MINUTES OF THE ASSEMBLY COMMITTEE ON GOVERNMENT AFFAIRS Sixty-eighth Session April 17, 1995 The Committee on Government Affairs was called to order at 9:35 a.m., on Monday, April 17, 1995, Chairman Lambert presiding in Room 330 of the Legislative Building, Carson City, 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 Mrs. Vivian L. Freeman Mr. William Z. (Bill) Harrington Ms. Saundra (Sandi) Krenzer Mr. Dennis Nolan Mrs. Gene Wines Segerblom Mrs. Patricia A. Tripple Mr. Wendell P. Williams STAFF MEMBERS PRESENT: Denice Miller, Senior Research Analyst Kim Guinasso, Deputy Legislative Counsel OTHERS PRESENT: John Swendseid, Bond Counsel; Bob Seale, State Treasurer; Marvin Leavitt, Clark County; Dr. Peterson, White Pine County School District Chairman Lambert began the work session with a request for Assemblyman Neighbors to review the subcommittee report on A.B. 52. ASSEMBLY BILL 52 - Requires certain bonds issued by municipalities to be sold by competitive bid. (BDR 30-406) Mr. Neighbors said the bill had been reviewed in three subcommittee meetings so far as it was a very complicated bill. Kim Guinasso, Deputy Legislative Counsel, had a flow chart made to illustrate the various aspects of A.B. 52 (Exhibit C). The chart was very self-explanatory and Ms. Guinasso went through each portion step- by-step with additional information. Mr. Neighbors noted the highlighted sections were for the committee's reference to the amendments for each particular bill section. Ms. Guinasso continued her lengthy explanation. She indicated there were additional requirements that would appear in the draft, but the flow chart represented all the proposed amendments and showed how A.B. 52 worked in chronological order. Mr. Neighbors requested coverage of the proposed amendments. Ms. Guinasso stated the flow chart represented the requested amendments. The chart shows how A.B. 52 would work if the amendments were adopted. She said there were a few differences in the draft as compared with the actual bill. She went through them starting with page two, section seven, where A- was included instead of A or better, which brought the rating of the bonds down one level (Exhibit D). A time frame was also included where the bonds have to meet the appropriate rating or better; 90 days before the sale and again on the day the bonds are sold. Section seven, paragraphs a, b, and c, should read a, b, c, and d. It currently reads as "b", where it says the municipality shall obtain insurance for the bonds before the sale of the bonds; that requirement has been eliminated. Continuing in subsection two of section seven, paragraph a, there is an additional requirement which says "any bond which is not a general obligation bond that has been issued with a variable rate of interest"; it currently refers to any bond, not just general obligation bonds. Three additional paragraphs were added on page four; paragraphs (j) and (k) are exceptions and paragraph (l) was added at the request of the State Treasurer. The requirements for financial advisor in (h) and (I) have been eliminated as well. Further on page five, paragraph b, subsection three, if the municipality has a financial advisor, a written report would be required from him which specifically describes the method of sale used for the proposed financing. The last paragraph of subsection three states "before entering into a contract to sell bonds, at least two-thirds of the members of the governing body of the municipality must approve the certificate." The previous requirement was unanimous approval by the governing body. In sections nine and ten, the only change was the rotation of the underwriter every six years instead of five which reflects more accurately the industry's practice. Sections 11 and 12 are new and these are the requirements for the financial advisor, added at the request of Ed Felsing of Nevada State Bank. Section 13 has been changed to reflect the addition of a report instead of certification which was required previously. Section 18 was changed to indicate the expiration of any agreement entered into after six years. Mr. Neighbors mentioned the bill was passed out of subcommittee with a unanimous do pass as amended vote. Mrs. Lambert commended all the people involved for all the hard work on this bill. Assemblyman Bache referred to one of the terms used during the interim study, private sale, and wondered why it was not included in the bill. He questioned whether the definition of a negotiated sale covered a private sale as well. The answer was yes. Assemblyman Nolan remarked on intercept sales which had been addressed last week and wanted to know where issue was mentioned in this bill. Ms. Guinasso pointed out paragraph l, subsection two of section seven on page four of the draft. Mr. Nolan assumed the language was acceptable to the State Treasurer and did not preclude intercept sales. Ms. Guinasso had discussed that with Mr. Krolicki and was not sure if Mr. Seale had anything further to add. Mr. Seale, sitting in the audience, stated the bill addressed his concerns sufficiently. Assemblyman Harrington referred to section seven, paragraph 2j where the chief financial and administrative officers are able to bypass the competitive bid process, and questioned who wanted that in the bill and why. Ms. Guinasso indicated it had been requested by Mr. Swendseid. John Swendseid, bond counsel, spoke on his own behalf. He said that request was in response to a comment made by the State Treasurer in Las Vegas that there are windows of opportunity in the marketplace that one would not want to miss because of the requirement for competitive bids. This would be an exception to cover a window of opportunity situation. Mr. Neighbors agreed and mentioned that would require a two-thirds vote of the governing body for approval. Mr. Harrington said the window was big enough to drive a truck through it and completely ignore competitive bids. Mr. Swendseid said it is possible, but because of the difficulty in phrasing exactly what the intention would be, this was the chosen verbiage and if problems did arise, the bill would come back to the Legislature next session for another amendment. Assemblyman Ernaut stated it was important to note that a negotiated sale is often as cost effective and competitive as a competitive bid sale. Assemblyman Krenzer responded to Mr. Harrington by mentioning a list provided to her of all competitive bids and negotiated sales that have been done since 1993 and all of them complied with measures in this bill. This would document and ensure the kind of integrity that has been ongoing. ASSEMBLYMAN NEIGHBORS MOVED TO AMEND AND DO PASS A.B. 52. ASSEMBLYMAN BENNETT SECONDED THE MOTION. Mr. Ernaut had one concern; the changes were substantial and needed to be digested. He did not feel comfortable voting at the present time. THE MOTION PASSED. ASSEMBLYMAN ERNAUT ABSTAINED. SENATE BILL 367 - Authorizes board of trustees of White Pine County School District to borrow money for payment of operating expenses of district. (BDR S- 1948) Chairman Lambert stated the Senate had passed S.B. 367 on Thursday as an emergency measure. She requested Mr. Leavitt to explain what was happening with the local government advisory committee there and what kind of time frames were being looked at with regard to getting the school teachers paid. Marvin Leavitt spoke of the time frame involved to get the payroll out for the school district. He said they would not be able to make the payroll without an infusion of cash prior to Friday. He went through the bill. Section one says there is an unusual situation in the White Pine County school district and because of this and the shortfalls they have had, a special act is required. This bill provides a legal justification for having a special act which ordinarily is not the case. Section two of the bill authorizes the school district to borrow 2.8 million dollars to pay the operating expenses incurred for the period from April 1 to July 31, 1995, and for the capital obligations incurred prior to April 1, 1995. The obligations of the local advisory committee were put forth in subsection two of that same section. The reason for this is because the Senate committee was concerned there was no one on board in the district capable of negotiating a loan and the school board could not be trusted to do it either, so they chose the local government advisory committee who now have the responsibility to determine what the procedures are for negotiating the loan, the terms of the deal, and to solicit proposals. Once the terms and proposals are accepted by the advisory committee, they are turned over to the school district who then actually borrows the money. The maximum term of the obligation cannot exceed five years. The obligation is a general obligation of the school district, not an obligation of the State of Nevada. There is a provision in the bill to indicate if the school district violates the agreement it would be a misdemeanor. The loan has also been made more marketable as a result of Mr. Leavitt's suggestion to have an intercept mechanism in the bill to ensure repayment of the loan to the lender. Mr. Leavitt said this is not the final solution to their problem. The budget now needs to be completed, the capital funds have to be reviewed, re-negotiation of loans must be considered, and by the middle of May, the final proposals for the upcoming fiscal year should be ready. Mr. Ernaut asked who ultimately guarantees the loan. Mr. Leavitt replied it is a general obligation of the White Pine County School District which would mean the taxpayers are responsible. Given the intercept mechanism and the fact that more money is due from the state than is due for the repayment of the loan, this should not be a situation where there would be a repayment problem. Mr. Ernaut said the credibility of the school district was slight at best and if there were any shenanigans pulled and the school district defaulted on the loan, would the state not be responsible for the repayment of the loan. Mr. Leavitt indicated a provision in the bill that would free the state from any liability for repayment of the loan. Mr. Ernaut queried if that was constitutional from the standpoint the state was obligated to finance the school district of each county. Mr. Leavitt responded the obligation to the county has been fulfilled and the state is not responsible for the lack of accountability on the part of the school district. Mr. Ernaut replied the ultimate point was if they defaulted on the loan in some way, and there was no money to run the school system in White Pine County, then the state would have to step in and repair the damage. Mr. Leavitt reiterated there would not be a problem repaying the loan because there was enough money there. The intercept mechanism will ensure the loan is paid prior to operating expenses of any kind. The Department of Taxation holds the checkbook for White Pine County for the next five years and will not allow any frivolous expenditures. Mr. Ernaut insisted with something this important it was fair to establish who was the ultimate guarantor and subsequent to that, if the state is or is not the ultimate guarantor, who is the representative that is making sure that the new high school is not completed, spending exorbitant amounts on landscaping and other non-essential details. He stressed it was their job as legislators, if they were the ultimate guarantor, to have a say in the expenditure of school district funds from now on. Mr. Leavitt mentioned the basic plan to handle finances for the district involved the establishment of another, separate account so the money would not be co-mingled with the school district account until the Department of Taxation could review and determine what would be paid for on a day-to-day basis so expenditures can be monitored. Bob Seale, Nevada State Treasurer said there was another step to take as well. Besides the approval of the Department of Taxation and the local government advisory committee, any plan devised would have to be approved by the State Board of Finance. In addition, the Treasurer would intercept the school fund money. He emphasized in no way, shape or form was the state of Nevada taking on any obligation. The ultimate obligator would be the school district. The state was there to make sure the debt service was handled. There is more money being distributed to the school district than the debt service is going to require. Any default on any of their payments would reflect poorly on the state and could have an impact on the overall rating. It is important for the state to help solve their problem and this is a solution that will allow them to go forward and ensure that debt is paid on a timely basis. Mr. Ernaut said the only shred of ability for this loan to be marketable is that the Treasurer will be handling the debt service. Mr. Seale indicated it would be inconceivable for the loan to be marketable at all without this mechanism in place. This is an unrated issue and the private funding source would be comfortable because the Treasury is intercepting the money and is going to be obligated to make those payments. Mr. Bennett asked if anyone had been approached as a private lender. Mr. Leavitt mentioned they have had conversations with several private lenders who have given their assurance some proposals would be submitted. Nothing can be done until the bill becomes law because there is no authority to do so. Contacts have been made and the intercept provision will practically guarantee funding. Mr. Bennett questioned if the interest rates would be halfway favorable. Mr. Leavitt stated they would be all right due to the payment mechanism. Mr. Seale said the interest rate would not reflect the state's double A rating, but it will be an attractive rate and will not be particularly onerous. Assemblyman de Braga said above and beyond paying the bills, some decisions would need to be made as to who would now be in charge and make critical decisions. Apparently no one is aware of the seriousness of the problem and several laws have been broken. Mr. Leavitt indicated several things would have to be done. First of all, the Department of Taxation would be patrolling the payments, excessive capital purchases would be forbidden, and all payments will be scrutinized carefully. The ultimate solution is to hire a superintendent who will patrol the school district the way it should be followed and another new person to handle the finances, implement a workable accounting system and comply with all the reporting requirements. There has been discussion about getting someone to function in the interim until a permanent employee can be hired. All the details will have to come together before May 17 when the final plan has to be ready for the following year. Mrs. de Braga asked if that person would be selected by the school board. Mr. Leavitt said that depends on the subsequent legislation passed after this bill. Mrs. de Braga felt it was vitally important to hire someone who truly has the expertise, not just someone who needs a job. Mr. Neighbors questioned if payroll was being met in White Pine County. Mr. Leavitt said payroll was on Friday, four days away, and they would not be able to pay the teachers if money was not infused into the system this week. Mr. Neighbors spoke of the 2.8 million dollar loan with a payoff in five years and said that would be a million dollars a year for the five years. Both Mr. Leavitt and Mr. Seale felt that was a high estimate. Mr. Leavitt said they had to work with lenders and figure out the time frame, length of the loan, payment structure, interest rate and other details of the process before the exact terms would be known. However, the payments would definitely be less than one million per year. Mr. Seale indicated they probably would be around $750,000 per year. No matter what the payment, it will affect the amount of money available for operating expenses because the loan money will be intercepted prior to any other expenditures. Mrs. Segerblom questioned section two, subsection two, wondering who was the local governmental advisory committee. Mr. Leavitt answered the local government advisory committee is a statutory committee that consists of members from counties, cities and school districts; all essentially finance -type people. Mr. Leavitt himself was the chairman. Ms. Tripple queried why White Pine County as a local government did not have or accept the responsibility for this situation. Mr. Leavitt responded finance has an affect on every other standpoint other than investment of funds and some technical things relating to bond issues. The school districts, state and county are all very separate entities and there is no built-in mechanism for a county to bail out a school district and vice-versa. White Pine County and the city of Ely as well do not have the capability to solve a problem of this magnitude; they are barely making it themselves. Ms. Tripple asked if they did not have a moral obligation to help the school district. Mr. Leavitt said yes, but that moral obligation would not pay the teachers on Friday. Mr. Nolan wondered if the provision in subsection three indicating they would give the State Treasurer certified copies of each document within ten days would preclude or address the C.O.D. debts they have incurred or would that be taken out of the other accounts the Department of Taxation is holding. Mr. Leavitt said the reason that was in the bill was so the Treasurer has available all documents relating to the loan so he knows exactly what the payment terms are and when the payments should be made. Mr. Nolan reiterated there was a mechanism in place for the C.O.D.'s to be paid now though. Mr. Seale clarified the documents referred to in that section only deal with the debt itself or the bond or instrument that is being sold and not the documents as they relate to the individual payments. Those documents will be handled by the plan in the separate bank account that Mr. Leavitt had referred to so there are really two concepts or issues being looked at. Mrs. Krenzer asked about section two, subsection two and questioned if line 18 should say approve the proposals as well as review them. Mr. Leavitt supposed line 18 could be seen as an approval process. He indicated the current plan would begin that morning with a meeting of the subcommittee of the local government advisory committee followed by a meeting of the entire advisory committee on Thursday and a meeting of the White Pine County School District on Friday to try to approve the loan if the money will be available by that time. There is an extremely tight deadline to be met so the teachers will be paid and there is no time for the submission of any amendments at this late date. Mrs. Krenzer wanted a statement for the record that the Legislative intent would be to determine which proposals would be in their best interest means approval. Mr. Leavitt indicated that would be fine with him and eliminate any doubt. Mrs. Lambert stated Legal Counsel could be consulted to see if the Governor will be in-state to sign the bill on Wednesday, so it could be amended if it went in today. Mr. Ernaut said if the debt service is roughly $750,000, the cash disbursements for the last two quarters of 1994 and the first quarter of 1995 added together would be 12 million dollars. If that schedule were followed, the total for a year would be about 15 million dollars. Mr. Leavitt stated their operation money was about 9 million for a year. Mr. Ernaut indicated that $750,000 taken out of that would be a 9% decrease. Would this mean massive layoffs, closing programs, elimination of extracurricular activities or what? Mr. Leavitt replied no one knows the cost of operating the new school, the new debt payments have not been scheduled, there is a lot of debt incurred which has not been thoroughly scheduled for repayment, there is some debt yet to be re-negotiated, the assessed valuation will be done this year and as part of that, there could be a tax imposed above the $3.64 limit and other unclear issues which will affect the expenditure totals significantly. Mr. Ernaut questioned if the prevailing attitude was to use any means available to maintain the status quo. They have made an incredible mistake due to the mismanagement of the district and why are the taxpayers now liable for the loss while they attempt to keep their amenities intact. Mr. Leavitt said they might end up with fewer staff members, bus orders may be canceled and the more they dig into the situation, the more problems are uncovered. Mr. Ernaut asked if the increased assessed valuation was due to Magma Copper. Mr. Leavitt answered yes. Mr. Ernaut indicated they could defer their net proceeds for a length of time. Mr. Leavitt said there might not be any net proceeds. He also mentioned there is another property where homes have been built which had to be considered and analyzed, put on paper. The big difficulty is the short-term financial cash-flow problem culminating on Friday. Something has to be done about it and there is no way to have the final numbers to analyze their ultimate situation. It will be difficult to get the numbers together by May. The school district does not have anyone on board who has the capability to get a budget together. The budget has to be totally completed by people from the outside. They are dealing with loans and obligations that are just now being disclosed. No one really knows the final answer. Mr. Ernaut hoped that at some point, someone would realize the magnitude of the problem. It seems the pervasive attitude has been someone would come along and rescue the school district and when its over they will say "phew, that was close" and go about their business. No one will feel the brunt of this thing unless they suffer the logical consequences. Mr. Leavitt agreed that was the prevailing attitude, but if their property taxes increase above the $3.64 limit, it should send some sort of message when they are paying that bill. Mrs. Lambert hoped to discuss the issues further when the other bills were presented and there was more time. She pointed out Dr. Mary Peterson, Superintendent of Public Instruction, was in the audience and invited her comments after a few more questions. Mr. Neighbors spoke regarding Mr. Leavitt's statement on the obligation of the county. He said there were two separate entities, the school board and county commissioners, and both of these groups were elected by the people statewide. The school's tax rate is set by the Legislature. The debt service does fluctuate as the county continues to grow. At the $3.64 rate, even giving them another .60 or .70, had this been possible, would not have helped much because they do not have a big enough tax base. Mr. Leavitt indicated the problem faced was that they have taken money allocated for operations and have incurred debt obligations by spending that money for all kinds of purposes other than for which it was intended. Regardless of the basic tax base, any district who did the same type of thing would be in the same troubled situation. He said the problem was not an inadequate tax base, it was the misuse of funds allocated to them. Mr. Neighbors said one thing that would help them a bit would be the benefit of property tax from the mining operation in the future. That particular type of property is appraised by the Nevada Tax Commission rather than the Assessor. Ms. Tripple asked what would happen if the school were not opened. She queried if the opening of the school could be postponed until funds were available. Mrs. Lambert asked if that discussion could be put off until the other vehicles were available as the bill being dealt with was only to get the teachers paid. Mr. Ernaut moved do pass but Mrs. Lambert indicated the bill was not in the government affairs committee. This was an informational meeting for the benefit of the committee. This would probably be the only opportunity for the committee to be apprised of what is going on when the bill does come to the Assembly. The bill passed the Senate Thursday, should be recorded in the Assembly today and Leadership will have to make a decision whether to send it to the committee or declare an emergency measure like the Senate did. This is a very important issue and it is a shame to rush it through so quickly. Fortunately, Mrs. Lambert stated, Mr. Leavitt and Mr. Seale were there to give them the most updated information and Treasurer's input on the situation. Mrs. Lambert asked Dr. Peterson to comment on how she thought the school district would educate the children. Dr. Peterson said S.B. 367 was an absolutely necessary and immediate method to address the problems in White Pine County School District. Obviously, there need to be other measures put into effect and they would be happy to work with whomever necessary to ensure this does not ever happen again. Mrs. Lambert questioned if someone from her department would have the opportunity to work with someone from the Department of Taxation and the local government advisory committee. Dr. Peterson answered their Director of Fiscal Services, Doug Thunder, does serve on LGAC and has been working with them on the issue. Mrs. Lambert mentioned it was nearly time for floor session and the rest of the work session document would be taken up as time allowed during the week. Mrs. Freeman stated the subcommittee meeting on the public records bills would meet the following day. Mrs. Lambert thanked everyone for their patience with the White Pine County situation. The meeting was adjourned at 10:55 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 April 17, 1995 Page