MINUTES OF THE meeting
of the
ASSEMBLY Committee on Government Affairs
Seventy-First Session
May 7, 2001
The Committee on Government Affairswas called to order at 9:08 a.m., on Monday, May 7, 2001. Chairman Douglas Bache presided in Room 3143 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Mr. Douglas Bache, Chairman
Mr. John J. Lee, Vice Chairman
Ms. Merle Berman
Mr. David Brown
Mrs. Dawn Gibbons
Mr. David Humke
Mr. Harry Mortenson
Ms. Bonnie Parnell
Mr. Bob Price
Mrs. Debbie Smith
Ms. Kathy Von Tobel
Mr. Wendell Williams
COMMITTEE MEMBERS EXCUSED:
Mrs. Vivian Freeman
Mr. Roy Neighbors
STAFF MEMBERS PRESENT:
Eileen O’Grady, Committee Counsel
Dave Ziegler, Committee Policy Analyst
Virginia Letts, Committee Secretary
OTHERS PRESENT:
Brian Krolicki, Nevada State Treasurer
Larry Matheis, E.D., Nevada State Medical Association
Maureen Brower, Director of Government Relations, Wadhams & Akridge
Carole Vilardo, President, Nevada Taxpayers Association
Brian McAnallen, American Cancer Society
Tom Patton, Assistant Attorney General
John Albrecht, Deputy Attorney General
Renee Lacey, Chief Deputy, Secretary of State
Rick Bennett, Director of Government Relations, University of Nevada Las Vegas
Senate Bill 46: Increases maximum fee secretary of state may charge for providing special services. (BDR 18-262)
Renee Lacey, Chief Deputy with the Secretary of State, stated the bill actually was formulated in a subcommittee meeting during the Seventieth Legislative Session. The subcommittee resulted from an interim study encouraging businesses to locate in the state. The bill allowed a $500 fee for providing service within two hours after it was requested. Previously a $100 fee was charged for any special services provided within 24 hours, which was the present normal turnaround time for filings. During the interim study it was found both the state bar business section and resident agents were interested in having faster services. None of the other fees the office charged and both fees and services under consideration were provided in California and Delaware. It was felt many larger corporations wanted their paperwork processed in a shorter period of time.
Mr. Humke asked about the expedite fee, because when he had appeared at the counter, he was usually told the papers would be ready in approximately three to four hours. Ms. Lacey felt the paperwork that was probably being processed was either new filings or amendments, but generally it was ready the following morning for the resident agents to pick up. The office was currently running close to a 24-hour timeframe with current staffing. Toward the end of the fiscal year there could be a five to ten day time lag with normal filings because expedites took priority. Processing time really depended on the time of year.
Mr. Humke questioned what the expedite fees were used for. Ms. Lacey responded they went into the special services account under statutes. Some of the staff, such as corporate and technical staff, were paid partly from General Fund money and partly from the Special Services Account. Some of that funding was also used for the software system currently being developed which had been approved during the interim. Anything in excess of $2 million left in the fund at the end of the fiscal year reverted to the General Fund.
Mr. Humke inquired if the $500 fee was competitive with the state of Delaware. Ms. Lacey related it was competitive for comparable services in both Delaware and California.
Mr. Lee questioned how many people requested the special services on a day-to-day basis. Ms. Lacey replied she did not have an exact number but believed it was mostly for large corporate mergers and occasionally for amended filings.
Mr. Lee wondered how expedites would affect smaller businesses because it seemed like the large corporations were pushing them into the background. Ms. Lacey stated she did not know the exact figures but they had requested additional positions to compensate for those extra expedites. Normal turnaround time would not change because the office did not want to go any further than ten days out. The office did have a ten day money back guarantee so they did not want to go out too far and recognized smaller companies also needed their services quickly.
