MINUTES OF THE ASSEMBLY COMMITTEE ON GOVERNMENT AFFAIRS Sixty-eighth Session February 6, 1995 The Committee on Government Affairs was called to order at 1:30 p.m., on Monday, February 6, 1995, Chairman Bache presiding in Room 4412 of the Grant Sawyer State Office Building, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Mr. Douglas A. Bache, Chairman Mrs. Joan A. Lambert, Chairman Mrs. Deanna Braunlin, Vice Chairman Mr. P.M. Roy Neighbors, Vice Chairman Mr. Max Bennett Mrs. Marcia de Braga Mr. Pete Ernaut Mr. William Z. (Bill) Harrington Ms. Saundra (Sandi) Krenzer Mr. Dennis Nolan Mrs. Gene Wines Segerblom Mrs. Patricia A. Tripple Mr. Wendell P. Williams COMMITTEE MEMBERS ABSENT: Mrs. Vivian L. Freeman, excused GUEST LEGISLATORS PRESENT: None STAFF MEMBERS PRESENT: Denice Miller, Senior Research Analyst Paul T. Mouritsen, Senior Research Analyst OTHERS PRESENT: Robert Hadfield, Nevada Association of Counties; Patricia Manry, Nevada Dept. Of Transportation; Roger Means, Washoe County School District; Eric Cooper, Las Vegas Chamber of Commerce; Myrna Williams, Clark County; Mike Massey, City of North Las Vegas Fire Dept.; Irene Porter, Southern Nevada Home Builders Association; I.R. Ashleman, Southern Nevada Home Builders Association; Mike Olson, City of Las Vegas; Don Brown, City of North Las Vegas; Gary Holler, City of North Las Vegas; Kurt Fritsch, City of Henderson; Warren Hardy, The Furman Group; Mary Henderson, Washoe County; Stephanie Tyler, Mike Alastuey, Clark County School District; Marvin Leavitt, City of Las Vegas The meeting was called to order and began with an Overview of the Study of Laws Relating to Financing of Infrastructure which Accompany Development (A.C.R. 38 of the 1993 session). Chairman Bache introduced Mr. Paul Mouritsen, Senior Research Analyst for the Legislative Counsel Bureau, who provided an overview of the interim study. Mr. Mouritsen had worked for six months on the report being reviewed. A number of changes were recommended, including a proposal for changes in the impact fee law. Mr. Bache requested Marvin Leavitt, representing the City of Las Vegas, provide an overview of the state bonding mechanism, which would be covered more extensively at the hearing of several bills on Thursday. Mr. Leavitt pointed out there are generally three types of debt recognized in Nevada and most bond issues would fall into one of these categories. The first is straight general obligation debt, backed by full faith and credit of a local government agency. This type of debt is submitted to the voters who then accept or reject the proposition. The second type of debt is general obligation debt that is additionally secured by a specific revenue source. For example, in a wastewater treatment plant operation, there is levied against the users of that system a service charge and the local government body would have to certify the charges coming from that system would be sufficient to pay for the debt, knowing that sometime in the future if that were not the case, it would become a general obligation of the community and would be treated similar to the other debt in that there would be a levy against the property tax rate to pay for the debt. The third type is special obligations, commonly called revenue bonds. They are payable from a specific revenue source and are not general obligations, are not a debt of the general community and property taxes cannot be levied to pay for this type of debt. Mr. Leavitt stressed the importance of the general obligation debt. If the local government proposes to issue a general obligation debt, before that debt can be presented to the voters, it must be presented to a group called the general obligation bond commission. This commission is composed of a representative of county, school district, city of county seat, one other from all other cities in the county, and one from the general improvement district. The general representative of the public is appointed by the other members of the bond commission. The commission has the obligation to determine the ability to fund current and existing obligations. They review the debt plans of the local governments plus the current debt and decide if the combined debts will put them over the maximum tax rate or are unable to pay. The Commission looks at amortization schedules, sources to repay the debt, payment schedules, and all avenues available for repayment of the debt. All three kinds of debt mature serially, requiring payment each year. The general obligation debt in particular, is normally structured so that over time, the payments are somewhat equal. Assemblyman Ernaut asked what type of bond caused the problem in White Pine County last session. Mr. Leavitt indicated the bond was a general obligation school bond, payable from property taxes. At that time, a future look at the tax rate computation was not done and the assessor had some problems using an older computer program which had become ineffectual and out-of-date. Mr. Ernaut then wanted to know if there was trouble from time to time with revenue source-based obligation bonds that are not voter-approved. Mr. Leavitt was aware only of problems with straight revenue bonds, not with any general obligation bonds. Assemblyman Neighbors remarked that one of the four counties he represented approved using net proceeds over the 30 year growth period. Since then the mine that was involved has closed down and the bond still has to be paid. He suggested that method of payment was inferior to other methods. Mr. Leavitt clarified the way mining property is taxed is by the method of net proceeds. Rather than valuing property itself, property is valued using the net proceeds of a mine which would be the gross revenues minus certain costs. Taxes are then based on those figures. Since mining operations are very cyclic, and the price of the mineral being sold varies so much, it can become a boom or bust situation many times in a decade. It is an unstable type of revenue to use to secure debt. In White Pine, an anticipated mining operation did not materialize and thereby placed the county in the position of exceeding the tax rate. Assemblyman Segerblom questioned if a commission decides that a general obligation bond would be issued by a state for that state. Mr. Leavitt responded the Legislature is responsible for the approval of those types of bonds. The Municipal Bond Bank, administered by the State Treasurer, provides for bonds issued by the state for the preservation of natural resources. Assemblyman de Braga wondered how much of the problem in calculating net proceeds from mining operations comes from the fact that they are estimated rather than based on the previous year's earnings. Mr. Leavitt stated that was a big problem. Net proceeds can vary as much as 50 to 75% in one year creating a very serious situation. Mr. Neighbors commented when estimating net proceeds, under the law there is a stiff penalty for underestimating. Historically, most of the mines have overestimated and have received the excess money back. Sometimes the mines show no net proceeds at all, proving once again the instability of net proceeds as a tax base. Mr. Leavitt spoke on the way bonds are sold. Bonds are sold either by a public bid type sale or by a private negotiated sale. Most general obligation bonds are sold by pubic bid. They are straightforward, simple bonds, payable by property tax. Sometimes insurance is purchased to ensure payment of the bond. Bidders on the bonds provide a list of interest rates for maturity and ultimately, the lowest true interest cost gets the bid. A negotiated bid, which is less credit worthy, is worked out with an underwriter to formulate the sale of the bid. The underwriter goes back and forth to the market to ascertain what is going to be needed to sell the issue. Assemblyman Bennett wanted an example of a less credit worthy bond. Mr. Leavitt complied by indicating the bonds for a redevelopment district, for instance, would be paid by increment. The amount of the increment is differentiated by comparing the amount of the assessed valuation now with what it will be in the future. There is no guarantee that increment is going to exist. A long process of speculation is also involved as to the history of the assessed valuation, whether to insure it or not, and whatever it takes to make the bond salable on the market. Mr. Leavitt explained most types of debt are to be refunded. That is accomplished primarily by calling the debt after a certain amount of time, and refunding the debt by issuing new bonds at a lower interest rate. The interest rate differential results in a savings. Another method, defeasing the debt, is accomplished by putting money in a trust fund and that trust pays the existing debt when it becomes due. This applies in most cases in the state with the exception of special improvement bonds. This type of bond is a direct charge against property owners in the improvement district. If the interest rate goes down, the property owners are able to reduce the rate on the bonds by the refunding process. In the case of issuing bonds, experts are hired to assist local governments. Bond Counsel is a firm of attorneys specializing in the issuance of debt and are usually federal tax law experts as well. They provide certification that the government has followed all of the applicable laws of issuance of debt. They would also provide an opinion as to the taxability of the bond under the federal statutes. A financial advisor would be hired in addition to the Bond Counsel to be responsible for selling the debt. Mr. Leavitt wrapped up his presentation with brief coverage of short term financing. This is debt that is issued for a period of less than ten years. Bonds between 0-5 years can be for capital, operating or purchases. What is purchased with bonds of 5-10 years must have a life at least as long as the bonds themselves. Local government approves these by a two-thirds vote and then it goes to the Nevada Tax Commission. They determine whether the local government has the ability to repay. With this debt, there is no ability to increase property tax so it has to be paid for out of existing resources. Local governments have traditionally used this method to fund small capital projects. There is currently a proposal to change the terminology to medium term financing and to move the wording back to chapter 350 where most of the bond provisions are located. Mr. Bache thanked Mr. Leavitt for his overview. He then asked Myrna Williams of the Clark County Commission to address the committee. She had been the Chairman on the Interim Study on Infrastructure. She withheld comments until bills would be discussed. Mrs. Irene Porter, Southern Nevada Home Builders Association (H.B.A.), presented a booklet compiled as a Primer on Impact Fees. It was prepared by Mrs. Porter and Mr. I.R. Ashleman, also of H.B.A. This information was provided for everyone's benefit to define and explain some of the differences between certain fees and taxes, eliminating common confusion. Mr. Ashleman referred to the booklet (Exhibit C) to further elucidate the term "impact fees" and clarify their use. He prompted the committee to return to page 6 to examine the definition as it applies to Nevada. He also covered taxes, exemptions and regulatory fees. He stated fees should be related to the cost of whatever they are for. That is not always the case. The Tax Commission regulates these fees. Mr. Ashleman then expounded on the rules governing these fees. If it is really a tax or it is unreasonable, then it is unconstitutional. A rough determination has to be made as to the cause of the impact and all other costs and fees of the new development need to be taken into account before the impact fees can be assessed. Requests must be found to be of general benefit to the public. This law is very detailed and is to be kept within the bounds of constitutionality. The most common violation in this area is called substantive due process of reasonableness. There are three court tests in this country to determine the constitutionality of impact fees: one is the restrictive test which requires proof that the need for the fee was generated solely by new development; second is labeled general public need or anything goes rules that simply requires proof of a need for the facility that would benefit the public; the third analysis is the reasonable or rational nexus test which looks at the reasonable connection between the facility's need and the growth generated. The Supreme Court has specified that there must be a proportionate relationship between the cost and the benefit to the development and to the community. Assemblyman Lambert queried whether the interim study looked at the problem of enforcement with the way the current law is structured. Mrs. Porter replied the interim study did examine the current law and some changes have been recommended. The enforcement issue itself has not really been addressed because there are ways to enforce it within the statutes now. ASSEMBLY BILL 47 - Revises provisions relating to impact fees. The bill was introduced by Myrna Williams, Clark County Commission, who indicated at the time, she was Assemblyman Williams representing District 10. At the time of the first interim study on infrastructure, laws were written covering impact fees. Included in that law was a formula and a definition of what impact fees could be used for. One of the things discovered at that time were some flaws that made the laws difficult to use. The only one to use the impact fee law was the city of Reno. Simplification of the formula and examination of the uses allowed for impact fees were some of the intentions of the study. It was decided the definition needed to be broadened. Currently, the laws are flexible in terms of the hard improvements that it can be used for such as roads, streets, sewers, gutters, etc. However, with the growth that has occurred, the pressure placed on local governments and the need for additional revenue, it was determined to expand the definition of what impact fees could be used for to include police and fire facilities. This does not include operating, maintenance, personnel or equipment items. This will give local governments the opportunity to take funds that otherwise would have been used for that and put into older areas to reestablish the existing facilities in dire need of upgrading and rehabilitation. There was a Supreme Court decision stating that impact fees could only be used in the area in which they are generated. There must be a benefit to the people paying the impact fees. Public safety was a reasonable item to add to the definition of impact fees. Assemblyman Harrington questioned the thinking that schools are not eligible for impact fees. Mrs. Williams responded to add schools would be to add an amount of money that would raise the cost of homes in the school's neighborhood significantly to the buyer. Raising impact fees affects the consumer, not the developer. Mr. Harrington then asked why eliminate the exemption on schools and then make schools pay impact fees. Mr. Mouritsen said in the existing impact fee law it states schools do not pay impact fees. What occurs when a new development is put in place, the city or county imposing the fee does a study of what the impact of the infrastructure will be on the facility. When the schools do not pay that impact fee, that portion of the cost is paid by the general purpose local government. All taxpayers would bear the same burden whether it was paid through the general purpose local government or through the school district. It was felt by the committee that perhaps it would be more straightforward to have those costs paid as a part of putting in a new school building. That way, the schools would put in their share as a part of the bond issue rather than have the city or county pick up the tab. Mrs. Williams offered a bit of background on the committee. Unanimous agreement was necessary on every bill that was introduced. Everything was discussed in detail and the straightforward method was thought to be the most advantageous for everyone concerned. Mrs. Segerblom mentioned there was no one from the schools on the committee. Mrs. Williams confirmed that. Local governments do not have enough funding resources to include the schools. Mrs. Lambert brought up another bill, A.B. 140, dealing with refunding impact fees for low income housing or apartments. She wondered if the interim study looked at some kind of exemption or relief for low income housing when impact fees were involved. Mr. Mouritsen remarked that issue was not raised. However, Mrs. Williams suggested there probably would be no objection to an incentive for low income housing based on past discussion. Mr. Harrington noticed on page 2, section 6, line 32 of the bill that filing progress reports will be required every three years instead of annually. He questioned the thinking on this. Mr. Mouritsen explained the scope and process of the impact fee laws had caused some problems. Primarily, the process for imposing impact fees is extremely cumbersome, time consuming and very expensive. Several sections of this bill intend to streamline the whole process. Sections 6, 8, 9 and 10 all include measures for tailoring the bill to make the process easier and less expensive. Assemblyman Nolan inquired if by including police and fire services would there be an increase in fees or a different appropriation of the fees currently being impacted. Mrs. Williams surmised it was possible, depending on how the formula is calibrated. Mr. Mouritsen asserted it would be a decision made by local governments upon the imposition of the ordinance. Mr. Bennett asked if section 7 would increase or decrease the paperwork. Mrs. Williams felt it would certainly ease the workload if it was done at the initial time of planning and development of the school. Irene Porter, Executive Director, Nevada Home Builders Association, served on the interim study and attempted to put the law into a context to demonstrate how it works. The existing impact fee law is an enabling legislation which allows local government to impose the appropriate ordinances. There is flexibility in the choosing of one or all of the kinds of projects authorized within that law. Under the U.S. Supreme Court decision, monies collected must be used for capital projects only. There must be the rational nexus making the connection between the facility to be built and the area in which it is to be built. The local government has to do planned use assumptions, projections of the land use within the city over a ten year period. Service areas and units must then be identified. These would be districts within a community. For example, a road covering a three mile radius is in an area 50% already developed, 25% about to be developed, 25% residential and the other 25% commercial. The local government through its land use assumptions, capital improvement program and its needs assessment study would define a service unit. That would be how much is attributable to each land use density within that area; the existing, the new residential, and the projected new commercial and industrial. That service unit fee then determines the impact fee. In addition to that, taxes, land dedications and other credits will have to be applied against the impact to calculate the new development's real cost. The proportion of the existing residents' fees must also be decided, as impact fees do not make up for past deficiencies. Often a bond issue must be passed to ascertain the impact fee. There are a lot of safeguards and it is a very lengthy process. Mrs. Porter went on to elucidate some of the various aspects of the impact fee law. The Home Builders Association participated in the 1987 study and wrote the impact fee law we have today. There has to be a great deal of common sense used in constructing and amending this law. Local government has to be very prudent in the cost of capital improvement projects in order to keep the cost of housing from going beyond everyone's reach. The public must be involved in the development of those capital improvement programs to make sure costs are kept down. Each person and each segment of government should be paying their fair share. Mrs. Porter reiterated the police and fire impact fees would be for land and buildings only. The law identifies neighborhood needs in a cohesive manner to provide additional capital facilities. It is fair and reasonable that each area's service needs are met and the residents are paying a fair share according to the improvements made in each community. Mr. Bennett pointed out the expense of quality assurance and accountability and wondered who paid for it. Mrs. Porter stated it would be done as a part of the regular accounting practices by the local government. Mr. Bennett questioned if this crossed ward lines. Yes, indicated Mrs. Porter. The land use assumptions have no correlation to political boundaries drawn within a community. They only have a relationship to the people and the service area for that capital facility. Mr. Bennett surmised a conflict in ward funding and the impact law. However, Mrs. Porter remarked the Supreme Court does not recognize ward boundaries within state or federal laws. The district is based on the service area, not the political boundary. Mr. Nolan asked for clarification on the term "impact fee" as opposed to exactions and so forth. Mrs. Porter defined the fee and indicated Reno was the only example of a community using an impact fee. Other fees are regulatory, special taxes or exactions. Mr. Nolan wanted to know the dollar amounts currently being paid for impact fees. Mrs. Porter explained once all the fees and taxes are calculated, the total came to about $20,000 per lot for a single family dwelling as of 1993. Mr. Harrington mentioned trouble getting bonds passed for educational purposes and was concerned that this issue would curtail issuance of bonds for schools. Mrs. Porter said nothing was being taken away from the schools, but was integral to the schools. The school bond issue is not an exorbitant amount of money. If the money does not come from a bond issue, it comes from the general fund of the community and can cut into other beneficial programs. It should be a part of the school district's responsibility to pay fees as a part of a bond issue, rather than have the money come out of the general fund. Don Brown, Director of Development for the City of Las Vegas, testified for A.B. 47. He said it represented a reasonable compromise, bringing together the building trades and local government. He clarified that local government does not look at impact fees as a big pot of money. It is simply a means of providing services local government must provide for new residents of the community. There is a substantial delay from the time a resident moves into the area until the time tax benefits are received by the local government as a result. The impact fees will allow for a head start on the budget and, more importantly, will not detract from the older, more mature areas of the city. Mr. Bennett questioned the number of impact fees being referred to in the future. Mr. Brown mentioned seven covered by this legislation. Mr. Nolan inquired whether funds collected for building new police and fire facilities could possibly be diverted to accomplish needed repairs in existing buildings. Mr. Brown indicated yes, the money can be put back into the community as the need occurs. Robert Hadfield, Executive Director, Nevada Association of Counties, requested favorable consideration of A.B. 47. Kurt Fritsch, City of Henderson, spoke in favor of A.B. 47 and described many of the impending costs to be funded by this measure. Mike Alastuey, Clark County School District, testified with qualifications for A.B. 47. His reservation to completely support the bill is related to lines four through eight of the current bill, involving the removal of the impact fee exemption for schools. He stated schools were not responsible for growth in the community. He felt if the decision to grow were associated with one entity or another, then perhaps that entity should be first thought of as the place where the impact growth cost should reside. Mr. Ernaut was confused about Mr. Alastuey's testimony regarding accountability and the growth decision. Mr. Alastuey indicated that accountability and decision to grow must be defined so the cost of expansion can rest with the initiators of that decision. He said the school districts do not lead development, they only follow development. He felt schools should be receiving impact fees rather than paying them. Mr. Ernaut did not understand the logic; dollars still come from the same wallets. Mr. Alastuey added that a number of localities around the state were part of the leadership in the decision to grow. The decision to annex and to work directly with major scale developers in order to increase tax base has been a conscious decision on their part. As these entities then use bond proceeds from school districts, who are followers rather than leaders, he feels this needs to be adjusted. Mr. Bennett wondered if the removal of the school exemption would raise the overhead costs of personnel for the district. Mr. Alastuey could not say one way or the other. As this is enabling legislation, the actual implementation and passage of the ordinances would determine if that is the case. Mr. Bache mentioned at the time of the study on this bill there was some controversy about certain points but Mr. Alastuey did not testify at that time - why? Mr. Alastuey expressed he was correct. At that time, the language for the study committee came together indicating schools would be excluded from impacts in the study. Admittedly, his attention to the study effort was intermittent and his attendance was on and off. He did not have a response at that time. Mr. Bache questioned if the repeal of this exemption would impact when the school district would receive or give money. Mr. Alastuey expressed concern if the impact fees are paid from bond proceeds, then it would be utilized as a project cost extended over a number of years. Perhaps that could be seen in a negative sense as a surreptitious form of financing as opposed to an up front fee. Mr. Roger Means, Washoe County School District, voiced opposition against A.B. 47. He expounded that when the current legislation was written, schools were exempt from impact requirements. He said Washoe County believes schools are true infrastructure and do not have an impact on the community. They react to the impact of the neighborhood and provide a service to that neighborhood that is true infrastructure. He said it defied logic in his mind to insist that schools have impact. They are responding to growth, not driving the growth. He remained very concerned that money for building schools was going to be diverted to other projects. The hearing was closed on A.B. 47. The meeting was adjourned at 3:50 p.m. RESPECTFULLY SUBMITTED: Denise Sins, Committee Secretary APPROVED BY: Assemblyman Douglas A. Bache, Chairman Assemblyman Joan A. Lambert, Chairman Assembly Committee on Government Affairs February 6, 1995 Page