MINUTES OF THE

SENATE Committee on Government Affairs

 

Seventy-First Session

April 2, 2001

 

 

The Senate Committee on Government Affairswas called to order by Chairman Ann O'Connell, at 2:06 p.m., on Monday, April 2, 2001, in Room 2149 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.

 

COMMITTEE MEMBERS PRESENT:

 

Senator Ann O'Connell, Chairman

Senator William J. Raggio, Vice Chairman

Senator William R. O’Donnell

Senator Jon C. Porter

Senator Joseph M. Neal, Jr.

Senator Dina Titus

Senator Terry Care

 

STAFF MEMBERS PRESENT:

 

Kimberly Marsh Guinasso, Committee Counsel

Juliann K. Jenson, Committee Policy Analyst

Sherry Rodriguez, Committee Secretary

 

OTHERS PRESENT:

 

Echo Penrose, Concerned Citizen

Robert A. Ostrovsky, Lobbyist, Employers Insurance Company of Nevada

Ann W. Nelson, Lobbyist, Employers Insurance Company of Nevada

Harry H. Mellon, President, The Gordian Group Incorporated

Frederick C. Smith, Construction Manager, Facilities Division, Clark County School District

Warren B. Hardy II, Lobbyist, Associated Builders and Contractors of Southern Nevada

Cheryl Blomstrom, Lobbyist, Nevada Contractors Association

Gary E. Milliken, Lobbyist, Associated General Contractors-Las Vegas

Brian Krolicki, State Treasurer

Carole Vilardo, Lobbyist, Nevada Taxpayers Association

John Swendseid, Bond Counsel to the State of Nevada

Lawrence P. Matheis, Lobbyist, Nevada State Medical Association

Maureen Brower, Lobbyist, American Cancer Society

John Albrecht, Senior Deputy Attorney General, Human Resources Division, Office of the Attorney General

Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association

William E. Donovan, Attorney at Law, Orrick, Herrington and Sutcliffe

Steven D. McDonald, Administrator, Division of Unclaimed Property, Department of Business and Industry

John E. Adkins, Chief Deputy Treasurer, Office of the State Treasurer

Bob Gagnier, Lobbyist, State of Nevada Employees Association

Frank Siracusa, Chief, Division of Emergency Management, Department of Motor Vehicles and Public Safety

 

Chairman O’Connell:

We are going to begin with Senate Bill (S.B.) 566.

 

SENATE BILL 566:  Requires release of certain liens created by former state industrial insurance system. (BDR S-1478)

 

Senator Raggio:

If I could make a preliminary statement on S.B. 566, I requested this measure as a result of some extensive communications from a constituent, Ms. Echo Penrose.  Her situation was quite involved and had some severe consequences, and after discussion with her, it came to light there were a number of instances involving a situation where the State Industrial Insurance System, (SIIS), had imposed a lien.  There is a lot more to her story I know, and I know she will condense it, but the problem was a lien was authorized by law, and is authorized by law, but even after the date to enforce the lien, the lien remained on the property.  It resulted in the person owning the property, even though the time for foreclosure on the lien had expired, from being able to sell the property, with the inability to give a clear title. 

 

Notwithstanding a number of requests to SIIS, they would not release the lien.  It caused a great deal of discomfort and financial loss to this individual.  As I indicated, it apparently has been the practice to just leave those liens on forever and the inability to get a release of lien after that time has been a problem.  That is the reason I have requested this bill.

Chairman O’Connell:

Ms. Penrose, you can begin your testimony now.

 

Echo Penrose, Concerned Citizen:

I live in Reno and I have a very small home which I have put all my money into.  I run my business from my home office.  I have a business license by phone only; I have no work place, no employees.  And, that is the way it was during the time I was audited, from June 18, 1993, to July 31, 1995.

 

June 18, 1993, was the date S.B. 316 of the Sixty-seventh Session was passed with 150 amendments to chapter 616 of Nevada Revised Statutes (NRS), which is industrial insurance.

 

SENATE BILL 316 OF THE SIXTY-SEVENTH SESSION:  Makes various changes to provisions governing industrial insurance.  (BDR 53-1764)

 

Those 150 amendments went through without too much discussion, and immediately, I assume, thousands of audits were taken because it included a triple penalty, which in my case jumped the premiums SIIS said I owed them, from $6,936 to $20,808.  When you read the bill, when it was amended, it said they allowed the triple penalty on June 18, 1993, but it also stated the first offense was a misdemeanor.  Yet, I was penalized over $13,800.

 

MS. PENROSE:

 

I do not think misdemeanors allow such a high penalty.  I know Chairman O’Connell expressed, in the committee meeting, she worried about this bill being passed without it being examined closely; it was just pushed through with 150 items called a trailer bill.

 

This one went through, and it was wrong.  It allowed them to place a lien on my property prior to having a court date.  I wrote an article to be printed in the Nevada Journal; called “Lawsuit Extortion Act” at the state level (Exhibit C).  I spent 2000 hours studying the amendments to chapter 616 of NRS included in S.B. 316 of the Sixty-seventh Session, and then went to the county recorder’s office, where I found in Carson City alone, there were 586 liens recorded with no court action.  In Washoe County, there were 102, and in Las Vegas there were 318.

 

I spent a lot of time looking up those liens to see if they had expired, and all in Washoe County had expired. 

 

Senator Raggio:

When you say expired, you mean, time for closing on a lien?

 

Ms. Penrose:

Regarding the 3-year periods, I have a list of them here, with document numbers and names.  I went looking for some of these people to see what happened to them. I was able to get about 50 percent of them.  I went to the addresses listed on the liens and they were empty buildings.  I was only able to locate 2 people out of 50.  The rest had no phone numbers, as these businesses are no longer active.  I came to one address and knocked on the door expecting to find the person listed on the lien, and they said no, they had purchased the home through foreclosure.  In about 2 months, when people knock on my door, they are going to see the same thing. 

 

Anyway, I decided to file for bankruptcy on March 26, 2001, to stop the sale, because I had about $60,000 in equity which I needed to save.  I opened an escrow account to get the paperwork ready for the sale.  When I did, I received a letter demanding payment from Employers Insurance Company of Nevada (EICON) for this lien.  This was dated March 9, and stated the principal balance was $20,808; accrued interest, from August 25, 1995, to March 6, 2001, was $13,795, totaling $34,000.  The interest began accruing on August 25, 1995, which means this lien expired 3 years from that date, or August 25, 1998.

 

Yes, this is extortion.  It is called depriving, and I am going to read to you what deprive means in NRS 205.0824.  “‘Deprive’ means to withhold a property interest of another person permanently or for so long a time that a substantial portion of its value, usefulness or enjoyment is lost, or to withhold it with the intent to restore it only upon the payment of a reward or other compensation, or to transfer or dispose of it so that it is unlikely to be recovered.”

 

Now, the penalty for that statute, NRS 205.0835, subsection 1 states, “Unless a greater penalty is imposed by a specific statute, a person who commits theft in violation of any provision of NRS 205.0821 through 205.0835 . . .   If the value of the property or services involved in the theft is less than $250,” they are “guilty of a misdemeanor.”  In (subsection) 4, “If the value of the property or services involved in the theft is $2,500 or more, the person who committed the theft is guilty of a category B felony and shall be punished by imprisonment in the state prison for a minimum term of not less than 1 year and a maximum term of not more than 10 years, and by a fine of not more than $10,000.”  Subsection 5 states, “In addition to any other penalty, the court shall order the person who committed the theft, to pay restitution.”

 

I would say EICON is guilty of at least 900 felonies.

 

Senator O’Donnell:

I must have missed something in the testimony, how did the lien get on there in the first place?  What did they allege was not paid?

 

Ms. Penrose:

They called for an audit.  I took all my books to them as I had nothing to cover up or hide.  It was just a normal routine audit.  Seventy days after the appeal period, I received a copy of it in the mail.  They sent it to a closed address that had been closed for 4 years.  I found out they were applying the triple penalty in my case.

 

Senator O’Donnell:

Let me see if I can get to the point, you had an audit of your SIIS insurance books.  They determined you had employees.  Did you have any employees?

 

Ms. Penrose:

No.

 

Senator O’Donnell:

They assumed you had employees and they placed a lien on your property; however, they never perfected the lien in the time period allocated by the state law?

 

Ms. Penrose:

That is correct.  Nevada Revised Statutes 616B.239 (written prepared testimony [Exhibit D]), states they have to instigate an action within 3 years from the date the premium became due.

 

Senator O’Donnell:

Sounds like you have done your homework.  After they put on this lien, they did not perfect it and the 3 years have lapsed and now you are ready to fight them on this issue; but they never fought back, they just let it lapse, and now they will not take off the lien.

 

Ms. Penrose:

Yes, I sent them a letter stating the lien had expired and they still ignored me.  So, I called Senator Raggio, and sent him a copy of everything.  He sent them a letter and asked them to look into it.

 

Senator Raggio sent them about three letters.  One of the letters he received stated there was nothing they could do, because I had failed to file a petition for judicial review, which was a lie.  The petition for judicial review had been filed and we did have a hearing on it in district court. 

 

Senator O’Donnell:

What did the judge say?

 

Ms. Penrose:

He went along with SIIS.  In the judicial review, they are just supposed to look at the wrongdoings of the audit.  This document entitled “Committee Hearing” (Exhibit D), has a list of the wrongdoings, pursuant to NRS 41.0348.  I asked for a special verdict.  This explains the wrongdoings completely.  I can document everything I said in here about what they did.  I think if you read it, you would understand. 

 

Senator O’Donnell:

Who is this Donald Smith (Exhibit E), Deputy General Counsel?

 

Ms. Penrose:

He was the attorney representing SIIS at all the hearings.

 

Senator Raggio:

I think, for clarification, you had people working and said they were independent contractors.  That was the argument, and you closed your business.  They audited you after you had closed your business, and they determined you owed something like $5,000?

 

Ms. Penrose:

It was $6,936 and it was based on the amount of money I had paid to two contractors.  One was “A Hearts Construction,” a licensed general contractor, in business for himself with no employees.  I had a written contract, signed by him, stating there was no employee-employer relationship, because he kept his own tools, he worked casually, not everyday, did not report to work, and I did not control his time.  Because I was allowed to reject insurance, he also was allowed to reject insurance.  We were both very well covered by our own private insurance.  A Hearts Construction was fully covered for accident or health on or off the job by Blue Cross through his wife’s employment at the Carson City School District.  I was fully covered by the National Association of the Self Employed, with full coverage, accident or health, on or off the job.  I was having it automatically deducted from my account every month for the amount of $309.

 

I see no reason why any of us should have to purchase workers’ compensation.  Especially since I believe contracts cannot be tampered with.  We had a constitutional right to contract with each other. 

 

Chairman O’Connell:

Let me ask you a question.  Do you have a homestead on your home?

 

Ms. Penrose:

Yes, I do.

 

Chairman O’Connell:

Mr. Ostrovsky (Robert A. Ostrovsky, Lobbyist, Employers Insurance Company of Nevada), would you come up and let us see if we can get some clarity from the other side?  Have you read the information passed out to us?

 

Robert A. Ostrovsky, Lobbyist, Employers Insurance Company of Nevada:

I have with me today, Ann Nelson, General Counsel, Employers Insurance Company of Nevada, who would like to talk to you about this particular case, and I would like to say a few words.  The SIIS, when it existed, was required to sell workers’ compensation insurance to every employer in Nevada, regardless of the ability of the employer to pay.  We had to cover all employees.

 

All employers were then obligated to purchase workers’ compensation insurance for all employees in this state.  The penalties were those penalties which were statutorily provided.  The interest, which is accrued, has also been statutorily provided within the law.  I think you will find the SIIS did exactly what the law required it to do in every case.  This case has been all the way to the Nevada Supreme Court and back down again.  There is a lot more to this case you probably ought to hear.  I am going to ask Ann Nelson, General Counsel, for EICON, the successor company, to explain the position of EICON on behalf of SIIS today, and tell you the ramifications of the case and on other bills.  Perhaps she ought to give her testimony, and then we can answer questions.

 

Ann W. Nelson, Lobbyist, Employers Insurance Company of Nevada:

I am the executive vice president and general counsel.  Let us talk about Ms. Penrose’s case first, and then the bill in general.  Initially, as Ms. Penrose indicated, an audit was done of her account in August 1995.  That audit determined Ms. Penrose, in fact, did have two employees who were employees and not independent contractors.  If I might remind the committee, there was and still is a difference in the Nevada statutes between independent contractors and independent enterprise.  One required workers’ compensation insurance, but a true independent contractor did not.

 

Senator O’Donnell:

Would that not be, “alleged employees,” if she disputes it?

 

Ms. Nelson:

Yes, it would.  Ms. Penrose disputed the audit.  There were a number of conversation letters sent back and forth.  Ultimately, in August 1998, a manager’s hearing was held.  If you all will recall, back at the time when EICON was still a state agency, the manager’s hearing was the initial hearing by which a policyholder could dispute an audit finding, a rate classification, any of those kinds of things.  A manager’s hearing was held, and evidence was presented at the hearing.  Ms. Penrose was represented by counsel at that hearing.  The hearing was held in June 1996, and the decision was handed down in August 1996.  It found there were two employees who had worked for Ms. Penrose; they were not true independent contractors, it was not a true independent enterprise, they worked at the direction of, at the behest of, and under the control of Ms. Penrose.

 

Ms. Penrose then had the opportunity, if she disagreed, to file a petition for judicial review.  Senator Raggio, sometime in this time period, there were some letters from you on this case.  The petition for judicial review was filed late.  I think the deadline was missed by 1 or 2 days; it was not very long.  Also, at about the same time, a lien was filed.  Let me back up just a minute so I can make sure everybody has the date.  The hearing was held in June 1996, the decision was rendered in August 1996, and a lien was filed on her property in November 1996.  There was not a lien filed prior to the hearing being held.  I want to make that very clear. 

 

Subsequently, Ms. Penrose filed a petition for judicial review.  State Industrial Insurance System, at the time EICON, also filed a complaint to perfect the lien, in 1999.  The two actions were combined, and this is where things get to be a mess, because part of the petition for judicial review went all the way up to the Nevada Supreme Court and has come all the way back down.  That happened in November 2000.  Our complaint to perfect our lien is still pending in front of Judge Peter I. Breen of the Second Judicial District.  I believe we are waiting for an answer from Ms. Penrose at this time on that complaint.

 

So, there was a hearing in this case.  The lien was filed after the hearing and it was perfected within the statutory 3-year time period by our filing of the complaint.

 

Let me talk about the bill in general.  In speaking to the Legislative Counsel Bureau (LCB) this morning, it is my understanding the purpose behind this bill was to have EICON go through its lien files and discharge all of those liens which are 3 years out or can no longer be enforced because the 3-year statute has run out.  I am not sure that is what the bill does.  My concern is, in reading this bill, it seems to require release of all our liens.  I wanted to bring that concern to the committee.  I know, at least in discussing it with the LCB, this was not the intent.  All the lawyers who have read this read it the same way; this bill requires us to release all of our liens.

 

I want to stress this is quite a sizeable accounts receivable for EICON, as you can imagine.  When we rolled out from being a state agency and began going through all of our policies and procedures, collections had not been a big interest of the agency.  This is an area we are looking at, because we book it on our accounts receivable.  We are systematically going through these now, collecting what we can, writing off what we must, and trying to get these cleaned up.

 

So, if the purpose behind the bill is to force us to release all those liens which are not enforceable, I do not have a problem with that.  We can clean up the language and make it really clear this is what the bill does.  I want to make the committee aware, even if we can fix it to meet what the LCB tells me is the intent, I do not think it helps Ms. Penrose in her case.

 

Senator Raggio:

Certainly, liens that are not enforceable should be released.  The other thing that cries out in this case is there is an escrow pending; she is faced with EICON demanding $34,600 for something as inconsequential as the original situation.  Even if this is true, and the two employees are now determined not to be independent contractors, knowing her, I am sure she thought they were independent contractors. 

 

This was not some kind of a willful evasion of this law.  It seems like a grave injustice for this escrow to be sitting there and Ms. Penrose being penalized to this extent.  I guess there are two questions here:  One, I would certainly agree you ought to be required to go through all the liens not enforceable, particularly where people have requested a release of a lien so they can clear their title.  Secondly, there must be some flexibility in a case like this to review the situation and say, there is an escrow here and we, at least, want the amount that was owed.  There ought to be some way to alleviate a situation of this kind.

 

I think you are probably right on the language; it probably needs to be modified, because I do not think the intent was to imply you could not enforce a lawfully authorized lien.

 

Ms. Penrose:

Ms. Nelson, you stated they perfected this action by filing an action in court in 1999.  This lien expired in 1998, and where they are getting this from is right on the lien, the interest date is put on there, August 25, 1995.  In NRS 616B.239 it states 3 years from the date the premium became due.  It did not say, 3 years from the date the lien was filed, what they were trying to do.  The lien can be filed up until 2 years after, if they want, or they can file it anytime within the 3-year period.

 

Senator Raggio:

Is there some relief your company is authorized to give Ms. Penrose in this matter?  I think justice cries out here for some kind of a compromise on this situation.  It is not the reason I introduced the bill, I just think it is terrible to deduct this amount under those circumstances.

Ms. Nelson:

Senator Raggio, I would be more than happy to go back and attempt to get authorization to settle this case.  We just got it back from the Nevada Supreme Court in November.  I want to be really clear on that.  No attempt has been made to pay the initial premium due on this case.  I would be more than happy to pull the file and get the authorization to attempt to settle this case.

 

Senator Raggio:

Madam Chairman, I think the bill should be processed, at least to the extent of the liens no longer enforceable.

 

Ms. Nelson:

If I might address that, Senator Raggio, my legal staff is in the process of going through and doing that anyway.  I do want to correct one statement that was made; every lien which is no longer enforceable has been released if someone has called and asked to have it released.  This includes two more last week; so, we do, as a matter of course, systematically release these liens as they are brought to our attention.

 

Senator Raggio:

I know, I wrote to you on Ms. Penrose’s behalf, asking the lien be released.

 

Ms. Nelson:

At that time, the lien was not unenforceable and was in court.

 

Senator Raggio:

I understand it was beyond the period it could be in court.

 

Ms. Nelson:

That is not correct; in fact, it is still enforceable today.

 

Senator Raggio:

I would appreciate your going back, and certainly you can get that authorization in a short period of time, to see if you cannot do something to make this a more judicious situation.

 

Ms. Nelson:

I would be more than happy to go back and try to get authorization.

 

Senator O’Donnell:

How many other liens do you have on private citizens’ property beyond the 3-year perfection date?

 

Ms. Nelson:

We have 472 current liens.  Most of those have had an action filed against them, but I do not have a number for unperfected liens.  I would be more than happy to try to provide it to you later.

 

Senator O’Donnell:

I would appreciate that information.  The other thing is, since you are not a state agency anymore, however, you have the ability to act like the Internal Revenue Service (IRS), is any state governmental auditing body able to audit your organization, or are you now immune to any state audits?

 

Chairman O’Connell:

The commissioner of insurance does this.

 

Ms. Nelson:

Yes, the commissioner of insurance.  Also, these liens were filed when we were a state agency.  They were called statutory liens and could be filed, because we were a state agency.  The ability to file this kind of statutory lien went away when we became a private company on January 1, 2000.

 

Senator O’Donnell:

Are you saying our state auditors could go in there and examine those liens under the old law?

 

Ms. Nelson:

I do not know.

 

Senator O’Donnell:

I would have to agree with the sponsor of the bill.  This looks like a tragedy of justice.  I am also worried about the other people who have liens you did not perfect; yet, you have still continued to keep them on your books because, I think the comment you made was, “There is a lot of revenue out there we would be losing.”

 

 

Ms. Nelson:

Something to remember is, a lien is placed when a policyholder fails to pay the premium.  So, these were policies of insurance issued for which the premium was not paid.  Remember, as Mr. Ostrovsky said earlier, we were required at that time to cover everyone.  We could not say, “No, you are not creditworthy, we are not going to issue you a policy of insurance.”  That is why the statutory lien process was put into place.  It was the legal method a state agency could use to enforce the payment of the premium.

 

We are going through and making sure all liens were placed correctly.  It is an ongoing process with the company.  Yes, there is quite a bit of money.

 

Senator O’Donnell:

I think I am seeing this a little bit more clearly now.  When we changed the law and allowed private companies to write a policy for those who could qualify for credit and those who could not qualify for credit, you still maintained all those accounts and all those old audits which produced some kind of claim for your company in terms of remuneration back to your company.  You kept those on the books, but you may not have perfected them in that period of time.  Thereby, you got this windfall, predicated on an audit done by a state agency.  You got that on your books, and it is really hard for you to release it, because it is a lot of revenue.

 

Ms. Nelson:

I guess I would take issue with the term “windfall,” because not only was the premium on our books, but so were all of the claims resulting from those policies being purchased.  Those claims remain with us today.

 

Senator O’Donnell:

I understand, but the caveat here is you should have perfected the lien.

 

Ms. Nelson:

I am not saying we have not.

 

Senator O’Donnell:

I guess that was my original question.  How many of those do you have out there?

 

 

Ms. Nelson:

I do not know the number off the top of my head.

 

Senator O’Donnell:

Well, how can you say you have not, if you do not even know?

 

Ms. Nelson:

I have not asked the question.  If we become aware of a lien not released, and no action was filed against it, we release it.

 

Senator O’Donnell:

I would encourage you to audit your own 472 liens, and if they are beyond the statutory limitation, I would assume and hope your company would send a notice of relinquishment to those people.

 

Senator Care:

Just so I understand, under the old statutory scheme, before the 1999 session did what it did, if I understand this, you had 3 years to foreclose or to enforce the lien, is that correct?

 

Ms. Nelson:

Three years to file an action on the lien; that is correct.

 

Senator Care:

What affirmative act did you have to take to perfect the lien?  Did you actually have to file something after judicial review?  Were a number of liens perfected, in December of 1999, which are out there?  I am unclear what the time line is.

 

Ms. Nelson:

I think what you are asking is how do you file a lien.  There are two different stages; one is the filing or the recording of a lien, the other is a filing of an action to perfect or to foreclose on the lien.  The recordation of the lien was done pursuant to statute by the filing of an affidavit from what was formerly SIIS, and is now EICON, saying this money was due and owing.  Using Ms. Penrose’s case as an example, an audit was done, the audit was presented to Ms. Penrose, she disputed the audit, and there was a hearing.  After the hearing, it was determined Ms. Penrose owed the money and, in fact, had not provided coverage, so in that case, under the statute, the three times penalty was applied.  After that point, an affidavit was filed with the county recorder saying Ms. Penrose owed a state agency this amount of money.

 

Later, a complaint was filed to foreclose on the lien.  At that point, in Ms. Penrose’s case, the only thing pending is the complaint, because it has been up to the Nevada Supreme Court and back down again, it has not been responded to yet.

 

Senator Care:

So, 3 years from the date you filed the affidavit.  Now, my next question is, when are you obligated to file the affidavit?

 

Ms. Nelson:

Within 3 years of the determination of the premium due and owing.

 

Senator Care:

It can be 3 years plus 3 years?

 

Ms. Nelson:

Correct.  Remember, we are no longer authorized to file those statutory liens.  When we were still a state agency, it was 3 years plus 3 years.

 

Senator Care:

When we start talking about lapsed liens, was there an inordinate number of these affidavits filed so the 3 years would start ticking at that point?

 

Ms. Nelson:

To my knowledge no, but again, I can go back and check for you.

 

Senator Care:

I would like to know that.

 

Chairman O’Connell:

There is some information I would like.  This is a legislator’s worst nightmare of what can happen when you give authority to state agencies.  I would like to know how many homes you have foreclosed on, and what were the circumstances?

 

 

Ms. Nelson:

How many homes we have foreclosed on as a state agency?  In what period of time?

 

Chairman O’Connell:

In the period of time from 1995 to today, with specific circumstances, because we are not talking about any claims with this particular case.  They were covered by some insurance as a sole proprietor.  This is such a heavy-handed use of the law, it is very frightening.  Please provide us with that information.

 

Senator Neal:

What is the statutory basis for filing the lien in the first place, after you became a private company?  Did we do that transfer in the law when we allowed this agency to take the $2 billion in cash and assets and make it private?

 

Ms. Nelson:

No, Senator Neal, the statutory ability to file liens expired or went away, December 31, 1999.  Those liens filed previously, pursuant to the transitory language, could still be enforced by the new private company.  The private company could no longer file those statutory liens as state agencies had.

 

Senator Neal:

Did we put something in the statute saying the private company could exercise a lien against people’s property?

 

Ms. Nelson:

Yes.

 

Senator Neal:

For those claims outstanding prior to taking over these agencies?

Ms. Nelson:

Yes, you did.  If you look at S.B. 566, the first part of section 1 quotes the transitory language which allows us to enforce those liens.

 

Senator Neal:

So, we actually created this monster ourselves then?

 

Ms. Nelson:

I am not sure I want to answer that question.

Senator Neal:

How do we get out of it now?  Because the public has given you $2 billion in assets and cash, you did not buy this agency; we just transferred it to a private company.   The public should have something in return for that particular transaction.  They should not be left out standing where you can come and take their homes. 

 

Chairman O’Connell:

Plus the buildings.

 

Senator Neal:

Plus the buildings, that is what I am saying, assets and cash.

 

Ms. Nelson:

I understand what you are saying, Senator Neal.

 

Senator Raggio:

If I can add to this, in fairness, they were also required to take on certain responsibilities.  I think in this particular situation, we do not have the authority here today to direct you to do anything, but I think you have heard our expression of concern.

 

Senator Neal:

I beg to differ; this is a private company now, having gone from a public status to a private company, and we do have the authority to say they cannot go back and collect on those liens.

 

Senator Raggio:

Senator Neal, I am the one who proposed the bill, and I agree with you.  Ms. Penrose, when is your escrow going to close?

 

Ms. Penrose:

I only have about 45 days left.

 

Senator Raggio:

I think they understand our concerns.  Again, this was not a case where somebody was deceitful or willfully went in and hid records and things of that kind.  So, I certainly think, Ms. Nelson, you ought to encourage some reasonable adjustment.  Then, I think we would be interested in seeing your proposed amendment to address some of these concerns expressed today.

 

Ms. Penrose:

I would like to make one thing perfectly clear.  The law on the books states, they have 3 years from the date the premiums became due to instigate an action.  Employers Insurance Company of Nevada filed the lien 4 or 5 months after the audit.  I have a copy of my lien right here, and I looked at all of the lien records at the county courthouse.  Mine says, the total remaining unpaid after, and it gives the date, these liens expire 3 years from this date. Not like Don Smith did, when he attempted to perfect an action against me, he filed an action on, this was recorded November 12, 1996, so he pretended he had until November 12, 1999 to perfect this.  But, it had already expired and I did respond to that, and I did answer it, and I asked for it to be dismissed.  But, Judge Breen ignored all of this. 

 

One more thing I need to say, when it went to the Nevada Supreme Court, and all the way back down, these issues were not even touched.  It was sent back saying the petition had been filed one day late.  I object to that, I think it was just shoved under the rug.  Because, you have 30 days from the date of service, not counting the service.  It was filed on the thirtieth day.

 

Chairman O’Connell:

Ms. Penrose, we are going to take this information and look at it to see what we can do for you.

 

Ms. Penrose:

Thank you.

 

Mr. Ostrovsky:

I am sure my client, in this matter, would be more than willing to look at the terms to see if there is not some way we can settle this matter reasonably, given the facts.  Understand, if the other party does not agree to do that, and still feels the lien is inappropriate at this time or otherwise refuses, it ties our hands to some extent.  We will do the best we can to try to settle this matter and give you the other information you have required, plus the amendments you requested.

 

 

Chairman O’Connell:

How long do you think it would be before you can get back to the committee with the information on Ms. Penrose’s case?

 

Ms. Nelson:

We will try to get it done in the next couple of days.

 

Chairman O’Connell:

That would be helpful.

 

Senator Neal:

I am not concerned about just settling just this one case; many cases would fall under this, and I would like to see those settled also.

 

Chairman O’Connell:

We are going to take a look at those.

 

We will close the hearing on S.B. 566 and open the hearing on S.B. 473.

 

SENATE BILL 473:  Authorizes public bodies to use indefinite quantity construction contracts for certain public works projects. (BDR 28-746)

 

Harry H. Mellon, President, The Gordian Group Incorporated:

Thank you, Madam Chairman.  I am appearing in front of this committee today as the founder, or inventor of the family of indefinite quantity construction contracts (IQCC) currently being used in public agencies throughout the country.  I developed this process when I was with the U.S. Army Corps of Engineers as a way to help expedite small- to medium-size public works projects when we were having difficulty in hiring contractors through the traditional process.  It was taking from 6 to 10 months to hire contractors for projects which typically lasted only 2 to 3 weeks in construction duration. 

 

I have developed this process for the federal government and a number of agencies within the federal government, as well as for over 100 public agencies in 21 states.  The purpose behind S.B. 473 is to enable public agencies in the state of Nevada to use this IQCC process for accomplishing small- to medium-size public works projects. 

 

I want to make it very clear to the committee, what we are talking about is a contracting process that is competitively bid and awarded to the lowest responsive responsible bidder.  It has brought many benefits to public agencies, the first being time.  The time it takes an agency to hire a contractor has been reduced, typically by 75 to 85 percent.  It has saved an incredible amount of money, typically in the neighborhood of 10 to 15 percent of the construction cost.  It has enhanced participation of local contractors in the public agencies construction program, especially for emerging and minority businesses.  And, it has fostered a partnership between the contractors and the public agencies which has resulted in higher-quality work, less of an adversarial relationship, and fewer legal claims or changes within a more traditional system.

 

SENATOR O’DONNELL:

What is the definition of an IQCC?

 

MR. MELLON:

A contract is structured based on a catalog of construction tasks.  This catalog (Exhibit F) is a copy of one from the County of Los Angeles.  Each agency would set up a catalog of construction tasks; in other words, those items intended to be done under this contract.  Each item in the catalog would be fully described and priced, based on local prevailing wages, local equipment, and material prices.  For example, if you wanted to install a square foot of carpet in Clark County, the quality of the carpet would be priced in this catalog for the square yard cost of the carpet including installation.

 

Once the agency puts together this catalog, they go out for bid to the contracting community.  The structuring of the IQCC is, the public agency would guarantee them a small minimum dollar value of work over the period of a contract, typically about $50,000.  There is also a potential maximum on a contract, typically about $2 million to $3 million, for which the agency may use this contract.  The contractors evaluate the prices in the catalog, as published by the public agency, and they competitively bid their adjustment to these published prices, with the award going to the contractor who bids the lowest adjustment factor to the prices.  The adjustment and these prices are fixed for the first year of the contract. 

 

For example, once the contract has been awarded to Clark County School District for carpet installation in a classroom, it would contact the contractor, and jointly develop the scope of work.  They would look at the work that needs to be done, go to the catalog, pull out the appropriate tasks, and multiply it by the appropriate quantity.  The prices have already been fixed and a work order may now be issued, which is the contractor’s notice to proceed.

 

The true benefit of this program is the contractor has only been awarded a $50,000 contract, not a $3 million contract.  Each work order is predicated upon the performance of this work order.  So, if you perform well and produce high-quality results, the agency will have another job order for you up to the maximum value of the contract.

 

However, if you do not give the quality and responsiveness we are looking for as a public agency, there is no obligation to give you any work beyond the guaranteed minimum dollar amount.

 

Senator O’Donnell:

Now, I think I understand the issue, knowing what an IQCC is.  The upside is less cost to the state as a whole in constructing a building because, you do not have to go out for additional bids on every new project, is that correct?

 

Mr. Mellon:

Yes sir.

 

Senator O’Donnell:

You have one person who got the contract, and is going to do the job for the rest of the year?

 

Mr. Mellon:

Typically, most agencies will have a number of job-order contractors based either on specialty items of work or geographical regions.

 

Senator O’Donnell:

The down side is, every new facility which comes on-line to be bid really does not get to bid.  Is it every new facility, or is this just one contract for the same facility to be built for the entire year?

 

Mr. Mellon:

No sir, it is not for that type of work.  It is for small- to medium-size repair and maintenance projects; for instance, the painting of a classroom, the re-carpeting of a library, the patching of a roof.  You would not build a new school using this process. 

 

Senator O’Donnell:

I used to sell carpet going through college so I am very familiar with this kind of contract.  Would this preclude that?  Would this just give one person the contract for a period of a year, if you did good work?

 

Mr. Mellon:

Not typically.  What normally will happen for agencies adopting this process, this is just another tool in their contracting toolbox for those projects, which makes more economical sense for them to use.

 

San Diego’s (California) schools, for example, use job-order contracting for roughly less than 10 percent of their budget.  The same is true for New York City schools.  So, it does not preclude further bidding on other work at all.  Most state agencies, as I mentioned, have several job-order contractors usually broken up by geography or by trade.  They have a large number of contractors holding these contracts.

 

Senator O’Donnell:

If it is only 10 percent, what is the savings to the state then?

 

Mr. Mellon:

Typically, what I have found was these smaller projects, which end up with 10 percent of the money, take 80 percent of the time.

 

Senator O’Donnell:

It is a time saver.

 

Mr. Mellon:

It is a time and money savings.  On each of these projects you are going to save money.  When I was the chief engineer, I had this huge number of projects to put through the traditional bid process, and I was spending about 80 percent of my time on 20 percent of my dollars.

 

Senator Neal:

Are you familiar with the Minimum Property Standards (MPS) utilized by the U.S. Department of Housing and Urban Development (HUD)?

Mr. Mellon:

No sir.

 

Senator Neal:

It seems what you are talking about is, in order for your agency to award a contract, it goes through this book to determine what is needed and sets a price on it.  I was just trying to fully understand where you were going, since you have pre-made an IQCC.  What do you mean by indefinite quantity?

 

Mr. Mellon:

The quantities of the items in the book are not identified at the time of bid.  What you have done is you have given out a catalog with several thousand items, but you have not said how many of those items you are going to order.  So, the quantity is indefinite.  It has not been defined as part of the bid.

 

Senator Neal:

When you set out to formulate this into units . . . .

 

Mr. Mellon:

Then it is defined, absolutely.  It is defined in each work order.  If a school decides they want ten doors, it is defined as ten doors and ten doors are ordered at the price in the book.

 

Senator Neal:

Where would a school system get this information?

 

Mr. Mellon:

I will let Fred Smith answer that one.

 

Frederick C. Smith, Construction Manager, Facilities Division, Clark County School District:

To answer your question, Senator Neal, I know you all are aware of the tremendous growth in Clark County, particularly in our student population and therefore, you are very familiar with the number of new schools being constructed.  What many people may not realize is the tens of millions, even hundreds of millions of dollars of work in our existing schools for rehabilitation, modernization, and renovation.  This is the type of work we would use the IQCC to do.

 

To answer your question directly, in order to set up an IQCC, we would, with the authority of our Board of School Trustees, engage the services of Mr. Mellon’s group, The Gordian Group, to actually assist us in developing and implementing this concept for the Clark County School District.

 

Senator Neal:

So, you would get your information from the various dealers in terms of making up this booklet?

 

Mr. Smith:

I think Mr. Mellon can address more accurately how the prices in the book are actually developed.

 

Senator Neal:

This is what I am concerned about.

 

Mr. Mellon:

For each item in the book Clark County School District elects to put in its catalog, we will survey the market in Clark County and get representative pricing for materials and equipment, and use a prevailing wage for the various trades who would be performing that task.

 

For example, to install a three-foot by seven-foot hollow core wooden door, the crew consists of a carpenter and a helper.  We would use a prevailing wage for the carpenter and the helper for the estimated 45 minutes it would take to hang the door.

 

Senator Neal:

How would you determine the cost of a door, if you had many doors to order? 

 

Mr. Mellon:

We will take each door and get two or three independent prices from local vendors and price at the retail level, knowing every contractor can get some level of discounting.  Better contractors can get better discounts.  They take that into account when they bid the book and come up with their adjustment factor.  Every contractor will look at the pricing in the book differently, based on his or her own business experience.

 

 

Senator Neal:

How long would that cost last?

 

Mr. Mellon:

One year.

 

Senator Neal:

Just 1 year?  What if after 6 months, the costs change?

 

Mr. Mellon:

The contractor has to include in their adjustment factor, any contingency or escalation.  They would anticipate as they do now in their bids.

 

Senator Care:

It says in section 5, subsection 5, paragraph (b), an IQCC is not a contract, but it says that it is for purposes of NRS 338.400.  There is a definition of a contract, and I think what you are saying is, it is a contract, but not as defined under NRS 338.400.  Is that it?

 

Mr. Mellon:

That is correct, sir.

 

Senator Porter:

Regarding the successful bidders, are they the IQCC contractors?  How many could or would there be?  Could you have ten with an agreement on carpet?

 

Mr. Mellon:

Typically, what would happen, for example, if you look at somebody like the New York City Board of Education, they have a team of four contractors assigned to each borough.  The nature of the work would determine the allocation of which contractor they would use for a particular project.  There is a general contractor, a mechanical contractor, a plumbing contractor, and an electrical contractor.  So, if the predominant trade of the work order to be done was electrical, then it would be assigned to the electrical contractor in that borough.  I think Clark County schools envision the same sort of geographical breakdown within their school system as well.

 

 

 

Senator Porter:

So, you would not only have a catalog of drywall applications, but you would have a catalog of IQCC contractors you would use?

 

Mr. Mellon:

Yes, each of those contracts has already been competitively bid and awarded to the lowest bidder, so part of the contract is, in which sector would this contractor be working?  You are not competing the contractor again, after you do the initial bid, for 1 year.

 

Senator Porter:

You would advertise for these contractors to bid?

 

Mr. Smith:

In working with the local construction industry in the south, we had developed a three-phase implementation plan.  The plan was structured such that, to get the program off the ground, we would envision awarding one set of contracts to cover the entire Clark County School District for the first phase.  We would then step back and assess the success or the problems encountered.  Whatever changes need to be made would be done before we begin phase two.

 

Phase two would be to actually award a second set, and divide the district in half, east and west, if you will.  Another assessment would be done of any problems encountered and eventually, with our superintendent’s vision of five regions within the Clark County School District, we would envision five teams of contractors, one for each region.

 

Senator O’Donnell:

In Clark County, I have received a number of complaints about the timeliness of payments on contracts.  When you build a school, do you have all the money you need to finish the job at the time you start the construction on the building?

 

Mr. Smith:

Yes, we do.

 

Senator O’Donnell:

Is that money inclusive of any extras?

 

 

Mr. Smith:

Yes, there is money programmed in the form of a contingency fund to cover any extras authorized by change orders.

 

Senator O’Donnell:

Beyond the extra amount of money, is there any extra money available?

 

Mr. Smith:

When we program each of our bond programs, there is a contingency fund for each and every project.  There is also a contingency fund for the overall program.  There has not been a project yet, where we have had change orders of a magnitude that funds would not cover.

 

Senator O’Donnell:

Why do we have a lot of complaints from a lot of different contractors saying they are not getting paid from the school district?

 

Mr. Smith:

This issue is probably a separate subject.

 

Senator O’Donnell:

I know you are trying to sidestep this question.  Why not answer it for me?

 

Mr. Smith:

Most of those cases you are referring to have to do with subcontractors.  We have issued, what is known as a construction change directive to the general contractor because we have not been able to identify a lump-sum price for the work ahead of time; but we do need to get the work started, then it is incumbent upon the general contractor and his subs to provide to us all of the backup material.

 

Number one, it takes the contractor and the subcontractors a pretty extensive amount of time to gather all backup materials.  Most of the time, when we start submitting the material, we will discover anomalies in it and we get into negotiations, which take time.

 

Senator O’Donnell:

Let me give you this example.  I need this ditch dug because they are going to put the phone conduit in here, and I need it dug now.  I do not have time to go out and get a contract, just dig it.  The guy says, “Well I am not going to dig it until I get a signed change order,” then you say,  “No, just dig it.  We will negotiate all that stuff out later.”  Then he goes ahead and he digs the trench, and he sends you a bill.  You object to the bill because, that is what you always do.  You never sign it ahead of time.  Is that kind of procedure prevalent in building schools in the Clark County area?  I know I am deviating from this, but I can tell you, I have a ton of people who have complained to me about not getting paid.

 

Mr. Smith:

I would answer you in all honesty, Senator O’Donnell, it is our intent and desire to issue less construction change directives and to be able to negotiate more lump-sum contracts upfront.  It is not always possible, but the scenario you have described is more prevalent than any of us would want it to be.

 

Senator Porter:

Do you do something similar to this with your heating, ventilating and air conditioning (HVAC) and your electronic equipment, computers, and copy machines?  Do you have a service contract with companies you work with throughout the year?  Is this similar, only in the construction end?

 

Mr. Smith:

If I understand your question, Senator Porter, I am not sure I am in the best position to give an answer on types of contracts which may exist within our purchasing department for such services.

 

Senator Porter:

With HVAC, do you have multiple companies to help you, or do you do that in-house?

 

Mr. Smith:

We do have some “on call” contractors for HVAC services when we get into the heat of the summer, but most of the work we try to do within district maintenance.

 

Senator Porter:

So, it is not like you have negotiated a contract in advance for some of these service areas?

 

Mr. Smith:

You did mention one area, the HVAC, where we do have some “on-call” contracts for that type of service, yes.

 

Senator Porter:

You are not sure about your electronics or is that an issue for another time?

 

Mr. Smith:

Some of the items such as copier repair and computer repair are not handled by my construction department.  I do not have the answer.

 

Senator Porter:

Could we check into it sometime?  It seems like this could be another area to use some of the information you have provided today.

 

Mr. Smith:

It may possibly be, but some of the repair of electronic equipment for example, does not fall within the purview of a public works, which is what this process is intended to address.

 

Senator Neal:

You partially answered my question.  I wanted to ask in what area would these contracts apply, and you said public works.  You have an expenditure limitation of $1 million, so what type of public works projects would be anticipated under this new definition?

 

Mr. Smith:

A good example is if you were looking at renovating this room, and putting in a new ceiling, new doors, painting the walls, and replacing the carpet, it would be the type of a renovation project that would probably be done, and most certainly would be less than $1 million.

 

Senator Neal:

In this example, what would be the difference between awarding a regular contract, and the indefinite-quantity type contract?

 

Mr. Smith:

The big difference is time.  If I were to do a normal procurement action, I would actually engage an architect or an engineer to produce a set of plans and specifications for the sole purpose of issuing them to contractors, in order for them to understand the scope of work and be able to bid on the work.  It is a very time-consuming process to get the design and procure the work. 

 

Under the IQCC, it is just a matter of me giving a contractor the scope: “I want you to do this.”  The contractor actually would take the books and prepare his proposal of the scope of work needing to be done.  We check it and agree to it, and issue a notice to proceed.  The contractor is off and running in just a matter of a few days.

 

Senator Neal:

Is this something similar to what we call design-build?

 

Mr. Mellon:

No.  I think the biggest difference between this and design-build is public agencies select design-build contractors based on qualifications and other experience, not on the basis of low bid.  This is a low-bid contract.

 

Mr. Smith:

I also envision most of the work awarded under this IQCC would not require any design.  We have actually structured our implementation plan to where, if any design is required, we, the district, would provide it.

 

Mr. Mellon:

Senator Neal, in my experience, we were spending, as a public agency, 6 to 10 percent of the cost of construction in preparing the bid documents.  Often, we did not need them for any engineering or architectural reasons; we needed them for procurement reasons, and we needed to have a bid package. So, we were spending up to 10 percent of the cost of construction just to create a bid package.  Using the IQCC concept, you save that 10 percent.

 

Senator O’Donnell:

In New York City, when they have used this kind of process, has it contributed to any cronyism, nepotism, or corruption in terms of awarding of the contracts?

 

Mr. Mellon:

Absolutely not, in fact, the process has been absolutely clean because of the checks and balances put in place by the procedures.  Last year the New York City Board of Education used this process for over 1000 individual projects, valued at over $30 million.  There were no claims, no lawsuits, or disputes filed on any of this work, nor charges of corruption or malpractice.  All of the documents are public documents.  They are open.  It is clearly a bid document with prices and quantities established.  Everything is on the table, Senator O’Donnell.

 

Chairman O’Connell:

Has there ever been, in any of these jurisdictions, any claim of corruption or problems?

 

Mr. Mellon:

No, the only incident was in Philadelphia, where the agency did not follow the procedures set forth.  The contractors just disagreed, but there was no fraud, no convictions or anything like that.  They just felt they might have paid too much.  It was only one case.

 

Madam Chairman, it has been used extensively in major school systems in the country, for example, in Miami, New York, Chicago, San Diego, and San Francisco.  We just established a program for all the campuses of the California State University system, University of New Mexico, and Albuquerque Public Schools.

 

Chairman O’Connell:

Mr. Smith, as I understand it, one of the advantages of this system is you eliminate the change orders, is that correct?

 

Mr. Smith:

Yes, that is correct.  If we identify any work not included in the original contract or project another contract is issued.  It would also assist in what Senator O’Donnell was referring to, because the price is known up front.  It speeds up the payment.

 

Chairman O’Connell:

Committee, any further questions?  Is there anyone else wishing to speak in favor of S.B 473?

 

 

 

Warren B. Hardy II, Lobbyist, Associated Builders and Contractors of Southern Nevada:

My comments are along the lines of qualified support for the legislation.  We appreciate very much Mr. Smith and Mr. Mellon meeting with us to try to resolve our concerns.  Anytime these kinds of new programs come up, we are always concerned about what the long-term and short-term impact would be.  They have done a wonderful job of addressing our concerns.  Our concern now is, we do not really know what the impact would be.  I have met as late as one-half hour ago in the hallway, with Mr. Mellon and Mr. Smith.  We agreed to work with them to come up with a limited scope, if the committee so desires, to develop a pilot program to look at what the impact of this would be.  We think the draft implementation plan is probably a good place to start in terms of building a pilot program into legislation.

 

I think Mr. Smith and Mr. Mellon have given satisfactory answers in terms of how they have written the legislation.  But, I do not think anybody, until we have had a chance to see how this works, can determine what the actual impact is going to be on many of the questions from the committee.  We support this legislation.

 

Chairman O’Connell:

Mr. Hardy, has there been any networking with the areas where this has already been instituted, where your questions could be answered, as far as the impact?

 

Mr. Hardy:

We have talked to other chapters and the results seem to be good.  It is such a new program, and there is still uncertainty in terms of how it is going to ultimately play out.

 

Senator O’Donnell:

Does it depend, Mr. Hardy, on who you ask?  If you ask the guy who got the contract, he is very much in favor of it; the guys who did not get it are probably not so excited about it, but look forward to the chance to get it the next time.

 

Mr. Hardy:

I would say it certainly would potentially depend on whom you ask.

 

Chairman O’Connell:

Are there any other questions for Mr. Hardy?

Cheryl Blomstrom, Lobbyist, Nevada Contractors Association:

We have looked at IQCC, also known as job-order-contracting over several years, including, looking at a proposal from The Gordian Group to the Washoe County School District several years ago.  We have some concerns.  We also met with Mr. Smith out in the hallway, and are looking at his phase-one program as a possible way to narrow the scope of this particular proposal.  Our concerns are, the guy who gets the contract is very happy with it, and for a period of 1 year, the rest of the folks in the community are not particularly happy. 

 

We also have some concerns on how local bidders might be encouraged to bid.  As you know, we have taken some steps to fix that this session.  We would be very happy to work with Mr. Smith and The Gordian Group to see what we can do to craft some sort of an amendment.

 

Chairman O’Connell:

I wonder if you could be a little bit more specific as to your concern as far as the bidding process goes, since it is a public bidding process?  What are your concerns?

 

Ms. Blomstrom:

We liked the idea of the lowest responsible responsive bidder.  We support it as always the most appropriate way to bid the majority of public work.  Our concern is there does not appear to be any consideration of a lowest responsible local bidder, or a bidder’s preference being given.  I do not find it in here, and I am not sure how that would factor into a unit-price bid.

 

Chairman O’Connell:

Since that is the law, would it not have to apply?

 

Ms. Blomstrom:

I do not know.  I do not see it captured here.

 

Chairman O’Connell:

I think it would, would it not Ms. Guinasso?

 

Kimberly Marsh Guinasso, Committee Counsel:

Yes, it would.

 

Chairman O’Connell:

Okay.  Is there anyone else wishing to testify?

 

Gary E. Milliken, Lobbyist, Associated GENERAL CONTRACTORS-Las Vegas:

We have several concerns with this bill as it was originally written.  Since then, I have met with Mr. Smith.  If they want to do a phase-one program just for the Clark County School District, to see the efficiency of this program, if it really does save them money, and falls under the bidding preference areas, we would be glad to work with them on the language.  We would like it narrowed to that one program, and we can come back and take a look and see if it really does work.

 

Chairman O’Connell:

Committee, questions?  Is there anyone else who wishes to address S.B. 473?  We will close the hearing on S.B. 473 and open the hearing on S.B. 487.

 

SENATE BILL 487:  Authorizes additional types of investments for money in certain public funds. (BDR 31-359)

 

Brian Krolicki, State Treasurer:

We have some very complex issues to speak about, and there are some housekeeping issues.  You have the treasurer’s omnibus bill in front of you.  I will try to touch on every section just very briefly, but also try to give an overview so we can answer questions.

 

First, S.B. 487 pertains to the investments of money in the jurisdiction of the treasurer’s office.  One of the more important concepts in this legislation is the big gray area as it pertains to certain monies, and the possibility of investments in the equity markets.  Currently, the state treasurer’s office manages the permanent school fund.  By definition, principal only grows, and only interest and earnings can be used to supplement certain things such as the state distributive school account.  This money is long-term and we have some other monies which are long-term.  It is not clear whether or not investments in equities would violate Article 8, section 9, of Nevada’s Constitution, which essentially states, “The state would not lend its money or credit to private entities.”

 

What this legislation hopes to do is demonstrate where equity investments would make great sense.  I think it is somewhat malfeasant and non-fiduciary to not have the ability to have diversified monies in some of these accounts.  But, even if this legislation were to pass, the ability to proceed with these types of investments would require judicial determination to clarify this issue once and for all.  So, it would no longer be a gray area.

 

MR. KROLICKI:

Section 1 of S.B. 487 is about the permanent school fund, at about $82 million today.  Only interest and earnings are used to supplement activities; the corpus must remain in tact so, by definition, this is 50- or 100-year money.  A balanced approach to the market would make great sense, and I would submit to you, an equity investment would be prudent.

 

Section 2 is a housekeeping item.  It concerns the ability to invest general fund and other monies in the Federal Agricultural Mortgage Corporation securities, called “Farmer Mac.”  As the agency market gets bigger and the treasurer’s market shrinks, over 90 percent of the treasurer’s portfolio, the general portfolio is in treasuries and agencies; this is just a security we are seeing more of.  It is a guaranteed instrument by the U.S. Department of Agriculture.  We think it would be a beneficial thing to add to the capability of the portfolio.  Local governments would also be affected.

 

Section 3 would allow local governments to also purchase these securities.  Sections 4, 5, 6, and 7, pertain to the bill you are hearing next (S.B. 488).  These are monies, trust funds, which have been established, and would be largely affected if the next bill, (S.B. 488) becomes law. Those are the trust funds associated with the tobacco settlement.  Essentially what this does, it allows the ability to invest this longer-term money in equities, as with the permanent school fund. 

 

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)

 

Mr. Krolicki:

If we were to securitize these monies or the 10-year/20-year monies, for example, the trust fund for public health, it would be similar to the permanent school fund where only interest and earnings can be used.  We would like to present the opportunity for an equity opportunity with all of these trust funds. 

Even if securitization does not happen, it would still be beneficial for the millennium trust fund and the trust fund for public health to have this option in investments.  I do not have an amendment, but in some conversations, I found one request to be very appropriate: Even if it goes to the board of finance and other review processes, the assets in equities would be managed by professional money managers.  This is what we currently do with the prepaid college tuition program.  Currently, the treasurer invests most of the portfolio internally, we buy treasuries and agencies, as we discussed.  We do not have the in-house expertise for equities.  We would farm this out.  I am completely comfortable with the request I have been handed, and I just need to get the language for you.  The investment parameters would remain the same, but would need to be completed by a professional money manager.

 

Chairman O’Connell:

Mr. Krolicki, let me stop you, Senator Raggio has a question.

 

Senator Raggio:

This is an issue we have talked about previously on other types of investments.  I have always leaned toward the ability to invest in the equity market, but in recent months, as you know we are in what nobody seems to want to call it, a bear market.  There have been considerable losses sustained.

 

Since we are dealing with these kinds of public funds, how advisable and how secure would it be to allow investment in stock on the national stock exchange or, the over-the-counter market.  Is it limited to National Association of Security Dealers Automated Quotations (NASDAQ)?  If companies are large, with a total market value of over $50 million and your investment is not greater than 60 percent of the book value of the total investments, in this case I am looking at section 1 which deals with the state permanent school fund, I think you have the same limitations elsewhere where you are dealing with other funds.  What is in the language to minimize risk when you have an uncertain market?  The NASDAQ has taken a considerable drop or sustained a considerable loss because of the types of companies represented there.  What is in here to give us some reason to feel secure?

 

Mr. Krolicki:

I think that is why I am no longer a broker.  It is hard to give those; there is no such thing as a guarantee.  To try to answer, this is a great time to buy!

 

Senator Raggio:

When I first got into investing, I was told to buy when it is the lowest and sell when it is the highest and I have always adhered to that.

 

Mr. Krolicki:

The permanent school funds, the trust fund for public health, and the Millennium Scholarship, to a point, are long-term monies.  It is very similar to the Public Employees Retirement System (PERS); there is no way to insulate from market risk.  I must remind you, when we have a fixed-income portfolio, and interest rates go up, we have lost money.  When rates go up and I am locked in at a certain rate, the value of the portfolio goes down, because I have an average yield of 6 percent, but the market is yielding 7 percent.  For me, I am going to sell it for less than par, so there is plenty of risk on the fixed-income market side.  Orange County went bankrupt in fixed-income securities.  There is no guarantee; I certainly think equities have a higher risk attachment.  The idea here is for 10- to 20-year monies to balance out over a period of time.  Fixed-income was not doing as well as it has in a couple of years, and the equity markets are just unbelievable.  Over a period of time it does balance out.  By only having one egg in the basket, fixed income, I think we are also at risk. 

 

It is prudent and sound fiduciary management to have a diversified portfolio.  You hear it all the time, and this is exactly what I am trying to accomplish.  Also, to clarify what has long been a gray interpretation on the state’s constitution, I apply this to the general portfolio, the checkbook money of the state.  Monies, by definition, are in perpetuity for a long time, and I think a balanced approach is what we need to do.

 

Senator Titus:

Forgive me, if I do not get this jargon right, but I have two questions.  One, how does this fit with the questions voters turned down about investments from the treasurer’s office?

 

Mr. Krolicki:

Forgive me if I do not have the right answer because I am a finance guy not an attorney.

 

Chairman O’Connell:

I think it was question one on the ballot.

 

Senator Titus:

It allowed you to invest; it was to attract development companies, venture capital.

 

Mr. Krolicki:

That was question five on the ballot one year and it has never done well.  I think this money is different because, it is not General Fund money.  It is not sales tax and gaming revenues we have had questions about.  It is like the prepaid tuition program and PERS; individual contributors have a special trust fund and the question is whether or not the trust fund is under the constitutional purview.  To me, the tobacco monies are from extraordinary settlement fines with certain companies.  They are not traditional revenues for this state.

 

Senator Titus:

I guess my question is not a legal question, it is more of a political question, how do we tell the voters we have expanded your right to invest when the voters have just told us “we do not trust you to invest” in things that are kind of shaky?

 

Mr. Krolicki:

You approved the prepaid college tuition program 3 years ago, and we invest in equities.  I just think it is a different category of asset.  I realize it is subject to some discussion by judicial determination.  It is a question, which is why judicial determination is in there, to address these issues and the constitutional issues.

 

Senator O’Donnell:

On the Millennium Scholarship money, that is basically private money, which people have entrusted to the treasurer of the State of Nevada to invest appropriately.  Is it also tobacco money and private money, two different accounts?

 

Mr. Krolicki:

It is private money.  It is from four large tobacco companies making payments under the Master Settlement Agreement entered into by 46 states in this country.

 

 

 

Senator O’Donnell:

Do you not have another account with money people give you to pay for their son or daughter’s college education?

 

Mr. Krolicki:

The prepaid college tuition program is a different animal.

 

Senator O’Donnell:

Is that part of this at all?

 

Mr. Krolicki:

No.

 

Senator O’Donnell:

This is just the tobacco settlement?

 

Mr. Krolicki:

I am just using this as an example because it is an area where the treasurer is responsible for investing the assets, including equities.

 

Senator O’Donnell:

Are you allowed to invest in any land or real estate buildings?

 

Mr. Krolicki:

No, this would allow real estate investment trust and things like that, but the fund could not buy the EICON building if it wanted to.

 

Senator O’Donnell:

Beyond the parameters of the legal decision, it could not go directly into purchasing land or real estate assets?

 

Mr. Krolicki:

That is my understanding.

 

Senator O’Donnell:

Just looking at the overall economy and looking at what is happening to California, California produces 13 percent of the Gross Domestic Product  (GDP).  With the advent of the increase in power bills, every product coming out of California will have a higher price tag, which contributes to inflation.  One of the best hedges against inflation is real estate.  Would you want such expansion in this bill?

 

Mr. Krolicki:

At this point in time, I would just be a happy camper to have equities.

 

Senator Care:

Mr. Krolicki, I have often wondered if any government were to do this, in the case of the Millennium Scholarship money, nobody has said it and I do not think there is anything in here, it would obviously be inconsistent to use this money to invest in tobacco companies.  There are taxpayers out there who say they do not want their money going to certain companies, which begs the question; who would make the determination?

 

Mr. Krolicki:

For example, companies like Philip Morris are very active in corporate debentures, and commercial paper, which is something we buy every day.  It is a great short-term piece of money.  There is no prohibition in statute and there is no prohibition in investment policy, which is approved by the State Board of Finance, created by the treasury.  There are no rules against it, however, for example, I have no investments today in the tobacco industry.  I have no investments in the nuclear industry.  I misspoke, I do have some tobacco exposure if you will, but the nuclear issue I think is so third rail here in Nevada it is just not worth the headache if I can get quality paper.

 

My job is to be the best investor of the assets of this state.  If I am comfortable entering into a billion dollar or two agreement through the attorney general and approval by this body, it is difficult for me to boycott R.J. Reynolds or Philip Morris paper.  We do not have a lot of it; it is just whatever happens on a daily basis.  But, there would be discretion at the treasury level.

 

Chairman O’Connell:

Is any of the long-term money encumbered by any bonding against it?

 

Mr. Krolicki:

No, there is no encumbering.  On the next bill S.B. 488, when we talk about securitization, if there is a philosophical agreement, this is something good and these words work, then all of a sudden, we have a new “critter.”  Even that would not be an encumbering of the money.  The whole idea is to get away from that.

 

Chairman O’Connell:

So, we do not have any "inbondedness" against that money as secure?

 

Mr. Krolicki:

Correct.

 

Chairman O’Connell:

Is there anyone else who would like to testify on S.B. 487?

 

Carole Vilardo, Lobbyist, Nevada Taxpayers Association:

I understand the need for the bill.  I definitely have some concerns relative to looking at the market.  I do not want to find any regulated markets suddenly, as is worded on page 2, “any recognized market.”  All I could think of was, Chicago Mercantile, cotton stocks, pork bellies, and so forth.  Somehow I would like to know we are not getting involved with that. 

 

I am comfortable with Mr. Krolicki saying if the policy decision is from the committees, to go forward with expanding the types of investments with professional financial managers.  We would look at some benchmarks to report back, so we could see the effect of this over the first 2 years.  To that point, I would not have a problem with the bill mechanically.

 

Chairman O’Connell:

Are you talking about the amended language Mr. Krolicki suggested?

 

Mr. Krolicki:

If I may, I certainly appreciate the professional money manager approach, which is what we do under prepaid and is assured.  Ms. Vilardo may have some concerns about the type of equity investments.  The LCB does a great job of drafting the bill language, but I am happy to make sure all of the language of concern to certain folks is addressed.  We are not here to be aggressive.

 

Chairman O’Connell:

Is there any one else on S.B. 487?  We will close the hearing on S.B. 487 and open the hearing on S.B. 488.

 

(A proposal to sell the tobacco settlement proceeds was passed out to the committee [Exhibit G].)

 

Mr. Krolicki:

This is the securitization bill we have been talking about for well over a year.  Madam Chairman, if I may, I know we are here to look at words and law.  Did you want to try to go through the booklet (“Tobacco Settlement Securitization Proposal” [Exhibit H.  Original is on file in the Research Library.]) which describes what a securitization is and why we are looking at it, or did you just want to talk about the statutes in front of you?

 

Chairman O’Connell:

You might just want to hand them (Exhibit H) out to us and go through it.

 

Mr. Krolicki:

There is a quick overview in the first two pages.  We settled into an agreement with the tobacco industry, the Master Settlement Agreement (MSA), and 46 states signed on.  Nevada is due, in the next 25 years, approximately $1.2 billion if the MSA schedule is adhered to.  In that schedule, there are a variety of variables which really can affect the state negatively on whether or not those monies will actually be forthcoming, or be forthcoming in full.

 

The risks are many.  The federal government justice department looked at litigation, as did the states in the MSA, and the Europeans are looking at it also.  A civil case which I am sure many of you are familiar with, is a Florida civil case called the Ingle Case.  In just one civil action, there is $145 billion settlement.  It is likely to be reduced on review and appeal, but it is still a $145 billion exercise and there are bankruptcy variables involved.  Moody’s Investors Service in New York, one of the major credit-risk and state-risk rating agencies, has projected a scenario where the tobacco settlement to Nevada may only be worth $922 million, $300 million below what we have projected to receive, because of reduction in the sale of tobacco products. 

 

We have a stated goal in the American Cancer Society; we want to reduce smoking.  Our goal is reducing it by about 50 percent in the next decade.  I hope we are all very successful in these efforts.  At the same time, I do not think we would all be delighted to see this $1.2 billion settlement decrease by hundreds of millions of dollars.  Just note, Nevada has received about $42 million last fiscal year from tobacco taxes.  So, we are about $100 million dependent on the tobacco industry in Nevada.    I do not want to attack what is a good strong goal of reducing smoking, but at the same time we may be shooting ourselves in the “fiscal foot.”  This is why this plan is before you today.  It is called “Securitization,” and essentially it means, we would be selling all future payments to Nevada, under MSA, to the marketplace for a sum of money up front which allows us not to be concerned about the health of the tobacco industry, or these payments happening for 25 years. 

 

The funds, which we would still allocate exactly how the legislature determined, would be secured up front in a trust fund.  What is the value of $1.2 billion in today’s dollars?  The present value is around half a billion or about $500 million.  I have pursued a plan called “turbo” in some circles, and called “full apply” in others.  Essentially, it would dedicate all the monies received from the tobacco industry to the service of these bonds through establishment of a not-for-profit corporation.  Essentially, the state would have no liability for future diminishment of payments or termination of payments.

 

Chairman O’Connell:

Mr. Krolicki, is this modeled after anything else or is this your own vision?

 

Mr. Krolicki:

We have had some of our friends on Wall Street and some of the legal counsels work with us.  In the booklet (Exhibit H), there are newspaper clippings which demonstrate other states’ participation in securitization.  Alaska is in here and, there are some local jurisdictions.  There have been clippings and newspaper events (Exhibit I) since this book was created.  South Carolina sold almost $1 billion in tobacco bonds, including a $200 million portion which was taxable.  By the nature of what we are using our monies for, Nevada would be looking at a taxable transaction.  Florida is looking at a $700 million deal, and Wisconsin is looking at it.  I do not want to be a pioneer in this transaction.  I want to make sure it works and see the market’s reaction.  I can assure you, this is a tried and successful technique and I would never subject our state to a beta test site for something like this.  I also do not want to be the last out of the chute, because, how deep is the market to purchase these things?

 

As I mentioned, the present value of these monies, under tab I, page 14,  (Exhibit H), the first column, shows 25 years of the settlement.  Next to that, you have the WEFA (Wharton Economic Forecast Associates) base case, and those are the payments Nevada is scheduled to receive under the MSA; however, that number is subject to change.  That is the WEFA scenario, and there is your $1.2 billion.  The present value is $500 million.  The rating agency, Moody’s Investors Service worst-case scenario is $922 million, and the present value of that is $402 million.

 

Mr. Krolicki:

Page 15 describes what we can expect in a securitization and proceeds up front.  There are many different ways to do this, and I think completely weaning Nevada of the tobacco monies is critical so all monies would go to debt service.  Essentially, these would pay the bonds in about 15 years, but the structure we have investigated and studied most thoroughly suggests we would sell bonds in the model of about $415 million.  We would have to set up reserves to enhance the credit quality to the market, because we do not want to be paying a high rate of interest.  Then, we would have the proceeds available for the state.  When you look at that, I want to make sure no one is thinking it costs us ten scores of millions of dollars to do this.  It does not as there are residuals after year 15.  Depending on how you structure it, we could structure this securitization with these numbers to get a future value if we are going back to how this compares to the $1.6 billion.  So, there are lots of moving pieces, this is just the model we have chosen.

 

On page 16, you will see a summary of six cases I am offering, but we can do it in many different ways.  On page 17, case 1 shows the interest earnings from investments.  You will see there is a difference between what the state would be receiving under the MSA and what the annual cash flow would be under this model.  I suspect the legislators probably would not want to see the MSA payments in year 2005 of $41 million, only being almost $19 million.  You do not want to lose the value of the dollar, but you can see the future value of that is $1.4 billion.  It is just a matter of how you draw the money out; the rate of draw down on what you want to do.  It also has to do with the monies being earned.  On this model it is 5 percent, assuming fixed income only.

 

On the next page, with the balance portfolio including equities over a long period of time, you could expect something more like an 8 percent number.  So, all of a sudden in 2005, you have a $30 million cash flow, which gets much closer to the low 40 number you are seeing here.  I have two cases I would recommend to this body with all due respect.

 

 

Mr. Krolicki:

One which optimizes the money of the fiduciary side, is case 4.  The other recommendation is case 6, which matches the cash flow under the current MSA.  If I were a legislator, making these kinds of decisions for the trust fund for healthy Nevada, I would not want to have less money than what I think I am going to have under the MSA if I did not securitize.  So, we have done a model which matches that cash flow.

 

On case 4, if we have the abilities to invest in equities, instead of matching the MSA purely, again, this MSA number can change.  The Moody’s Investors Service number is far less than this, but if we took just 91 percent of the earnings and the monies, we are very close to where the MSA is, and under this scenario, you have a clean run for 25 years with the value essentially the same, the $1.2 billion versus the MSA, risks aside, of $1.28 billion.

 

Case 6, page 22, is the matching cash flow, which has the investment in equity capability and matches the MSA exactly.  The problem with this model is, as we retire the debt in 2014 and 2015, we do not have enough money coming out of the trust fund to match, so there would be a hole.  Fifteen years from now we would either need to reserve for it or know we need to “one-shot,” and then the debt is paid off.  Then, we come down exactly to the payments received under the MSA.  Under the private not-for-profit corporation, there is no longer debt, we would just be receiving payments from the tobacco industry again, but at least we have gotten 15 years of insulation.

 

Senator Raggio:

I am still not clear how this is proposed to work.  Just to make it easy, let us say we are talking about $1.2 billion and the present value of $500 million.  You form a nonprofit corporation for the state, then we sell our future right to these funds to a third party.  What does the state get under this proposal?  Does the state get some bonds from this third party?

 

Mr. Krolicki:

We get cash; we are going to get about $400 million.

 

Senator Raggio:

I am talking about the $500 million present value.

 

 

Mr. Krolicki:

Under this securitization proposal, this would generate over $400 million, there would be reserves and so forth, but you would invest that money.  The state would get the cash and divide it up.

 

Senator Raggio:

You would sell it to whom?

 

Mr. Krolicki:

We would sell it to the market. 

 

Senator Raggio:

I am looking at something here about issuing bonds.  Are we talking about the issuance of bonds?  I am just not clear, what is the issuance of the bonds?

 

Mr. Krolicki:

The bonds would be issued by this corporation.  We would assign all future payments under the MSA to this corporation for a lump sum of money.  Under this scenario, over $400 million, future value gets us back to, if not beyond the $1.2 billion, but we would have the money up-front.  That is when the last piece of legislation (S.B. 487) would be important, because we are investing the money under the same percentages as we have determined for the trust fund for healthy Nevada, public health, and the Millennium Scholarships.  Those trust funds are separate. 

 

We are done, except for some enforcement things, but the corporation would issue the bonds, the market, we would go through an underwriter, in New York they would sell $400 million worth of these tobacco securities and the debt service would be from . . . .

 

Senator Raggio:

Let me understand this because you are getting by me.  How do we evidence our right to these funds?  By bonds, is that what you are saying?

 

Mr. Krolicki:

We have that right now, because we have signed off on the MSA.  It is our asset today.  We have entered into this agreement to receive these monies for 25 years.

 

Senator Raggio:

I still do not understand what the bonds represent.  What are the bonds?

 

Mr. Krolicki:

The state would not be selling bonds. 

 

Senator Raggio:

Why does S.B. 488 talk about the issuance of bonds?

 

Mr. Krolicki:

It allows the state to move this future cash stream to a not-for-profit corporation to issue bonds.  This corporation would be created by the treasury.

 

Senator Raggio:

I understand that this would authorize the creation of a nonprofit corporation.  And it would be for what purpose?

 

Mr. Krolicki:

For the purpose of issuing the bonds to allow the state to receive its money up front and not have any liability in the future, should payments from the tobacco industry, under the MSA, come up short so it cannot service the debt of the bonds.  It is important to have this third party.  Let us say the MSA falls apart or there is a bankruptcy, and the monies are not there.  The bondholders would not be paid in full.  We do not want any liability under that scenario.  That is the whole purpose, getting out of the risk of the tobacco industry.  By creating this not-for-profit corporation, legally and structurally, we create an insulation where we receive our money up front, we have invested it, and it is doing well.

 

Senator Raggio:

I guess I am being simplistic.  Could the state of Nevada “party A,” just assign all its rights to these settlement proceeds to “company B” for X dollars?  Why do we have to create a nonprofit company and go through that procedure?

 

Mr. Krolicki:

We could do that.  Senator Titus brought up the fact of just selling it to a company or big-pocket corporation. 

 

Senator Raggio:

We do not care who they are as long as they give us the money.

Mr. Krolicki:

It would be more costly.  Accessing capital markets is more cost-efficient to us as a state than a private placement with an insurance company or something similar.  We just think for legal reasons, protection reasons, and the cheapness of the cost of accessing this money, this securitization route is the best way to go.

 

Senator Raggio:

So, these bonds which are to be issued by the nonprofit corporation represent and affect the right of the state to receive the proceeds over a period of time, is that what they are?

 

Mr. Krolicki:

Yes, they would be issued by the company.

 

Senator Raggio:

I will listen intently.

 

John Swendseid, Bond Counsel to the State of Nevada:

Madam Chairman, my name is John Swendseid and I am the bond counsel to the State of Nevada.

 

Chairman O’Connell:

Mr. Swendseid, let me ask you to do your testimony to us in an example of a financial institution already in existence mimicking what Mr. Krolicki is proposing we do as a state.  I thought I was following what Mr. Krolicki was saying a minute ago about the bank.  Is there any financial institution to compare with what is being suggested for the state to do with creating the nonprofit corporation and selling the bonds?

 

Mr. Swendseid:

My understanding is there are institutions in existence which acquire right to settlement monies from the state.  The disadvantage of those is, we do not get $400 million from them, we get something less than $400 million.  So, the nonprofit corporation appears to be an economically better way of doing it.  It does involve the state setting up a nonprofit corporation; there are more steps, it is a more complicated transaction.  I think the reason Mr. Krolicki is recommending it, is it makes the state more money.

 

Chairman O’Connell:

The state would not be competing with any present type of a business doing something similar?  I think of what Assemblyman Hettrick (Assemblyman Lynn C. Hettrick, Douglas, Carson City (part) Counties Assembly District No. 39) does, in loaning out his money for the use of whomever, and how he is repaid and gets his money up front.

 

Mr. Swendseid:

I do not believe this would put the state in a situation where it is competing with another private industry.  If the state authorizes a private corporation to sell a bond, that bond competes for investors with everybody else who wants to borrow money.

 

Chairman O’Connell:

We are the money supplier?

 

Mr. Swendseid:

Yes.

 

Mr. Krolicki:

It is not cost of money or accessing the capital market, because we have the ability to do that.  We are a known customer, and our abilities to do that will always be cheaper than going with a private-placement, business-factoring route.  We get inquiries all the time and they make a lot of money.  This scenario, I assure you, is the highest amount of money we can collect in this structure up front to fund the things you decide to fund.

 

Chairman O’Connell:

So, we are selling money at a lesser rate? 

 

Mr. Krolicki:

There is a cost to this.  For a company to buy that receivable, they need to get compensated for it.

 

Chairman O’Connell:

It is like buying in quantity?

 

 

 

Mr. Krolicki:

Usually when we sell bonds, they are tax-exempt.  This means a whole lot, because it is a couple hundred basis points usually when you access the markets.  If we were building buildings with this money, we could sell these tobacco bonds tax exempt.  But, that is not what we have chosen; we have done programs, health care, things like that.  The Internal Revenue Service, therefore, imposes upon us a structure which is taxable.  So, these will be taxable securities issued by this not-for-profit enterprise.  We are looking at a cost of about 8 percent, which is what we have seen around the country and rates have come down, so maybe we can do better.  But, if you get a taxable rate of 8 percent, the company would have to pay these bondholders for them to assume the risk the tobacco industry would not make payment in full, or at all, between now and 25 years from now.

 

Senator Neal:

What is the risk of losing it all?

 

Mr. Krolicki:

Who knows?  The market credit rating agencies say a blended rate of the tobacco company credit risk is really the same as the state.  They are “AA.”  How many hundred billion dollar settlements or rulings will be imposed on the industry between now and 25 years from now, none, five, I just do not know. 

 

I have heard in the treasury circles they have essentially paid $250 billion to settle with the states.  It is about $250 billion these companies have agreed to pay over 25 years and there are still ongoing concerns.  I have heard it said it could do another settlement of $250 billion and still have viable ongoing concerns.  

 

Senator Neal:

So, we are kind of like in a dice game here, rolling the dice and betting on the come?

 

Mr. Krolicki:

The bottom line is I would rather manage money, than manage the risk associated with the tobacco industry for 25 years.  That is why I am here.

 

 

 

Senator Neal:

Maybe you have said this, but if we just followed the normal course of receiving the money from the tobacco settlement for the period of 25 years, how much would that be?

 

Mr. Krolicki:

Under the formula, it moves around; but right today, they expect about $1.2 billion to be paid over 25 years, which would be the total amount of payments.

 

Senator Neal:

The securitization proposal you have here; what would be the difference if we went that route?

 

Mr. Krolicki:

Under this model, there are moving pieces; $400 million would be the proceeds of a bond sale.  But, this is not costing us $100 million; it is just the structure.  These bonds will be paid off in 15 years under scenarios depending on certain reinvestments, so if you look at those six cases I showed you, even with the proceeds of the $400 million, if you look into the future 25 years, we could have more than $1.2 billion of value.  It is just a matter of how you take the money out of these trust funds.  If you want to take a lot of money fast, then the value is going to be less than $1.2 billion.  If you are willing to let these trust funds work and grow and mature, and take out the monies as I have demonstrated, then you will have around the $1.2 billion also.  So, I would argue this does not cost the state.

 

Senator Neal:

So, the bonds would be for the 25 years?

 

Mr. Krolicki:

Yes, but they could be paid off early and this model would show these bonds would be paid off, likely in 15 years.  All of the money we get would go to debt service.  For example, New York City not only had bonds, but they also took some of the money for operating purposes.  Again, that is a policy decision.

 

Senator Neal:

The amount of money we get initially from selling the bonds, which would accumulate over 25 years to $1.2 billion, would be $400 million?

 

Mr. Krolicki:

Yes, we would have a deal that would give us that amount of proceeds.  Under this scenario, the not-for-profit corporation would have the right to receive these payments, but we would get from the marketplace, if people buy the bonds, the $400 million today.

 

This is an awful example.  We do not have a lottery here in Nevada, but it is the same, California’s lottery, you win the big lottery, you can get your payments over 20 years or, you can check the box that says pay me now.

 

Senator Neal:

Let me see if I understand what you are saying.  You are talking about selling bonds from the tobacco settlement, which would be a billion something for $400 million, and then you are going to turn around and invest that money?

 

Mr. Krolicki:

It is the “time value” of money.  We do not have $1.2 billion today.  We have an arrangement for over the next 25 years, to receive annual payments which, in totality, add up to $1.2 billion. 

 

Senator Neal:

So, what would be the difference and the risk between what you are going to invest the $400 million with in the tobacco company, which is now under court order to pay the money?

 

Mr. Krolicki:

They are under agreement to pay the money, but I am more comfortable investing the money over a long period of time.  Money behaves in a very predictable fashion over a longer period of time.  I think that risk is far more appropriate for this state and more tenable for this state than having a billion-dollar asset tied to the tobacco companies for 25 years.

 

Senator Neal:

Now, who are the people who would purchase these bonds?

 

Mr. Krolicki:

They are insurance companies, portfolios, funds, and banks, anybody who buys bonds.

 

Senator Neal:

So, whoever purchased the bonds would be purchasing them on the basis of having a greater risk of collecting or getting that money back?

 

Mr. Krolicki:

For an 8 percent coupon or whatever we would actually put on the bond, they think it is a good deal.  It is also an inflation hedge for them because of how certain things happen.  They think it is a good investment.  People buy junk bonds, and people buy tobacco bonds.

 

Senator Care:

Our committee deadline is 2 weeks from now and I generally take a lot longer than that to buy a car.  I appreciate what you are trying to do with this bill, S.B. 488, and the companion bill S.B. 487.  In my brief legislative experience, I will suggest, perhaps this is the type of thing which actually ought to be put into some sort of interim study, given you are talking about in excess of $1 billion.  I would feel uncomfortable voting on this thing anytime within the next 2 weeks.  I think it takes a lot of digging, investigation, and study.

 

Senator O’Donnell:

Mr. Krolicki and I do not always agree, especially on some of my stock picks, but in this one, I happen to agree with Mr. Krolicki.  Here is the situation.  We have an agreement with the tobacco industry, and it is just that, it is an agreement.  If everybody stopped smoking cigarettes tomorrow, these companies would go broke.  The likelihood of them paying off these settlements would not be there.  It is a risk. 

 

What Mr. Krolicki is saying is, basically there are four companies we are putting our bet on to pay us $1.2 billion over the life of the agreement, 25 years.  That $1.2 billion is not $1.2 billion today.  For instance, your mortgage on your house may be $150,000, but when you sign that agreement, they tell you that in reality you are going to pay $390,000 over a period of 30 years. 

 

So, the point he is making is, let us put our eggs in a lot more baskets than just four companies who have agreed to pay.  Let us take the money and put the risk off on someone else who is willing to take 8 percent.  There are those who are willing to do that.  And, that portfolio is fine for them, and it makes sense for them to do that.  They are happy with that return.  However, dealing with the state money and the responsibility, it is better for us, and the capabilities we have, to take the risk and spread it over a number of different companies or a number of different portfolios.  

 

Mr. Krolicki:

Senator Care, let us say we sold this up front for cash, $500 million or the present value.  The general portfolio of the state, what we invest every morning or have responsibility for maintaining the investments is about $1.2 billion.  If I had another $500 million and invested it all in the tobacco industry in four companies, you would run me out of office.  You would say I am malfeasant, “How could you be so rogue as to consolidate your assets into such a small area?”  That is exactly what the tobacco settlement is.  It is a $1.2 billion over 25 years out of four companies.  This is a way to get away from that risk with the industry, which I think is ripe. 

 

Senator Care:

We are talking about money projected over the next, now 24 years, $1.2 billion.  All I am saying is, when you are talking about that much time and that much money, and the tenuous market, I do not see anything wrong with taking 2 years to study what you are going to do over the next 24 years.  That is my point. 

 

Senator Raggio:

Going back to the charts we looked at, under tab I, assuming we had a continuous flow of money under the tobacco settlement agreement.  On page 14, the WEFA base case, those are the annual payments we anticipate receiving, is that correct?  We are looking at payments next year and so forth of around $40 million, $50 million?

 

Mr. Krolicki:

Correct.

 

Senator Neal:

If we go through this process, page 17, and take the scenario where the proceeds are invested at 5 percent.  Are we only going to be receiving $20 million, $18.9 million each year?

 

Mr. Krolicki:

We would have the $379 million up front at 5 percent earnings.  Five percent of $379 million is $18.950 million.

Senator Raggio:

That is my problem.  How are we going to fund any of the commitments that we are presently committed to?

 

Mr. Krolicki:

I agree with that, which is why this is mostly for demonstration purposes.  Just to show you what it can be, you can see, if we did not take out the cash quickly, not at the same rate we would under MSA or WEFA, we have a $1.4 billion asset. 

 

In this report, I have two recommended options respectfully submitted to this group.  One is case 4, which presented six alternatives.  Case 4 uses the earnings and part of the trust fund we have, but it is 91 percent of the adjusted MSA payments.  So, you can see, we are just $2 million away from the adjusted MSA payments.  All of a sudden, millennium, trust fund for healthy Nevada, or whatever, those are all pretty much funded.  If you take in the rating agency’s worst-case scenario, or even a less good-case scenario, our cash flow is better.

 

Senator Raggio:

Case 4 is assuming you can invest the proceeds at 8 percent, and where does the balance come from?  The earnings are $16 million at 8 percent, where does the rest come from, the annual pay?

 

Mr. Krolicki:

We take it out of the funds available after securitization, the funds sitting in there to be used are $379 million.  You are using some of the fund.

 

Senator Raggio:

So, your fund is going down each year?  Whatever the reduced fund is, you are assuming getting 8 percent for each year.  In other words you are using part of the principal?

 

Mr. Krolicki:

Correct, in case 6, I anticipate a legislative desire to not reduce the MSA payments as you know it, shows we have consumed the trust fund to be identical with the adjusted MSA payments.

 

 

Senator Raggio:

In case 6, at what point have you utilized the fund?

 

Mr. Krolicki:

Years 2014 and 2015.  Remember there are a lot of different pieces moving, and who knows what is happening.  In the year 2014, we have a hole.  You have a $54 million hole that year, 15 years from now, which we would have to reserve for or know we would have to “one-shot.”  At that point, the bonds are fully paid; the bonds which were in the market are completely taken care of. 

 

Then you get back to the MSA payments, there is no more debt service, and the state would then be receiving that money again.  We match the last 10 years or so with the MSA.  We could re-securitize at that point.  There are many different options.

 

Senator Titus:

The amount securitized goes down each time as you draw from it to make up the difference between what you are earning and what you need to cover the commitments in place now.  Are there any guarantees that, just because this amount of money is sitting over there, somebody else would not dip into it?

 

Mr. Krolicki:

I will be blunt.  Some states have gone through this discussion and were afraid, if $400 million is sitting there, what is to prevent the legislature from grabbing it all and blowing it out the door?  My job is to protect assets of this state and receivables.  Your job is to determine how to spend the money.  You could do a lot of things; you could blow it all out tomorrow if everyone agreed it would be a good thing.  The answer, I think, is best sought among yourselves, not from the state treasurer.  I am just trying to make sure this asset does not go away.

 

Senator Titus:

The Governor could use it to balance the budget.  Is there anyway to lock that money in?

 

Mr. Krolicki:

The answer is yes.  Whatever we posses as assets, you determine its destination.  We may not have assets of 25 years from the tobacco industry. 

 

 

Chairman O’Connell:

One legislature cannot encumber the next one, so that possibility is always out there.  Is there anyone else on S.B. 488?

 

Lawrence P. Matheis, Lobbyist, Nevada State Medical Association:

I am president-elect of the Nevada Tobacco Prevention Coalition, and it is on behalf of the coalition I am speaking to support the basic proposal.  We had two constitutional officers take a very good look at how to get the state of Nevada funds to be able to deal with a very serious problem of the impact of tobacco use on our state.  Nevada and some 40 other states did enter into this MSA.

 

The basic intent is, because of the cost to every state and to the people of every state resulting from the use of tobacco products over the years, and because of the behavior of the tobacco industry in not being fully candid with the consequences of tobacco use when they had a pretty good knowledge about it, the settlement was entered into.  Nevada now has resources; this Legislature, the Governor, task forces which were set up, have for the first time used Nevada money to deal with the very real problems in everyday life of tobacco use.  The tobacco control programs, for the first time, were funded through this.  All of you who have participated should feel proud of it because there were actual programs helping Nevadan’s today kick the habits associated with tobacco.  These programs treat people for the illnesses caused by tobacco, and educate children so they do not get into the problem in the first place.

 

We certainly want to see these funds used in the maximum way to improve Nevada’s tobacco situation.  The concern is it is quite probable we will never get the full entitlement of funds over the 25-year period.  Tobacco use, we hope nationally, is going to plummet.  Nevada has a special reason to want to have as much of these resources as possible, because clearly, while the rest of the country is getting the message and numbers of tobacco use goes down, we continue to go up.  We are at the top of the country.  We are going to need these resources longer than many other places, because unfortunately, we have not gotten the message through to enough Nevadans to stop smoking and to discourage children from getting started.

 

MR. MATHEIS:

How best to do this?  While they are beginning to learn the error of their ways, we have this issue of how to try to secure as much of what we are entitled to, in terms of these funds for the future.  I think the treasurer has laid out a very ambitious and very detailed program, which, in the end, should mean we will get everything to which we are entitled.

 

The basic principle is, if we are entitled to a certain amount of money, and there is a way of securing the title to it, without having to engage fully, the state is accepting the total risk of what is indeed an industry which is likely not to be able to pay off what they owe us over time.  We do support it and I agree with Senator O’Donnell, we have mixed emotions on this.  One of the reasons we liked this is so we can engage as vigorously as the Nevada tobacco coalition wants, in efforts to reduce the profitability of these companies and reduce the amount of money coming in through the MSA because, that is what we want.  We do not want them to be able to sell as many tobacco products.  

 

Maureen Brower, Lobbyist, American Cancer Society:

The American Cancer Society strongly supports securitization of the tobacco settlement funds.  We have had debates, nationwide, to determine if this is a good idea.  On a general basis, it has been accepted and strongly supported.  I think what really needs to be clear is Mr. Krolicki has done a tremendous amount of work on this.  A lot of research and a great deal of brain power has gone into it.  I think he has offered a number of different choices.  I am a member of the task force for healthy Nevada which helps determine where these funds are spent.  We worked very hard over the interim, trying to make the right decisions to help spend the money correctly, and to encumber the money to the best of our ability so it could not be used for other purposes.  

 

Chairman O’Connell:

Mr. Krolicki, if I remember correctly, we gave the attorney general a person in her office to do nothing but look at the opportunity Nevada had for getting involved with these multi-state lawsuits.  Do you know if they have gotten involved with any more of these lawsuits?   Not necessarily dealing with tobacco, but just in general?

 

Mr. Krolicki:

I am not sure, Madam Chairman.  John Albrecht is here.  He is lead point man for the attorney general’s office for the MSA.  I know he has some concerns as to the legal structuring for the state to enforce the MSA and some of the potential liabilities and litigations and I understand that, but I am not sure if we have other situations. 

 

May I add one point to put this in perspective.  Regarding the 10 percent portion, the only money the trust fund for public health task force can use, are the interest and earnings generated from 10 percent of the payments.  Just say it is $5 million every year, which is not much money.  Under securitization, just this one group, I think, would benefit by far the most.  They would have interest earnings on $40 million rather than the $4 million under the annual payment.  It would take a long time for them to get enough principal for interest earnings to actually mean something.  So, this is the way to jump-start the public trust fund.

 

Senator Titus:

I am glad you mentioned that.  It is one of my concerns.  I hear these groups come forward and say they support this because it guarantees them money for these kinds of programs.  As I recall, we had to fight to get the money put into those kinds of programs, because most of it was designated for the Millennium Scholarships, and there was a little piece left over which went to these anti-smoking programs.  I am afraid if this dips down or if does not come with as much as you anticipate, the first things to be cut will be these old smoking programs.  It is not going to be the Millennium Scholarship because that is so politically popular, and who wants to cut that out?  I am not sure that would not happen to these people who just came up here and testified.

 

Mr. Krolicki:

Ten years from now, if we have knocked down smoking by 50 percent under the MSA, or there is a bankruptcy or other settlement, we could have half the money if not less than what we are looking at in that same feeding frenzy, or millennium preservation, which would still occur.

 

Senator Titus:

Then they would have had a success, because they would have at least diminished smoking.  This other may occur without them diminishing smoking.

 

Senator O’Donnell:

What is happening here is there is a higher risk that these medical groups would not receive the money under the present system than there would be if we changed and allowed the controller to take the cash, sell the bonds, invest the money, and keep it in the same sort of account.

 

Mr. Krolicki is the guy with the green visor.  He has nothing to do with the guy putting the deposit in or the guy who is going to take the money out.  He has no say-so in how it is spent or how much money comes in.  The job he is charged to do is: make sure the money he has is invested wisely so the interest is paid back to the depositor, which happens to be us.  That is all this is. 

 

Mr. Krolicki:

It is hard to put into perspective what has just happened, but the American Cancer Society and the medical association, these groups and others have not always been supporters of securitizations in other venues.  I am so proud we have that kind of support here because it means a lot.  I sit on the Board of Directors of the Southwest Division of the American Cancer Society, Southwestern United States.  I had conversations with some of my colleagues in other parts of the country where they are opposing securitization.  They have come full circle in conversations and realize they would rather face those risks than the risk of not getting the money.  They would rather compete than not even have a pool to access.

 

Senator Titus:

I commend you because this is obviously a lot of work.  I know you are there just to invest the money.  I am just more skeptical about political wins, perhaps, than you are, and that is why I have some hesitancy.

 

Senator Care:

Mr. Krolicki, several years ago, the big tobacco companies, in anticipation of future litigation, began diversifying.  Do you know whether the MSA is between the states and true tobacco companies, or are these big tobacco companies now subsidiaries of parent companies?  I am looking at the bankruptcy now. 

 

Mr. Krolicki:

There may be people who can better answer this question, but it is my understanding it is the tobacco companies; it is the domestic corporations.  The formulas are based on on-shore sales, not any international sales. 

 

Chairman O’Connell:

Is there anyone else on S.B. 488?

 

 

 

John Albrecht, Senior Deputy Attorney General, Human Resources Division, Office of the Attorney General:

We are in opposition to S.B. 488.  I want to point out a caution.  The attorney general’s office actually has no position on the actual securitization.  What we want to point out is in section 7 of the bill. 

 

This section authorizes a covenant to allow the nonprofit corporation, requiring the state to perform its obligation under the MSA, and requiring the state to sue or take any other legal action to enforce payments under the MSA.  If you look at section 7, this would authorize the nonprofit corporation to sue the State of Nevada if we did not enforce the MSA as the nonprofit corporation believes it should be enforced.  I guess it might be a price we would pay for securitization, but it is something being sold out there.  We need to be aware of it when we sell it for we are selling a lawsuit to the nonprofit corporation.

 

Senator O’Donnell:

Would you sue the tobacco companies if they do not adhere to the MSA?

 

Mr. Albrecht:

Yes.

 

Senator O’Donnell:

You would, so, why would you be afraid if the nonprofit organization sued you if you did not?

 

Mr. Albrecht:

I think we are all reasonable people who may disagree on what is enforcement.  One example, one of the requirements of the MSA is that the state sue non-signatories to the settlement to establish escrow accounts and, put a penny a cigarette into those escrow accounts.  Right now, that is part of what I do everyday; I sue nonprofits under the MSA.  We are probably one of the most aggressive states in bringing enforcement of its model statute.  We filed three lawsuits, we have the first judgment, and we are the second state to file a lawsuit. 

 

If the nonprofit corporation, for whatever reason, said that was not aggressive enough, they could sue the State of Nevada.  That is what this is saying. 

 

 

Chairman O’Connell:

While we have you here, are you the gentleman in charge of the division which looks at joining national lawsuits such as the tobacco settlement?

 

Mr. Albrecht:

Practically speaking, I am the only attorney who works on the tobacco settlement.  Under the MSA, the state cannot sue anymore.  That does not stop individuals from suing on their behalf, because we have recovered our damages, and we did not recover the damages of the individual.

 

Chairman O’Connell:

Forget the tobacco suit, I am trying to remember who it was who sold the commerce committee on establishing a division with the attorney general to do nothing but simply watch for lawsuits Nevada can join in, as far as national concerns happen, such as the tobacco lawsuit.

 

Mr. Albrecht:

That might be the antitrust division; I am not sure.

 

Chairman O’Connell:

Are there any other questions for Mr. Albrecht?  Is there anyone else on S.B. 488?

 

Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association:

We have concerns.  I think some of the questions raised here are valid concerns.  For example, the bill is silent as to the composition of this nonprofit corporation; who appoints them, how big is it, do they take expenses out of the fund, how many expenses?  I have concerns about that.  I am still fuming over the fact the coalition for a healthy Nevada failed to fund our tobacco sting operations and, currently, as I understand it, we have to use General Fund money for this.  Here is a key part of our anti-tobacco program which our stores participate in, and this coalition would not give us a dime to fund that program.  I think that is dastardly, Madam Chairman.  I think there are a lot of questions to be answered.  Those are my concerns.

 

Chairman O’Connell:

Any questions for Mr. Krueger?

 

 

Senator O’Donnell:

Just a comment, Mr. Krueger, I do not think it is any clandestine attack on either your MSA or your intent.  I think it is a matter of pragmatism, in that we have no idea who is going to quit smoking.  We have no idea what acquisitions these four companies are going to make in the next few years.  We do not know, so it is extremely volatile.  There is a risk involved; however, that risk will be coupled with an interest rate on top of the bond that is sold, which makes it worthwhile for some people to buy it.  I do not think it is any personal attack against the MSA.

 

Mr. Krueger:

No, I am not taking this personally.  I am miffed about a situation where I thought good tobacco settlement money ought to go to fund these sting operations to validate our people doing their jobs, reducing and coming close to, in all practical purposes, eliminating youth access to tobacco products. 

 

Chairman O’Connell:

Is there anyone else opposing? 

 

Mr. Krolicki:

Madam Chairman, we have some comments which could alleviate the attorney general’s office of its concerns about some of these things.

 

William E. Donovan, Attorney at Law, Orrick, Herrington and Sutcliffe:

The question that arose is whether the state would sue to collect the money for the nonprofit corporation.  The state has to do that.  Under the settlement agreement, the state cannot assign its collection responsibilities to the nonprofit corporation.  So, the nonprofit corporation has to turn to the state and request it pursue the collection of the monies.  There is no alternative under the law and the settlement agreement.

 

Senator O’Donnell:

His point was, he was afraid you would sue him because he did not do his job as defined by you, not as defined by him and, I think that is the real caveat. 

 

Chairman O’Connell:

We will open the hearing on S.B. 489. 

 

SENATE BILL 489:  Makes various changes regarding powers and duties of state treasurer and revises Uniform Disposition of Unclaimed Property Act. (BDR 18-360)

 

Mr. Krolicki:

Senate Bill 489, as I called it before, is the omnibus bill.  It contains some housekeeping and some very large changes to government and its structure.

 

Section 1 pertains to a status currently enjoyed by the governor’s office, but one I feel strongly about myself, which the non-classification of employees, so they are neither classified or unclassified.  Essentially, it gives the treasurer the flexibility to hire people in a manner which has some kind of financial flexibility which I do not currently enjoy.  I have had this discussion with Senator Raggio and certain members of the money committees, and I know there is great trepidation about losing certain control and oversight on salaries. 

 

The oversight is on the lump sum.  I have to work within that, but the lack of flexibility has cost my office several incredible people who could just make more money elsewhere.  There was absolutely nothing I could do about it.  Even $2000 would have made a difference, but I had no flexibility, despite reverting back to the General Fund usually hundreds of thousands of dollars every biennium.

 

In absolute respect for the current employees who may not enjoy a classification of non-classification, I would do nothing to upset these people, or harm their careers, or put them in a manner of fear.  So, in section 1 there is a section where all classified employees have the option of not going to non-classification; they would not enjoy the benefits, but they certainly would stay within the system.  So, those folks are protected and, only upon their departure, retirement, or whatever they do, when a new person would come into the office, that position would revert to non-classification.

 

Chairman O’Connell:

We would not run into any situation where people would not be paid for overtime would we?

 

Mr. Krolicki:

They would largely be like unclassified employees.  It would be a salary.

 

Chairman O’Connell:

I see Mr. Gagnier is shaking his head; he has a concern.  We have a concern with the controller’s bill also, that if we change positions for people, they would still be there working and would not be able to be paid for the overtime they now are able to acquire.  So, we just want to be sure we are not getting into the same thing.

 

Mr. Krolicki:

In a worst-case scenario, and I do not want to walk away from what I am asking for, because I think it is important, if you all run businesses, the flexibility in how you compensate those with whom you work, I think is a critical thing.  For current unclassified people in the treasurer’s office, I would hope to have this flexibility.  So, the half dozen or so people, whatever that global salary is, I would hope to have it, but again, I would urge it for the entire office.  Unclassifieds are unclassifieds and they do not get paid overtime.

 

Sections 2 and 6 have to do with facsimile signatures.  Essentially it keeps up with technology, laser technologies, things like that, with all the security currently enhanced in the mechanical signature plate of the treasurer.  This just allows for new technologies to be used in this dispensation of monies.

 

Sections 3 and 4 have to do with unclaimed property, but not necessarily in Mr. McDonald’s area.  This has to do with the transfer of the division from the Department of Business and Industry to the state treasurer’s office.  Some of you have seen this bill before and I am pleased to say, you voted for it.  It passed the Senate.  Fundamental review has endorsed this transfer, and there are two reasons we are looking to do this.  State treasurer’s offices around the country are in the business of unclaimed property.  In the past year, the professional organization, the service organization for unclaimed property, was moved and housed inside the National Association of State Treasurer Headquarters in Lexington, Kentucky.  So, we go hand in hand in this process. 

 

We entered into a Memorandum of Understanding with the department, with the division, with the department head, and through the governor’s office, which essentially had shown us the ability to operate and work with the division to see if we could add value.

 

We have been able to upgrade their computer systems, their networks, their claims, and they have done a wonderful job.  We have also shown a way to get a $10 million one-shot windfall, by changing some of the holding periods.  I think this is a significant value added in our efforts with the unclaimed property folks.

 

Chairman O’Connell:

Have you got a section-by-section review on your amendments for the committee?

 

Mr. Krolicki:

Sections 3 and 4 pertain to the transfer.

 

Steven D. McDonald, Administrator, Division of Unclaimed Property, Department of Business and Industry:

I am actually wearing two hats today; I am speaking on behalf of the director’s office, representing the director, and first, they are in support of the transfer of unclaimed property to the treasurer’s office.  They want to ensure, in the nonclassified portion of this bill, that the classified employees would still have the option to stay classified if the transfer were to occur.

 

Now, as the administrator, I am also in support of the Governor’s budget, which recommends this transfer.  On pages 10 through 21 of the bill, it mainly deals with the meat of the unclaimed property statute.  Most of the changes you see in there are not very substantive.  They are more clarifications of language.  Mr. Krolicki is going to talk about the change in two categories of property, which were bank accounts lowered from 5-year to 3-year dormancy periods.  So they will turn over to unclaimed property after 3 years instead of 5 years.

 

Chairman O’Connell:

Mr. McDonald, did you say from section 15 through section 21?

 

Mr. McDonald:

Actually, all the way to section 47.  As I said before, most of these are just changing the words “division” to the “Office of the State Treasurer” and, the administrator is defined as the state treasurer.  It would basically just replace those words in the language throughout the whole section.

 

Mr. Krolicki:

Madam Chairman, in that section, we are trying to get our arms around the state’s Uniform Act for Unclaimed Property in 1995.  I was asked by the director’s office and by the budget office to insert this housekeeping for unclaimed property in this bill as a vehicle.  Again, I do not want this to look presumptuous; it is just a vehicle, and we are talking about the transfer.  That is why you are seeing it as part of this bill.

 

Chairman O’Connell:

So, we are just codifying the uniform act of 1995 right now?

 

Mr. Krolicki:

We are moving in that direction.  Since we are on unclaimed property, I just skipped to sections 15 to 47.  Two of the areas related to the 1995 act, are in the areas Mr. McDonald referenced; financial institutions or bank accounts.  By moving the holding period from 5 years to 3 years, the state will get a one-time shot of $10 million for the biennium.  Again, it is not an aggressive move, but by enforcing it, we will benefit from the 2-year jump-start, if you will. 

 

Section 5 simply changes the due dates for the treasurer’s annual report.

 

Sections 7, 11, 12, 13, 49 to 55 are clean up statutes from a LCB audit.  There are some operations in the treasurer’s office or the controller’s office, and this just codifies things which have been happening in there for 10 or 15 years.  The controller’s office is comfortable with those sections I mentioned.

 

Sections 8, 9, and 10 are clean up for the Department of Business and Industry, as Mr. McDonald has mentioned, if and when, the unclaimed property division is transferred.  We have discussed sections 15 to 47, relating to the uniform act of 1995.

 

Sections 56 to 60 contain cleanup language.  Sections 61 to 67 are housekeeping.  Sections 68 to 71 would be necessary cleanup language if the transfer of unclaimed property occurs.

 

The last three sections, 72 to 74, are LCB housekeeping items.  Again, we have several very independent thoughts tracking in here with some housekeeping.

 

Chairman O’Connell:

Committee, questions?

 

 

Senator O’Donnell:

On page 29, section 60, you are not doing away with the controller’s office are you?

 

Mr. Krolicki:

No, in fact, the controller is empowered by some of the duties they are performing with fines and collections.  They will be officially doing what they have been doing for a dozen years, which is part of the LCB audit to clean up this language.

 

Chairman O’Connell:

Mr. Krolicki, why do you suppose it says, “requires two-thirds majority vote” on this?  It does not seem to have a fiscal impact?

 

Mr. Krolicki:

I have no idea and I am not sure where you see it.

 

Chairman O’Connell:

Ms. Guinasso, can you tell us why?

 

Ms. Guinasso:

Senator, I believe it is because of subsection 3, section 45, on page 21.  It is authorizing a fee of $200 for the cost of an examination.  It authorizes the administrator to assess the cost of an examination against the holder at a rate of $200 a day.

 

Chairman O’Connell:

You are charging an individual that amount of money?  It says, “If an examination of the records of a person results in the disclosure of property reportable under this chapter, the administrator may assess the cost of the examination against the holder at a rate of $200 a day for each examiner.”

 

Mr. McDonald:

Actually, “person,” is defined under section 23 on page 11; it means a natural person, business association, a state trust, government, or governmental subdivision, and so forth.   Actually, we would be charging the actual holder of the property, not the individual.  When we go out and audit holders, looking at their records for unclaimed property, we actually go out and audit casinos’ and businesses’, or banks’ wages, where they have wages.  Sometimes the audit findings do not actually match up to the cost of having the auditor go out there and do an audit.  That is all it is.  “It is basically, really for willful conduct.  I am a nice guy; I do not charge people.  And it says, “may,” by the way.”

 

Chairman O’Connell:

What do you currently charge?

 

Mr. McDonald:

Actually, we do not charge anything.  This actually was recommended in the 1995 act.  I want to give you a brief history of the act itself.  There are 1954, 1966, 1981, and 1995 acts.  When this body passed the unclaimed property statute, it was passed in 1979 and was implemented in 1980.  In 1981, the act had not come out yet so, we actually have a weird set statute right now, because it is not the final version of the 1981 act.  It has taken 14 years, at least up to 1995, and I tried to get this passed in 1997 when I was the administrator.  It was introduced in mid-session and of course did not get a hearing, but it took 14 years to get it right.  The statute was reorganized, taking into account a lot of case law, as well as all the operational problems other states have.  The 1995 act is a good act and I feel we should definitely move in the direction to adopt it.

 

Chairman O’Connell:

Tell me, how is the money spent, since you have never charged before?  What is your budget for it currently, or is it in the presentation of the bill?

 

Mr. McDonald:

I am not sure I understand your question.

 

Chairman O’Connell:

If your examiners come out, and we pay them $200 a day, each, what are you going to do with the money?

 

Mr. McDonald:

It goes right into the trust fund and then the trust fund, at the end of each fiscal year gets transferred to the General Fund for this body to decide where it goes.

 

Chairman O’Connell:

Approximately how much do you think you might collect under this provision?

 

Mr. McDonald:

Under this provision, it would be minimal.  Actually, our auditors pay for themselves right now.  We project about $400,000, but we have already done over $600,000 this year.  Our auditors cost about $200,000, just their cost benefits, salaries and so forth.  When we go out and audit, we audit less than 1 percent of our database.  We have over 10,000 holders in there.  We do about 40 to 50 audits a year.  We really do a risk analysis to make sure our auditors are out there giving the best bang for your buck. 

 

Chairman O’Connell:

Two hundred dollars per day, for each person doing the examination; approximately how long does the examination last?

 

Mr. McDonald:

I would say 2 to 3 weeks, sometimes longer.  Sometimes the holder does not have records and they have to get them, which takes time to actually get the paperwork together.

 

Chairman O’Connell:

So, we are talking about 2 or 3 weeks at $200 a day, that is a bunch.

 

Mr. Krolicki:

This is a level of expertise Mr. McDonald certainly has and, John Adkins also, but it conforms to the 1995 act, the two-thirds was not on my document.  I am aware it is there now and, we may wish to have a conversation about whether or not this portion is worth subjecting the old bill to two-thirds majority.

 

Chairman O’Connell:

That just seems like an awful lot of money to me for something they have never ever had to pay for before.

 

Senator Porter:

Regarding the process, this is not related to the bill, but the proceeds go into the trust fund for a period of time, is it for a year?

 

Mr. McDonald:

It is for a fiscal year; it goes in for the balance of the fiscal year.  Whenever we do the audit, the proceeds come in, if we get it in May of that fiscal year, we actually transfer the money at the end of each fiscal year to the General Fund.

Senator Porter:

What is the average per year would you say?

 

Mr. McDonald:

Total trust fund actually transferring, we have transferred between $5 million to $8 million to the General Fund each year.

 

Mr. Krolicki:

The majority of it is from financial institutions in related money things, which is why we believe we can get $10 million.  Mr. McDonald, if you could share your comments on unclaimed property.

 

Mr. McDonald:

On subsection 3, page 21, we are really neutral on it.  If it makes this bill go through more than it has to go through, we can definitely agree with you in possibly taking it out.

 

Chairman O’Connell:

It is not a hill to die for?

 

Mr. McDonald:

No, it is not.

 

John Adkins, Chief Deputy Treasurer, Office of the State Treasurer:

If we were to exclude this provision for the recouping of auditing expenses, then we need to make a slight adjustment in the present requirement for auditing.  Under the present audit it says we have to have a reasonable doubt as to whether they are reporting or not.  This gives us an automatic lever in order to do an audit on any state or any business within the state.  As it is now, we do not have such an option.

 

Chairman O’Connell:

What area in the bill are you speaking to?

 

Mr. Krolicki:

We have some homework to do, and I apologize.  If we can come back, we will have in writing, not only your write up of the bill itself, but the amendment to perhaps take out the fee, so we get out of the two-thirds and any other changes Mr. Adkins and Mr. McDonald think are germane for the integrity of the bill.

 

Chairman O’Connell:

We can do that.  When we have a work session on it, Mr. Krolicki, we will be sure to let you know.

 

Mr. Krolicki:

We will do all the other changes we have talked about with the investments in equities and the different trust funds and the tobacco securitization.

 

Chairman O’Connell:

Anyone else wish to address S.B. 489?

 

Bob Gagnier, Lobbyist, State of Nevada Employees Association:

I am speaking in opposition to S.B. 489, but in particular, I am speaking against sections 1 and 72.  As the treasurer said, section 1 would create a nonclassified status for the employees of his agency.  The nonclassified service was something that was created during the last session by the Governor in his desire to set up a different system for his office.  We objected to the concept, but we agreed not to oppose it on the basis it would not expand beyond the Governor’s office.  There is some reason to believe governors are unique.  As an example, the Fair Labor Standards Act of 1938 provides for time and a half overtime for employees, but specifically excludes the personal staff of the governors of all the states.  So, there is some national recognition to treat governor’s offices somewhat differently than you would treat others, just as the Fair Labor Standards Act of 1938 says the Legislative Branch should be treated differently.

 

The nonclassified status is a system whereby the administrator of an agency will be able to set the salaries within an overall budget.  If they want to set the salaries higher for higher-level positions, how do they do that?  If the money committees have set aside a budget and that budget is generally predicated upon the existing staff, there is only one way to do it, either eliminate a lower-level position, or cut the salary of a lower-level position in order to give the money to another position.

 

What we were afraid would happen in the governor’s office last time, did in fact happen.  They did eliminate some positions to pay upper-level positions higher amounts and, those positions are right back in the budget this year.  You can see this is the type of thing which can happen.

 

I think you can see where we are coming from and the problem is, there is another bill for another elected official to do pretty much the same thing in the Assembly Committee on Ways and Means.  We will be testifying against that bill.  Tomorrow morning there is a bill to unclassify more people in the secretary of state’s office, it seems this is a very popular thing this session. 

 

Even though it says in the bill, and we do commend the treasurer for this, anyone currently in a classified position could stay classified if they wanted to; there is nothing in the bill which says their position would not be abolished in order to make up the money to pay one of these nonclassified positions. 

 

Chairman O’Connell:

I do not think he is that devious.  I do not think he has thought that far ahead Mr. Gagnier.  Mr. Gagnier, tell us about section 72 and how it impacts this.

 

Mr. Gagnier:

Section 72 repeals, among other things, NRS 226.100, which has a couple of the unclassified positions.  So, if you were to take out section 1, which I have asked you to do, without taking out section 72, then I think those people would be in no-man’s-land.

 

Chairman O’Connell:

Are there any questions for Mr. Gagnier?  We will close the hearing on S.B. 489 and open the hearing on S.B. 306.

 

SENATE BILL 306:  Makes various changes relating to emergency management. (BDR 18-1231)

 

Frank Siracusa, Chief, Division of Emergency Management, Department of Motor Vehicles and Public Safety:

I am here in support of S.B. 306.  The mission of the Division of Emergency Management is to assure the state of Nevada and its local jurisdictions mitigate from, prepare for, respond to, and recover from, an emergency or disaster occurring anywhere in the state of Nevada.

 

In carrying out this mission, both during day-to-day activities, and during times of emergency, it is really critical we have a direct line of communication with the Governor’s staff in the Governor’s office.  In acting on behalf of the Governor, and the critical nature of what we do, and life-safety-related issues, it is critical for decisions to be made very quickly.  In decisions to deploy state resources, expend state dollars, or declarations asking for federal assistance, we need those direct lines of communication.

 

During day-to-day operations, in order to be in a position allowing us to successfully respond to an emergency and recover from an emergency, we have to make sure our state agencies are well trained.  We do this almost on a day-to-day basis; we are probably one of the few state agencies which works on a daily basis with almost all other state agencies.  We also, on behalf of the Governor, can actually task state agencies to expend recourses, personnel, and dollars.  It is critical we be a part of the Governor’s office, to be able to access the Governor on a direct basis, to be able to make those kinds of decisions.

 

Just for the record, both the National Emergency Management Association, the Federal Emergency Management Agency (FEMA) and, the National Governor’s Association, all support this particular effort.  There is a national movement for emergency management agencies, at the federal, state, county, and local levels to be under the chief executive of that particular organization.  It is a more effective way of doing business.  Lastly, I would like to say this is strictly an administrative move; there is no financial impact on it.

 

Chairman O’Connell:

It was my understanding we were not doing anything but picking it up here and putting it over here, but everything else is the same.

 

Mr. Siracusa:

Absolutely, yes it is.

 

Senator Care:

Section 1, subsection 3, it says the director may employ technical, clerical, stenographic, and other personnel as may be required.  Does this mean only in the event of an emergency or is it just everyday staffing?

 

 

 

Mr. Siracusa:

It is particularly during a time of emergency.  Normally, we have a staff of 17 to do our normal planning, training, and exercise functions.  If we were involved in an emergency, we have the capability to expand our operation, depending on how severe the situation may be.

 

Chairman O’Connell:

I will adjourn the meeting at 5:45 p.m.

 

 

RESPECTFULLY SUBMITTED:

 

 

 

Sherry Rodriguez,

Committee Secretary

 

 

APPROVED BY:

 

 

 

                       

Senator Ann O'Connell, Chairman

 

 

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