MINUTES OF THE SENATE COMMITTEE ON FINANCE Sixty-eighth Session February 3, 1995 The Senate Committee on Finance was called to order by Chairman William J. Raggio, at 8:00 a.m., on Friday, February 3, 1995, in Room 223 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator William J. Raggio, Chairman Senator Raymond D. Rawson, Vice Chairman Senator Lawrence E. Jacobsen Senator Bob Coffin Senator William R. O'Donnell Senator Bernice Mathews COMMITTEE MEMBERS ABSENT: Senator Dean A. Rhoads (Excused) GUEST LEGISLATORS PRESENT: Senator Dina Titus, Clark County Senatorial District No. 7 STAFF MEMBERS PRESENT: Dan Miles, Fiscal Analyst Bob Guernsey, Principal Deputy Fiscal Analyst Ronald T. Steele, Program Analyst Marion Entrekin, Committee Secretary OTHERS PRESENT: Rose McKinney-James, Director, Department of Business and Industry Alice A. Molasky, Esq., Commissioner, Division of Insurance, Department of Business and Industry David Hall, Deputy Commissioner, Division of Insurance, Department of Business and Industry Deborah A. Erickson, Budget Analyst, Budget Division, Department of Administration John F. Wiles, Advocate, Office of the Advocate for Insurance Customers, Division of Insurance, Department of Business and Industry L. Scott Walshaw, Commissioner, Division of Financial Institutions, Department of Business and Industry Senator Rawson stated he wished to have a bill draft request (BDR) written to introduce before the committee relating to the disproportionate share of tax for replacement in the Governor's Executive Budget. The proposed BDR would allow social service departments in Nevada counties to turn revenue into the state for disproportionate share payments to be matched with federal funds. The revenue would then be used to pay community hospitals. Senator Rawson said a BDR is needed to start the process. Senator Raggio asked for a motion from the committee to request a BDR regarding the disproportionate share of tax. SENATOR JACOBSEN MOVED TO REQUEST A BILL DRAFT REQUEST. SENATOR O'DONNELL SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR RHOADS WAS ABSENT FOR THE VOTE.) * * * * * Insurance Regulation - Page 709 Rose McKinney-James, Director, Department of Business and Industry, remarked during discussions in the Assembly Committee on Ways and Means on February 2, 1995, an issue arose she wished to address today. She explained during the 1993 session of the Legislature, a series of model acts surfaced that are referred to as an accreditation package. The National Association of Insurance Commissioners (NAIC) have promoted the package for a period of time to establish some uniformity among the states, and Nevada is not yet accredited. However, Ms. McKinney-James said based on current statutory authority, approximately 90 percent of what appears in the accreditation package is already in state statute. She said the department has engaged in a variety of discussions with industry and the NAIC to establish some details regarding the issue. Later this week, several officials from the NAIC will be coming to Nevada to work with the staff to determine the extent to which the department can comply. Ms. McKinney-James stated there are two BDRs that have been submitted, but the focus of the accreditation is to provide consumer protection and some uniformity to the extent the department is required to periodically engage in multi-state examinations. Ms. McKinney-James pointed out as the budget for the department is reviewed today, the committee will note several positions at the agency level have been requested to accommodate accreditation. After some discussion, it was determined based on the staffing received during the 1993 session, and with some modifications within the division, the department will be able to support accreditation if it is approved by the Legislature. Ms. McKinney-James indicated the staff was asked to provide detailed information to the Assembly Committee on Ways and Means regarding the measure. She offered to provide the same information to the Senate Committee on Finance. Ms. McKinney-James introduced Alice A. Molasky, Esq., Commissioner, Division of Insurance, Department of Business and Industry, and David Hall, Deputy Commissioner, Division of Insurance, Department of Business and Industry. Senator Raggio asked Ms. McKinney-James to define accreditation by the NAIC, and how the state will be impacted if accreditation is not received by the NAIC. Ms. McKinney-James said there are two impacts. One relates to the multi-state examinations previously mentioned, and the other relates to how the agency would address specific types of insurers. At this time she wished to defer to Ms. Molasky to respond to the question. Ms. Molasky said when she served as counsel for the Division of Insurance, she assisted with the accreditation bill during the 1993 legislative session. She explained the package was originally created by the NAIC. Originally, United States Representative John D. Dingell from the State of Michigan, who was the Chairman of the House Commerce Committee, prepared a paper called "Filled Promises." The paper points out the failure of the states to regulate the business of insurance, and effectively withdraw the McCarran-Ferguson Act that enables the states to regulate the insurance business. Ms. Molasky reported in order to protect the states, the NAIC developed a body of model laws to strengthen the methods of enforcing and protecting the interest of consumers, and to investigate and examine the solvency of insurers. Ms. Molasky commented this is the sole focus of what is called accreditation. She stated her focus is on consumer protection, and she advocates the passage of the BDR relating to this issue when it comes before the Legislature. Ms. Molasky said the positive side of the accreditation measure is the insurers will have a uniform body of laws across the nation, just as they have in the past. Ms. Molasky pointed out there is also an economic factor to be considered. The division encourages insurers to domesticate in the State of Nevada. She would like to see strong, respectable, insurers come to Nevada to expand the economic base. She opined if the state is not accredited, insurers will not come to Nevada because they will not be recognized by other states as coming from a state prepared to take strong enforcement measures. Ms. Molasky warned there is also a possibility, although (the United States) Congress has departed from this route, the issue of regulation of the insurance industry by the states versus the federal government may come alive again. In the event it does, the premium tax paid by Nevada insurers would be very much in jeopardy, because the Congress would be regulating insurance, and not the State of Nevada. Senator Raggio noted that in 1993, the Division of Insurance requested and received six positions they claimed were necessary to achieve accreditation from the NAIC, and the funding appropriated was used for training to help achieve accreditation. He asked what the necessity is for new positions and training if the issue at the present time is only to enact new model laws. Ms. Molasky responded the NAIC has established a procedure called "the accreditation package." Part of the process is the adoption of certain laws, and the other is an indication by the states to have sufficient staff to meet the needs of the domestic industry and the insurance business carried on in the states. Her understanding is, in 1993, there were positions added that met most of the requirements. As far as what is requested by the division this year, she believes there is misapprehension the positions were based on accreditation and reassured the committee they were not. David Hall, Deputy Commissioner, Division of Insurance, Department of Business and Industry, answered that in 1993, the division did add additional staff to the financing sections to review companies for insolvency. Presently, one person is reviewing approximately 1,500 companies. In reviewing other states already accredited, the ratio is one analyst to approximately 750 companies. Therefore, the division believes the NAIC will probably request them to add additional staff. The division is now asking for the staffing necessary to make Nevada comparable to other states with similar needs and already accredited. This will lower the ratio and allow more time to be spent reviewing financial statements for solvency and checking on insurance companies. Senator Raggio asked Mr. Hall to comment regarding an audit performed in 1994 by the Legislative Counsel Bureau (LCB). The Fiscal Year 1993 audit report indicated the division did not perform any market conduct examinations of property and casualty insurers, even though they accounted for 55 percent of all complaints and 50 percent of the insurance sold. Also, it was noted the market conducted examinations performed by the division in 1993 that were not performed in accordance with NAIC standards. Mr. Hall replied he could provide the information in writing, but said market conduct is a new area and the standard has just now been perfected. To fully and correctly answer the questions posed, Mr. Hall stated he would prefer to obtain the information from staff members more familiar with the concept. Senator Raggio agreed this would be acceptable. He asked that the written response also contain information concerning the progress made toward a systematic, risk-based selection of insurers for examination, and the steps taken to follow up on problems identified during the actual examination. Mr. Hall said the division has put together a plan of corrective action for the LCB audit outlining how the division will correct the deficiencies. He will provide a copy of the plan to the committee, as he believes it will address Senator Raggio's concerns. Senator Raggio noted mission statements were not provided for most of the division's budgets, and appropriate measurement indicators were also omitted from some of the budgets. Mr. Hall said he will provide mission statements and performance indicators as needed to the committee along with a plan for corrective action previously mentioned. Deborah A. Erickson, Budget Analyst, Budget Division, Department of Administration, interjected there was a misunderstanding on her part regarding the mission statements. She said she will be certain to work with all of the agencies within the department to provide adequate information in the future. Ms. Molasky added she did not believe Mr. Hall was fully aware of the effect of accreditation when the initial budget was requested. Ms. McKinney-James pointed out the team of individuals who will visit with her staff next week are a part of an accreditation committee comprised of commissioners and staff of the NAIC who ultimately will have the responsibility for determining whether or not a state has sufficient resources, sufficient statutory infrastructure, and regulatory infrastructure, to be considered accredited on the part of the NAIC. Ms. McKinney-James emphasized as the division proceeds with the accreditation issues, they will do so in a manner that will take into consideration both the needs of the regulatory environment as well as the industry being regulated. Senator Coffin stated NAIC accreditation is important due to state rights issues involved. He concurred Congressman Dingell was attempting to centralize the control on a federal level in Washington, D.C. He also feels the cooperative efforts among the commissioners helps to build a level of confidence so that a domestic company from one state can be secure about marketing their products in another state and be assured that state will look after its domestic companies. Senator Coffin said there is a real spirit of cooperation and trust that has to be built up. He explained states look to each other to do a good job within their own borders while testing each other to make certain they are conforming. Senator Coffin said to address the question as to whether or not the division has properly used funding granted by the state to achieve or approach accreditation is another issue that will have to be examined. He added that not all insurance companies are really in favor of state control. Some of them are in favor of federal control because it allows them to file one plan for all 50 states. These companies usually have a very large legal department due to problems encountered in matching all of the state requirements. Therefore, for budgetary reasons most insurance companies prefer control on a federal level as opposed to placing control in each of the 50 United States capitols. Ms. Molasky said the budget is the division's operating budget account which includes federally funded Health Care Financing Administration (HCFA) funds for the division's Medicare Health Information Counseling and Assistance Program. Prior to FY 1993, this budget was funded by the General Fund. However, at the last session of the Legislature, the division was requested to use the reserve account of the Insurance Examiner's budget account 3817 as the main funding source of the division's budget. Ms. Molasky said for the 1995 -1996 biennium, the division is requesting General Fund support because they will reduce their reserve of the Insurance Examiner's budget to a minimum level. Ms. Molasky remarked the Governor has recommended approval of the Base Budget, which she pointed out includes funding from budget account 3817, Insurance Examiners. In order to continue the transfers from the Insurance Examiner's fund, the division will be required to increase their administrative charge to 100 percent from the present level of 50 percent which will cost the state's domestic insurers about one- third more in examination costs. Senator Raggio asked for an explanation regarding the administrative charge . Ms. Molasky replied the charge is an administrative override assessed by the commissioner to pay the cost of administrative expenses, and was raised to 100 percent in 1991 then subsequently reduced to 50 percent. It is contemplated the administrative charge will remain at 50 percent, but Ms. Molasky repeated if the division is required to continue using the Insurance Examiner's fund, it will be necessary to increase the assessment anywhere from 75 percent to 100 percent. Mr. Hall pointed out a confusing accounting adjustment wherein the transfer from budget 3817 for the Insurance Examiner's fund is shown in the Base Budget. However, the Enhancements will reflect an adjustment to move this out. He referred to the summary page of the budget and said it reflects a switch back to the General Fund and a reduction in the allocation coming from the Insurance Examiner's fund. The division is transferring from the Insurance Examiner's fund only the funds they can identify as being attributable to their costs associated with monitoring the program, which amounts to approximately $300,000. Senator Raggio asked the amount of General Fund appropriation that will be needed to replace the revenue. Mr. Hall referred the committee to the Budget Summary reflected on page 712 of the Governor's Executive Budget, and said it will clearly identify the transfers discussed. He said the information is also shown in the Enhancement Category 908, Program Transfers (E-908). Senator Raggio asked if there are different funding options available other than increasing the override to the companies. Mr. Hall responded the division explored the possibility of changing the premium tax by increasing it 15 basis points from 3.50 percent to 3.65 percent. He said the increase would provide enough money to cover the operation of the department. The division looked at using dedicated funding at the same time. Senator Raggio asked how the premium tax rate in Nevada compares with other western states. Mr. Hall answered the state is approximately the third highest, and changing the premium tax rate would not change the level of where Nevada is with other states. He stated he could provide the information from a chart he has prepared. Senator Rawson requested the division to provide the committee with information pertaining to the projected reserve for the Insurance Examiner's fund. He said he wanted to explore all avenues before discussing a raise in the premium tax. Mr. Hall said when the Insurance Examiner's budget is discussed, this information may become clear. Referring to Maintenance Category 200, Demographics Caseload Changes (M-200), Ms. Molasky noted the division's request to add one Management Assistant to their Las Vegas office to assist in the increased volume of public contact. Senator Raggio noted that in Fiscal Year 1994, the division projected $480,000 in fines would be collected. The actual collections amounted to $317,828 according to a report by the Office of the State Controller, but performance indicators indicated only $192,554 was collected. He asked why there is a discrepancy between the performance indicators and the controller's report. Mr. Hall said he would have to provide the requested information at a later date. Senator Raggio referred to decision module M-200 which recommends an additional Management Assistant for Las Vegas to handle consumer complaints. However, he said an LCB audit revealed the Las Vegas consumer services section processed 50 percent more consumer complaints than the Carson City office, and closed complaint files in a more timely manner. He asked why the additional position is recommended for Las Vegas rather than Carson City since it appears the Carson City office must have assistance in order to process more complaints. Mr. Hall responded the division's plan of corrective action addresses consumer complaints and will be provided to the committee. Mr. Hall said the Carson City office did not enter complaints into the computer on the day of receipt as does the Las Vegas office, and the system is designed to tally complaints on the day of receipt. The procedure for entering consumer complaints has been corrected in the Carson City office. Senator Raggio asked if this is the budget for the Consumer Advocate for Auto Insurance. Mr. Hall said the consumer advocate's salary is reflected in the Insurance Regulation budget, but his expenses are reflected in the Insurance Cost Stabilization budget. Senator Raggio asked for further comments regarding the division's request to abolish the Consumer Advocate for Auto Insurance as reflected in the Base Budget. Ms. McKinney-James replied the position was created some years ago to address concerns the automobile insurance industry is not providing adequate service to consumers, specifically from the standpoint of rates. The rates for automobile insurance are high, and the Legislature consequently approved the position. The automobile industry grew over a period of time and is now considered one of the more competitive industries in insurance. There have been questions regarding the extent to which the consumer advocate duplicates the authority of the insurance commissioner. Embodied within the authority is the requirement the commissioner attempt to protect the interest of the consumer. Addressing the budgetary issue, Ms. McKinney-James said the budget for the office is located in the Insurance Cost Stabilization fund comprised of contributions by all insurers, automobile and others. Currently, the cost of supporting the office cannnot be underwritten by pulling out just the contributions of the automobile insurers. Ms. McKinney-James said the Governor indicated his desire to streamline government to the extent possible in response to a series of focus groups. The comment was made they prefer to use tax dollars for essential services, and the decision is to eliminate the position in response to the items set forth. Ms. McKinney-James pointed out the Consumer Advocate for Auto Insurance was transferred administratively from the Division of Insurance to the Consumer Affairs Division at her request. One of the things she hopes to achieve by her action is to strengthen the consumer aspect of the office. Much of the work accomplished has been performed in the area of litigation. Ms. McKinney-James said Mr. John F. Wiles, the Consumer Advocate for Auto Insurance, was present and could respond to any questions by the committee. Senator Coffin commented he has heard of government by poll and government by instinct, and now he has heard of government by focus-groups. He asked how an agency can be eliminated or improved based on an opinion by a focus group. He also asked if the methodology had been used frequently in the past, and the type of focus group used to arrive at the decision to abolish the position. Ms. McKinney-James said she could only speak of her understanding about the concept. To respond to the first aspect of the question in terms of how frequently focus groups are used, she said she did not know. She does know in the preparation of the budget the Governor and his staff felt it was necessary to use a slightly different approach. Ms. McKinney-James admitted she does not have personal experience with a focus group, but she was advised through cabinet meetings the approach is used, and that a variety of focus groups were used for industry, labor, and consumer issues. She also is aware this is a mechanism used frequently by utilities in attempting to assess what the customer is seeking. She pointed out the concept of total quality management (TQM) was founded on the principle service can be delivered better once customer needs are identified. She believes there is a concerted effort on the part of the individuals involved in the focus groups to be reasonable, and the individuals usually represent certain components of a constituent group. Ms. McKinney-James commented she mentioned the focus group as an aspect of the basis for the decision to eliminate the advocate position in the Office of the Advocate for Insurance Customers, but she is not suggesting this is the most significant reason. Ms. Molasky remarked she has worked with Mr. Wiles and respects him as well as his dedication. She stated she was slightly alarmed after listening to discussions during budget hearings in the Assembly Committee on Ways and Means the Commissioner of Insurance is not performing his or her duties. She stated she worked for seven of the commissioners that preceded her who exhibited sincere dedication to their role of insuring the protection of consumers. It is her personal objective to carry out the role to the fullest degree possible under terms of the statutes. Ms. Molasky said she did not know if anyone had considered the costs within the agency affected by the role of the consumer advocate, but as a result of only one hearing involving the California State Automobile Association, direct and indirect costs to the agency amounted to approximately $106,000. Senator Raggio countered the same argument can be made with respect to the Public Service Commission and the Office of the Consumer Advocate. He pointed out in 1991 there was a high priority placed on the consumer advocate position, and it is suddenly no longer a needed position. John F. Wiles, Advocate, Office of the Advocate for Insurance Customers, Division of Insurance, Department of Business and Industry, testified he is not here to criticize the Governor's decision, or to criticize the work performed by the Division of Insurance. He stated he would like to answer any questions the committee may have and provide indicators that may lead the committee to a contrary conclusion. Senator Raggio asked Mr. Wiles if he agreed with the decision of the Governor to eliminate the position on the basis it is not needed. Mr. Wiles replied he does not agree with the Governor's decision. He stated there were competing bills by the Senate and Assembly when the office was created in 1991. It was not clear at the time whether the advocate would have intervention authority or whether the advocate would be primarily an educational officer. Assembly Bill (A.B.) 728 of the Sixty-sixth Session, provided for a very broad scope of powers to permit the advocate to represent private passenger automobile insurance customers in rate, solvency, and related matters. ASSEMBLY BILL 728 OF THE SIXTY-SIXTH SESSION: Creates depart ment of insura nce. Mr. Wiles referred the committee to Exhibit C which provides additional information concerning A.B. 728 of the Sixty-sixth Session, and the powers of the advocate in the intervention of rates, educational functions, and the examination function of the office. In concluding his argument regarding why his position should not be abolished effective July 1, 1995, Mr. Wiles addressed the cost issue. He calculated his costs to be approximately $120,000 each year, which includes $45,000 for salary. He said if the committee looked at his costs in terms of the amount of money insurance customers pay, they would be looking at a very small percentage. Mr. Wiles also noted for every registered vehicle in the State of Nevada, a consumer would pay 12 cents a year for his costs. A 4-year term would cost those who register a vehicle in the state a total of 48 cents, which he considers to be a very small amount considering the services he is able to provide. He believes the consumers in Nevada deserve his representation, and his job is to favor the consumer within the boundaries of the law. Senator Dina Titus, representing Clark County Senatorial District No. 7, testified against the Governor's recommendation to eliminate the Office of the Advocate for Insurance Customers, effective July 1, 1995, and to encourage the reinstatement of funding for what she considers to be a very important position. Her testimony was from prepared text (Exhibit D). Senator O'Donnell stated he has received many complaints from his constituents regarding the rising costs of insurance. He asked if insurance awards have increased. In his estimation, there have been fewer accidents, but the awards appear to be for larger amounts. Ms. Molasky said she could not answer his question, but would discuss it with the actuary within the division responsible for information of this type and provide a response at a later date. Senator Mathews expressed her displeasure with the fact many of the agencies use the lack of help as their excuse for not getting things done. Senator Coffin asked for information to be provided, in writing, to the committee regarding the amount of revenue the division receives from fines and penalties. He also asked the amount of revenue received from agent, broker and licensing fees. He reiterated his frustration concerning the large number of licensed individuals paying heavy license fees to support an agency for which they are not receiving a return. It is his feeling the fees and fines well exceed the amount of General Fund money expended by the budget, and more could be done with the appropriation dedicated for use by the agency. Senator O'Donnell asked if the premium tax were to be raised l5 basis points would this be passed on in terms of rate increases. Ms. Molasky confirmed the raise would be passed on because the premium tax is a component of a rate. Senator O'Donnell suggested to use technology more efficiently instead of looking at another way to raise the rates. National Association of Insurance Commissioners - Page 715 Mr. Hall indicated the account was created to provide funding for the Division of Insurance to communicate on insurance issues with insurance officials from other states, provinces, or counties. Senator Raggio asked if funding for the budget account is through an assessment on the insurance companies. Mr. Hall stated the funding is from a $15 annual assessment to insurance companies. The fund pays for the reasonable and necessary travel and related expenses for state staff to attend association meetings as well as staff training associated with national accreditation standards. Insurance Cost Stabilization - Page 717 Senator Raggio noted the 1987 Legislature created a system for the Commissioner of Insurance to collect, analyze, and distribute information concerning cost stabilization of insurance. The study results are to be reported to the Legislature no later than February 1 of each year. Senator Raggio asked for a summary of the report indicating whether the cost of insurance has stabilized. Mr. Hall responded the budget is the division's cost stabilization account and allows them to connect with the NAIC to obtain additional data bases and information. It is based on an annual assessment of $210 on property and casualty companies. Ms. Molasky stated although the report does not provide information as to whether the cost of insurance has stabilized, it does reflect a 2-year history of insurance rates and costs in all areas of property and casualty. She added this is the budget from which the publications, The Consumer Guide to Automobile Insurance, The Consumer Guide to Home Insurance, and The Comparison Guide to Buying Personal Auto Insurance are funded. Senator Raggio asked what the mission statement is for the budget function, since he believes it is to work for the stabilization of insurance costs. Mr. Hall replied he does not have a mission statement or performance indicators for the account, but will provide a report to the committee as soon as possible. Self Insured - Workers Compensation - Page 721 Ms. Molasky said the budget was established in relation to the division's oversight certification examination on auditing of qualified employers who wished to self-insure their workers' compensation program for industrial insurance. It is funded from an assessment by the Division of Industrial Relations. Senator Raggio said it appears the number of examinations have increased considerably. The division projected about 40 examinations in Fiscal Year 1994, but 159 were conducted. The projections also show increased levels of examinations. He asked if the division will be able to perform examinations with the number of personnel approved. He noted additional positions have been requested, but not recommended. Ms. Molasky said as of December 31, 1994, there were 190 self-insured employers of workers' compensation. She pointed out each employer must have a tangible net worth of $2.5 million. Ms. Molasky said the 190 represents single employers and not associations or groups which have come together. The employers are also required to be examined or audited every 3 years by the division. Ms. Erickson interjected the reason Module M-200 was not recommended in the budget account, which also ties in with the Insurance Insolvency Fund shown on page 733, is due to a bill draft request to be introduced soon that may delay qualified employers in Nevada to self-insure for workers' compensation. Senator Raggio qualified if the bill draft as presented does not pass with reference to allowing smaller companies to consolidate and unite, then the Budget Division would have to add positions to the budget account. He asked the committee members to make note of this possibility. Insurance Examiners - Page 725 Mr. Hall said the fund was established to provide for examination of the affairs, transaction accounts, records and assets of each authorized insurer. Domestic insurers are examined not less than once every 3 years, and each insurer applying for an initial certificate of authority is examined. He stated there are approximately 30 examiners under contract at the present time who perform examinations on behalf of the Division of Insurance. An administrative fee equal to 50 percent of the examiner's daily per diem rate is assessed to the examined insurance company to pay the administrative costs. Senator Raggio asked how much revenue the override produces each year. Mr. Hall responded $615,894 is projected for Fiscal Year 1996 - 1997, which represents the 50 percent override portion. Regarding the balance in the Reserve Account at the end of 1995, Mr. Hall said the division is projecting they will need approximately $250,000 to $300,000 working capital by the end of the fiscal year to pay for the contract examiners. Mr. Hall also said the division has asked to increase the Reserve Account another $350,000, and in the event of liquidations not charged to the budget, revenue would be available to perform non-chargeable work when funds cannot be recovered. He explained the division is charged with following up with the examination process on a company that might become insolvent, and such action requires personnel coverage. Senator Raggio noted in 1993, the Fiscal Division and the Budget Division were invited to a meeting with the division's examiners regarding the loss of insurance premium tax to the state on surplus lines business. The commission was planning to order several examinations in order to ascertain the amount of tax owed to Nevada, and made plans to recover the tax. He asked what the outcome of the enforcement effort yielded in terms of back taxes, fines and penalties. Ms. Molasky said the plan at the time presented required one of the division's market conduct examiners to examine surplus lines insurers. As a result there were three such companies examined. The question then arose as to the appropriateness of expending appropriations from the examination fund which could not effectively be charged back against an unauthorized insurer. The division is awaiting an opinion by the deputy attorney general regarding how to proceed with the examinations. Because of the budgeted amount in the account, there is insufficient revenue from the override to support the examiner. Ms. Molasky said the examinations were terminated until the division receives the funding or a resolution is received from the deputy attorney general. She believes surplus lines insurers are authorized insurers, and if they are not conducting business on a surplus lines basis through licensed surplus lines brokers, their business is unauthorized. She further believes there are taxes not being collected at this time, and the Division of Insurance should go after the premium taxes and the fines and penalties due from the surplus lines insurers. Insurance Education and Research - Page 729 Ms. Molasky said the budget account was established to provide the funds for education and research, and includes staff training for the Division of Insurance. Nevada Revised Statutes (NRS) 679B.305 requires any balance over $40,000 remaining in the Insurance Recovery Fund at the end of the fiscal year to be transferred to this account. Senator O'Donnell referred to the line item Personnel Expenses reflecting approximately $75,000 for two individuals, and the $45,000 and $50,000 costs shown for Research and Education for two individuals. He asked for an explanation. Mr. Hall said this fund is used to balance out and pay the difference when the division does not receive funds from the NAIC. He clarified if it is an NAIC function, the revenue would come from the NAIC budget account. If it is a non-NAIC function or partially NAIC funded, the division must substitute the balance of the training expense from the Insurance Education and Research budget account. He advised Senator O'Donnell he would have to refer to the NAIC budget account reflected on page 715 of the Governor's Executive Budget as well as this budget account to accumulate the total cost for training and publications. Senator O'Donnell asked to have the aggregate total of all the education expenditures the division has made for Fiscal Years 1995 - 1996 and l996 - 1997, and Mr. Hall said he would provide the information. He added, "I guess my question would be why are two people needed to administer $44,000." Mr. Hall said he would also provide Senator O'Donnell with an organizational chart of the department and how they operate to make things clearer. He also clarified one of the positions shown in the budget is the coordinator of the licensing section who oversees all of the licensing functions performed by five individuals. The individual also oversees all of the education training materials for the licensed brokers who must complete continuing education courses. Additionally, there is one staff assistant who works in the licensing section and supports the education function. He reiterated the functions of the two individuals cover a multitude of facets within the division. Insurance Insolvency Fund - Page 733 Ms. Molasky said the budget represents the insolvency trust fund for self-insured employers required under Nevada Revised Statutes (NRS) 616.2925. The trust fund is funded by a balance forward through an annual assessment, and by interest earned on the fund balance to cover any insolvency of a self-insured employer who would otherwise be unable to pay claims. Senator Raggio asked if there have been any claims filed against the account, and Ms. Molasky replied in the last 3 years there have been no claims filed. Senator O'Donnell commented the state spends a lot of money auditing self-insured companies every 3 years, and yet Ms. Molasky said in the last 3 years there has not been anybody who has defaulted. He asked why the audit schedule has not been changed to once every 5 years instead of every 3 years. Ms. Molasky replied the audits are not purely from a financial standpoint. They also look at how the self-insured workers' compensation employer is dealing with safety, whether they are complying with the provisions for compensation to workers, and the requirement regarding the handling of the claims by third party administrators. Insurance Recovery - Page 735 Senator Raggio noted the Insurance Recovery budget has already been discussed and refers to the $40,000 to be transferred to the Insurance Education and Research budget account. He further stated the account was created to provide a means of satisfying claims. Mr. Hall said in the last 3 years there have not been any claims filed against the account. To his understanding there are statutory requirements a broker-agent must go through before the fund can be used. Financial Institutions - Page 761 L. Scott Walshaw, Commissioner, Division of Financial Institutions, Department of Business and Industry, testified his office is responsible for the regulation of a variety of financial institutions including banks and financial intermediaries such as mortgage companies. They are charged with protection of consumers and investors in the financial institutions within the state, and with maintaining a stable banking and financial system in Nevada. His office is also responsible for the licensing, supervision and regulation of all state-chartered financial institutions including banks, savings and loans, credit unions and mortgage companies. They also answer any complaints and inquiries from the public concerning licensees. Senator Raggio remarked the division has very good performance indicators, but suggested his office might benefit from additional measurement of their accomplishments. Indicators such as the results of the financial examinations, and the time required to resolve complaints, would provide information on the division's success. Mr. Walshaw pointed out in the case of their examinations the division did consider a measurement at the time the performance indicators were first adopted. The division felt the "man hours projections" and the "number of examinations" projections were the best the division could do since in most cases the results of the examinations are considered confidential to the point even the LCB auditors are not privy to the information. However, the issue of identifying the time constraints used to resolve complaints is something the division can put into their performance indicators, and he has already made plans to do this. Mr. Walshaw stated when a General Fund appropriation is placed into this budget account, whatever amount is used from the appropriation during the year is the basis used for assessing the regulated financial institutions. By the end of the year, the division refunds the money received from General Fund revenues. In theory, the budget is revenue neutral. Senator Raggio noted the division is requesting two new positions. He asked Mr. Walshaw if he wants the authority, or is he actually planning to hire two individuals. Mr. Walshaw said the two new positions requested are actually reinstatements. He stated he wants to reclassify the positions so that he can hire secretarial support for the office due to the increase in the number of licenses to be processed. He commented while their budget provided flexibility to hire new examiners to cope with increases in the number of licensees, it overlooked the effect it would have on the secretarial staff. The division has asked to have the two positions restored. They do not necessarily plan on filling the positions, but would like the flexibility to hire in the anticipation of 10 new banks opening in Nevada. Senator Raggio asked about travel and other costs associated with the positions, and Mr. Walshaw answered the costs have been factored into the division's request. The division will not use the funds allocated for travel or related costs if the two positions are not filled, Mr. Walshaw attested. Senator Raggio referred to a change in the law regarding interstate branching. Mr. Walshaw answered this is an issue that may have a fiscal impact on the office, but he will not know what the impact will be "until the division can see in what shape and form interstate banking will occur." However, he pointed out the performance indicators reflected the division handled about 120 new applications this year including 13 new bank applications. He stated there are only 20 banks now located throughout the state. Mr. Walshaw noted the state has had a number of new mortgage companies move in, especially in the Las Vegas area. Senator Raggio asked the number of staff the division has in their Las Vegas office, and Mr. Walshaw said they presently have six examiners. Financial Institutions Investigations - Page 765 Mr. Walshaw stated the account was the result of an interim study done in 1985. The account provides for investigations of applications for licensing of financial institutions and special investigations relating to the institutions. The fees deposited into the account, by statute, are application fees and fees charged to perform reviews involving changes of control. According to Mr. Walshaw, the budget account is also used to support the salary and operating costs for one investigator assigned to the Gaming Control Board who assists them with the investigation of licensing procedures for financial institutions. The investigator also performs special investigations relating to financial institutions. The individual was assigned to the division in accordance with a 1985 interagency agreement. Mr. Walshaw mentioned over the last 10 years, the division averaged about 40 investigations a year. Due to steady growth, this activity has increased, and in 1994 there were 163 investigations performed. Senator Raggio asked the nature of the investigations performed. Mr. Walshaw replied the investigator performs background investigations on potential licensees or for a change of control for a bank or mortgage company. He stated the investigator also has access to law enforcement information not normally available to the division. Financial Institutions Audit - Page 767 Mr. Walshaw explained the Financial Institutions Audit Program is responsible for conducting independent audits and examinations of financial institutions, and was set up as a result of an interim study performed in 1985. The purpose of the account is to enable the division to employ, on a fulltime basis, a staff Certified Public Accountant (CPA). The budget account is the depository for assessment fees levied on all the licensees to pay for the position, and the related expenses of the position. The individual is there to review all of the financial information required to be furnished according to statute or regulation. Mr. Walshaw said the CPA also acts as a resource or troubleshooter when division examiners find problems with a company in which trust accounts are located. Mr. Walshaw indicated the individual has been an invaluable resource to his office over the years, and has helped the division prevent incidents and avoid potential problems. The division has also used the CPA as an agent to deal with receivership and liquidation of a defunct escrow company. Senator Raggio asked if the state has any financial institutions still operating as a savings and loan operation only. He noted the budget indicators projected no savings and loan companies for review. Mr. Walshaw responded there are federally chartered savings and loan companies, also known as savings banks, but the state does not have jurisdiction over them. Mr. Walshaw said there are only two federally chartered savings and loan or savings banks left in the state; the American Federal Savings Bank and the Primerit Bank-Federal Savings Bank. Mr. Walshaw pointed out an anomaly occurred in the budget through no fault of the Budget Division. He referred the committee to the top of page 768 of the Governor's Executive Budget and the categories In-State Travel and Operating Expenses. Mr. Walshaw referred to the categories as contingency accounts built into the budget to afford the opportunity for the CPA to travel. In the period 1993 - 1994 only $62 was shown for travel expenses and $92 for operating expenses for the CPA, which formed the Base Budget for the current biennium. Mr. Walshaw requested $3,000 be restored for In-State Travel and $2,100 for Operating Expenses to be used if necessary. If the amount is not used, it will be carried forward as a credit for the following year's assessment. Mr. Walshaw said the budget is a non-General Fund account, and established by law to carry forward from year to year. Senator Rawson noted under the measurement indicators for the division there are 90 credit unions throughout the state. Mr. Walshaw said the overall number of financial institutions listed is correct, but the breakout is not correct. He will look into this and provide the information to the committee. Senator Rawson mentioned the concern regarding stability of financial institutions in the past, and asked what the outlook is at the present time. Mr. Walshaw responded proudly that, presently, there are no problem banks and very few problems whatsoever. In fact, some of the banks in the state are probably some of the most profitable and well capitalized as any in the western United States. He mentioned the only bank failure in 50 years occurred in 1983. During the l980s there were some problems not only with banks, but other types of financial intermediaries. Mr. Walshaw pointed out many of the suggestions from an interim study performed in 1985, including the flexibility built into the budget, more than corrected the problems which existed in the past. Mr. Walshaw reported on an overall basis the return on assets in the State of Nevada is over 4 percent which he believes on a national average would place the state in the top three. He reiterated there are no problem institutions in the State of Nevada at the present time. Senator Raggio remarked due to time constraints, the presentation reflected on the Agenda (Exhibit A) on the Statewide Cost Allocation Plan would be rescheduled. Mr. Walshaw interjected in response to Senator Rawson`s inquiry regarding the number of credit unions reflected in the measurement indicators, banks are required as many of the depository institutions are, to provide quarterly reports as well as an annual financial statement. To arrive at the numbers shown in the indicators, the CPA built in the fact he is actually reviewing every quarterly report as well as every annual financial statement, multiplied by the number of banks supervised. Senator Raggio adjourned the meeting at 10:25 a.m. RESPECTFULLY SUBMITTED: Marion Entrekin, Committee Secretary APPROVED BY: Senator William J. Raggio, Chairman DATE: Committee Secretary APPROVED BY: Senator William J. Raggio, Chairman DATE: Senate Committee on Finance February 3, 1995 Page