Ms. Parnell stated she had served on the interim committee and for the first time realized what an integral part the Secretary of State’s Office played in encouraging business to locate in the state. She felt all the recommendations coming out of the committee stressed providing a top-of-the-line service center for companies wanting to locate in the state, as they were in competition with Delaware and California. There had been no testimony against increasing the expedite fee from the interim committee.
Mr. Brown noted his law firm had used the 24-hour expedite service many times and if there was not a 2-hour service they would still use the 24-hour service. He did not feel there would be any more impact than what the 24-hour service currently offered. Five hundred dollars seemed to be reasonable and would only be used under extraordinary circumstances.
ASSEMBLYMAN LEE MADE A MOTION TO DO PASS S.B. 46.
ASSEMBLYMAN HUMKE SECONDED THE MOTION.
THE MOTION CARRIED, ASSEMBLYWOMAN GIBBONS WAS ABSENT FOR THE VOTE.
Senate Bill 487: Authorizes additional types of investments for money in certain public funds. (BDR 31-359)
Brian Krolicki, Nevada State Treasurer, testified the bill involved investing certain trust funds in equities. It provided a legal framework from which the state could challenge the long-held investment restrictions that related to certain monies. There was language in statute saying money could not be loaned by private corporations, which prohibited the ability of the state to invest in stocks. There were precedents where trust money funds were exempt, for example PERS was state-generated money but had private retirement accounts, which were not part of the General Fund. The Prepaid College Program was another example that had a separate trust fund with the ability to invest in equities. The Permanent School Fund was created when Nevada first became a state with long term monies, such as fines and escheated estates placed in the account. It was a permanent fund without year-end balances reverting to the General Fund. Their hope was the three tobacco trust funds, which included the Millennium Trust Fund for Scholarships, Trust Fund for Public Health, and Trust Fund for a Healthy Nevada would enjoy the same capability. There needed to be a diversified portfolio that would include equity investments and the document that was distributed (Exhibit C) showed the differences between various investments. The growth rate was indicated by year, starting with 1930 to the present day. The second page indicated the percentage of returns on different types of investments. The long-term Government Fund, for the past five years, was just under 10 percent while the Standard and Poors (S&P) was just under 15 percent. The monies received under the tobacco Master Settlement Agreement (MSA) and Permanent School Fund would be far larger in volume than needed to take care of the state’s needs. He stressed those monies would never revert back to the state, but remain separate to take care of specific needs. Before any of the funds could be invested in equities, that would have to be identified as constitutionally feasible. The bill indicated that judicial determination must be secured before the Treasurer could proceed with those investments. If those investments were approved, it would involve larger capitalized companies with a cap on the amount of equities, with the portfolio managed by qualified portfolio managers. The Treasurer’s office would go through a Request for Proposal (RFP) process selecting professional managers with proven track records who could do the investing far better than anyone in the Treasurer’s office. It also allowed the Treasurer to invest monies in the local government investment pool.
Mrs. Gibbons asked why there were four “no” votes when the bill was heard in committee on the Senate side. Mr. Krolicki recalled Senators Care, Titus, Carleton and Neal were the negative votes on the legislation. He thought they had concerns on how monies would actually be invested. Senator Care, for example, voted for S.B. 488, the next bill the committee would hear, but wanted an extreme conservative approach when investing state funds. Amendments were added to the bill regarding money managers while some language had been deleted.
Mr. Lee indicated single corporations were not more than 3 percent of the book value and when the state invested in mutual funds he understood that if it was more than 5 percent the National Association of Security Dealers (NASD) had to be notified, and wondered if the Treasurer was bound by the same regulation. Mr. Krolicki replied when the state invested in mutual funds it would be part of the RFP and state law did not allow for investing beyond a certain threshold or book value.
Mr. Lee questioned if all investments had to have an RFP. Mr. Krolicki responded mutual funds were an option that could be utilized and processed through the equity portion by money managers. So the managers could decide which funds were the best, but they were still subject to the same constraints.
