is needed right away, whether the "box" can be deferred to the year 2000. If so, he said, there would be $6 million available for other agencies and needs of the state. Ms. Giunchigliani asked what will happen if the system crashes. Senator O’Donnell declared it will not crash, it will simply get slower.

Ms. Lockard said Exhibit F shows where DoIT anticipates problems based on what is already approved and scheduled to come on-line, not on what new technology is approved this session. She asserted there will be a major problem by October if no relief is provided.

Senator O’Donnell noted the budget indicates a cost of $6 million for NOMADS programming staff for this biennium, and DoIT anticipates NOMADS will utilize 67 millions of instructions per second (MIPS) on the mainframe by October. He reviewed a report dated March 5 to Myla Florence, Administrator, Welfare Division, from Douglas County which expressed disappointment with the rollout. Senator O’Donnell read:

Ms. Lockard interjected those issues have been corrected.

Senator O’Donnell continued:

Senator O’Donnell declared, "They’re not happy down there." Ms. Lockard agreed. Senator O’Donnell noted, "They rolled it in from Washoe County because Washoe County just wouldn’t put up with it, and I’m worried about, if Washoe County won’t put up with it, what is Clark County going to do?"

Ms. Lockard responded DoIT has instituted monthly meetings with district attorneys throughout the state, and the district attorney of Douglas County provided a valuable service to the entire project. She said, "Rolling out a project of this magnitude is very complex, and Douglas County was selected because of their size and for a number of other reasons." She said all the issues with Douglas County are serving to help rollout and implementation issues with the other counties. She proposed having a full discussion with Gary Stagliano, the Welfare Division’s project manager for NOMADS, on the entire NOMADS project. Senator O’Donnell supported the proposal, saying he believes the project is flawed and will never work.

Senator O’Donnell noted the Department of Information Technology is requesting funding for the boxes to supply to NOMADS. He asked, "Why do we keep on spending millions of dollars for this boondoggle? We need to know whether it’s going to work or not." Ms. Lockard agreed. Senator O’Donnell declared no more money should be spent if the process is not going to work.

Ms. Lockard responded, "The short answer is the millions of dollars in fines potentially hanging over our head from the feds [federal government]." Senator O’Donnell worried millions of dollars will be spent in an attempt to get the program to work. He considered it might be better to "just cut and run."

Mr. Beers opined the letter from Douglas County appears to be a completely normal reaction to "initial mutations of a complex system." He asserted there is not enough information to decide whether NOMADS will work or not. He agreed it would be wise to schedule a hearing with all parties. Senator O’Donnell stated he has been attending hearings on NOMADS for 10 years, and he insisted it has real problems. Mr. Beers pointed out he has been implementing similarly complex systems for 13 years and he feels there is insufficient information.

Mr. Beers asked whether the "booms" depicted on Exhibit F truly indicate systems crashing. He said those would be more like a "grind" on a personal computer system. Senator O’Donnell agreed and said those will be slowdowns. Guy Duensing, Deputy Director, Department of Information Technology, acknowledged the "booms" depicted will be a "grind." He said, "Basically what you’re seeing on the 821 now, with the slow responses, having trouble getting batchwork through, those types of things, would happen on both systems, not just the one." He noted productivity would suffer greatly.

Senator O’Donnell announced the hearing would have to be continued later since members of the Senate were scheduled for a floor session. Mrs. Chowning made a request to the Budget Division. Regarding the proposed funding plan, she said the subcommittee will want to ensure there are reporting requirements in place which would supply monthly as well as year-end fiscal reports that will track which agencies are being charged how much and for what. She added that the Legislature should have monthly reports that track the system’s performance. Mr. Comeaux expressed confusion regarding the details of the request but said he would confer with Jim Rodriguez, Program Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, on the matter.

Senator O’Donnell adjourned the meeting at 10:30 a.m.

RESPECTFULLY SUBMITTED:

Judy Jacobs,

Committee Secretary

APPROVED BY:

Senator William R. O’Donnell, Chairman

DATE:

Mrs. Vonne Chowning, Chairman

DATE: