MINUTES OF THE ASSEMBLY COMMITTEE ON GOVERNMENT AFFAIRS Sixty-eighth Session February 9, 1995 The Committee on Government Affairs was called to order at 9:00 a.m., on Thursday, February 9, 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 COMMITTEE MEMBERS ABSENT: Mrs. Vivian L. Freeman, excused Mr. Wendell P. Williams GUEST LEGISLATORS PRESENT: None STAFF MEMBERS PRESENT: Denice Miller, Senior Research Analyst Paul Mouritsen, Senior Research Analyst OTHERS PRESENT: Myrna Williams, Clark County Commission; Marvin Leavitt, City of Las Vegas; Carole Vilardo, Nevada Taxpayers Association; Anita Laruy, City of North Las Vegas; John Swendseid, Swendseid and Stern; Paul Howard; Bob Seale, Nevada State Treasurer; Ed Felsing, Nevada State Bank; all others present listed on Attendance Roster, Exhibit B. ASSEMBLY BILL 50 - Authorizes medium-term financing for municipalities in lieu of short-term financing. (BDR 30-404) Chairman Bache requested Myrna Williams, Clark County Commissioner, and Paul Mouritsen, Research Analyst for the Legislative Counsel Bureau, to introduce the bill. Mrs. Williams indicated this bill was the result of an interim study. Paul Mouritsen said the purpose of A.B. 50 was to clarify the statutes, making them easier to use and to change one of the terms used therein. What this bill does is take some provisions which were formerly in chapter 354, repeals them, enacts the same provisions and puts them in chapter 350, where the other borrowing statutes are. The second revision changes the phrase "short-term financing" to "medium-term financing". The reason for this is that the statute has evolved and the uses to which it has been put have changed somewhat. The types of obligations that are being issued now would be more properly characterized as medium-term rather than short-term obligations. He proceeded to go through the statute. The repealed portions from section 354 were added as sections two through six of this bill along with the change in terminology of short-term to medium-term. He then indicated the corresponding chapters. Assemblyman Neighbors received a call on the bill regarding line 18, posting of the notice of resolution in a school district in three different places. The caller was concerned that it may be posted in an inconspicuous place and wanted the posting to be done on school grounds. Assemblyman Harrington wondered how often the local municipalities used the exemption listed on lines 23-25, page one, and line one on page two. Mr. Mouritsen referred the question to the local government people. Marvin Leavitt, City of Las Vegas, answered Mr. Harrington by stating that was a provision not often used. It means there is an exemption from normal limitations on taxes which are levied for operating purposes. Normally, a bond issue goes to a vote of the people and automatically would not be subject to that provision. If taken to the Nevada Tax Commission, this does allow the exemption for the repayment of short-term financing issued for public safety purposes. The exemption is not the subject to the 364 limitation but is computed at 6% per year. Mr. Harrington asked whether the switch to medium-term financing would anticipate more frequent use of the clause. Mr. Leavitt responded the length of time for financing would not change; it is either for five or ten years. If it is for five, it can be used for anything. If it is between five and ten years, it has to be used to buy something that has a life at least as long as the duration of the financing period. In the financial markets, short-term is generally thought to be used for a period of about one year. This is a misnomer as we are dealing with financing that will mature in five to ten years. The term medium-term fits the time frame more accurately. When this law was originally enacted in the sixties, it was called an emergency loan designed for very short-term operating problems. In the major tax changes in the seventies and eighties the use was altered for the purchase of small capital items that would not be applicable to a bond issue. That is essentially the reason for the change. Mr. Leavitt indicated there are still some other types of special financing issues in other chapters of the Nevada Revised Statutes but general purpose financing mechanisms are now all found in chapter 350. Assemblyman Lambert pointed out page three, lines 29-36,where it talks about a county organized farm bureau and a special tax being levied for that. She wondered if that was still used. Mr. Leavitt did not recollect it ever being used. Carole Vilardo, Nevada Taxpayers Association, spoke in favor of A.B. 50. The recommendation for this bill was made to facilitate the research and financing of infrastructure by moving all the general purpose financing statutes into the same chapter. Mrs. Lambert inquired of Ms. Vilardo if the Taxpayers Association had considered the capital expenditure for public safety being allowed to go outside the 6% cap. Ms. Vilardo indicated they had and were opposed to it. Anita Laruy, representing the City of North Las Vegas, offered support of A.B. 50 on behalf of Mr. Vytas Vaitkus, Finance Director. Mr. Bache closed the hearing on A.B. 50. ASSEMBLY BILL 52 - Requires certain bonds issued by municipalities to be sold by competitive bid. (BDR 30-406) Myrna Williams introduced A.B. 52 as another to come out of the interim study. It was suggested by the Nevada Taxpayers Association who has had a long interest in it. She briefly summarized the bill was designed to save the taxpayers money by requiring competitive bids on the sale of bonds as opposed to negotiated bids. Paul Mouritsen walked the committee through the bill. There are different ways of selling municipal obligations. In most cases with large rated obligations, they are put out for competitive bid. The bidder coming in with the most favorable terms can then purchase those obligations. There are situations where competitive bidding may not be appropriate and in that case, a potential purchaser is selected and then a deal is negotiated with that purchaser. There have been allegations of improprieties associated with the negotiated sale of bonds. This bill would act as a preventative measure to place limitations on the circumstances in which negotiated sales would be possible. He referred to section four defining "competitive bid" and to section six, "negotiated sale". The heart of the bill is in section seven, subsection one, stating that for most types of municipal securities, it will be necessary to go out to competitive bid under this statute. There are some exceptions to that listed in subsection two. There are also provisions regarding the delegation of authority to negotiate these sales. Carole Vilardo obviously supported the bill. She referred to the original recommendation of the infrastructure committee to make all bids strictly competitive; none were to be negotiated. She mentioned the resulting publication on infrastructure financing which addressed tax rates and infrastructure needs. They got a listing of bonds from every entity in each state to determine under every provision they were sold, then updated the numbers and compared the types of bonds available. It turned out that there were an extreme number of problems with negotiated sales of bonds in several states. At that point, the committee recommended the sale of bonds only by competitive bid, primarily to benefit the taxpayer. However, upon teleconferencing with local governments, it was deemed this was not a viable solution as there are some bonds that simply cannot be sold competitively. Thus, section seven of this bill in essence came out of committee recommendations combined with modifications of the government finance officers association. The qualifications in that section are provided as the best elements for competitive bidding. There are other guidelines for qualifying bids as negotiated rather than competitive. The competitive advantages in this bill parallel the same ones in the California Debt Management Advisory Council, a publication used to govern all of that state's financing on competitive versus negotiated sales. Ms. Vilardo would provide copies to the committee at a later time. She indicated the bill would be a useful tool and a protection for the taxpayer. Assemblyman Nolan wanted an example regarding page two, line 28, bonds sold by a municipality. Mr. John Swendseid, bond counselor, proceeded to illustrate that when a local government obtains a bank loan, the bank agrees to buy the bond for investment and they make a loan to the municipality. This is very common in Nevada. Mr. Nolan queried whether the municipality would then be selling the bond to investors, in this case not more than ten. Mr. Swendseid indicated typically it is one investor. The bank or whoever purchases the bond does so for investment, not for resale. Assemblyman Bennett questioned the competitive bid definition in section 4 where it says "one or more purchasers" and wondered how it could be competitive if there is only one bidder. Mr. Swendseid said the reason this reads " one or more purchasers" is a lot of times in a larger bond issue, two or three purchasers might get together to submit a bid and many bids may be received, but each comes from a group of buyers, not just individuals. Mr. Bennett then looked at page three, line eleven and asked what is a reasonable equivalent of a sealed bid. Mr. Swendseid related the advancements of technology, the latest being fax machines. Faxed bids are the desired method because interest rates are market sensitive and bidders do not want to write their bids down before the bid opening in order to appraise the current market. Computer bids have also been submitted. He indicated INTERNET bids would be the next step and room must be made for advances in technology. Mr. Bennett felt he was leaving himself open to litigation because of the lack of security in those types of processes. Mr. Swendseid emphasized they were sensitive to that issue. Under current law, competitive bids are frequently made and there is no statute on it; faxed bids have been secure and successful thus far. Mrs. Lambert asked Mr. Swendseid if the integrity of the process could be maintained while allowing these technologies and would people be deprived of the bidding process if these technologies were not permitted. He answered that people who want to place a bid the morning of the sale usually have an agent at the sale to whom he telephones his bid. The agent writes it down, puts it in an envelope and delivers it. This is somewhat expensive, but effective. The market is moving toward the faxed and computer bids. The interest is in something that works and has integrity. Paul Howard, financial advisor, explained the most common method of submitting a bid is by the underwriters calling somebody on the phone ten to fifteen minutes before the deadline. They either send someone from their firm or ask an agent to do this for them. Experiments with faxed bids have been seen mostly in other states. There is also a parity system, a computer system which has been tried once and found to be very successful. However, this is new and the bidder calling someone is still the most commonly used method. Mrs. Lambert wondered if he would be nervous having the term "sealed bids" instead of "sealed bids or the equivalent thereof" become the law in this statute. Mr. Howard indicated that might prohibit the parity system, an electronic or computer system and thereby defeat the purpose of timeliness. It also might prevent taking advantage of future technologies. Assemblyman Segerblom remarked if the bidder does not care, why should we care. For example, Mr. Howard related when the parity system was initially used they first spoke with at least twenty underwriters about the system and those who had used it practically begged to make it an option because they liked it so much. It is less risk for them as it eliminates human error. Mr. Nolan recalled last month's testimony by Tom Tatro regarding the elimination of the verbiage of sealed bids in order to allow faxed bids. In that particular situation, some of the recommendations were to allow for the option of receiving a faxed bid or a sealed bid and to obtain a waiver from the person sending the bid to eliminate liability on the receiving end. Mr. Bennett agreed with Mr. Nolan that if the waiver of responsibility were included in the statutes he would be inclined to move forward into the high tech area and would not object to eliminating the sealed bid process. Mr. Harrington agreed. Mr. Bob Seale, State Treasurer provided some information on sealed bids. He testified against A.B. 52 because he had serious concerns about the language in the bill. He said Nevada did not have the problems previously mentioned. The language allows for empowerment of the private sector in that it requires the consent of the financial advisor. It is also very restrictive in requiring unanimous approval of the entity issuing the bonds. Care must be taken in understanding the two types of bidding methods. He was concerned if the option of flexibility was removed from the issuer of the bonds, that it could be costly to the entity who is issuing the debt. Guidelines exist on how to issue these bonds. Mr. Seale was not convinced that it made sense to have another mechanism in the statutes to follow. He felt there would be a loss of flexibility to be able to issue those bonds in the appropriate manner. He related a recent sale of bonds that, at first glance, a competitive deal would have appeared to be the right choice to make. By taking the time to meet with individuals in the field, it was concluded a negotiated deal would be a better choice. It was a long process to select the firms to assist with the negotiated sale. A great deal of money was saved because of the approach taken. Mr. Seale again stressed the importance of flexibility. He applauded the language which states that an entire list of items must be thoroughly checked prior to proceeding with a negotiated bid. He believes that to put it into the statutes would result in the loss of flexibility to move in a rapid manner when these markets are so quick to shift. Ultimately, the language needs to be worked on to prevent empowerment of the private sector to control how and when bonds are sold. Assemblyman Ernaut inquired whether the state would be put in jeopardy if the statutes did not have this requirement and a Treasurer were in office who did not have a great deal of understanding of this issue. Mr. Seale replied there was always a risk; however Nevada has a long history of issuing debt both at the state and local level. He indicated there was not a clear line of abuse in the way the debt has been issued. A debt oversight committee is clearly needed that looks at these things. The State Board of Finance oversees Mr. Seale's debts via frequent reports. He believes this is appropriate and that much of the language used in the bill is more suitable on either a policy level or a regulatory level, not at a statute level. Mr. Harrington asked if any specific changes in the bill would make it more acceptable. Mr. Seale mentioned there were some, but his main concern was the financial advisor and the need for his approval. Another problem was the requirement of unanimous approval by the governing body because one vote alone would prohibit the sale from going through. Mrs. Segerblom inquired as to Nevada's bond rating. Mr. Seale pointed out it was good; it was AA. She also asked if there had been difficulty selling bonds. Mr. Seale replied no, there had been no problems in that area. Part of the reason for that is because Nevada bonds do not sell as well and are more expensive than in other states. One way to get around that is to utilize, under certain circumstances, a negotiated sale. That is why he is worried the removal of that mechanism could prevent the state from getting a good price for bonds. Mrs. Segerblom questioned the bond rating of counties and cities in the state. Mr. Seale responded that varies depending on the entity; some of them are not rated at all because they are so small. Others such as the larger counties have the better ratings. That is why the municipal bond bank exists, so that those smaller entities can come and sell their bonds directly to Mr. Seale, Administrator of the bond bank. Some of the language bothers him because perhaps these smaller groups could not sell those bonds to him if he were planning on a negotiated sale rather than a competitive sale. He restated the need to clarify the language in the bill. Mrs. Lambert asked Mr. Seale his opinion of the language dealing with sealed bids or the equivalent thereof and whether the security would be adequate to deal with problems that could arise. Mr. Seale related an incident of receiving six sealed bids from Mr. Howard's employees which had been collected over the telephone minutes before the deadline. The bids were given to Mr. Seale and subsequently the winner was determined. He believes in this day of electronics, there are mechanisms for ensuring protection. Millions of dollars are moved electronically every morning and they are very secure. He was very positive about this. Mr. Bennett wondered if bids required an original signature to be legal. Mr. Seale indicated they required his and the documentation they receive is signed prior to being assigned a number by the representative of that firm. Mr. Ed Felsing of Nevada State Bank spoke in favor of A.B. 52. When he was first introduced to the bill, he was told it was designed to stop the "pay for play" situation. At one time due to the tremendous profits in underwriting, there were a lot of surreptitious payoff-type deals being made and the integrity of the negotiated bid process was highly questioned. The industry itself finally put in a rule called G37, directed to anyone possessing a broker/dealer license, that prohibits pay for play (Exhibit C). Political contributions or favoritism of any sort had to be reported. There were civil and criminal penalties imposed for not reporting those types of things. He expressed a positive feeling that this bill would open up the bidding process and ensure public confidence in the whole scheme. It is in the best interest of all concerned, giving the public the highest quality service at the lowest prices. Mr. Felsing also felt the need for broadening the scope of the language as all bids need to be examined individually to determine whether a competitive or negotiated sale would be more beneficial for everyone involved. Mr. Felsing cited examples of both the New Jersey Executive order number 26 and an executive order from Florida which set appropriate criteria for all professionals in public finance (Exhibit D). Mr. Bennett asked Mr. Felsing if the pay for play situation had occurred in Oklahoma. Mr. Felsing said no, it was a recent occurrence and related the incident. He further elaborated the process needs to be opened up to make sure the public's business is done in an open and honest way. Mr. Bache requested any suggestions or amendments to A.B. 52 be put in writing and submitted to the committee for further consideration. Myrna Williams felt it necessary to respond to Mr. Seale's testimony. She indicated there were some problems under a different Treasurer in the past and by putting things into the statutes, protection was provided for the public. Mrs. Williams pointed out the distinction between state and local governments. One of the reasons Nevada bonds are more expensive than other states' is that there is no state income tax in Nevada. She also addressed the 100% unanimous vote of the elected officials at the local level, recognizing this could create some difficulties. She emphasized the understanding that elected officials have to take the responsibility for the finances of their local government. They cannot turn that responsibility over to staff and appointed people. The elected officials should have the final okay on major indebtedness as a way of protecting the public. She agreed some clean-up of the language may be necessary, but the intent of the bill should remain intact. Mr. Swendseid clarified a point in line four, page two of the bill that says a competitive sale would be required if the bonds have an "A", "AA", or "AAA" rating and that insurance must be obtained for the bonds. That is intended to mean just what it says; the municipality would obtain the insurance. If the underwriter secures the insurance, that particular clause would not apply. Mr. Harrington referred to page three, line three, mentioning the unanimous vote giving veto power to one person who could then hold the rest of the commission hostage until he got his way. He wondered if it would be possible to have a lesser vote that would be acceptable rather than unanimous. Mrs. Williams felt he had a valid point worth considering. She believes the intent, especially in larger counties, was to be well-reasoned and agreed upon before those local governments were indebted. Perhaps there could be more discussion on that element. Mr. Nolan proposed that Mr. Seale work with the committee on some language that would provide for some exemptions should a window of opportunity open or a particular issue present itself for negotiation within a limited time frame in order to save the taxpayers money. Mr. Seale thought it an excellent idea and would be more than happy to do that. Mr. Bache closed the hearing on A.B. 52. He appointed a subcommittee to deal with the issues in question. He appointed Mr. Neighbors to chair the group, along with Mrs. Lambert, Mrs. Krenzer and Mr. Bennett. ASSEMBLY BILL 53 - Authorizes municipalities to issue refunding bonds for improvement districts under certain circumstances. (BDR 21-407) Myrna Williams and Paul Mouritsen presented A.B. 53. Mrs. Williams chaired a subcommittee dealing with this bill. All bills submitted for bill draft at that time received unanimous approval by the committee and the technical committee comprised of representatives of many local governments, the home building industry, the resort industry, commercial real estate and so on. In larger counties and cities, the local government may be in the process of organizing several improvement districts at the same time. Because of the relatively small amount of money required, it is often not economical to issue bonds to finance a single project. However, if several projects were financed jointly, bonds could be sold on more favorable terms. The statutes do not currently authorize this practice. The subcommittee recommends the law be amended to include this authorization. Mr. Mouritsen explained that often, local improvement districts are also known as special assessment districts. When a certain neighborhood requires capital improvements, a city, county or general improvement district may form what is called a local improvement district. It has no governing board nor is it a true unit of local government. It is simply a district created to assess the property holders in that area over a period of years to pay for the money that was borrowed to put in that improvement. When a city or county establishes a number of these districts they could combine all of those for the purpose of issuing bonds. That is what is provided for in section two of the bill. It is simply a way of saving the assessment payers a bit of money. Section one has to do with refunding of outstanding improvement district bonds. After a district has been organized the bonds can remain outstanding for a number of years, often five to fifteen or more years. Many times during this period, the interest rate drops substantially. This is an opportunity to refund those bonds, that is to borrow at a lower rate and pay off the outstanding bonds. That practice currently is not explicitly authorized in the statutes. He reiterated the subcommittee recommendation to authorize this to save the taxpayers money. Mr. Nolan inquired if this would transcend municipal boundaries. Mr. Mouritsen did not see that allowance in the provision. He surmised it would be confined to one jurisdiction. John Swendseid, bond counselor, mentioned there is a separate provision in chapter 271 of NRS which allows a city and a county through an interlocal agreement to allow one of those entities to issue bonds for a project within the other entity's boundaries. Mr. Bache closed the hearing on A.B. 53. ASSEMBLY BILL 54 - Revises provisions relating to distribution of uncommitted balance in fund for municipal bond bank. (BDR 30-408) Myrna Williams spoke in favor of A.B. 54. She indicated that many times the small local improvement districts will go to the municipal bond bank because they can get a better interest rate there as opposed to the open market. There are times when they oversell and the project they are working on was not as costly as they had anticipated. If there is money left in the municipal bond bank, it reverts to the state. The suggestion in this bill is to have that money returned to the point of origin. Paul Mouritsen identified the municipal bond bank as a mechanism allowing the small local governments to borrow on more favorable terms. This permits them to issue obligations which are purchased by the municipal bond bank and then financed by state obligations. The advantage of that is the state does have a "AA" rating and can borrow on more favorable terms and therefore can pass those savings on to the local governments. During the early 1990's, there was a dramatic decrease in interest rates. That made it possible for the Treasurer to engage in several transactions which resulted in a fund balance accumulating in the state bond bank. That balance reverted to the general fund in 1993. It was a substantial amount. This bill would provide for that type of fund balance, should it occur, to revert to the local governments who use the bond bank. Mrs. Lambert queried whether this meant the local governments who had sold bonds to the bond bank or all of the local governments who have the potential to do so. Mr. Mouritsen specified in lines 18-22 of the bill that it would be in proportion to the amount of bonds issued. Mrs. Segerblom questioned if the district took the risk of the bond, lost money and could not repay it, would the state take over that debt. Mr. Mouritsen replied the state holds the local obligations. Presumably, if there were a default, it would have an effect on the state. Mrs. Segerblom assumed the profit would not be returned to the district. Mr. Mouritsen said no, it would not. The last time there was an uncommitted balance left, it reverted to the state general fund. Mrs. Segerblom felt if they take responsibility for the bond they ought to get the money back. Mr. Mouritsen agreed that certainly was an issue to be raised. Carole Vilardo recommended A.B. 54 indicating it had been accepted by the interim committee. In 1993, Mr. Howard found that 8.2 million dollars had reverted to the general fund. It did not stay in the Treasurer's account or in the municipal bond bank because the state was scrambling for money everywhere. Upon discussion of this, it was felt if the municipalities were using the municipal bond bank and it is their money that is generating this interest, then the refunds should go back to the local governments as it was their money to begin with. Those bonds that are issued are general obligation bonds and any problems would fall back on the municipality. Marvin Leavitt, City of Las Vegas, spoke in favor of the bill. He explained some of the process of getting an issue funded by the state bond bank. It is required to be a general obligation of the government who is issuing the bonds. Issues funded must be for the preservation of natural resources. If not, it would count against the state debt limit. A court determination would be needed to ensure that it was truly for that purpose before the bonds would be issued. Normally, one general obligation bond would be issued and that bond would be in favor of the state. The state would then go to the market and issue bonds through the normal market process. If it was later determined that the market interest rates had declined since the time the bonds were originally issued, then it would be advantageous to refund that issue and benefit from the lower interest cost currently on the market. Mrs. Segerblom asked Mr. Leavitt if historic buildings were considered a natural resource. He did not think so. Mr. Bache wanted to clarify that the Treasurer received money from the fund for administering it. Mr. Leavitt verified he did and said the costs associated with the issuance of debt are paid by those who are involved. The state hires bond counsel and financial advisors to take care of their portion of the transaction. Mr. Harrington wondered if Bob Seale had been consulted on this bill and what his position was. Mr. Leavitt did not know for certain. Mr. Mouritsen commented on Mr. Harrington's question. The State Treasurer did participate in the hearing of the subcommittee on this bill. Mr. Bache closed the hearing on A.B. 54. The meeting was adjourned at 11:10 a.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 9, 1995 Page