Mr. Lee wanted an overview of what was being accomplished with the graphs submitted in Exhibit C, and Mr. Krolicki’s thoughts on what the returns might be for the state. Mr. Krolicki related his first priority was security of the money, the second would be liquidity, and yield was the third priority. The target rate for investments over a long period of time was more in line with a balanced portfolio, which would probably be around 8 percent.
Mr. Humke queried if the situation had been remedied where a previous Treasurer invested in a controversial way about the same time as Orange County in California had certain financial failures. Mr. Krolicki understood the questionable investment by the previous Treasurer was something called a “reverse repurchase agreement” which was not allowed under Nevada state law. It basically took existing assets and loaned them out, but there was a collateralization spread that in a worse case scenario would lead to a liability of two to three percent of under-collateralization, which was referred to as a “reverse-repo.” The Treasurer entered into repurchase agreements but that was the opposite side of the “reverse repo” transaction. He added the Board of Finance was responsible for monitoring all investment activities on a quarterly basis, which would forestall any problems in Nevada similar to those that arose in California.
Chairman Bache stated because he had been in the Legislature since 1991, the discussion of derivatives had come up on and off throughout the years and the Legislature was careful not to let the state get into a position similar to California. He had one concern about the recommended 60 percent level because PERS used a 50-40-10 standard on their investments, and he would feel more comfortable with the same 50 percent level for investments. Mr. Krolicki replied he did not disagree, but it was his understanding the indicators had been above 50 percent in the past even sometimes close to 60 percent. There was the ability to adjust downward. He referred to the ideal Wall Street portfolio mix, which many times were beyond 60 percent. All investments would still have the oversight of the Board of Finance, but it was not crucial to him if the committee wanted to set the mix at 50 percent.
Mr. Bache knew PERS did not have a cap; it was just their adopted policy. Mr. Krolicki indicated PERS conducted their investments under the “prudent person principle.”
Chairman Bache opened the hearing on S.B. 488.
Senate Bill 488: Revises authority of state treasurer to invest money held in certain trust funds and to administer proceeds from settlement agreements and civil litigation between State of Nevada and tobacco companies. (BDR 18-361)
Brian Krolicki, Nevada State Treasurer, testified S.B. 488 was being called “the tobacco securitization bill.” It was a very simple concept, but complex in how it would be deployed within legal statutory aspects. Nevada was one of 50 states receiving a portion of the $250 billion the tobacco industry agreed to give to the states. Nevada was one of 46 states that negotiated a group settlement agreement, with the state receiving $1.2 billion over the next 25 years from four of the largest tobacco companies. The bill would remove Nevada from the risk of relying on payments over a 25-year period and place the monies up front, with the ability of investing in the marketplace. He would rather take a risk in the bond market in a diversified portfolio with all its safeguards, than rely on the four major tobacco companies to dispense their funds over the next 25 years. During that length of time those companies could find reasons to delay or ignore compliance with the MSA. The four companies involved were RJ Reynolds, Phillip Morris, Lorillard and Brown & Williamson. The MSA had been studied by rating agencies, which looked at the quality of funds and projected what the outcome might be. Their belief of the settlement was in the case of Nevada, in a worst case scenario, might be just over $900 million in cash payments over the next 25 years. Litigation among tobacco companies had become massive and in just one case there was a $145 billion award. He pointed out a letter from the Office of the Attorney General (AG) (Exhibit D) regarding the $3.8 million that Nevada did not receive on a timely basis, which indicated to him there was the possibility of receiving payments in a lesser amount than originally intended. The very first payment received under MSA was several million dollars lower than anticipated. There was some concern on how the law should be written to ensure the Attorney General’s Office had the flexibility it needed to enforce the MSA versus a private not-for-profit corporation established with the passage of S.B. 488 that would actually be issuing bonds. If the money was received up front that money could be invested in the same proportions as the tobacco money was currently divided; 40 percent for the millennium scholarship, 10 percent to the trust fund for public health, and 50 percent into the trust fund for a healthy Nevada. A not-for-profit company would be set up with a board comprised of officers of the state, which gave the company a liability shield. If payments were not forthcoming, or not in the amounts anticipated, the state would have no liability under those circumstances to the holders of the bonds that had been issued. All money derived under MSA would be used to service the debt on the bonds, but some jurisdictions had chosen to use some of the payments for bond payments and some for operating costs. He felt it was important that Nevada divest itself of the money stream completely with it all going to the bond holders and consequently made those bonds a better investment. One problem was as all of the programs for cessation of smoking became more effective, the less money would be available to the state under the MSA. It that occurred, the rewards from the tobacco companies would have to be adjusted downward.
Mr. Lee questioned if the receivables were being discounted by implementing the MSA program. Mr. Krolicki replied there would be reserves established, so the bond holders would see debt-service retention ability. One challenge to the state was the tax-exempt status of bond holders, that money could not be used for capital construction programs, only health care related issues so the IRS forced the state to establish taxable bonds.
Ms. Parnell thought having the treasurer invest the monies was critical in the terms of success for the MSA. She was uncomfortable with a not-for-profit company handling investments rather than the Treasurer. Mr. Krolicki responded the office would be investing the funds. The state would take the money up-front and the not-for-profit corporation would receive all future payments from the tobacco industry for the next 25 years.
Ms. Parnell queried if Mr. Krolicki was comfortable with the proposed changes by the Attorney General. Mr. Krolicki indicated some of the things that seemed obvious were not clear in a bond lawyer’s world. There needed to be assurance that bond holders had absolute leeway in securing the MSA funds, and overseen by the corporation, so the state would not have to pay a higher interest rate on those bonds when they were sold. He thought the AG was anticipating a situation that he did not feel was viable because state officers comprised the private corporation and as long as the AG kept on the cutting edge of enforcing the guidelines under MSA, there should never be a problem.
Dr. Larry Matheis, Executive Director, Nevada State Medical Association, indicated he was also the President-Elect of the Nevada Tobacco Prevention Coalition and stated he had submitted a letter from the coalition for the committee’s consideration (Exhibit E). They had mixed concerns regarding the stream of money coming into the state from the tobacco industry, as they hoped that eventually the industry would be bankrupt because the funding was being used to work against tobacco interests. Tobacco related illnesses were prevalent throughout the state while at the same time the state was number one in tobacco usage. As a state, no effective tobacco control policies had been implemented until the tobacco settlement monies became available. Previously, funding had been provided by federal grants through the Center for Disease Control (CDC). As younger citizens who engaged in smoking aged, the state would continue to have a disproportionate amount of smoking related illnesses per capita. The AG had been aggressive in using federal laws to start suits against tobacco companies although most tobacco control issues had been initiated outside of Nevada. When the FDA adopted amendments the AG acquired funds to pursue stings for underage purchasers. The creation of the Task Force for a Healthy Nevada had been the most progressive force on tobacco control with representation from the Heart Association, Lung Association, Cancer Society, and the Medical Association. So for the first time the state had the ability to make a difference in communities and it was hoped funding would continue.
Carole Vilardo, Executive Director, Nevada Taxpayers Association, testified they were in full support of the bill. She understood there were some concerns but felt those could be worked out with the help of the bond counsel. The tobacco fund was needed, as a survey had been done in November on the issue of smoking in Nevada and it indicated Nevada was at the top of the list. It was done for tax purposes to see the number of packs sold, and if the evasion of smoke shops and over-the-border sales were still occurring. In 1994 the consumption per capita was 154 packs of cigarettes and in 1999 that figure was down to 94 packs per capita. As that figure continued to decline so would the amount of money the state might receive from the settlement. She had discussions with her counterparts in bordering states and they had all seen a decline in revenue. Because of the settlements in court due to health problems created by smoking, there was a potential for some of those tobacco companies to go out of business. Nevada was one of the earliest states to be processing the type of proposed legislation in S.B. 488 and she felt it was imperative to proceed while funding was still available.
Brian McAnallen, Director of Government Relations and Advocacy, American Cancer Society, Southwest Division, testified he had considerable experience with similar pieces of legislation regarding overall issues of tobacco control. The goal of the society was to put the tobacco industry out of business and save lives. He realized it was an uphill battle and indicated Nevada had the highest rate of consumption in the nation. Even with that high consumption rate and the Fund for a Healthy Nevada there were at least some investments into tobacco control and prevention programs. In 1999 the actual consumption rate declined farther than what was projected by about 1 percent, and that was before any state actually started any tobacco control programs. In 2000 the MSA payment for all of the states was significantly lower by 14 percent than what was projected. At the rate the money was falling, it was doubtful funding would be on a par with the programs that had been created through the tobacco settlement. When that occurred it would mean the state would have to assume funding for those programs. He felt passage of the bill would create a standard flow of revenue to pay for the programs set up by the settlement. With decreases in consumption there would naturally be a decrease in payments to the states.
Mr. Mortenson questioned the terms of the settlement, as he understood tobacco companies were now pushing hard in Asia to increase consumption and wondered if it would affect the settlements within the United States. Mr. McAnallen replied, as he understood the MSA, state payments were regulated by the consumption only within the U.S. It was understood that the tobacco companies were trying to make up for the loss in consumption within the U.S. by turning to other international markets.
Mr. Lee asked why only 46 of the 50 states were involved in the settlement. Mr. McAnallen responded 50 states moved forward with the tobacco litigation based on their Medicaid costs. Nevada was one of those states settling in bulk, the other four states settled independently because of their initial lawsuits with the tobacco industry. Those states were Minnesota, Texas, Florida and he was not sure of the fourth.
Mr. Krolicki interjected the fourth state was Mississippi, who had received their settlement money up front. The other 46 states could not be afforded that same up front lump sum and that was the compelling reason for Nevada to try and get their money in-house via securitization.
Maureen Brower, Director of Government Relations, Wadhams & Akridge, stated she was representing herself because of her involvement with tobacco prevention and cessation programs. She was personally in support of S.B. 488 and believed securitization would assure the state received their settlement dollars regardless of declines in tobacco usage. It would enable the state to maintain their efforts and continue to reduce tobacco usage. She had worked closely with the Task Force for a Healthy Nevada, ensuring the money was spent on programs that were especially geared toward the youths of the state.
Thomas Patton, First Assistant Attorney General, commented that the Attorney General’s Office did not want to register any opinion on the securitization proposal as they considered it a policy and budget issue better left to the Legislature. The MSA was a very complex document and he did not think it was intended to be a trap for the unwary but their concern related to the settlement. There had been discussions with the Treasurer and they had tried to reach an agreement because of the language in Section 7, subsection 2, which provided “if the state treasurer executes a sale” to a nonprofit corporation, it would give the nonprofit the right to “enter into covenants” and be binding on the state and require the state to sue or take any other legal action that the nonprofit deemed appropriate. The concern was that the nonprofit could deem the “appropriate action” rather than the state. In NRS Chapter 228, which governed the Attorney General and her powers, one of the fundamental concepts was the authority of the Attorney General to bring a legal action on behalf of the state of Nevada when the Attorney General determined such action to be appropriate. They did not want to see a situation in which a contracting body determined when or whether a legal action would be brought. There was the same concern in Section 9, subsection 2, which stated no action “may be brought . . . against the State of Nevada or any of its officers, employees, agents or other representatives . . . other than any suits or other legal proceedings brought to enforce any contracts for the purchase of tobacco proceeds or any covenants entered into by the state treasurer.” It was not entirely clear if it would be limited to the nonprofit organization or gave them the ability to enter into contracts with the bond issuance. There was a possible conflict because in the settlement agreement there was a clause prohibiting any settling state in assigning its enforcement authority. The AG would still be responsible for bringing legal action, but under provisions of the bill the decision making on such action could evolve to the nonprofit or third party bond purchasers. In talks with the Treasurer those concerns would be addressed by either changing the language, or if further analysis showed there were no problems there could be a nonassignability provision.
John Albrecht, Senior Deputy Attorney General, testified he had been working on the settlement since it had been signed. The settlement required the state to do two things. They had to obtain the money from those companies signing the agreement and enforce NRS Chapter 370A against those companies not signing. A major hurdle was getting the money from those companies that had signed the agreement. There were 6 major and about 25 small manufacturers. Of those 25, 3 did not make payments on April 15 as required. The total from those 3 companies was $3.8 million, with Nevada’s share at $23,500. One company, the Landmark Corporation was a Nevada corporation and they had been noticed that the state would sue. The bulk of that money was from a company called Tobacco and Candy Incorporated with a settlement of $3.6 million. In that case the state was allowing the Association of Attorneys General to negotiate a timetable for payment of the past-due amount. There was no way of knowing what the nonprofit may require of the state in pursuing the $3.8 million. The Department of Taxation found that approximately 40 companies had not established escrow accounts as required under NRS Chapter 370A. Three lawsuits had been filed against those companies with another six establishing escrow accounts. Between those 9 companies 80 to 85 percent of the settlement dollars would be forthcoming from the Non-Participating Manufacturers (NPM) markets in Nevada. There was no way to anticipate if the nonprofit corporation could require enforcement against all 40 companies in order to protect the NPM adjustment. The adjustments were important because if the participating manufacturers had a market share loss of greater than 2 percent annually, those three companies would create a loss three times the actual anticipated reduction in compensation. Another concern was a remedy was unclear if the nonprofit corporation decided to sue the state. He felt language needed to be added, addressing specific prohibition on any damage judgment against the state under the act. In summary, the bill added two parties into the mix, nonprofit corporation and the bond holders.
Mr. Mortenson said the way the bill was written it gave a comfort level to bond holders that the state would take action, and if the AG was objecting to that he wondered if they had a solution. Mr. Albrecht replied there were only two states, Alaska and South Carolina, who had embarked on securitization. The bond holders would request some type of assurance the state would continue enforcing their rights under the MSA, so the stream of income was uninterrupted to the maximum extent possible. In Alaska’s contract there was a pledge the state would assert its best efforts in continuing to enforce the agreement. The concern of the Treasurer was the salability of bonds while the AG’s concern was creating a law mandating what the state’s attorney must do.
Rick Bennett, Director of Government Relations, University of Nevada, Las Vegas, testified he was speaking on behalf of the University and Community College System in support of S.B. 488. Others had addressed concern over the uncertainty of funds going into the MSA and he shared those concerns. As 40 percent of those funds went to the Millennium Scholarship Program they appreciated the Treasurer’s efforts in trying to minimize the risks and protect all the health care programs that were funded through the MSA.
Chairman Bache closed the hearing on S.B. 488.
Mr. Williams wished to go on record regarding the bill heard in committee on police and fire issues, as he understood there had been threats made not only to the Chairman but his family. He pointed out in checking statutes he found it was unlawful to threaten a legislator and thought a letter should be forthcoming from the Director of the Legislative Counsel Bureau to the Attorney General’s Office for a formal inquiry into the incident. Because of heavy-handed lobbying he felt the incident should be in the record alerting others that inappropriate behavior would not be tolerated.
Chairman Bache indicated he had options on how to pursue the matter and had chosen to let Sheriff Keller in Las Vegas to pursue an internal affairs investigation of the situation and for the present he preferred to leave it that way. He appreciated the concern but he would rather not have the legislative process get caught up in the incident. If need be the issue could be revisited in the future.
The meeting was adjourned at 10:53 a.m.
Virginia Letts
Committee Secretary
APPROVED BY:
Assemblyman Douglas Bache, Chairman
DATE: