MINUTES OF THE meeting
of the
ASSEMBLY Committee on Ways and Means
Seventy-Second Session
February 5, 2003
The Committee on Ways and Meanswas called to order at 8:10 a.m., on Wednesday, February 5, 2003. Vice Chairwoman Chris Giunchigliani presided in Room 3137 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Mr. Morse Arberry Jr., Chairman
Ms. Chris Giunchigliani, Vice Chairwoman
Mr. Walter Andonov
Mr. Bob Beers
Mrs. Vonne Chowning
Mrs. Dawn Gibbons
Mr. David Goldwater
Mr. Josh Griffin
Mr. Lynn Hettrick
Ms. Sheila Leslie
Mr. John Marvel
Ms. Kathy McClain
Mr. David Parks
Mr. Richard Perkins
STAFF MEMBERS PRESENT:
Mark Stevens, Assembly Fiscal Analyst
Steve Abba, Principal Deputy Fiscal Analyst
Julie Brand, Program Analyst
Brian Burke, Senior Program Analyst
Russell Guindon, Deputy Fiscal Analyst
Tracy Raxter, Program Analyst
Susan Cherpeski, Committee Secretary
Connie Davis, Committee Secretary
Vice Chairwoman Giunchigliani informed the committee they would be taking the agenda out of order at the request of the Office of the State Controller and asked Brian Krolicki, State Treasurer, to present the budgets for the Office of the State Treasurer first.
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Brian Krolicki, State Treasurer, indicated he would be presenting an overview of eight different budgets. Prior to beginning the overview, Mr. Krolicki indicated the presence of members of his staff in the audience, pointing out they were there to offer their expertise if needed.
Mr. Krolicki then began his presentation by highlighting items of interest from the previous biennium. Mr. Krolicki stated he was proud to report his office’s accomplishments to the Committee. Those accomplishments included the debt service agreement pursued in the past year, which had secured $20 million for the General Fund, and the restructuring of the Bond Interest Redemption Fund, which had created another $10 million for General Fund use.
Mr. Krolicki went on to discuss refunding. On the debt side, he noted the interest rates were at a 40-year historic low, which lowered interest rates on debt service costs. Unfortunately, this also meant the earning capacity on the portfolio was equally limited by the low interest rates.
Mr. Krolicki called attention to an upgrade received from Fitch Ratings Agency and explained the upgrade was the first one the state of Nevada had received since 1977. The upgrade changed Nevada’s rating from AA to AA+. He acknowledged the upgrade was only a matter of approximately five basis points; however, with a debt portfolio of several billion dollars each point was very important and made a difference.
Mr. Krolicki told the Committee his office had issued $312 million in bond indebtedness in the past year. He reported that on the cash side, the volume of transactions had grown and would continue to grow along with Nevada. He explained the Treasurer’s Office made almost 125,000 deposits and issued close to 90,000 checks every month. He assured the Committee his office was vigorously trying to increase electronic transactions in order to decrease costs.
Continuing to the next item, Mr. Krolicki mentioned one of the important issues with which the Committee would be dealing was that of securing monies from the Tobacco Settlement Fund. He informed the Committee the Treasurer’s Office was responsible for obtaining the Master Settlement Agreement (MSA) monies and administering the three different trust funds. He claimed his office would once again pursue his tobacco securitization plan utilizing some improvements to increase effectiveness.
Mr. Krolicki mentioned Nevada, under the previous treasurer, Robert Seale, had been the first state to receive a Certificate of Excellence in its investment policies from the Municipal Treasurers’ Association of the United States and Canada. He indicated Nevada had been, within the last few months, recertified as excellent.
Mr. Krolicki moved on to highlight the next item: the Millennium Scholarship. He announced 20,000 young Nevadans had achieved the threshold necessary to qualify for the scholarship and approximately 12,300 people were currently benefiting from the Millennium Scholarship Program. In addition to that scholarship program Nevada was participating in the 529 program. The 529 program provided two options for paying for college: a Prepaid Tuition Program and a savings program. In Nevada, 9,600 children had been enrolled in the state’s Prepaid Tuition Program. Mr. Krolicki claimed the state had approximately $36 million in assets in the Prepaid Tuition Fund. He said the savings program was thriving, and he reported the state had secured new national partners: Strong Capital Management; American Skandia, Inc., which had been purchased in December 2002 by Prudential Financial, Inc.; USAA Worldwide Insurance; Upromise; and The Vanguard Group, one of the largest fund managers in the world. The Vanguard Group’s 529 national program was now Nevada’s program, which Mr. Krolicki saw as a big accomplishment on Nevada’s part.
Vice Chairwoman Giunchigliani verified 9,600 individuals were enrolled in the Prepaid Tuition Program and inquired how many individuals were enrolled in the college savings program. Mr. Krolicki replied there were approximately 14,000 people enrolled in that program.
Mr. Krolicki then addressed his last highlighted item, which was unclaimed property. He reminded the committee that in the 2001 Legislative Session, Senate Bill 49 had been passed. S.B. 49 expedited movement of monies from the location of being unclaimed to the state General Fund. Mr. Krolicki stated his office had suggested the passage of S.B. 49 would generate between $9 and $12 million for the General Fund, and the state had in fact realized $12 million.
Having completed his review of highlights, Mr. Krolicki provided an overview of the Office of the State Treasurer’s eight budgets. He indicated his department’s current budget request was 6.18 percent below the flat budget mark set by the Governor. The 6.18 percent was derived from the combination of all the budgets with the exception of the debt service account. He said the General Fund request he was making was 26 percent below where the department had been previously.
Mr. Krolicki discussed Budget Account 1080, the Treasurer’s main account. Once again, he reported a few highlights to the Committee, emphasizing the importance of seemingly small items and amounts due to the “bare bones budget” requirements due to low interest earnings. He offered good news to the Committee stating three positions had been eliminated; two had been eliminated by the Treasurer’s Office and one had been recommended for elimination by the Governor.
Mr. Krolicki then said the Governor’s recommended budget had removed two items that the Treasurer’s Office felt were necessary, and Mr. Krolicki requested the Committee put them back into the budget. He described the two items. The first was an E-300 decision unit of $895 to purchase a VeriSign Secure Sockets Layer (SSL) certificate allowing for secure communications from the Web server to clients on the Treasurer’s Office Web site, http://www.nevadatreasurer.com. The second item was a request to increase printing, copying, and postage costs to fund an increase in check stock and direct deposit devices that were sent out by the Controller. The amounts requested were approximately $2,000 in FY2004 and $3,000 for FY2005.
Vice Chairwoman Giunchigliani requested clarification on the budget categories for those two items stating the VeriSign SSL certificate was E-300, but Mr. Krolicki had not identified the postage and printing item. Mr. John Adkins, Chief Deputy Treasurer, answered her question and stated both items were in category 04, operating. Vice Chairwoman Giunchigliani thanked him for the information and asked Mr. Adkins to provide it in writing as well. She then verified the printing and copying costs were associated with sending out checks. Mr. Adkins replied the amount requested was for purchasing envelopes, printing envelopes and checks, and mailing the checks.
In response to a follow-up question from Vice Chairwoman Giunchigliani, Mr. Adkins replied those services were done in-house by the office itself. Continuing the discussion, Vice Chairwoman Giunchigliani asked if the Treasurer’s Office had pursued electronic transactions in an effort to be as paperless as possible. Mr. Adkins answered the Office was as paperless as possible in respect to the sending of checks but was working to increase the use of electronic fund transfers. He admitted there had been progress, but not as much as he would have liked. At this, Vice Chairwoman Giunchigliani wondered what was slowing down the process and Mr. Adkins explained resistance from the vendors was a problem.
Vice Chairwoman Giunchigliani recognized Assemblyman Goldwater. Mr. Goldwater expressed a desire to see performance indicators for the Treasurer’s budget accounts. Mr. Adkins assured Mr. Goldwater the Office did have performance measurements for the budget accounts, with the exception of Budget Account 1080, which used informal measurements of performance with respect to investment activity. Mr. Goldwater repeated his desire to see performance indicators developed for all the budgets over time, especially indicators measuring qualitative performance rather than quantitative. Mr. Adkins agreed to provide the Committee what information he could in terms of performance indicators focusing on qualitative factors.
Vice Chairwoman Giunchigliani resumed her questioning and asked Mr. Krolicki to elaborate on his earlier comment that the budget request of the Treasurer’s Office was down 26 percent. She pointed out the numbers she had received indicated it was in actuality up 24.1 percent. Mr. Krolicki defended his position and stated his earlier comment was correct if the budgets were totaled together, excluding Budget Account 1087, the debt services account.
Vice Chairwoman Giunchigliani explained she was looking at Budget Account 1080 and preferred to keep the budget accounts separate rather than combining them. Mr. Adkins replied he did not have the numbers she wanted, but he would get them for the Committee so the Committee would be able to do a comparison. Mr. Krolicki then reassured the Committee that his office was 6.18 percent below the flat budget rate as he had stated earlier. Once again, Vice Chairwoman Giunchigliani stated the numbers she had been provided showed Budget Account 1080 as being increased by 24.1 percent, and she wanted a statistical breakdown of the individual budget accounts rather than a sum total.
Vice Chairwoman Giunchigliani then inquired about the Treasurer’s assessment, which was apparently going down. Mr. Adkins explained the assessment measured interest distributions received from management of the general portfolio and the Local Government Investment Pools (LGIP). The assessment was based on interest earned rather than a flat rate of assets managed, so revenues had gone down dramatically with respect to the drastic decline in interest rates. In addition, the charge for the Loomis delivery activity had gone down slightly and the charge for the Department of Employment Training and Rehabilitation (DETR) bank reconciliation had been eliminated in the past year, so those decreases had caused the revenues to go down.
In response to a query from Vice Chairwoman Giunchigliani, Mr. Adkins affirmed that transfers from the municipal bond bank had gone down as well, and he explained that it was based on interest earnings. Mr. Adkins explained the monies that the municipal bond bank received into the account were received 5 days to 15 days early, and with the forwarding contract entered into the past year, 75 percent of those revenues were now being forwarded rather than remaining in the municipal bond bank. Vice Chairwoman Giunchigliani verified the drop in the municipal bond bank was due to the low interest rates. Mr. Adkins confirmed it was the interest rates and the interest base that led to the decrease.
Vice Chairwoman Giunchigliani then referred to a transfer of $1.1 million made in 2003 and noted the transfer had caused the lowering of the interest in the main account because that dollar amount was no longer present. Mr. Adkins agreed and reminded the Committee the Office had been given $250,000 for that period in order to deal with the problem. He added that no additional funds had been provided for FY2004 or FY2005. Mr. Krolicki said the General Fund received $20 million by entering into the debt service agreement.
Mr. Goldwater alluded to earlier conversations and voiced his concern that, while Mr. Krolicki had made an excellent short-term decision regarding the debt service agreement, he felt it was debatable whether it was a good long-term decision. Mr. Goldwater pointed out the decision precluded future governors and future legislatures from taking advantage of high interest rates in order to earn a higher amount on the portfolio. He emphasized that in the event that interest rates rose, they would be unable to act. Vice Chairwoman Giunchigliani expressed similar concerns and said the debate would be continued at a later time. She then requested the Treasurer’s Office provide projections of earnings and losses over 5-, 10-, and 20-year periods in order to examine the impact on the state.
Mr. Krolicki offered further explanation of the debt service agreement. He explained the agreement locked into a 6 percent interest rate. He pointed out, looking at the past decade of historical earnings rates for those funds in the general portfolio the average had been about 5.85 percent. Mr. Goldwater indicated he had different numbers; however, Mr. Krolicki continued and addressed the possibility of interest rates going up and agreed in that event there would be an opportunity cost. Mr. Krolicki pointed out federal fund rates were just over 1 percent and not improving, and so currently the state was in a better position having locked into the 6 percent rate. He then reminded the Committee that as the debt service agreement matured approximately 50 percent of the encumbered securities would be fully amortized, thus the opportunity cost would diminish by half in less than 10 years. Vice Chairwoman Giunchigliani requested those projections in writing, and Mr. Krolicki agreed to provide those to the Committee.
Vice Chairwoman Giunchigliani concluded that portion of the discussion and asked for details on the Board of Finance. Mr. Krolicki informed her the Board’s membership was determined by statute, and consisted of the Governor, who served as chairman, the state Controller, the state Treasurer, and two gubernatorial appointees, one of whom must have been active in commercial banking activities in Nevada and one who must have been a certified public accountant. The Vice Chairwoman questioned if the members of the Board had a travel budget and if that budget had increased. Mr. Krolicki said they did have a travel budget, and Mr. Adkins confirmed the budget had been increased. Mr. Adkins explained that in prior years, the Office’s budget had not included the pay the Board members were entitled to receive. The amount was $80 per session, and in the past the appointed members had refused to accept the money. Vice Chairwoman Giunchigliani then inquired if the travel budget could be eliminated, and Mr. Adkins replied that, while the members had refused the pay, they were entitled to it, and so if they decided to claim it, it would have to be given to them. He conjectured the travel budget could be eliminated if the requirement to pay were eliminated. Vice Chairwoman Giunchigliani conceded the point and opined it might be time for a change.
Vice Chairwoman Giunchigliani directed Mr. Krolicki’s attention to decision unit E-720 and asked him to elaborate. She asked how many of the Office’s staff members were in the north and how many were in the south. Mr. Krolicki replied there were 41 employees and they were split fairly evenly between the north and the south. Vice Chairwoman Giunchigliani then questioned the Microsoft project in which software had been obtained and asked if the charges from the Department of Information Technology (DoIT) were adequate. Mr. Adkins verified there was a charge from DoIT, and that DoIT had reviewed the charge and approved it, and the project was essentially a teleconferencing system. The system would be in the state Capitol Building and would be available for use by all offices within the state Capitol Building. Vice Chairwoman Giunchigliani wondered if the teleconferencing system would allow for the reduction of the in-state travel budget. Mr. Adkins agreed it would reduce travel, but would not eliminate it completely. He said the Office had already reduced travel due to budget constraints. Rather than eliminating the need for travel, the teleconferencing system would absorb the excess capacity needed for the Treasurer’s Office as well as the Governor’s Office.
Vice Chairwoman Giunchigliani questioned the purpose of the travel and if travel could be reduced by relocating staff. Mr. Krolicki replied the responsibilities of the Treasurer’s Office were statewide so some travel was necessary. Mr. Krolicki emphasized that as an agency, the amount of travel was not significant, but it was necessary depending on what responsibilities arose in dealings with clients as well as meeting schedules for the Government Finance Officers Association (GFOA). He indicated the Office’s clients were the local governments and much of the travel was driven by the needs of those clients. Mr. Krolicki said his office worked with the local governments to invest their money, approximately $500 million, and so travel was dependent upon the clients’ needs. Mr. Krolicki then explained that the Office’s investment function, education programs, and unclaimed property staff were located in the south, and the cash management debt activities staff were located in the north; thus, if something that pertained to the debt department occurred in Clark County, travel was necessitated.
Vice Chairwoman Giunchigliani inquired if those situations could by handled differently, either by telephone, teleconference, or e-mail. Mr. Krolicki conceded that some situations could be handled in such a way, but there were some situations that were best handled in person, such as a due diligence meeting with a roomful of people that lasted for five hours. Mr. Krolicki assured the Committee that his office did do a large amount of work by telephone and teleconference and had traveled only when absolutely necessary.
Vice Chairwoman Giunchigliani explained her concern that things were being done out of habit rather than necessity and she merely wanted a clearer picture of what staff was doing and if a different location would be more advantageous to the state as a whole. Mr. Krolicki acknowledged her concern and informed the Committee there had been some restructuring in some of the other budgets. Vice Chairwoman Giunchigliani reiterated her desire for an explanation for the location of staff. Mr. Adkins offered additional information regarding travel and stated the majority of the travel could be attributed to the Office’s one computer expert who traveled between the north and the south as computer problems arose. He added that travel could be reduced if an additional person were hired to do computer maintenance in the south. He said the rest of the travel consisted mainly of educational travel, such as conferences and seminars.
Vice Chairwoman Giunchigliani acknowledged his point and proceeded to her next question regarding decision unit E-722. She asked Mr. Adkins to elaborate on the database expenses. Mr. Adkins explained the database documents consisted of minutes, agendas, and other documents from the Board of Finance. In response to Vice Chairwoman Giunchigliani’s question, Mr. Adkins said the expense was buying a program that could convert those documents into electronic files that could be placed on the Web site. He pointed out it was a one-time cost and would then entail a maintenance cost of approximately $300 per year after FY2005. Assemblyman Beers asked if the agendas and other documents were being prepared in Microsoft Word. When Mr. Adkins indicated that was correct, Mr. Beers offered an option that would cost approximately $400. Mr. Beers explained the purchase of this alternate program would allow the Treasurer’s Office to save Microsoft Word documents in a different format and facilitate easier posting on the Web site. Mr. Adkins indicated he would appreciate more information from Mr. Beers on the topic and would be willing to look into other options and cost-saving measures.
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Vice Chairwoman Giunchigliani then turned the meeting over to Chairman Morse Arberry Jr. as Brian Krolicki, State Treasurer, continued his presentation. Mr. Krolicki introduced a member of his staff, Janice Wright, who oversaw and helped with educational programs at the Treasurer’s Office. Mr. Krolicki explained BA 1081 was the Treasurer’s Higher Education Tuition Administration Budget, more commonly referred to as the Prepaid Tuition Budget. Mr. Krolicki reminded the committee the Prepaid Tuition Fund had previously been discussed in terms of the fund reaching critical mass. This “critical mass” would allow the fund to essentially sustain itself, and original projections had placed that amount at approximately $40 million. That would have allowed the fund to be weaned off General Fund loans while retaining the capacity to take out the fees needed to sustain the program. Mr. Krolicki indicated the fund had reached approximately $36 million, so his office was not requesting any money from the General Fund budget for the biennium. He said, as part of the restructuring occurring in the Treasurer’s Office, he had proposed the elimination of two positions in the budget. The first would be a Management Analyst IV position. He assured the Committee he would be providing all the details in writing.
Assemblyman Goldwater wanted to know if the achievement of critical mass, which allowed the Treasurer’s Office to pay administrative costs, would also allow for the repayment of the state loan from the previous legislative session. Mr. Krolicki replied his office would begin repaying the loan at the rate of $25,000 per year.
Mr. Krolicki then returned to the discussion of positions and informed the committee his office would be eliminating two positions in the budget, while reclassifying the Administrative Services Officer IV position as an unclassified position. He indicated he hoped the reclassification would be considered part of the unclassified pay bill. Mr. Krolicki said the reclassified position would be called a Senior Deputy Treasurer, and this person would have general oversight and responsibility for the southern Nevada office of the state Treasurer’s Office. Mr. Krolicki indicated he would be making two similar requests for reclassification, reiterating that he was not requesting any more funds. To this, Ms. Giunchigliani inquired if this reclassification and elimination of positions meant two people who currently did the work would be replaced. Mr. Krolicki responded that the director position for the Prepaid Tuition Program would be eliminated, but the person currently in the position would retain the job, albeit with increased responsibilities. The reclassification would allow for the broadening of the scope of the position itself.
Ms. Giunchigliani inquired what the reason was behind the loan being repaid at a rate of only $25,000 per year, considering the loan had been over $3 million. Mr. Krolicki explained the fund needed assets to cover future liabilities and he felt it best to be prudent rather than stress the fund by removing large amounts of money. He explained his office had a good handle on the defined benefits side, which meant he knew who was enrolled in the program and when they would be matriculating. He emphasized the importance of a healthy fund, and claimed the fund currently was strong and healthy, but it had been challenged by the decline of the market just as every other trust fund had been. Mr. Krolicki said the investment had been strong and he felt the fund was where it should be. He opined that the big challenge the fund faced, and any other prepaid tuition program in the country, was the decision of regents regarding tuitions. Mr. Krolicki explained the fund was actuarially formatted to assume 5 percent growth in tuition increases at the university and college levels; however, there would be a 15 percent increase in the next two years in Nevada. He went on to say the percentages drawn out over 15 to 20 years could be substantially more than 5 percent. Mr. Krolicki reemphasized the need for prudence rather than aggressive action with regard to repayment of the loan. He reassured the Committee the loan would be repaid and he felt $25,000, along with over $100,000 in personnel reductions, was a strong show of commitment on his part.
Mr. Krolicki pointed out the legislation for the college savings side of the 529 program allowed revenues created from that source to be put into the prepaid tuition program and was another way to ensure the health of the prepaid tuition program. Ms. Giunchigliani requested clarification of the Treasurer’s projection of the fund’s actual assets. Mr. Krolicki explained the current market value was about $36 million, and stated that on a monthly basis the fund received close to $1 million by people filling out their coupons and making their payments to the Prepaid Tuition Fund. Ms. Giunchigliani verified those payments were from the 9,600 individuals enrolled. She then inquired as to the identity of the actuarial company, and Mr. Krolicki informed her the company was Milliman & Robertson, to which Ms. Giunchigliani responded the actuarial company had projected a sufficiency rate of approximately 62 percent, which had gone down from 71 percent. She then inquired if Mr. Krolicki had a plan for the fund to become sufficient or to maintain sufficiency to ensure those 9,600 participants were guaranteed. Ms. Giunchigliani then conjectured that it might be time to guarantee those enrolled and discontinue the program in order to reduce the risk to the state of Nevada.
Mr. Krolicki responded that his office had priced contracts very conservatively, but no one could have predicted the market would perform as poorly as it had over the past couple of years or that the regents would raise tuition rates the way they had. Notwithstanding, Mr. Krolicki claimed that markets and tuition costs followed trends and did certain predictable things over time. He explained that had been anticipated and a yearly actuarial study and resetting of price had been part of the legislation. Mr. Krolicki assured the committee the actuarial study was “taken to heart” and it had influenced earlier decisions to delay a push for enrollment in the Prepaid Tuition Fund due to the uncertainty in the market and costs of tuition. Mr. Krolicki explained the Board of Regents had met several times to deal with those things, and he expected to launch a scaled-back push for the Prepaid Tuition Fund; however, he suspected the tuition rate and the Board of Regents’ decision to adopt the contracts would increase the cost of the program 40 to 60 percent above the current rate.
Ms. Giunchigliani acknowledged his response, then reiterated her earlier concern regarding the drop in projection from 71 percent to 62 percent and requested to see the actuarial report in order to examine the self-sufficiency of the fund. Mr. Krolicki informed the Committee the report would be due in approximately two months, which led Ms. Giunchigliani to ask if the process could be expedited. Mr. Krolicki said he would try, but the timing of the report was dependent upon decisions the Board of Regents had to make, and the regents were due to meet in early March.
Mr. Krolicki then reemphasized the ability to take earnings from the college savings plan in order to put monies into the trust fund. Mr. Krolicki assured Ms. Giunchigliani the Board of Regents had discussed ways in which to increase the percentage from 62 percent to 71 percent. Ms. Giunchigliani expressed concern at this and stated that it seemed the Treasurer was merely moving monies back and forth in order to keep each side of the 529 plan barely afloat. Ms. Giunchigliani repeated her desire to see the actuarial report by mid-March as well as a plan that did not involve moving monies back and forth. She emphasized the need for a contingency plan as well as the examination of the state’s obligation to the program participants.
Assemblyman Goldwater asked if the college savings plan was a defined contribution plan and Mr. Krolicki nodded his assent. Mr. Goldwater requested clarification of Mr. Krolicki’s earlier comments regarding shifting funds from one account to the other. Mr. Krolicki explained that with prepaid tuition, his office was obligated to meet a certain rate of tuition at a future time, making it a defined benefit plan. He added that the college savings plan program was not a defined benefit plan. Rather, participants could contribute what they wished, and the end amount was the value of those monies after they had compounded tax-free for the amount of time the monies had been in the savings fund.
Mr. Krolicki explained that at the inception of the college savings plan, he had been empowered to enter into contracts with money management firms. The 529 programs, a moniker which came from the IRS, section 529, were created by federal law, but in order for the money management firms to offer the 529 college savings product to their customers, they needed to contract with a state. Mr. Krolicki then stated his opinion that Nevada had one of the finest models in the country because of the multi-manager approach. He explained that if someone bought a contract or invested with Vanguard in New York there was a fee charged, and Nevada was then given part of that fee. In that way the college savings plan generated revenue for Nevada. That revenue could then be used to counteract any problems with the Prepaid Tuition Program. Mr. Krolicki assured the Committee that he was confident the Prepaid Tuition Fund would be able to meet any liabilities.
Mr. Goldwater questioned Mr. Krolicki’s position that Nevada had one of the finest portfolios and cited an article from The New York Times published Sunday, December 1, 2002, titled “Rush to Safety on College Savings” and pointed out that Strong Capital Management’s aggressive equity portfolio managed for Nevada had been the worst performer of any of the 529 plans in the country, losing 22.3 percent (Exhibit C). Mr. Krolicki indicated he was not familiar with the article and would look into it.
Mr. Goldwater pointed out the Treasurer’s Office had requested $370,000 for marketing and he asked for examples of the marketing materials. He wondered if the state should be so aggressive in marketing given the uncertainty of the fund, particularly since the state would have to guarantee the fund with General Fund monies if it collapsed. Mr. Goldwater then asked why the Treasurer was asking for $370,000 for marketing while only paying back $25,000 of the loan and stated $370,000 spent on scholarships rather than marketing would be more effective as a “word of mouth“ marketing tool.
Mr. Krolicki explained the marketing budget had been needed initially in order to sell the product so the fund could reach a point where it could be self-sustaining; however, at the present time the majority of those funds would not be utilized in terms of marketing. He stated he thought those monies would be placed in the fund. Mr. Krolicki again assured the Committee the Prepaid Tuition Fund was viable and strong. Mr. Goldwater inquired if Mr. Krolicki had the actuarial report that stated the fund’s viability and strength. Mr. Goldwater then said he thought it was a great program and Mr. Krolicki had done a good job, but he was concerned because the fund was guaranteed by the state. Mr. Krolicki quickly assured the Committee that was not the case. Mr. Goldwater disagreed saying there were 9,000 children in the program who would someday say there was a state guarantee if the fund portfolio did not perform or if college tuition went higher than predicted. The participants would expect the state to guarantee it, and Mr. Goldwater felt the state would be obligated to do so.
Mr. Krolicki admitted he was concerned as well, but he reassured the Committee he did not feel the situation was as dire as thought. He said there were several prepaid tuition programs around the country that were struggling because of quarterly tuition increases that created liabilities the actuarial assumptions could not keep up with. Mr. Krolicki opined that markets over time behaved in certain ways, and so, despite three bad market years and tuition increases beyond the projection, the fund was still viable. He informed the Committee steps had been taken to address those issues, including recalculating tuition based on a 7.5 percent rate for the new contracts as opposed to the original 5 percent rate. He then explained the actuarial study and stated that the reduction from 71 percent to 62 percent was a way to deal with those issues as well. The 62 percent meant that in 1,000 cases, the assets would be sufficient to cover liability on 620 of those cases.
Mr. Goldwater requested that Mr. Krolicki supply the actuarial study to the Committee, so the Committee could make its own determination. Mr. Krolicki agreed to supply the study and said it would be transmitted to the Committee on March 31. Mr. Goldwater then repeated his request for more detail on the marketing plan. He wanted to see materials, and he wanted to know why Nevada’s portfolio of investments was rated among the lowest in the country and why Nevada had elected to contract with Strong Capital Management. Mr. Krolicki explained the reasoning behind choosing Strong Capital Management had been that Strong created different portfolios for different entities. He also stated there was no Nevada state money in the fund. Mr. Krolicki explained there could be a Nevada resident participating in a 529 program with a particular fund in Strong, but that it was not state money, it was the individual participant’s money. Mr. Goldwater asked who had contracted with Strong Capital Management. Mr. Krolicki replied the Treasurer’s Office had contracted with Strong and reiterated his earlier point that a resident of New York could buy a 529 program from Strong Capital, and it would not be Nevada money. Mr. Goldwater then repeated his question: who had contracted with Strong Capital. Mr. Krolicki stated again that the state of Nevada had contracted with Strong Capital, adding that the state of Wisconsin and the state of Oregon had contracted with Strong Capital as well.
Ms. Giunchigliani addressed Mr. Krolicki and reminded him the Committee had requested several things, including the actuarial report that would be issued in mid-March, the plan to become or maintain self-sufficiency of the Prepaid Tuition Fund, a timed payment plan for the repayment of the state loan, the materials from the marketing campaign, and if there had been a Request for Proposal (RFP) prepared and its purpose. Mr. Krolicki responded he would get those items for the Committee, and he commented he thought the Committee would be very satisfied once the Committee had viewed the information.
Chairman Arberry recognized Speaker Perkins. Speaker Perkins stated he thought the Prepaid Tuition Program had great merit, and he disclosed he was a participant in the program. He then expressed his concern that, although there was no Nevada tax money in the 529 program, it was a program that had been endorsed by the Legislature and by the state of Nevada as a whole. Speaker Perkins said the endorsement implied an obligation to the participants. Mr. Krolicki agreed then reminded the Committee the participants had their choice of many different investment funds, and they chose which fund they wished to invest in. He assured the Committee he was monitoring the fund and he did not take the responsibility lightly, but the participant chose what type of fund, be it a conservative fixed-income portfolio or an aggressive portfolio, and the market reacted differently depending on the portfolio type chosen. Speaker Perkins agreed and said no one had foreseen the current market situation, but that meant a contingency plan was necessary. He also voiced a desire to see the results of the marketing plan.
ELECTED OFFICIALS – MILLENNIUM SCHOLARSHIP ADMINISTRATION (260-1088) – BUDGET PAGE ELECTED-96
Mr. Krolicki continued his presentation and addressed the Millennium Scholarship Administration Budget Account 1088. Mr. Krolicki indicated the director of the Millennium Scholarship program, Ms. Susan Moore, was in the audience and available for additional information if necessary. Mr. Krolicki then began his presentation and stated one administrative aide position was being eliminated in the Millennium Scholarship budget. He requested continued funding for the baseline study. Mr. Krolicki mentioned the program was funded with the tobacco litigation Master Settlement Agreement (MSA) monies, of which the fund received 40 percent of monies collected from this settlement by the state of Nevada. He then noted the law placed a cap of 2 percent for administrative costs by the Treasurer’s Office, and he assured the Committee he did not foresee a problem, but he said the tobacco securitization proposal would prevent future problems.
Chairman Arberry stated he was looking at information provided by the Legislative Counsel Bureau staff, which indicated the tobacco revenue would be insufficient to fully fund the Millennium Scholarship fund and a new infusion of revenue would be needed by 2006. Mr. Krolicki responded that Nevada was 1 of 46 states that entered into the Master Settlement Agreement and Nevada’s portion was estimated at $1.2 billion over 25 years. He assured the Committee the Treasurer’s Office was constantly reviewing the next 25-year horizon so it was in perpetuity but there was a 25-year window. Mr. Krolicki explained that Master Settlement Agreement (MSA) money amounts were determined exclusively by a formula largely based on domestic consumption of tobacco. He acknowledged that, because of this, those monies would always be subject to potentially significant changes in the ultimate amount received under the MSA. Mr. Krolicki said there were four tobacco companies in full compliance with the rules of the Master Settlement Agreement and payments could be more if people smoked more; however, he did not see that situation.
Mr. Krolicki mentioned that in addition to the Millennium Scholarship program, the monies from the MSA were used to fund the Trust Fund for a Healthy Nevada, as well as other programs promoting smoking cessation. Mr. Krolicki said this had been discussed before, but he believed his office was on track under the Wharton Economic Forecast Associates (WEFA) projections for the MSA. He postulated that without a securitization proposal, the Millennium Scholarship fund would continue to be fully funded under the existing terms of qualifications and eligibility through 2010.
Chairman Arberry voiced his concern that with additional taxes on cigarettes and the subsequent decline in smoking, which was already declining, there would not be as much tobacco money available to fund the program. He inquired as to what contingency plans were in place in that event. He also asked Mr. Krolicki when the Millennium Scholarship fund would need additional revenue to support the projected expenses. Mr. Krolicki pointed out it was difficult to predict hypothetical situations, but he felt the fund would be sufficient and additional revenue would be unnecessary through 2010.
Mr. Krolicki then agreed there was a risk the Master Settlement Agreement monies would be substantially reduced as people smoked less and the tobacco tax was raised, possibly tripled to $1.05 per pack. Mr. Krolicki acknowledged the purpose behind the tax was to generate revenue and to reduce smoking, but he said it could affect the amount of money the state received. Mr. Krolicki indicated he was well aware of the risks, which was why he proposed tobacco securitization in order to avoid being affected by the risk and to reduce the state’s dependency on the MSA money.
In response to a question from Chairman Arberry regarding a contingency plan, Mr. Krolicki said securitization was the contingency plan; the plan had been ready two years before, and he would provide an update on that plan this session. Mr. Krolicki said he knew members of the Legislature had legitimate concerns and he would provide details on the plan as well as an additional bill draft request (BDR) that would look to change the Constitution of the State of Nevada and essentially preclude the securitization monies from being used for other purposes. He explained this was a necessity as other states had used this decade’s worth of revenue that could be used in the long-term to balance their budgets in the short-term. Mr. Krolicki remarked that he understood the “direness of their situations” but he condemned their public policy in using tobacco monies under the MSA to balance budgets.
Mr. Krolicki reminded the Committee that securitization would provide a pool of money with a present value of approximately $1.2 billion, but in order to avoid the situations other states had found themselves in, the BDR would make it essentially a “poison pill” so those monies would not be eligible to be consumed by this Legislature or future Legislatures. The constitutional amendment would cap the amount that could be withdrawn, which would prevent its use for budget balancing and would ensure the monies would be used for the trust fund, or for whatever original purpose as determined by the Legislature.
Mr. Goldwater commented that securitization appeared to be a better option now than it had been in the past. He asked if Mr. Krolicki, using a higher discount factor and projections of investments, had an estimate of the amount of money that would have been lost had the Legislature allowed securitization when Mr. Krolicki had requested it in 2001. Mr. Krolicki replied he had no legal authority to do a test case on the investment side in order to see how it would perform. Mr. Goldwater then asked if Mr. Krolicki had previously requested to be allowed to invest the money. Mr. Krolicki replied he had made a request, but because of the interpretation of the law, which did not allow for investment of General Fund monies, he had not been given the legal authority to do a test case. Mr. Goldwater asked if the current securitization proposal allowed for equity investment. Mr. Krolicki explained that was an option, and since it was an amount of money that could be used for decades, it would have equity exposure, much like the Public Employees’ Retirement System (PERS) or any long-term funds would have.
Mr. Goldwater repeated his original question and asked for an estimate of what would have been lost and how that would have affected the budget account. Mr. Krolicki answered he did not have that estimate because he did not have the legislative authority to do a test case. He explained it was similar to the lease-purchase agreement his office had pursued with the Legislature. He had been given legislative authority in that case, but it took two-and-a-half years to reach the point judicially so that it was not in violation of the Nevada Constitution. Mr. Krolicki said he would need clarification from the Nevada Supreme Court before he could invest those monies. Mr. Krolicki said there would have been some loss due to the market situation if there had been a balanced portfolio that included equities.
Mr. Goldwater inquired if the discount factor would have gone up or down in the past two years, and Mr. Krolicki replied it had not changed very much. Mr. Goldwater then asked what discount factor Mr. Krolicki was using, to which Mr. Krolicki replied it depended on tax exemption status. The discount rate was 7 percent if tax exempt and 8.5 to 9 percent if taxable. Mr. Goldwater said that seemed to be a rather high discount factor. Mr. Krolicki responded that in order to take risks, the market needed to be compensated. He informed the Committee that the Council of State Governments (CSG) had issued a special publication discussing tobacco trends, and the CSG suggested that under the MSA, states would be receiving $15 billion less over the next decade. He advised the Committee the risk of getting less money under the MSA was greater than the cost of discounting between 7 and 9 percent. In addition, Moody’s Investors Service offered a worst-case scenario in which Nevada would receive $900 million, $300 million less than originally thought.
In response to questions regarding securitization posed by Mr. Goldwater, Mr. Krolicki replied the situation with the MSA was not whether or not the four tobacco companies would pay, and he did not think the MSA monies were going to disappear, although he conceded that was a possibility, rather, Mr. Krolicki pointed out, the MSA was essentially investing in four tobacco companies, while securitization would allow for a diversified portfolio approach. Mr. Krolicki opined that depending on tobacco money when governments, regulators, lawmakers, and program providers were attempting to decrease smoking was an untenable position. Mr. Goldwater asked Mr. Krolicki if he could estimate the different scenarios of securitization, and Mr. Krolicki agreed to do that.
Assemblywoman Chowning posed a question regarding a decision unit where one position was being eliminated while workload projections rose. She asked how that could be accomplished with the cutback in positions. Mrs. Chowning then inquired if the Treasurer’s Office would be looking at changing the eligibility requirements for the Millennium Scholarship in light of the many students who were achieving a 3.0 grade point average in college and yet were not eligible for the scholarship.
Mr. Krolicki responded to the latter question and said there had been a baseline study and there was initial data that could be supplied to the Committee. He explained eligibility requirements for the scholarship were determined by the Board of Regents; however, in terms of funding the Millennium Scholarship program, changing the eligibility requirements was always an option. Mr. Krolicki stated he was not aware of any currently proposed legislation addressing eligibility, but it could be done at a future date. Mrs. Chowning expressed a desire to look into the eligibility requirements then repeated her question regarding the position cutbacks.
Janice Wright, Deputy of Education Programs for the State Treasurer’s Office, identified herself to the Committee and explained the cutback that was recommended in the Governor’s request would eliminate a position that had previously not been filled. She stated the Treasurer’s Office would continue cost-cutting measures by reducing certain services and yet maintaining the same level of quality of service.
Vice Chairwoman Giunchigliani returned to the previous discussion and asked Mr. Krolicki if he concurred with the assessment that the revenue stream would not carry the Millennium Scholarship Fund through 2006. Mr. Krolicki indicated he was not aware of any information that led to that conclusion.
Mark Stevens, Assembly Fiscal Analyst with the Legislative Counsel Bureau (LCB), addressed Mr. Krolicki’s comment and stated that a member of the LCB staff had met with the Treasurer’s Office staff the previous week on a number of subjects, including the Millennium Scholarship Fund. In that meeting the projection for the scholarship fund was discussed and the conclusion had been reached that the money in the scholarship revenue stream would support expenses through the 2006 school year. Mr. Stevens pointed out if there had been a misunderstanding, or if the Treasurer’s Office had been in disagreement, he would like to have another meeting to address those concerns. Mr. Krolicki agreed, but stated he stood by his earlier statement that the revenue stream was sufficient to fund the Millennium Scholarship program through 2010. He added he had not been aware of any “red flags” in 2006. Vice Chairwoman Giunchigliani requested that Mr. Krolicki meet with his staff, reexamine the information, and devise a plan if the revenue stream proved to be insufficient from 2006 to 2010. Mr. Krolicki agreed to do that, and then inquired what Wharton Economic Forecast Associates (WEFA) numbers were used as future revenues. Mr. Stevens indicated he would supply that to the Treasurer and his staff.
Vice Chairwoman Giunchigliani recognized Speaker Perkins. Speaker Perkins asked if there was a contingency plan in the event securitization was not approved by the Legislature given the Legislature’s concerns regarding market volatility and the temptation to use securitization money to balance the budget. Mr. Krolicki acknowledged his concerns and explained the Millennium Scholarship Fund was not the only program dependent on the MSA money. He restated his position that securitization was the only way to eliminate being subjected to the agreement, and he said being subject to the agreement meant being subject to complex formulas. He explained that even if the current level of smoking were maintained, the likelihood of people purchasing tobacco from the “gray market” of non-participating manufacturers would grow exponentially. This would then affect the amount paid out under the MSA. Mr. Krolicki opined it would be better to shift the risk to the market. He acknowledged Mr. Goldwater’s concern and agreed there would be a cost, but Mr. Krolicki felt it was in Nevada’s best interests in the long term.
Mr. Krolicki explained that the bond rating the securitization might receive was a threat. Mr. Krolicki said when he had proposed securitization in the 1999 Legislative Session as an amendment to the original Millennium Scholarship bill, nationally there was approximately $200 million securitized, and by the 2001 Legislative Session, that amount had increased to $3 to $4 billion, and currently there was over $16 billion of tobacco bonds outstanding and another $5 to $6 billion “in the pipeline.” Mr. Krolicki acknowledged saturation of the market was a problem because, from a buyer’s perspective, the four tobacco companies were the underlying credit for the MSA. Mr. Krolicki said market interest rates were at historic lows, which would allow for entrance into the market. He acknowledged that some states had paid more to enter the market because they had needed to balance their budgets in a short amount of time, so the market had not been as favorable.
Speaker Perkins repeated his question and asked if there was another contingency plan in the event securitization did not become a reality. Mr. Krolicki replied there was no other contingency plan.
In response to Vice Chairwoman Giunchigliani’s question regarding the purchase of bonds, Mr. Krolicki replied the tobacco companies currently had the same investment grade rating as the state of Nevada. Vice Chairwoman Giunchigliani voiced her concern that the rating currently was the same, but in the future it would not be, and it would be difficult to sell bonds when the revenue was going down. She assured Mr. Krolicki they would be returning to the issue of securitization as the session continued.
Vice Chairwoman Giunchigliani referred to an earlier comment by Mr. Krolicki and asked for clarification of the 2 percent statutory requirement outlined in Nevada Revised Statutes (NRS) 396.926and an explanation as to how the FY2004 and FY2005 budget had been determined as meeting that requirement. Mr. Andrew Clinger, Deputy Director of the Budget Division, addressed the Committee and offered to provide that information. Vice Chairwoman Giunchigliani then requested that the Treasurer’s Office provide the projected revenues and expenses for the Millennium Scholarship Program by year through 2010. Mr. Krolicki agreed to provide the information by February 28, 2003.
ELECTED OFFICIALS – UNCLAIMED PROPERTY (101-3815) – BUDGET PAGE ELECTED-101
Mr. Krolicki continued with his presentation and presented Budget Account 3815, Unclaimed Property. Mr. Krolicki indicated that Mr. Steven McDonald, Deputy of Unclaimed Property, was present to answer any questions regarding the budget. Vice Chairwoman Giunchigliani indicated there were no questions from the Committee and requested Mr. Krolicki continue to the next item on the agenda.
ELECTED OFFICIALS – NEVADA COLLEGE SAVINGS TRUST (605-1092) – BUDGET PAGE ELECTED-104
Mr. Krolicki began his presentation by stating the Nevada College Savings Trust account was not funded by the General Fund. Instead, it was funded by the revenue generated from contracts with private sector firms. Mr. Krolicki pointed out there was a request in the budget for one full-time employee and supporting operating costs. The Treasurer’s Office was also requesting elimination of an Administrative Services Officer (ASO) IV position in order to create a Senior Deputy Treasurer position. The position had much broader authority than an Administrative Services Officer IV position and Mr. Krolicki hoped it could be made an unclassified Senior Deputy Treasurer position. Mr. Krolicki indicated two positions associated with the Allodial Title Program had been eliminated and the person in the new Senior Deputy Treasurer position would oversee that program. Mr. Krolicki pointed out this change in position did not require more money, merely a reclassification.
Vice Chairwoman Giunchigliani revisited the question of the General Fund payback. She indicated that previously Mr. Krolicki had written that when he had prepared his budget, he had anticipated the college savings program helping support the Prepaid Tuition Trust Fund, yet he had forecast there would not be sufficient revenue at that time to do that. Mr. Krolicki explained that the contracts with Vanguard that had been agreed to by the Board of Examiners had been in place since October or November of 2002, and so it would take time for the programs to grow and the annuities to be established. Mr. Krolicki said, as this was a brand-new program, the revenues could not possibly be at that level. He said his office had examined the contracts actuarially and were looking forward 10 to 20 years to future revenue. Mr. Krolicki stated that a portion of those expected revenues would solidify the funding of the Prepaid Tuition Trust Fund. He conceded there was not a large body of money in the fund currently, but that money would be earned annually over years to come, and that money would be diverted to the Prepaid Tuition Fund to ensure the fund maintained its viability.
In response to Vice Chairwoman Giunchigliani’s question regarding the number of people paying into the fund, Mr. Krolicki verified there were approximately 14,000 individuals paying into the fund currently. Mr. Krolicki then explained those 14,000 individuals had opened up a 529 savings plan that ultimately was anchored to Nevada because they had invested with one of Nevada’s partners—Strong Capital Management, USAA, American Skandia, Vanguard, or Upromise. He pointed out there were other investment options and other firms that were anchored to other states, such as Merrill Lynch, which was partnered with the state of Maine. Vice Chairwoman Giunchigliani confirmed Nevada received money from people opting to invest with Nevada’s partners. She then requested a projection of revenue generated in the college savings plan. Mr. Krolicki said his office had that information and would be having a board meeting March 1, 2003, at which time the information would be presented. Vice Chairwoman Giunchigliani indicated the Committee would like to have that information as well. Vice Chairwoman Giunchigliani then turned the Chair back to Chairman Arberry.
Chairman Arberry indicated he had received a letter from Mr. Krolicki regarding the cash-flow position of the state. Chairman Arberry informed Mr. Krolicki the Committee would like to discuss the cash-flow information on Monday, February 10, at 9:00 a.m. Mr. Krolicki expressed concern that he would not be able to provide the necessary information at such an early date. He explained that cash-flow information was dependent on gaming and sales revenue and the Treasurer’s Office did not make projections regarding those. Mr. Krolicki said that for his office to have the information requested in five days was a challenge. Chairman Arberry acknowledged the difficulty, but reemphasized the need for the information. In response, Mr. Krolicki reiterated that his office did not make projections of sales tax and gaming revenues.
Speaker Perkins asked how that information could be obtained. Speaker Perkins observed that as state agencies crafted budgets, there had to be some discussion about cash flow and there had to be some concern. Speaker Perkins informed the Committee the state Controller had sent a letter to the Department of Education regarding a change in Distributive School Account (DSA) payments because of cash-flow problems. He remarked it would be very difficult to make decisions in such a compressed time frame without the Treasurer’s cash-flow information.
Mr. Krolicki explained his office dealt with cash management issues, and he gave the example of needing to make a DSA payment Monday, a university supplemental payment Tuesday, payroll Friday, and determining if there was sufficient cash on the books and in the banks to make those payments. Mr. Krolicki explained his office worked on those types of situations, but it was a very different exercise to project cash flow between now and June 30. He said those decisions were made by the Budget Division, but even the Budget Division was limited because of the nature of the system. The Budget Division was able to predict the ending fund balance by June 30, assuming certain revenue projections, but the Treasurer’s Office was not capable of answering questions regarding specific payments on specific dates.
Speaker Perkins said he recognized those difficulties, but emphasized the difficult position the Legislature was in with regard to cutting programs or raising taxes. He posed the question of whether the Legislature would need to raise taxes in order to get through the biennium and said that decision would be based on cash-flow projections. Speaker Perkins reemphasized the need for the best information possible to allow the Legislature to make the best decision possible. Mr. Krolicki pointed out that the memo Chairman Arberry had referred to was not delivered until late the day before because the Treasurer’s Office had been working to comply with the request. Mr. Krolicki informed the Committee he had spoken with John P. Comeaux, Director of the Budget Division, and Mr. Comeaux had assigned Andrew Clinger, Deputy Director for the Budget Division, and Bill Anderson, Economist for the Budget Division, to assist with the cash-flow analysis. Chairman Arberry inquired if Mr. Krolicki would be present with the requested information on Monday, February 10, 2003, at 9:00 a.m., and Mr. Krolicki indicated he would be present.
ELECTED OFFICIALS – BOND INTEREST & REDEMPTION (395-1082) – BUDGET PAGE ELECTED-108
ELECTED OFFICIALS – MUNICIPAL BOND BANK REVENUE (745-1086) – BUDGET PAGE ELECTED-111
ELECTED OFFICIALS – MUNICIPAL BOND BANK DEBT SERVICE (395-1087) – BUDGET PAGE ELECTED-113
Mr. Krolicki continued with the final portion of his budget presentation. He indicated the last three budget accounts, the bond interest redemption fund, the municipal bond bank revenue, and the municipal bond bank debt service, were as presented in The Executive Budget. Mr. Krolicki explained those budgets were obligations the state had incurred on behalf of itself or through municipal governments that participated in the bond bank. He indicated Ms. Robin Reedy, Deputy Treasurer of Debt Management, was present to answer any questions regarding the conduit budgets. Chairman Arberry asked for questions from the Committee and there being none, he thanked Mr. Krolicki and called a brief recess at 9:45 a.m.
Chairman Arberry called the meeting back to order at 10:00 a.m. He asked Kathy Augustine, State Controller, to present the budget for the Office of the State Controller to the Committee.
ELECTED OFFICIALS – CONTROLLER’S OFFICE (101-1130) – BUDGET PAGE ELECTED-74
Ms. Kathy Augustine, State Controller, identified herself for the record and presented a brief overview of the Office of the State Controller. Ms. Augustine explained the State Controller was one of the six constitutional officers of the state of Nevada, elected to a term of four years. She said the State Controller was the ex-officio chief fiscal officer charged with administering the state’s accounting system and the state’s debt collection program. Ms. Augustine indicated the Committee had been provided with a packet regarding information about the State Controller, including the debt collection program.
Ms. Augustine continued her explanation of the Office of the State Controller and stated the Office had the mission of administering the system to permit fair, accurate, consistent financial reporting and to provide current and historical financial information. In processing financial transactions, the State Controller had the constitutional duty of conducting the final audit and settling of all claims against the State and, as such, must ensure compliance with the intent of the Constitution of the United States, federal laws, and state statutes. Ms. Augustine said the Controller was also responsible for computing withholding and accounting data for all state payroll deductions and overseeing all records in connection with administration in compliance with federal revenue and income tax laws. She explained that financial activity reports were provided to a broad constituency. Ms. Augustine said the financial community and the general public were provided a comprehensive annual financial report, prepared in accordance with generally accepted accounting principles, and the Office had been mandated by the Governmental Accounting Standards Board (GASB) to also produce a popular annual financial report. Ms. Augustine indicated the Committee had received a copy of both of those publications through interoffice mail in the previous three weeks. She indicated those reports were essential to the marketing and selling of state bonds.
Ms. Augustine then explained that state agencies were provided printed and online information for administering their budgets and conducting the final activity associated with legislatively directed missions. Federal agencies were provided reports on income, cash management activity, and single audit activity. Ms. Augustine stated the State Controller’s constitutional authority was found in Article 5, Section 19 of the Nevada Constitution. She informed the Committee that the Controller’s Office currently had 45 full-time equivalent positions. Ms. Augustine pointed out the Office had received the Certificate of Achievement for Excellence in Financial Reporting under the program established by the Government Finance Officers Association (GFOA) for the last four years.
Ms. Augustine indicated the Controller’s Office had also implemented procedures and computer systems that allowed the state to comply with the Cash Management Improvement Act (CMIA) of the United States Congress of 1990. She said the Office continually monitored the receipts and expenditures of agencies that administered major federal programs to minimize investment losses associated with the CMIA. Ms. Augustine stated the Office of the State Controller was fully committed to implementing the Integrated Financial System (IFS) for the state. She said her office was in the last five months of implementing the Integrated Financial System, and were currently in the receivable component module. Ms. Augustine expected the system would be completed by July 1, a full six months ahead of the originally scheduled projection date of December 2003.
Ms. Augustine then introduced Kim Huys, Chief Accountant for the Integrated Financial System (IFS), to present the budget. Chairman Arberry indicated he would like to address questions he had regarding the debt collection program first. Ms. Augustine explained that in the 1999 Legislative Session, the Office of the State Controller had asked that the Legislature mandate that state agencies report to the State Controller on a quarterly basis how much was owed by state agencies, and she indicated she had provided the Committee with a handout detailing those amounts (Exhibit D). She explained the sections of the handout and indicated her office was most interested in the amounts that were overdue by 60 days. Ms. Augustine directed the Committee’s attention to the September 30 total of the amounts overdue by 60 days, which was $172,036,060.49.
Chairman Arberry recognized Assemblyman Marvel. Mr. Marvel asked how much of the debt had been written off and how much was collectible. Ms. Augustine explained her office had only written off approximately $11,000, but currently it was permissive for the agencies to turn over their debt for collection. She said all the revenue collection agencies had the capability to collect their own debt but had not done so. Ms. Augustine explained that the Department of Taxation and the Tax Commission had many of the bankruptcy cases and had chosen to contract with one of the state’s debt collection vendors to pursue those debts. She reiterated that the revenue collection agencies made their own determination about debt collection.
Mr. Marvel said it appeared that many of the debts would never be collectible because of bankruptcy or write-offs. Ms. Augustine said that was not necessarily true. She explained that her office had contracted with two debt collection agencies, OSI Collection Services, which did small debt recovery, and RecoverMetrics, which did forensic recovery over $25,000. Ms. Augustine explained RecoverMetrics was in the process of collecting an amount totaling between $500,000 and $1,000,000 from one of the mining bankruptcies in Yerington. Mr. Marvel asked if that amount would be collectible in the current year to aid in the budget shortfall. Ms. Augustine said it was dependent on the Legislature and indicated the Office of the State Controller had submitted a bill draft request (BDR 102) mandating all state agencies, with the exception of the Department of Taxation and the Tax Commission, who had expressed an interest in collecting their own debt, to turn over their overdue receivables to the State Controller for collection.
Ms. Augustine directed the Committee’s attention to another handout (Exhibit E) detailing the current amount of overdue receivables. She explained the Controller’s Office had interlocal contracts signed with ten agencies: Department of Motor Vehicles, Department of Business and Industry, Department of Agriculture, Department of Conservation and Natural Resources, Department of Taxation, Department of Transportation, Private Investigators Licensing Board, Commission on Economic Development, Public Employees Benefits Program, and Commission on Ethics. She pointed out the amount turned over to OSI was $5,675,883.63 and $1,028,542.01, 18.14 percent, had been collected. The amount turned over to RecoverMetrics was $1,572,517.00 and $6,245.32 had been collected. Ms. Augustine said she expected that amount to rise with the aforementioned mining settlement. She pointed out the Controller’s Office had collected $315,681.03. She indicated the total amount collected in the past 13 months was $1,351,468.36. Ms. Augustine said the Controller’s Office was collecting at a rate of $100,000 per month. Ms. Augustine said the results achieved from only $7 million of debt that had been turned over to the Controller’s Office demonstrated how high the return could be if the total amount of $172 million were turned over to her office.
Assemblywoman Giunchigliani referred to another handout (Exhibit F) provided by Ms. Augustine and inquired regarding the $226,951.75 in warrant offset. Ms. Giunchigliani asked what warrant offset was. Ms. Augustine explained the Legislature had authorized a pilot program, which had an end date that bill draft request 102 would seek to eliminate. That program, using the capabilities provided by the Integrated Financial System (IFS), allowed the Controller to “match” payments. She gave an example in which the labor commissioner of Las Vegas had sent the Controller’s Office an offset and the commissioner said that a contractor owed them money on a prevailing wage, but that same contractor had billed the Nevada Department of Transportation (NDOT) for the service. Ms. Augustine explained the Controller’s Office offset the payment to the vendor from NDOT and then her office sent the money to the labor commissioner in Las Vegas.
Ms. Giunchigliani expressed confusion and asked for further clarification. Ms. Augustine said in the example the contractor was liable, not NDOT, and it was a matter of matching payments so when money was owed, the two could be put together to rectify the situation. Ms. Augustine said the program had been so successful that it was now available to all the state agencies, but was dependent upon the agencies turning over their offsets to the Controller’s Office.
Ms. Giunchigliani asked if the $1,028,432.88 in the category, Department of Motor Vehicles (DMV) licenses (Exhibit F), was part of the pilot project. Ms. Augustine explained when all the contracts were in place in December 2001, the DMV submitted 6,000 bad checks to the Controller’s Office for collection. She said the Attorney General had advised her to send out demand letters, which the Controller’s Office had done. Ms. Augustine explained the debtors were then given 30 days to make a payment, and so through December 31, 2001, the Controller’s Office had collected $55,633.69. She said as of January 2, 2002, the Controller’s Office had turned over to OSI for collection the names of debtors who had not made restitution. Ms. Augustine pointed out that over $1 million from those 6,000 bad checks had been collected. She indicated the Office of the State Controller had been given an additional “hammer” in the 2001 Legislative Session to deal with the problem of bad checks for DMV services. Her office had been given the authority to suspend, until restitution had been made, a driver’s license, vehicle registration, or driver’s permit if an individual had written two bad checks. Ms. Giunchigliani asked how that program was working and Ms. Augustine directed her to ask the DMV for those statistics.
Ms. Giunchigliani asked what OSI was paid for the contract with the Controller’s Office. Ms. Augustine said OSI was paid approximately 11 percent of monies collected, which was passed on to the debtor. She explained that the Senate Majority Leader last session asked that the debtors owing under $200 not be assessed the fee. Ms. Augustine pointed out the State Controller had paid $2,589.48 in FY2002 and $2,956.44 in FY2003 (Exhibit F) and those were the only fees the state of Nevada had paid out of the $1,351,468.36 that had been collected. Ms. Giunchigliani asked if OSI had made 11 percent of that $1,351,468.36 collected. Ms. Augustine explained that OSI’s portion was 11 percent, but RecoverMetrics percentage was higher. She pointed out the $1.3 million included the payroll overpayment collection, a portion of the DMV collection, and the warrant offset collection, which were collected by the Office of the State Controller, not OSI or RecoverMetrics. Ms. Giunchigliani verified that RecoverMetrics collected debts over $25,000, and OSI collected those debts under $25,000, then asked what RecoverMetrics’ percentage was. Ms. Augustine explained RecoverMetrics’ percentage was on a sliding scale from 30 to 50 percent. She reminded the Committee that fee was passed on to the debtor, and a maximum fee of $50,000 had been put into statute.
Ms. Giunchigliani asked if positions could be eliminated as much of the debt collection had been turned over to outside vendors. Ms. Augustine said the 2001 Legislature had given the Office of the State Controller one Administrative Assistant I who was overwhelmed when the debt started being turned over to the Controller’s Office. Ms. Augustine said the Assistant Controller and an employee in the operations section had begun working on debt collection full time. Ms. Augustine explained those three people had been working full time on debt collection the past year, and she believed the workload would continue to grow as more agencies turned their debt over to the State Controller. Ms. Augustine said her office had conducted a couple of training sessions in Carson City and in Las Vegas in conjunction with the Office of the Attorney General. Ms. Augustine explained agencies were being trained to do the initial billing, the second billing, and the letter-writing requesting payment. Once those measures had failed, the debt could be turned over to the State Controller’s Office.
Ms. Giunchigliani asked what prevented the agencies from contracting with their own debt collection agencies. Ms. Augustine explained the revenue generating agencies always had had that capability but had not used it, and the statute had been put in place in the 2001 Legislative Session requiring state agencies turn over their debt. Ms. Giunchigliani asked what the duties of the three aforementioned employees were. Ms. Augustine explained the Office of the State Controller also collected payroll overpayments, which was a completely separate entity. She pointed out the total payroll overpayment debt was $323,818.02 (Exhibit D) and $33,095.59 (Exhibit F) had been collected; those three employees had been responsible for that.
Ms. Giunchigliani asked where the savings were if three positions had to be filled despite contracting out to other companies. Ms. Augustine assured the Committee her office was not asking for any additional positions. Ms. Augustine said she was asking that the Management Analyst I, currently working on IFS, be made a permanent position working on debt collection. In response to Ms. Giunchigliani’s question, Ms. Augustine replied the three employees had been pulled from other areas. Ms. Giunchigliani pointed out the 2001 Legislature had given the IFS five positions, three that were to be temporarily filled until July 1, 2003. Ms. Augustine explained those three positions would not end but would be used for continuing training. She then requested the question be turned over to Kim Huys, Chief Accountant for the Integrated Financial System.
Ms. Giunchigliani assented, and Ms. Huys addressed the Committee. Ms. Huys explained her area of expertise was the Integrated Financial System (IFS), but she wished to augment some of what Ms. Augustine had said regarding the use of resources currently dedicated to debt collection. Ms. Huys explained the IFS was being used to manage the warrant offset program, and she said there was ongoing work to deploy that program and enhance the system. Ms. Huys pointed out, as debt was turned over to the collection agencies, the Controller’s Office had a responsibility to do the reconciliation and to audit collection efforts to ensure the collection agencies were collecting the amount turned over to them.
Ms. Giunchigliani commented that privatizing would therefore not save money or improve efficiency. Ms. Huys agreed and said the Controller’s Office did expend resources to bring the state agencies and collection agencies into convergence. Ms. Augustine interjected that one advantage to privatizing was that it did allow debtors to have a collection status placed on their credit reports. She reminded the Committee the Controller’s Office did not have that ability, but it could be an incentive for debtors to make restitution if they were aware that those debts would show on their credit reports. Ms. Augustine said the only power the Controller’s Office had been given was the suspension of licenses and registrations at the DMV. She added that the Division of Wildlife had been designated to be part of the pilot program, but that division had been unable to get the system running. Ms. Giunchigliani returned to the pilot program at the DMV and asked if the placement of cash kiosks in the DMV had eased the amount of bad checks. Ms. Augustine replied that had not been studied. She said she and the prior director of the DMV had discussed the placement of check reader machines in DMV offices to try and alleviate the situation, but the check reader machines only determined if funds were sufficient at that moment; it did not guarantee the funds would be there when the bank received the check a few days later.
Ms. Giunchigliani asked about the five positions for the IFS project. She clarified that three were originally intended to be temporary, but the Controller had asked that two of those three be continued. Ms. Augustine explained that two of the three would continue working on the IFS project as the IFS project was now an ongoing program. She said there were 800 users currently on the IFS system. Ms. Giunchigliani asked how many users there potentially could be. Ms. Huys responded 800 users was the total, and Ms. Augustine interjected that the number of users would stay the same.
Ms. Augustine reiterated that two of the three positions would stay with the IFS, and a Management Analyst I would be working in debt collection. Ms. Giunchigliani said she had reviewed the minutes from the 2001 Legislative Session that related to the five IFS positions. She said Chairman Arberry had asked whether the five positions would still be needed once the IFS project was completed and Mr. Winebarger had replied, “Three temporary positions would probably not be needed after the project; however, the other two positions would need to be reevaluated at the completion of the project. There might be continuing requirements for the training of new employees.” Ms. Giunchigliani expressed consternation and asked for justification to return the three positions requested.
Ms. Augustine explained there were four sections within the State Controller’s Office: an operations section, which dealt with agency services such as 1099 forms; a financial reporting section, which dealt with budget presentations as well as the CMIA and the state school permanent fund; a data processing section, which dealt with the technical areas within the office; and the debt collections section, which had been recently created. The IFS section had been combined with the operations section, so it was a matter of reorganization within the office in order to operate more efficiently and effectively. Ms. Augustine said there were three Chief Accountants and one Data Processing Manager, which was the same as it had been before the reorganization.
Ms. Giunchigliani clarified that the new debt collection division was in actuality a realignment of duties within the Office. Ms. Augustine indicated that was correct, and Ms. Giunchigliani requested job descriptions of heads of the four areas. Ms. Augustine explained each section had a Chief Accountant, except for the data processing section, which had a Data Processing Manager. Ms. Augustine said those were all classified positions and only the Chief Deputy Controller, the Assistant Controller, and the Controller’s Executive Assistant were unclassified positions. Chairman Arberry asked if there were any other questions then indicated the presenters should continue.
Ms. Huys mentioned a few of the highlights in the budget. She said that contained within the budget was a request to move two of the positions, which were scheduled to end, into the Controller’s operations department. Those two positions would support the 800 users, provide training for every new user, and promote a more aggressive use of the system in order to use it to its full potential. Ms. Huys said the request also included the office equipment and furniture necessary to support the positions. She indicated the Controller’s Office had asked for additional training staff. Ms. Huys explained there were 45 positions in the Controller’s Office, 14 of those individuals were professional accountants and 10 were professional programmers. She said the Controller’s Office maintained certified public accountant (CPA) certification, which required approximately 40 hours of continuing education per year. In addition, the information technology department was required to continue training to keep up with the industry in order to run the financial system and technical operations.
Ms. Huys pointed out the Controller’s Office had some equipment replacements scheduled, according to the recommendations of the Department of Information Technology (DoIT). She said the Office had requested three new computers to support some of the positions, and the replacements had been scheduled over the next two fiscal years. Ms. Huys indicated there was another transfer request, decision unit E-902, which would bring the DoIT Help Desk position into the Controller’s Office. She said the last item was also a transfer of the Integrated Financial System (IFS) maintenance fees for software and various applications from the IFS Department of Administration budget to the budget of the Controller’s Office.
Ms. Giunchigliani returned to the discussion regarding positions in the Office of the State Controller. Ms. Giunchigliani said there were 45 positions, which was a 41 percent increase from the 1997 Legislature. Ms. Giunchigliani acknowledged the reorganization, but she pointed out that job-specific positions should end when the job ended. Ms. Giunchigliani expressed concern about the state’s budgetary constraints and requested more information in order to make a determination if the additional positions were the most efficient option.
Ms. Augustine acknowledged the financial situation of the state, but she indicated the Controller’s Office had assumed additional duties and the additional positions were necessary to carry out those duties. Ms. Augustine stated she had personally overseen the debt collection issue because pursuing debt collection was not a popular position, but it was a necessary one. She stated debt collection was the reason the State Controller had asked the 1999 Legislature and the 2001 Legislature to expand the duties of the Office to include collecting the money owed the state. Ms. Augustine said the Legislature had approved one Administrative Assistant I to perform those duties, but the task had been too large for one person. She explained the Controller’s Office was using the aforementioned positions to perform those additional duties. Ms. Augustine repeated she was not asking for additional positions, she was asking to convert the current positions which had already been funded. She explained the IFS project did not end, it was an ongoing system with 800 users. Ms. Augustine pointed out the State Controller’s Office had done the entire training for the entire state of Nevada on the Integrated Financial System. She said the Department of Administration had signed the initial contract. Ms. Augustine remarked she had been a member of the Legislature when the project was funded, not knowing that she would then be administering it. She said it had been a daunting task for her staff to train every state agency on the new system and continue the training for new users.
Ms. Augustine reiterated it was not a creation of new positions, but a transfer of positions to deal with additional duties caused by the new programs the Controller’s Office had undertaken. She pointed out her office was recovering approximately $100,000 per month, which easily covered the cost of maintaining those three positions.
Ms. Giunchigliani acknowledged the benefit of the debt recovery but cautioned against funding positions for a particular job and then maintaining the positions unnecessarily when the job was completed. Ms. Giunchigliani questioned whether those duties could be approached differently. She asked if it would be better to address those issues statutorily and tell the agencies what to do and how to do it, rather than adding duties to the Office of the State Controller. Ms. Augustine replied there had been several studies that showed centralized debt collection was more effective than the approach Ms. Giunchigliani had mentioned. Ms. Augustine indicated she would provide those studies to the Committee. Ms. Giunchigliani said that would be helpful as she was advocating an elimination of the Department of Taxation and the creation of a Department of Revenue staffed with individuals with the background to collect both revenues and receivables.
Ms. Augustine agreed and said her office did not have the expertise to collect the receivables, which was why her office had contracted with OSI and RecoverMetrics and allowed the agencies to sign interlocal contracts. Ms. Augustine said the process of procuring those contracts had been extremely difficult, and Ms. Giunchigliani responded that would be something to examine in the future. Ms. Augustine redirected the committee’s attention to the handout on interlocal contracts (Exhibit E) and pointed out the total fees paid for collection were $120,524, of which the debtors paid $114,979. This meant the Controller’s Office was collecting $243.73 for each dollar paid to a collection agency.
Chairman Arberry requested Ms. Augustine provide a report of the turnover of bad debts from agencies to the Office of the State Controller, and Ms. Augustine consented. Ms. Augustine then addressed one additional point. She said she had met with Chief Justice Deborah Agosti, the Administrative Office of the Courts, and the Las Vegas Municipal Court with regards to the judicial system. Ms. Augustine said when she had been the chairwoman of Legislative Affairs and Operations, there had been an audit to examine fees, fines, and forfeitures within the judicial system. It had been discovered uniform rates were not being charged across the state and Ms. Augustine hoped to work with Chief Justice Agosti to ensure the monies due the state were being collected and returned to the state. Ms. Augustine indicated her presentation was finished. Chairman Arberry thanked her for her testimony.
DEPARTMENT OF PERSONNEL (717-1363) – BUDGET PAGE PERSNL-1
Chairman Arberry recognized Jeanne Greene, Director of the Department of Personnel. Ms. Greene introduced Ms. Kim Foster, Administrative Services Officer for the Department of Personnel, and indicated the Committee had been given the Department of Personnel Budget Presentation to the Assembly Committee on Ways and Means (Exhibit G) and the 2002 Salary and Benefits Survey (Exhibit H).
Ms. Foster explained the Department of Personnel was funded from uniform assessments of all agencies served. This personnel assessment was set each biennium as a percentage of all classified salaries in the Executive Branch. The payroll assessment was similarly set as a percentage of budgeted salaries for agencies served by the Central Payroll System. Ms. Foster pointed out the percentage rate for the personnel assessment for FY2004 was .98 percent and the payroll was .35 percent, and in FY2005 the personnel assessment was .97 percent and the payroll was .35 percent. Ms. Foster indicated there were two other sources of revenue: the subscription training and miscellaneous revenue. Ms. Foster explained that subscription training entailed charging agencies in need of specific training a fee that was equal to the amount paid to the contracted trainer. Miscellaneous revenue were those fees received for the processing of child support payments, IRS levies, and wage garnishments.
Ms. Foster provided an overview of the base budget and the maintenance units. She said the base budget, less the reserves, was $8,501,906 for FY2004 and $8,556,662 for FY2005. The maintenance decision units included inflation, fringe benefits, and a travel adjustment. She explained the inflation and fringe benefits were both calculated and added by the State Budget Office, and the amount was approximately $200,000. Ms. Foster explained that, due to the terrorist attacks on September 11, 2001, the Department had curtailed its travel and had taken nine fewer trips between Las Vegas and Carson City.
Ms. Greene then presented the enhancement decision units. Ms. Greene explained the majority were recommendations made by the Governor’s Personnel Task Force, comprised of nine department and division administrators who had studied the personnel system for a year. Ms. Greene first addressed decision unit E-275, a proposal to relocate the payroll and records section to another location. That move would allow the section to be housed with the Integrated Financial System and would increase efficiency. Decision unit E-276 would create an harassment discrimination investigation unit within the Department. Ms. Greene stated that currently sexual harassment investigations were conducted by staff within the various agencies. Decision unit E-276 would create a unit of three investigators whose sole responsibility would be to conduct sexual harassment and discrimination investigations within the various agencies.
Chairman Arberry asked if classes were being provided for each agency to alleviate problems with sexual harassment and discrimination. Ms. Greene replied the Department of Personnel was currently providing classes, and she indicated there was an additional enhancement unit requesting the conversion of a part-time employee to full time to allow for ongoing refresher training for all employees. Ms. Greene said the Department hoped to provide refresher training every two years for supervisors and managers and every three years for other employees.
Chairman Arberry asked Ms. Greene if the classes had decreased the number of complaints. Ms. Greene directed his attention to page 9 in the exhibit (Exhibit G) and explained the Office of the Attorney General had compiled statistics on settlements and court decisions. Ms. Greene remarked the amount the state had paid in sexual harassment and discrimination cases had increased from 2001 to 2002, and it was a “significant” amount. Chairman Arberry remarked that if the cases were not decreasing, perhaps the Department of Personnel needed to do more training. Ms. Greene agreed and indicated the decision unit recommending a part-time employee be increased to full time would allow for that additional training. She said the Department had revised the class and initiated the new class in January.
Assemblywoman Chowning asked if the investigation unit would decrease the amount of time an employee would lose due to an ongoing investigation. She pointed out the investigation unit should provide an impartial group to aid in reaching a quicker and fairer result. She emphasized the importance of decreasing the investigation time and allowing the employees to get back to work doing the job they were supposed to be doing. Ms. Greene agreed and said the approach was critical to a more efficient and effective investigative process, which would result in a reduction of the costs associated with investigations, settlements, and court decisions. She said the Department of Personnel agreed that having a third party outside of the Department provided some fairness to the issue, and the trained investigators would be able to go out immediately and conduct the investigations. Ms. Greene pointed out the current system required the agencies to pull staff that had other responsibilities, which meant the investigations were not carried out as quickly as they could be.
Mrs. Chowning asked Ms. Greene to provide a projection of savings in employee time and dollars with more efficient investigations that would allow the employees to return to work more quickly. Mrs. Chowning said the savings in court costs were important, but the savings in the General Fund budget were just as important. Ms. Greene agreed and indicated her department would provide those projections to the Committee.
Ms. Giunchigliani mentioned the Department of Personnel was requesting three investigators and asked how many investigators were currently authorized within the Department. Ms. Greene explained there were no positions in the Department dedicated to investigations. Ms. Giunchigliani asked if there were positions in other agencies dedicated to investigations. In reply, Ms. Greene said she did not know of any positions that were solely dedicated to investigations, although investigations might be a part of the overall job responsibilities. Ms. Giunchigliani wanted to know what the job title for those positions would be, and Ms. Greene said personnel officers and affirmative action officers conducted investigations in addition to their regular duties. Ms. Giunchigliani surmised those positions could be eliminated with the creation of the investigative unit and asked why every agency needed a personnel officer. Ms. Greene said that many of the Department’s functions were decentralized. She explained the Department of Personnel did the recruiting on a statewide basis.
Ms. Giunchigliani stated that other agencies had personnel offices that did recruiting as well. Ms. Greene explained that some agencies did, but the Department of Personnel had delegation agreements with some of the personnel offices. Ms. Giunchigliani asked for a report detailing to which agencies the Department of Personnel had delegated recruiting. She said she had not yet looked at the entire study, but that seemed to be a duplication of effort. Ms. Giunchigliani asked why there was an assessment charge for the Department of Personnel when other agencies might already be performing that function. Ms. Giunchigliani said it was possible that those duties did not need to be done by the Department of Personnel anymore and should be fully decentralized.
Ms. Giunchigliani then referred to the study regarding harassment and discrimination cases (Exhibit G) that gave percentages, but did not give numbers of actual cases, which she requested be provided to the Committee. Ms. Greene replied she would try to get those numbers from the Attorney General’s Office. Ms. Giunchigliani asked if the Department of Personnel knew how many actual cases had been requested within an agency, pointing out the Attorney General’s Office received the information after an investigation, not the Department of Personnel. Ms. Greene indicated that was correct, and Ms. Giunchigliani remarked that the Department of Personnel should look into getting that information.
Ms. Giunchigliani indicated the Department of Personnel should look at the training and the quality of the training overall, not just in the area of harassment and discrimination. She mentioned there were evaluations done by the state employees and supervisors and she expressed a concern that those evaluations were not followed up on. Ms. Giunchigliani emphasized the quality of the training was very important. Ms. Greene said the Department did look at those evaluations and used them as performance indicators. Ms. Greene explained a new procedure had been instituted wherein Ms. Foster reviewed the evaluations. Ms. Giunchigliani said she thought that would be helpful. She mentioned she had taken a class and several of the participants had felt the class was not beneficial and had indicated that on the evaluations, but she and the other class members were concerned the evaluations were not reviewed.
Ms. Foster commented she would like to clarify that the three positions for the investigative unit would be a matter of reclassifying existing positions. Ms. Giunchigliani asked which positions would be reclassified, and Ms. Foster explained one employee would be from central data entry in the Integrated Financial System, as that particular position was no longer needed. Ms. Greene addressed the remaining positions and explained they would be transferred from the occupational studies unit.
Ms. Greene explained the Department’s approach with regard to occupational studies had changed, so it would be possible to divert the position with no additional cost. Ms. Giunchigliani asked how many individuals were currently in the occupational studies unit. Ms. Greene replied there would be three after the position was moved.
Assemblyman Hettrick asked if, in light of the current budget situation and the Governor’s request there be no increases, it was really necessary to have occupational studies this biennium when there were no funds available for salary increases. He pointed out the Legislature would most likely do a flat across-the-board increase in the next legislative session.
Ms. Greene said the Department of Personnel was changing the approach of the occupational studies due to the recommendations that came out of the Personnel Task Force. She said the occupational studies would no longer be looking at each individual position, the focus would be looking at class specifications, updating those specifications to ensure that the qualifications were still relevant, and ensuring the specification described duties and responsibilities. She said she had seen a significant decrease in the cost of the occupational studies to the agencies, and she said there were not many grade-level adjustments. Mr. Hettrick asked Ms. Greene to quantify how much the various agencies were saving. He pointed out that in one of the budgets presented previously, there was a fee for conducting an occupational survey study. He recalled that the fee was several thousand dollars and he was curious as to why those occupational studies were necessary over the biennium when money was scarce. Mr. Hettrick said the state could not spend any money, and in two years would probably recommend a flat 2 percent increase for all state employees, so while the occupational studies might make cases for people to get increased pay, currently the state was unable to do that.
Mr. Hettrick wondered if the money should be spent to do the studies. Ms. Greene replied the occupational studies were initiated as a result of a legislative audit recommendation several years previously. She said that at that time many class specifications had not been reviewed for 10 and, in some cases, 15 years and were outdated. The Department of Personnel had agreed the studies needed to be done and they needed to be done systematically. Ms. Greene said the majority of the classes were reviewed twice and she felt now they were at the appropriate grade levels, unless there had been significant changes to those jobs. She indicated the Department had conducted three major studies in the last two years: library and archives, which resulted in a total cost of $74,000; rehabilitation, which actually resulted in a savings of $2,000; and social services, which cost an additional $638,000, for a total of $710,000. Ms. Greene said, as a result of the change in approach, there would be minimal cost, if any, to implement the changes.
Mr. Hettrick clarified his position and said he was concerned about the actual cost of doing the studies. He asked Ms. Greene if, as she said, the studies had been conducted for the past ten years and the classes seemed to be properly classified, the studies could be eliminated for the biennium. Mr. Hettrick explained he did not disagree with the past audit findings, he was merely trying to find a way to eliminate unnecessary expenditures.
Ms. Greene informed the Committee the Department of Personnel had already initiated the new occupational studies examining class specifications for engineering and the allied mechanical construction trades, as well as rehabilitation. She explained the study had been initiated three months before. Mr. Hettrick asked if the engineering class specifications had been studied in the 2001 Legislative Session. Ms. Greene said there had been a salary increase last session, but there had not been an occupational study in the past ten years.
Mr. Hettrick asked why there was a study, when there had been a salary increase. Ms. Greene replied the purpose of an occupational study was not to increase salaries, but to look at job structure and update the class specification, which was used for recruiting and work performance standards. Reiterating his point, Mr. Hettrick said he understood the purpose of the studies, but there was a state hiring freeze, 500 positions were being eliminated, and there was no money to fund any changes made because of an occupational study. He emphasized he was looking for a way to eliminate expenses. Ms. Greene restated the purpose of the occupational studies was to update class specifications, which was necessary for recruitment purposes to ensure a qualified applicant pool, it was not to increase salaries.
Mr. Hettrick acknowledged that but pointed out the last three studies had increased costs by $700,000. He did not feel a study was necessary as the current situation with the hiring freeze meant changing the classifications, and requirements would have no effect. Mr. Hettrick said the state was not hiring anyone and there were no increases in salary, so there was no need for occupational studies. He asked Ms. Greene if it would be possible to wait two years to do the studies. Ms. Greene said it would be possible to delay the studies, but resources had already been expended to begin the process. Ms. Greene explained the departments had felt very strongly that the engineering and allied mechanical construction trade, and the rehabilitation classes needed to be examined immediately for recruitment purposes. Mr. Hettrick asked how much money would be saved if the studies were delayed for two years. Ms. Greene said the savings would be primarily in the three positions that were devoted to occupational studies. She pointed out those positions would then have to be eliminated or diverted to another program area.
Ms. Giunchigliani asked Ms. Greene to prepare a report for the subcommittee detailing how many positions got an increase in salary because of the occupational study. She conjectured occupational studies and salary increases tended to go together regardless of the intent. Ms. Giunchigliani opined the process needed to be reviewed. She stated her position that every vacant position should be eliminated, and then the agencies would have to argue for that position if needed.
Chairman Arberry indicated it was time for the meeting to end, and he invited Ms. Greene to return on Monday, February 10, 2003, to address the remainder of the budget for the Department of Personnel. Chairman Arberry adjourned the meeting at 11:00 a.m.
RESPECTFULLY SUBMITTED:
Susan Cherpeski
Committee Secretary
APPROVED BY:
Assemblyman Morse Arberry Jr., Chairman
DATE: