MINUTES OF THE ASSEMBLY COMMITTEE ON WAYS AND MEANS Sixty-eighth Session March 3, 1995 The Committee on Ways and Means was called to order at 7:04 a.m., on Friday, March 3, 1995, Chairman John Marvel presiding in Room 352 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Mr. Morse Arberry, Jr., Chairman Mr. John W. Marvel, Chairman Mrs. Jan Evans, Vice Chairman Ms. Sandra Tiffany, Vice Chairman Mrs. Maureen E. Brower Mrs. Vonne Chowning Mr. Jack D. Close Mr. Joseph E. Dini, Jr. Mr. Thomas A. Fettic Ms. Chris Giunchigliani Mr. Lynn Hettrick Mr. Bob Price Mr. Larry L. Spitler COMMITTEE MEMBERS ABSENT: Mr. Dennis L. Allard STAFF MEMBERS PRESENT: Mr. Mark Stevens, Fiscal Analyst Mr. Gary Ghiggeri, Deputy Fiscal Analyst Ms. Mary Matheus, Program Analyst DEPARTMENT OF TAXATION - PAGE 597 Michael Pitlock, Executive Director of the Department of Taxation, distributed two documents, one entitled "Department of Taxation, Executive Budget - FY 1996 & 1997" (Exhibit C) and the other entitled "Report of the Governor's Task Force on the Combined Audit Program" (Exhibit D). Chairman Marvel stated the Department's performance indicators would be closely examined. Mr. Pitlock agreed the indicators needed attention and refinement. Mr. Pitlock explained pages 1 and 2 of Exhibit C provide an overview of the Department's organization, duties and responsibilities. Information regarding revenue performance indicators begins on page 3. The number of sales and use tax registrations provides the best measurement of the Department's overall work load. Between fiscal 1988 and fiscal 1993, average annual growth was 7.4 percent. Between fiscal 1993 and fiscal 1994, the number of registrations rose 10.8 percent. Measurement indicator No. 3, the number of man days required to assemble the tax roll, reflects both workload and the Department's level of efficiency. Mr. Pitlock pointed out that even though the number of accounts is increasing, a downward trend in the number of days necessary to generate the tax roll is projected. This increase in efficiency has been brought about by improvements in data processing capabilities. Mr. Pitlock indicated several Taxation staff members were also in attendance at the hearing and available to answer any detailed questions. Representatives from the Department of Information Services (DIS) were also present. Chairman Marvel asked when the Automated Collection Enforcement System (ACES) would be in place and functioning. Mr. Pitlock responded a meeting was recently held with representatives from Pro Data, the vendor developing and installing ACES, at which time May 15, 1995 was agreed upon as the target date for implementation. Chairman Marvel asked whether the May 15 date is firm. Mr. Pitlock responded it is the best target date currently available. The program will be tested as implementation begins and problems may arise which need to be resolved before the next phase of implementation can begin. Mr. Pitlock pointed out corrections to Audit Program measurement indicators. Measurement indicator No. 1, the number of sales and use tax audits completed, should read 3,202 projected for FY 96 and 4,049 projected for FY 97. A sharp decrease in the number of sales and use tax audits completed in FY 94 and projected for FY 95 can be ascribed to the failure of the combined audit program. Chairman Marvel indicated the committee was well aware of the decrease in income-generating audits. Mr. Pitlock said the Combined Audit Program Report (Exhibit D) had been provided to make the committee aware of the legitimate reasons for the program's failure. The program was based on what appeared to be reasonable assumptions at the time; however, implementation revealed those assumptions to be flawed. The Department was never able to accomplish the very ambitious number of combined audits projected. Chairman Marvel asked whether the major flaws had been identified. Mr. Pitlock responded the major problem was that the number of combined audits to be performed was generated by examining individual selection criteria of the three departments. At the time, it was assumed one audit was like another and a good audit for ESD would also be a good audit for SIIS and Taxation. That assumption was proved incorrect. When priority audits from each agency were submitted and compared, none of them matched. The Department chose to target ESD audits because of a federal mandate regarding the number of ESD audits to be completed. SIIS audits received next priority and sales and use tax audits were the most neglected. Chairman Marvel interjected sales and use tax generated income and neglect of these areas created the necessity for A.B. 128. Mr. Pitlock explained the supplemental appropriation is the result of failing to complete the projected number of ESD and SIIS audits. The fact that sales and use tax recoveries are down is a separate problem although it is tied to the fact that the Department was attempting to complete the projected number of ESD and SIIS audits. Mr. Pitlock indicated he was hopeful that the Governor's recommended budget and reducing the number of combined audits will result in the number of sales and use tax audits increasing in FY 96 and FY 97 and recoveries of sales tax increasing because Taxation will be able to target those companies with the greatest potential to generate recoveries for the General Fund. Chairman Marvel questioned the 32 percent increase in audit staff contained in the budget. Mr. Pitlock responded the increased number of positions would offset those positions being transferred to ESD and SIIS. Along with the positions, responsibility for performance of the ESD and SIIS audits will also transfer. The increased staffing should allow the Department of Taxation to focus on generating additional sales and use tax revenues. Chairman Marvel asked how much additional revenue this 32 percent increase in audit staff is expected to generate. Mr. Pitlock said prior to implementation of the combined audit program, sales and use tax recoveries averaged $13.5 million per year. In FY 93, recoveries were a record $18-$19 million. It is hoped recoveries in FY 96 will exceed FY 93 and recoveries should at least equal the average of $13.5 million. Chairman Marvel expressed his hope that recoveries would mirror the increase in personnel. Mr. Pitlock observed that a turn-around should be evident before July 1 with the number of audits already scheduled for the remainder of FY 95. Recoveries have already increased $700,000 to $800,000 per month in November, December and January, and these figures do not include larger audits now being completed. Ms. Giunchigliani recalled that last session when combined audits were discussed, federal representatives testified against the program as did those in charge of state agencies. That experience should show that those closest to the problems know best how to handle them. Ms. Giunchigliani expressed concern that the SPIRIT Program (Strategic Plan for Information Resources and Information Technology) would encounter similar problems to the combined audit program. Mr. Pitlock responded that even though the combined audit program was described as a failure, it did emphasize the benefits to be gained from pilot programs. If the combined audit program had started out with a pilot program similar to what is planned for the upcoming biennium, potential problems would have been identified and the economic impact minimized. Ms. Giunchigliani expressed her agreement and added that consideration must be given to the fact that each new program affects other areas of state government. Mr. Spitler remarked the vote on combined audit program had been very difficult. He inquired how much is projected to be collected during 1994-95. Mr. Pitlock responded sales tax recoveries are expected to approach $8 million if the current rate of recovery is maintained. Mr. Spitler pointed out that is $1 million lower than the lowest period since 1989, and inquired what the estimate is for 1996-97. Mr. Pitlock said the Department plans to attempt to catch up as much as possible and some major audits are planned. The goal is to reach $20 million in additional sales and use tax recoveries for FY 96. The $20 million will be comprised partly of "catch-up" audits and another part will be from issues that have been neglected in the past. Mr. Spitler inquired whether the recoveries are predicated on the additional staff. Mr. Pitlock responded recoveries are predicated on the Governor's recommended budget being approved which allows the Department to retain nearly the same number of positions being transferred back to ESD and SIIS. The net impact to the Department is an increase of one half-time position. Mr. Spitler remarked $20 million would represent the highest year of recoveries since 1988-89. Mr. Pitlock said this presumes audit staff would be freed to work solely on sales and use tax audits. Chairman Marvel said the staff had done an excellent job prior to this last biennium. Mr. Pitlock observed during the last biennium staff had not been allowed to perform the usual audits and if the Department had been allowed to select audits, sales and use tax recoveries would not have decreased. Mr. Spitler questioned what new issues the Department's audit staff wished to examine. Mr. Pitlock explained the Attorney General's Office is reviewing Nevada Power Company; the preliminary determination holds that the specific transactions under investigation are taxable. If that position holds, a number of other entities will be in a situation similar to Nevada Power Company and $150-$175 million of additional taxable transactions per year could be identified. Mr. Arberry asked whether Mr. Pitlock proposed to completely eliminate combined audits. Mr. Pitlock responded he supported the Governor's recommendation to scale the program at 50-60 combined audits per year. The expertise developed over the past two years can be used and the program will be in the mode of a pilot program. Potential benefits from the combined audit program can be explored without the risk of significant economic impact. Mr. Arberry expressed his hope that with additional training and equipment, the concept of a combined audit program would be successful. He asked when Mr. Pitlock would know whether the program would succeed. Mr. Pitlock responded that experience was gained over the past two years and audits were being performed more efficiently. However, it was learned the program must be more modest in scale because the group of priority combined audits is very small. By reducing the program to 50-60 audits, only the best candidates for combined audits will be targeted. Mr. Arberry observed that agency heads should be held accountable for their decisions and for recommendations made to the committee. Last session the committee had been assured the combined audit program would succeed. Mr. Pitlock expressed his agreement that witnesses before the committee must be accountable for their testimony. Chairman Marvel asked whether combined audits for ESD and the business license tax are contemplated. Mr. Pitlock responded the 50-60 combined audits would incorporate all four areas. Chairman Marvel pointed out a legislative audit demonstrated failures in business license tax audits. Mr. Pitlock said he had reviewed that audit and the Department concurs with the recommendations of the Legislative Counsel Bureau and is developing a plan to implement those recommendations. Chairman Marvel inquired when the recommendations would be in place. Mr. Pitlock said implementation of the recommendations is dependent on the ACES program. Ms. Giunchigliani inquired whether a combined audit team would perform the 50-60 audits per year and asked how many members would be on the team. Mr. Pitlock said a determination had not yet been made whether one team would be named to perform only combined audits. Most likely staff members with the greatest aptitude for combined audits would be named to those functions. Ms. Giunchigliani asked whether any means exist to enforce the tax laws for false businesses, such as vendors that set up in parking lots to sell stuffed animals or souvenirs. Mr. Pitlock explained the Department works with those local government entities responsible for issuing business licenses. A standard form has been developed so local government entities can report on a consistent basis and the ACES program will provide the tools to more quickly respond to those types of situations. Ms. Giunchigliani inquired whether properly licensed businesses, such as convenience stores, that allow unlicensed businesses to set up on their property place their own business licenses in jeopardy. Mr. Pitlock did not know the legal answer to this question. Chairman Marvel inquired whether John P. Comeaux, Director of the Department of Administration, who was in the audience, could answer the question. Mr. Comeaux expressed doubt that legal businesses place their licenses in jeopardy when allowing unlicensed businesses to operate on their property. Ms. Giunchigliani remarked an interlocal agreement might be possible with licensed businesses to provide a means of recourse against unlicensed businesses operating on their property. Mr. Pitlock said this might be an effective enforcement tool. Ms. Tiffany requested detailed explanation of the ACES program: what computer capability is currently available to the Department; whether ACES will be operational May 15, and whether it will be operating independently at that time. Pam Case, Deputy Director of the Department of Information Services (DIS), summarized the contract process. The project originally funded in 1992 was for a delinquent collections system. Through discussions with the Department of Taxation, DIS advised an integrated system to handle billing and collection of sales tax and business tax and to also handle delinquencies. A request for proposal (RFP) was written for a system that would encompass most functions of the Department of Taxation. At the time, the Department was paying for DIS services relating to sales tax, business tax, gas tax and several other subsystems. The cost to the Department of Taxation to run these systems on the state's mainframe computer is very high. Ms. Tiffany inquired how funds allocated in 1992 were used. Ms. Case responded those funds were for a delinquent collection system. The RFP was for a revenue management system to handle delinquent collections and other functions needed to replace the old, expensive individual systems. In April of 1993, the contract for the integrated revenue management system was awarded to Prodata with contract dates of April 1, 1993 through December 31, 1994. The contract has since been extended through May 31, 1995. The contract was let in two phases in response to budgetary constraints within that biennium. Phase I was to conduct an up front piece of the system and was within the budget approved for that biennium. Phase II was contingent upon funding for the current biennium and was subsequently approved and awarded to Prodata. Ms. Case explained Phase I was completed and accepted in December of 1993, but was not put into production because expensive interfaces would have been required between the existing systems and the new system as well as continual updates of data between the old and new system. Ms. Case remarked the loss of two key staff members at Prodata resulted in project delays. DIS views ACES as being very successful and substantially more cost effective to operate and maintain than the individual systems currently in use. There have been some delays; however, the contract is a firm fixed price contract and Prodata has absorbed the cost of the delays. Delays resulted when the Department of Taxation moved its offices and for further system testing to insure the system would be fully operational when brought on-line. Ms. Tiffany expressed displeasure with the delays and the resulting loss of revenue; she questioned what portions of the system would be delivered May 15. Ms. Case responded on May 15 the system should be fully tested and ready for production processing. At that time, preparations will begin to convert existing systems to ACES. All systems will run in parallel for one month. Ms. Case added that ACES is complete but is undergoing further testing and Taxation staff is reviewing the system and making sure it works in accordance with the RFP. Ms. Tiffany inquired whether ACES will interface with other departments and whether data will be cross-referenced between departments for business tax purposes. Mr. Pitlock indicated he understood ACES would provide improved capability to ascertain whether a particular entity is appropriately registered for all activities. ACES will not enhance the combined audit program but will respond to problems identified in the legislative audit. Chairman Marvel noted the Department declared its intention of combining business license tax with ESD audits. Ms. Case reiterated ACES would not handle the audit function. It will help with delinquent collections as well as the billing and collection of sales and business tax. Ms. Tiffany pointed out that data from ESD's computer system must be compared to data from the Taxation system. Mr. Pitlock said the legislative audit identified as a weakness whether the Department captured all entities that should have registered and filed for the business tax but did not. The audit indicated the Department did not have the data processing capability to make those matches. ACES will provide an additional tool to attempt that. Mr. Pitlock said which data base will be used for comparison has not yet been identified. Ms. Tiffany questioned whether the capability to cross reference between the different data bases exists. Mr. Pitlock said efforts are aimed at determining a cost effective way to cross reference the data bases. Ms. Tiffany asked why a portion of the $1.5 million supplemental appropriation is for the ACES system when the system is fixed cost. Ms. Case said the contract with Prodata is fixed; however, DIS charges for existing system utilization and programming services and maintenance to be provided for ACES are not fixed cost. Mr. Pitlock added that of the $1.5 million appropriation, approximately $180,000 relates to DIS. Of that $180,000, $104,000 relates to equipment purchased for the combined audit program; $76,000 relates to additional on-line ACES testing. Mrs. Evans remarked the Department expected revenue collections would double when funds were first appropriated for ACES in 1991. She inquired whether Mr. Pitlock still expected revenue collections to double when ACES is operational. Mr. Pitlock said he would not guarantee revenue collections would double but revenue officers would be provided with a tool to make them much more efficient in the collection of delinquent accounts. Mrs. Evans asked what the increase in revenue collections is expected to be. Mr. Pitlock expressed the goal of making the Department's staff as efficient as possible and to give them every tool needed to do their jobs. It is possible to double the collection of delinquent accounts but there is no way to guarantee that will occur. Mr. Hettrick inquired whether ACES would help with a problem like one that recently occurred in Douglas County where product was delivered into Douglas County and taxes were collected in another county. Mr. Pitlock indicated that situation related to problems within the taxpayer's system as opposed to problems with the state's system and ACES will not necessarily solve problems within the taxpayer's system. However, it should allow the Department to more quickly identify situations of this type. Mr. Hettrick remarked the audit function appeared to address total tax collection without reference to correct reporting by county. Chairman Marvel indicated the same situation happened in the 1970's when Valmy Power Plan was constructed in Humboldt County, materials were warehoused in Washoe County and Washoe County received the sales tax. Mr. Close requested a copy of the original RFP as costs were double the original projection. Ms. Case observed the committee had made clear its displeasure with the progress of several computer projects, but indicated she wished to explain the difference between the NOMADS, BISON and ACES. Both NOMADS and BISON were instituted by agencies without DIS involvement and costly mistakes were made. From its inception, ACES has been a joint effort between Taxation and DIS which provided a degree of expertise regarding the RFP and contract monitoring. The contract includes a performance bond against Prodata so the company is liable for the entire cost of the project should it not be delivered. Mrs. Brower inquired what benefits ACES would provide and whether the system would ultimately pay for itself. Ms. Case responded the system is an integrated application and will perform many functions currently performed by individual systems, making it more cost effective to operate and maintain. ACES will provide more information than any of the older existing systems which provide fragmented data and result in costs for communication between separate data bases. Mrs. Brower asked whether billing would be automatically generated. Ms. Case responded affirmatively. Mr. Spitler asked whether a cost benefit analysis had been performed regarding the 55 scheduled SIIS audits. Mr. Pitlock said he had not seen a specific cost benefit analysis targeted at those 55 audits. Mr. Spitler requested the information be provided if available. Mr. Pitlock agreed to do this. Mr. Spitler inquired whether this was the best use for the Department's audit talent. The 1994-95 work program reflected $1.2 million to be collected from SIIS; the 1993 figure was $66,000; for 1995-96, $300,000 was requested with the Governor recommending $14,000. Mr. Spitler inquired whether the 55 audits are to be yearly or over the biennium. Mr. Pitlock said yearly. Mr. Spitler observed 110 audits over the biennium worked out to $30,000 per audit. If auditors were able to collect more money in sales tax, it seemed better not to perform the audits. Mr. Pitlock said one reason to continue the program at a scaled down level, even if it does not completely cover its cost, is to obtain some benefit from the last two years. Mr. Spitler referred again to a cost benefit analysis and noted losses incurred by the program must also include what could have been collected in sales tax. Mr. Pitlock said the Department was attempting to minimize any losses by scheduling a small number of audits, and the impact on sales and use tax should be minimal. Mr. Spitler reiterated his request to see whatever cost benefit analysis may have been performed and to receive reasonable assurances regarding the impact on sales tax audits. Mr. Spitler cautioned that taxpayers should not be subjected to further losses. Losses already incurred have resulted in a supplemental appropriation for the Department of Taxation. He requested back-up material regarding the Highway Fund and how taxes charged to that fund are calculated. Mr. Pitlock said the information would be forthcoming. Chairman Marvel indicated the problem had been detected some time ago and steps should have been taken immediately to correct the problem. Mr. Pitlock said his initial review of the organization revealed Department personnel had focused on attempting to make the combined audit program work. If fault was to be found, it was that staff did not realize the impossibility of what they were trying to do. The program should have been stopped much sooner to consider whether it would work and to minimize the damage. Ms. Giunchigliani pointed out the audit task force recommendations include a recommendation to transfer payroll audits to ESD for tax collection. Mr. Pitlock expressed agreement with the task force's analysis regarding why the program did not succeed but disagreed with recommendations to correct the program. The task force recommends moving all payroll based audits to ESD and leaving all tax audits with Taxation. ESD and SIIS audits tend to focus on compliance and are not designed to detect and remedy tax evasion. Tax audits and business tax audits focus on detecting evasion rather than determining compliance. Ms. Giunchigliani inquired whether there will be common business identification numbers so ESD, SIIS and Taxation can interface. Mr. Pitlock said this was a worthy goal and added the current computer systems lack common identifiers. Ms. Giunchigliani inquired whether legislation was required to move in that direction. Mr. Pitlock said A.B. 153 should provide a framework to address areas of inconsistencies between local entities. Ms. Giunchigliani questioned whether monthly assessments for ESD and SIIS would continue. Mr. Pitlock responded the current interlocal agreements require SIIS to be billed $263.90 per audit and ESD to be billed $228.59 per audit. Ms. Giunchigliani inquired what amount is projected to be collected. Mr. Pitlock said with the current projection of 55 audits per year, collections would be relatively small. Mr. Fettic asked what indicators were available to gauge whether the project remains on track. Mr. Pitlock said the Department generates monthly information regarding the number of completed audits, the number of hours spent on those audits, and billings generated. Mr. Pitlock added that he would review the figures on a monthly basis and would act immediately to correct any problems. Mr. Fettic inquired how quickly the program could be changed if it does not work. Mr. Pitlock said the supplemental appropriation is based on a level of production continuing for both SIIS audits and ESD audits through the end of June. The Department is committed to completing those audits in order to ensure the $1.5 million appropriation is enough. If the program were stopped today and no more ESD or SIIS audits were completed, more than $1.5 million would be required. Mr. Hettrick requested the measurement indicators be adjusted to include dollars collected. Mr. Pitlock said this information was available and would be provided to the committee. However, the statutes noted that Department employees cannot be evaluated based on the number of dollars they generate from an audit so whether measurement indicators could include this information would need to be determined. Mr. Pitlock reported adjustments to the base budget include: reducing environmental protection transfer fees and administration of petroleum products clean-up fees to an ongoing basis; adjusting revenue from ESD and SIIS to levels projected prior to the time the Department restructured; the vacancy rate for FY 95 was used to prepare the budget due to an unusually high turnover for FY 94; reclassifying some costs from training to out-of-state travel; adjusting operating costs to reflect rent and phone systems for new offices in Las Vegas as well as an 800 line to be used in conjunction with the ACES program. Mr. Pitlock indicated revenue sources in the base budget are basically the same as in the past with the exception of processing fees for net proceeds of mine and centrally assessed properties which are subject to sunset at the end of FY 95. Mr. Pitlock said the most significant change in expenditures is realignment of information services costs as the result of moving from development and implementation of ACES to operations. Chairman Marvel requested explanation of the fuel tax evasion grant. Mr. Pitlock said these federal grants are available to either the Department of Taxation or the Department of Motor Vehicles to detect those attempting to evade payment of fuel taxes. Mr. Pitlock reported the M100 decision unit provides for an increase in postage and insurance. The M200 decision unit provides for demographics and caseload changes associated with a 10.8 percent increase in the number of accounts between FY 93 and FY 94 resulting in the recommendation to add four and a half positions to the revenue division and four positions to the audit division. The four audit positions will include one clerical position and three out-of-state auditors in Atlanta, Kansas City and Chicago. Appropriate travel and operating costs have been included. Mr. Pitlock indicated the M300 decision unit includes fringe benefit and merit funding recommendations by the Budget Department. Mr. Close requested revenue amounts generated by out-of-state offices be provided to the committee. Mr. Pitlock agreed and added the out-of-state auditors tend to be more productive because they typically audit larger accounts. Mr. Pitlock said decision unit E325 works in conjunction with decision units E960 and E961 to reflect the restructure of the combined audit program, the transfer of positions from the Department of Taxation to ESD and SIIS, and the elimination of two account clerks from the Department of Taxation. Mr. Spitler inquired whether travel should be reduced to correspond with the transfer of positions out of the Department. Paula Steinbauer, Budget Analyst, said travel was curtailed significantly this biennium due to the lack of funds and the Department does not yet have enough travel money even with the transfer out of the auditors. The M200 decision unit reflects an increase in travel so the necessary audits can be done. Calculations would be provided to the committee. Ms. Giunchigliani noted N.R.S. 364A.153 authorizes the Motion Picture Division to act on behalf of the Department of Taxation to collect taxes from the motion picture industry coming into the state and the Motion Picture Division reported difficulty in collecting these taxes. Ms. Giunchigliani said these taxes did not appear in the Department's budget. Mr. Pitlock said he was not aware of that difficulty and he would contact Economic Development to determine the problem. Mr. Pitlock reiterated decision units E325, E960 and E961 reflect the restructure of the combined audit program. Decision unit E375 provides two additional positions, an Administrative Services Officer in Carson City and a Management Assistant II. Chairman Marvel inquired what function the Administrative Services Officer would serve. Mr. Pitlock said many Department costs are allocated between different entities which must be done in a timely and accurate manner. Because of the level of detail and the significance of this function, an additional position is required to help with internal administrative accounting functions. Mr. Hettrick referred to decision unit E375 where the operating category includes $7,335 to repair damaged equipment. Mr. Hettrick inquired what was damaged and how the damage occurred. Ms. Steinbauer responded the Department had submitted a list of equipment in need of repair to make it usable and avoid replacement costs. The equipment includes furniture to be repainted and repaired. Mr. Pitlock testified decision units E710 and E720 include service agreements and other minor items required to complement equipment in the one-shot appropriation. Mr. Pitlock observed the E960 and E961 decision units are part of the restructuring of the combined audit program. Referring to the budget summary on page 960 of the Executive Budget, he remarked the overall increase in the recommended budget between 1995 and 1996 is less than one percent. Chairman Marvel inquired why Highway Funds decreased while General Fund increased. Mr. Pitlock said part of the increase in General Fund results from two fees subject to a sunset provision. Ms. Steinbauer said Highway Fund is based on a formula for the entire Executive Budget. Mr. Pitlock added the last two pages of Exhibit C contain schedules which reflect revenue sources and how they impact the allocation of certain costs into different funds. Chairman Marvel asked why licenses and fees decrease. Mr. Pitlock indicated this information would be provided. Ms. Giunchigliani asked whether businesses must be licensed in order for the Department to collect the business tax or whether the requirement for collection of the business tax was to be an employer. Janice Wright, Department of Taxation, said a business must register with the state and pay a one-time $25 charge. The business license tax is paid based on a head count at the rate of $25 per employee. SENIOR CITIZENS' PROPERTY TAX ASSISTANCE - PAGE 607 Mr. Pitlock reported the Department of Taxation administers the Senior Citizens' Property Tax Rebate Program. Changes in decision unit M200 reflect growth in the number of eligible participants. The Department pays out 100 percent of the amounts appropriated. If growth is greater than anticipated, less than 100 percent is paid out. In the past, 98 percent of the eligible amount has been paid out. Any fund balance is distributed into the next fiscal year. Chairman Marvel noted local governments protect most of the property tax, yet the state is responsible for the rebate. Mr. Pitlock indicated local entities often concurred with this opinion and did not appreciate state interference. Mr. Close questioned an error in measurement indicator No. 1. Ms. Steinbauer said 14,000 should be projected for FY 94. Measurement indicator No. 4, average refund given, should reflect $181 for actual FY 94. Measurement indicator No. 2, ineligible applicants, should reflect 508 projected for FY 97. Measurement indicator No. 3, actual number of refunds given, should reflect 13,299 projected for FY 97. ASSEMBLY BILL 128 - Makes supplemental appropriation to department of taxation to offset revenue shortfalls and for additional data processing expenses. Mr. Pitlock explained this appropriation results from failure of the combined audit program and is comprised of five major elements. For FY 95, the authorized work program provided for the Department to receive more than $1.2 million from SIIS in exchange for performing 4,704 audits. Based on seven months of actual production and projections for the remaining five months, approximately 1,216 audits are expected to be performed. Estimated revenue is $320,000 when it was budgeted at $1.2 million, resulting in a shortfall of $920,000. The FY 95 authorized work program reflected $445,000 from ESD based on the completion of 1,944 audits. Estimated production of ESD audits for FY 95 is 804, of which 204 were billed in the prior fiscal year but not completed. Revenue generating ESD audits for FY 95 are expected to be 598 which will generate $137,000, resulting in a shortfall of $310,000. Mr. Pitlock noted these two items make up the vast majority of the $1.5 million. Mr. Hettrick observed that what were costs to Taxation must have represented savings to SIIS and ESD. Mr. Pitlock concurred and added ESD and SIIS are non- General Fund agencies. Mr. Hettrick asked whether the costs for the audit functions to be transferred to ESD and SIIS have been built into those budgets. Ms. Steinbauer noted the ESD budget is complete and includes the transfer of personnel and operating costs as well as revenue to pay Taxation for the 55 combined audits. Mr. Hettrick inquired whether the SIIS budget contained the same accommodations. Ms. Steinbauer reported she worked with the SIIS analyst to ensure that budget was handled appropriately. Chairman Marvel noted in September the shortfall was estimated at $272,000 and has risen nearly $1 million since that time. Mr. Pitlock noted testimony given in September indicated nearly 100 percent of the required SIIS audits would be performed. Mr. Pitlock said his review showed the Department was not on a course to complete those audits. The SIIS shortfall is $900,000 and nowhere near 100 percent of the projected audits were completed. Chairman Marvel requested explanation of personnel expenses. Mr. Pitlock pointed out a $30,000 shortfall in the personnel line item, part of which occurred when positions transferred to the Department. It was assumed those positions would come in at the first step of the appropriate grade; however, individuals were hired at higher pay steps. Chairman Marvel inquired how costs had been handled during the first year as funding was supposed to follow the personnel. Woody Thorne, Deputy Director of the Department of Taxation, explained there were delays in filling positions during the first year of the biennium. In addition, there were more new positions in Taxation than there were positions transferred in from ESD and SIIS. All new positions are budgeted at step 1; however, the majority were hired at higher rates. The new positions were hired October 1 during the first year of the biennium so vacancy savings funded the difference. In the second year of the biennium there are no vacancy savings to cover the shortfall. Chairman Marvel inquired whether much turnover took place during the past months. Mr. Thorne responded affirmatively and added some employees also retired which necessitated termination pay. Chairman Marvel indicated the Board of Examiners could be approached for termination pay. Mr. Thorne responded a portion of the payroll shortfall could be handled through the supplemental appropriation and a portion through the Board of Examiners. Ms. Giunchigliani asked whether eight positions were eliminated from ESD and SIIS when the combined audit program was instituted and whether staffing levels at ESD and SIIS would be returned to prior levels. Ms. Steinbauer said the eight positions were being returned to ESD and SIIS. ESD will require one additional position in 1997 to complete its audit requirements. Ms. Giunchigliani said a constituent had said that when transferring from one state agency to another, employment had to start over again and some employees who transferred to Taxation had to start over at step 1 and lost their seniority. Ms. Steinbauer said employees were transferred out of an agency at the same grade and step. Mr. Thorne said employees transferring from ESD and SIIS into Taxation were not transferred as specific positions but were laid off from ESD and SIIS and hired at new positions in Taxation. Ms. Giunchigliani confirmed no employee salaries were reduced when transferred from ESD or SIIS to Taxation. Mr. Thorne said he was not aware of any salary reductions. Ms. Giunchigliani requested Mr. Thorne confirm the information. Mr. Spitler asked who was currently performing SIIS audits. Mr. Pitlock said auditors from different locations were performing SIIS audits. Mr. Spitler said not fulfilling the goals of the combined audit program also affects the SIIS budget. Mr. Pitlock said the failure of the combined audit program has caused difficulties for ESD and SIIS similar to those caused for the Department of Taxation. Mr. Spitler asked in what time frame it was necessary that A.B. 128 be processed. Mr. Pitlock responded the total budget is just over $10 million per year and the shortfall is $1.5 million. Mr. Spitler inquired when the Department would be broke. Mr. Pitlock said the appropriation would cover in excess of two months of costs. Mr. Spitler asked when the Department would have to close its doors if A.B. 128 is not approved. Mr. Pitlock estimated at the end of April but indicated he would like to report back with a more definite date. Mr. Close asked Mr. Pitlock to describe the remaining three elements that contributed to the necessity for the appropriation. Mr. Pitlock said the third element is in the area of information services. The total authorized budget for DIS costs was $696,000 while actual costs will be $876,000, resulting in a shortfall of $180,000. Of this amount, $75,000 relates to on-line charges for ACES implementation and testing that was inadvertently omitted from the Department's budget. The remaining $105,000 relates to equipment purchased so Taxation auditors would be able to implement the combined audit program; Taxation did not have the data processing equipment necessary to interface with ESD's mainframe computer. Mr. Pitlock said the fourth portion of the appropriation is $30,000 for the shortfall in payroll. The remaining $80,000 is for unanticipated operating expenses. It became necessary to move the Carson City offices when the lease on the old office space came due and the property was sold to a new owner who attempted to significantly increase the lease. It was decided to incur short-term moving costs rather than long-term lease costs. Also, the increase in postage rates was not anticipated and this had a significant impact on the budget. Chairman Marvel inquired about cigarette stamps. Mr. Pitlock responded the latest contract on cigarette stamps resulted in a significant increase in the cost of the stamps themselves. Chairman Marvel inquired whether these costs were pass through. Mr. Pitlock answered affirmatively but indicated the cost increase is passed on through a cost allocation formula and will not be apparent until the next fiscal year; however, the stamps must be purchased now. Mr. Spitler asked what would be the disposition of the equipment purchased for the auditors. Mr. Pitlock said the equipment was purchased after the auditors moved to the Department to enable performance of combined audits. Mr. Spitler remarked the equipment had been purchased for ESD and SIIS auditors and if the auditors are returning to ESD and SIIS, the equipment could be sold to ESD and SIIS. Ms. Steinbauer explained Taxation bought equipment no longer wanted by ESD and SIIS. ESD and SIIS are now purchasing new equipment. Mr. Spitler questioned why Taxation bought the equipment. Ms. Steinbauer said the Department had no choice. Mr. Pitlock remarked that when he moved to Taxation a month earlier, he was appalled at the equipment provided to Taxation staff. He noted 180 people shared a handful of personal computers. Mr. Spitler reiterated that Taxation should be compensated for the equipment purchased from ESD and SIIS. Mr. Pitlock noted most equipment at Taxation came from surplus. Ms. Tiffany questioned why equipment is requested to interface with the ESD system when ESD will soon store its data on the same mainframe Taxation uses. Mr. Pitlock said the purchases which add to the supplemental appropriation have already occurred and were necessary to complete combined audits. Ms. Tiffany asked how much had been spent for equipment which will not be used when the system changes. Mr. Pitlock said laptop computers were purchased and they will continue to be used. Mr. Thorne added the laptop computers were for field auditors; in addition, emulation cards were purchased to allow the laptops to access ESD data directly. The laptops are also used for sales and use tax audits. Mr. Pitlock said the Department was attempting to make the combined audit program work and this equipment was part of that attempt and will continue to be put to very good use. Ms. Tiffany expressed her dismay that the situation had not been fully explained to the Interim Finance Committee and asked what was the least amount of funding required to keep the Department functioning. Mr. Pitlock responded the calculations for A.B. 128 were as conservative as possible. He expressed concern whether the Department would be able to make the levels of production that formed the basis for the $1.5 million and cautioned that if care was not taken, the figure could grow rather than decrease. Ms. Giunchigliani observed the Department should be given the tools necessary to perform their work so the taxes which fund the budget can be collected. Chairman Marvel invited any final comments from Mr. Pitlock. Mr. Pitlock expressed his appreciation to the committee for delaying hearing the Department of Taxation budget as the four week delay allowed him to become somewhat familiar with the budget. Chairman Marvel called for public testimony on A.B. 128. There was none. DEPARTMENT OF HUMAN RESOURCES ADMINISTRATION - PAGE 987 Chairman Marvel inquired how much State Legalization Impact Assistance Grant (SLIAG) money was contained in the budget. Charlotte Crawford, Acting Director, Department of Human Resources, responded in the range of $500,000 but a more definite figure would be forthcoming. Ms. Crawford indicated the budget had been presented at a prior hearing and invited questions from the committee. Mr. Hettrick questioned where a request for proposal scheduled for April 1, 1995 appeared in the budget. He also inquired whether the RFP for software contained performance bonds and penalties. Ms. Crawford explained the RFP was generated in coordination with the Department of Information Services and provides for data elements regarding the Child Care Development Block Grant and the Title IV-A At- Risk Child Care Grant. Currently the data is collected manually and does not allow capture of information regarding demographics of recipients. The RFP requests approximately $40,000 for software design and staff training. Mr. Hettrick asked where the $40,000 appears in the budget. Ms. Crawford explained it is a combination of the Title IV-A At-Risk Child Care Grant operating money and Child Care Development Block Grant operating money. Mr. Hettrick noted the name "comprehensive automated data collection system" sounded like a project that would cost much more than $40,000. Ms. Crawford responded the rhetoric exceeds the scope of the project. Chairman Marvel requested discussion of the Business Processing Re-engineering (BPR) program. Ms. Crawford explained $1 million is requested for BPR for the entire Department of Human Resources with the exception of the Division of Child and Family Services which is currently in the process of BPR. The intent is to study all agencies, the types of products and systems and to formulate a plan at the end of the biennium that identifies gaps, duplications and inefficiencies and proposes alternative systems and processes. At this point, the Department is purchasing evaluation, analysis and planning. Chairman Marvel inquired whether the $1 million was an estimated cost. Ms. Crawford responded the estimation was based on information provided by the Department of Information Services. Ms. Tiffany expressed her support of a BPR pilot project involving one agency. She inquired where the BPR appears in the budget. Ms. Crawford responded BPR funding is requested in a one-shot appropriation. Ms. Tiffany inquired whether the software program for data collection would be on the mainframe. Ms. Crawford said the Child Care Block Grant software development is a personal computer application. Ms. Tiffany requested further detailed information regarding the automated data collection system. Ms. Crawford indicated the DIS overview would be provided. She added the system had been based on programs which handle similar functions in other states. Mrs. Evans observed the base budget reveals the Department administers a number of block grants including SLIAG and Child and Adolescent Social Services Program (CASSP) which are scheduled to terminate. She inquired what impact the termination of these grants is expected to have. Ms. Crawford explained CASSP was designed to support and encourage networking, particularly among emotionally disturbed children, and resulted in creation of the Division of Child and Family Services. Mrs. Evans confirmed that the programs currently in place and providing services will not be impacted by the grant termination. Mr. Close noted of the $1.7 million expenditure authority in SLIAG funds, $508,820 had been spent and $384,000 will be unobligated. He requested a detailed accounting of the program. Ms. Crawford responded the information was being compiled and would be forthcoming. HEALTH RESOURCES COST REVIEW - PAGE 995 Chris Thompson, Chief of the Health Care Financial Analysis Unit in the Department of Human Resources, reported this account is a pass through account for two primary types of expenses. One type is a biennial audit of hospitals performed by independent auditors to determine compliance with the cost containment provisions of N.R.S. 439A and 439B. The external auditors perform the audit, bill the agency and the agency then collects the money from the hospitals and pays the auditors. This is reflected in the budget as $50,000 in license fees and audit expense. Mr. Thompson explained another expense is $50,000 which relates to potential penalties on indigent care. N.R.S. 439B requires that hospitals of more than 100 beds in Washoe and Clark Counties provide a certain amount of indigent care free of charge. If this requirement is not met, the state imposes penalties and passes that money on to the county. Mr. Thompson explained the third item involves data entry expense. Pursuant to a contract for the collection of data on all hospital in-patient admissions in the state with the University of Nevada, Las Vegas, (UNLV) Center for Public Data Research, there is a provision that hospitals of over 200 beds must submit that information by computer medium. If the information is not submitted by computer medium, the hospital is charged for the cost of data entry by UNLV. The money is collected into this account and then paid to UNLV. Mr. Thompson said state cost allocation was included as an add-on to the audit expense. The Department has some question whether that $5,614 can legally be charged out to the hospitals. Ms. Giunchigliani referred to a recent article regarding the hospital provider tax which indicated Nevada would be required to refund that tax. Mr. Thompson explained in December of 1994, the Federal Department of Health and Human Services distributed letters to various states including Nevada regarding provider tax programs. Nevada was listed as having a $500,000 disallowance for taxes that actually related to a tax program in place in 1992 and 1993; those taxes were not actually collected until after July 1, 1993. Although the report indicated the state owes money, no federal financial participation has ever been taken for those taxes and subsequent discussions with the Health Care Financing Administration (HCFA) have resulted in acknowledgment that the state will not be subject to any refunds. Mr. Thompson reported the state was also cited regarding a waiver necessary for the tax program currently in place. Information was initially submitted in February of 1993; a formal waiver was subsequently submitted in December of 1993; fourteen months later a response on that waiver has not been received. Nevada recently attended a HCFA meeting at which time new interpretations of the regulations were distributed. Based on these regulations and discussions with counsel, Nevada is in compliance with the federal rules; however, HCFA continues to take exception to the waiver. Ms. Giunchigliani inquired whether the exception relates to the fact that Nevada did not apply the tax uniformly. Mr. Thompson said there were two tests: a broad- based test and a uniform test. Broad-based means all hospitals in a class are taxed; Nevada chose not to tax all hospitals. Public hospitals and rural hospitals not affected by the disproportionate share program were excluded and this is why a waiver was required. The uniform test allowed for states to exclude either Medicare and/or Medicaid revenues. The federal government is now taking the position that even though the state has complied under the law regarding uniform tax, the broad-based tax waiver test cannot be used because the state excludes Medicare. Mr. Thompson expressed his opinion that the state will be able to insure that all requirements of the law have been met. Ms. Giunchigliani questioned whether the $500,000 would actually have to be repaid. Mr. Thompson responded if the state were not able to meet the federal waiver test, the entire tax program for fiscal years 1994 and 1995 would be affected. Ms. Giunchigliani confirmed the entire program could be in jeopardy regarding pay-back if the federal government does not accept the waiver test. Mr. Thompson concurred. Mrs. Evans requested every effort be made to obtain a written response from the federal government. Mr. Thompson agreed and said it was upsetting that no written response has been received fourteen months after submitting the waiver request. PURCHASE OF SOCIAL SERVICES - PAGE 997 Chairman Marvel called for any questions regarding this budget account. There were none. Chairman Marvel called for public testimony. Jan Gilbert, representing the Progressive Leadership Alliance of Nevada, reported she had testified previously regarding the Title XX Advisory Board. The Advisory Board distributes non-state money in the amount of $562,000. The Board was formed at the Governor's request in 1990 and makes recommendations to the Director of Human Resources. Ms. Gilbert distributed a handout (Exhibit E) which reflects a decrease in funding provided to local communities over a five year period. Ms. Gilbert distributed a document (Exhibit F) which reflects how five states including Nevada spend Title XX funds. Each state distributes the funds differently. Arizona provides 32 percent to local communities. Montana provides 90 percent to non-state agencies. Utah provides 10 percent to local communities. Idaho provides 31 percent to the local communities. Nevada provides 3.81 percent to non-state agencies. Ms. Gilbert noted $4 million of the $14.8 million Title XX funds goes to administration for the state while local communities are downgraded if a large portion of funding goes for administrative costs. Ms. Gilbert observed this $4 million should provide for services rather than administrative expenses. Mrs. Evans asked what function the Advisory Board serves. Ms. Gilbert reported the committee reviews all proposals, evaluates and grades them, and then averages the grading. Of the Title XX funds, two-thirds goes to southern Nevada, one-third to rural communities and northern Nevada. The Advisory Board distributes the Title XX funds. Mrs. Evans questioned how many applications are received. Ms. Gilbert said 45 applications have been received this year and approximately 20 programs receive some level of funding. Ms. Gilbert said the Advisory Board makes recommendations to the Director of Human Services who makes the ultimate decision regarding distribution of funding. Last year the Director of Human Services did not abide by the Board's recommendations for southern Nevada. Mrs. Evans confirmed that the Board's decisions can be superseded. Ms. Gilbert reported the Board is comprised of two citizen representatives, county representatives, two United Way representatives and state representatives. Mrs. Evans indicated the process regarding distribution of Title XX funds would be further reviewed in subcommittee. Lisa Lee, Director of Advocates to End Domestic Violence, testified the organization operates a shelter in Carson City for victims of domestic violence. The organization has applied for Title XX funding for four years and for two of those years received $10,000 in Title XX funds which provide victim services in the shelter. The shelter provides services to Carson City, Gardnerville and Lyon County. Without Title XX funds, the shelter would have difficulty in providing services. Clients are allowed to remain at the shelter for up to five months, during which time shelter personnel assist clients with finding employment, job training, day care and housing. Ms. Lee noted if the organization requested any of these funds be used for administrative costs, funding would most likely stop. At a recent Title XX training, more than sixty representatives attended to determine whether their organizations would qualify for funding. Most did not submit applications when informed of the limited amount of funding northern Nevada receives. Mr. Hettrick inquired whether the $10,000 is 100 percent of the request. Ms. Lee responded affirmatively. Mr. Hettrick noted testimony reported the organization's budget at $240,000 and inquired whether administrative costs are contained in that amount. Ms. Lee said the program receives Marriage License Surtax in the amount of $59,000 per year. Approximately 10 percent of the budget is for administrative costs. Mrs. Evans requested Ms. Crawford provide information regarding what agencies have received Title XX funds and the level of funding and the amount of administrative money for the past three years. Ms. Giunchigliani requested information regarding what it means to qualify for Title XX funds and the actual intent of Title XX. Ms. Crawford indicated the information would be forthcoming. Joni Kaiser, Executive Director of the Committee to Aid Abused Women, distributed her testimony (Exhibit G) to the committee and requested consideration of setting a legislative intent policy which would incrementally increase the percentage of Title XX dollars going to nonprofit organizations and setting a policy to formalize the allocation recommendations of the Title XX funding committee. COMMUNITY SERVICES BLOCK GRANT - PAGE 999 Ms. Crawford reported this account receives funding which is distributed according to a federal formula to communities to fight poverty. A small amount is retained in the Director's Office. One and a half FTE's administer the program. Chairman Marvel inquired how long this funding is anticipated to continue. Ms. Crawford said this is not certain. Mr. Close asked whether the changes in personnel expenses result from the fact that the program did not start until March of 1994. Ms. Crawford said the program was originally transferred from Community Services to Welfare and from Welfare to the Director's Office. It took some time to get the program up and running and there was considerable lag time before staff was hired. Mr. Close confirmed $70,000 is the more realistic cost figure. Ms. Crawford concurred. With no further business to come before the committee, Chairman Marvel adjourned the meeting at 9:55 a.m. RESPECTFULLY SUBMITTED: Deborah Salaber, Committee Secretary Assembly Committee on Ways and Means March 3, 1995 Page