MINUTES OF THE JOINT SUBCOMMITTEE MEETING OF SENATE COMMITTEE ON FINANCE AND ASSEMBLY COMMITTEE ON WAYS AND MEANS Sixty-eighth Session March 14, 1995 The joint subcommittee meeting on General Government of the Senate Committee on Finance and the Assembly Committee on Ways and Means was called to order by Chairman William R. O'Donnell at 8:00 a.m., on Tuesday, March 14, 1995, in Room 321 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. SENATE COMMITTEE MEMBERS PRESENT: Senator William R. O'Donnell, Chairman Senator Lawrence E. Jacobsen Senator Bernice Mathews ASSEMBLY COMMITTEE MEMBERS PRESENT: Ms. Chris Giunchigliani, Chairman Ms. Sandra Tiffany, Chairman Mrs. Jan Evans Mr. Dennis L. Allard Mrs. Maureen E. Brower Mr. Bob Price GUEST LEGISLATORS PRESENT: Mr. Jack Close Mr. Larry Spitler STAFF MEMBERS PRESENT: Mark Stevens, Fiscal Analyst Bob Guernsey, Principal Deputy Fiscal Analyst Ron Steele, Program Analyst Debbra J. King, Program Analyst Pamela Jochim, Committee Secretary OTHERS PRESENT: John P. Comeaux, Director, Department of Administration Tracy Raxter, Chief, Administrative Services Division, Department of Administration Pat Eischeid, Chief, Office of Internal Audits, Department of Administration Rose McKinney-James, Director, Department of Business and Industry David R. Thomas, Chief, Risk Management Division, Department of Administration Jeanne Adams, Chairman, Committee on Benefits Ron Dewsnup, Actuary/Consultant, W.F. Corroon Paul Mead, Representative, Ernst & Young LLP Budget and Planning - Page 461 John P. Comeaux, Director, Department of Administration, testified the department has been requested to provide an explanation to the joint subcommittee regarding a 15 percent increase in data processing charges. He explained the Department of Information Services (DIS) provided the Department of Administration with the estimate. The increase took into account the volume of service the DIS would be providing and the department's increased usage of the system. Senator O'Donnell asked how the DIS calculated the 15 percent increase. Mr. Comeaux related the department received a letter from the DIS which stated: The increase is a result of an estimated increase in mainframe utilization along with increased system support. The mainframe utilization increase will occur due to the installation of the Budget Division's data on the state's mainframe. In addition, systems support by this department will increase as it is our intent to provide in-house expertise to the Executive Budget system, rather than utilize an outside vendor for system enhancements. Senator O'Donnell questioned if the department accepts the DIS explanation. Mr. Comeaux said he has no expertise in estimating costs for data installation and increased utilization. He stated the DIS was very supportive during the budget preparation process and noted his confidence in the DIS and its staff. Senator O'Donnell asked whether the duties of the requested Management Analyst I position would duplicate the duties of the Management Analyst I currently authorized by the budget. Mr. Comeaux maintained the position will not be duplicative. He said the department's planning section had a series of meetings in 1994 with various grant writers and analysts from other state agencies to identify roadblocks they have experienced in securing federal grants. The chief complaint of the group was the lack of time and resources each agency had to locate available grants. Nevada ranks 49th in per capita federal grant money to state and local governments. The department recommends the position in order to have one centrally located person who could identify federal grants and private grant opportunities. The grant person would work with grant personnel in other state agencies to develop grant applications. In the past, the state relied on each agency to identify and obtain grants which applied to their program. During the meetings in 1994, it became apparent this particular system is not very efficient, so the concept of a centralized grant person was developed. Senator O'Donnell questioned who would be reading and preparing the grants. Mr. Comeaux replied the proposed grant person will work with the various agency grant staff. The position will review all necessary information regarding the availability of grants and determine if the grant is applicable to a state program. Once an available grant has been identified, the grant person would notify the grant staff at the appropriate agency. Ms. Tiffany noted the federal government is considering changing its grants' program and asked if the new position would still be needed if the change occurs. She also questioned whether one person could become familiar enough with all the state agencies needing grants and the available grants being offered. Mr. Comeaux related, if the federal government consolidates grant funds into program packages, then the need for the grant position would be reduced. He said the department asked for only one position in order to see if the program would be successful. Ms. Tiffany asked whether Mr. Comeaux knows of any professionals who possess such "cross-program knowledge." Mr. Comeaux replied, "No." He said the grant person would have to work closely with the grant staff in the various agencies. The grant person would become familiar with what grants are available and inform the various agencies of the grant's applicability to a program. Ms. Evans noted grants are also available from other sources besides the federal government. She related she is excited about the prospect of the position and the possibility of accessing additional funds for the state. She asked if there is adequate staffing in the various agencies to perform grant-writing duties. Mr. Comeaux responded he could not answer the question because grant staffing varies from agency to agency. In the 1994 meetings, the various agency grant personnel indicated their biggest obstacle is a lack of time to locate and research the grants. Ms. Evans stated she would like to have some indication from the agencies acknowledging they have adequate staffing to write the grants. Senator O'Donnell questioned, if the position is granted, would the agencies be required to go through the grant person before investigating and writing a grant. Mr. Comeaux stated each agency would still be able to identify and write grants on an individual basis. The grant person would assist the agencies in locating and applying for grants. Mr. Allard commented some state agencies already contract with private companies for help in identifying and applying for grants. He asked how the grant person would work with the private companies. Mr. Comeaux responded he is not aware of how many grant research contracts have been awarded and has never considered how the grant person would work with private companies. Mr. Allard suggested the grant position's functions would overlap the functions performed by the private grant research companies. Mr. Comeaux related the grant position should be able to provide most agencies with the necessary grant information, so a private firm would not be needed. Mr. Allard asked if it is a trend for agencies to contract with outside companies for grant identification and application. Mr. Comeaux replied grant research contracts have not increased, so he does not foresee this as becoming a trend. Mr. Allard inquired if the position is approved, would the agencies need to seek outside help on grant research. Mr. Comeaux explained contracts for grant-writing services may still be needed, but contracts for grant identification would not be necessary in most cases. Senator Jacobsen questioned if the position would have any effect on a rural community's opportunity to receive grants. Mr. Comeaux responded there may be some areas where the state and local governments compete for grant funds. Ms. Giunchigliani noted in a number of cases grants received by the state government trickle down to local governments. She mentioned it might be more productive to identify and investigate which agencies have a need for the position and if the agency has qualified staff to perform the grant writing. Mr. Comeaux stated the department does not care how the problem is solved, as long as the state implements some type of a coordinated method to rectify its 49th position in receipt of federal grant funds. Ms. Giunchigliani requested the Department of Administration to survey the state's agencies to identify which agencies apply for grants and if they already have grant- writing personnel. Senator O'Donnell contended it might be beneficial to contract with an experienced grant writer, since state agencies have limited time and staffing available. Mr. Comeaux stated he will contact the state agencies regarding their grant-writing needs and report back to the joint subcommittee. Senator O'Donnell noted budget module E128 recommends two staff positions to allow the state to develop its own Business Processing Reengineering Team (BPR). The senator asked if the department has considered adverse agency reaction to staff from the Department of Administration determining how an agency should be operated. Mr. Comeaux commented the BPR will provide an independent overview of an agency's operations. He explained the BPR concept was developed because of data processing and information services problems. Senator O'Donnell interjected the Department of Information Services (DIS) views the BPR as a complete evaluation on how an agency is functioning and what can be done to operate more efficiently. Mr. Comeaux said the staffing request does not directly involve the DIS. He stated the department plans on contracting with outside consultants to perform large BPRs. The contract will require that state personnel work with the consultants to gain experience, so eventually an in-house BPR team can be formed. The in-house BPR team would be utilized to perform smaller BPR functions. In addition, the in-house team would work in conjunction with contractors engaged to perform larger BPR functions. Senator O'Donnell suggested the personnel designated for the in-house BPR should be placed in the DIS budget. The senator asked why the positions are funded from the Budget and Planning budget. Mr. Comeaux related he discussed the positions with Karen Kavanau, Director, DIS, and it was agreed the positions should be placed in the Department of Administration. He commented, "I think she [Karen Kavenau] felt the positions would be more independent in the Department of Administration than in DIS." Ms. Giunchigliani observed several agencies are already undergoing BPR studies and asked who is performing the BPR studies for those agencies. Mr. Comeaux responded the Department of Motor Vehicles & Public Safety (DMV&PS) had work performed by an outside contractor, but he does not know the contractor's identity. In addition, a BPR study was performed on the Integrated Financial System by an outside contractor. Mr. Comeaux explained the two requested positions would be permanent state employees; however, the employees will receive training from an outside contractor until they have become proficient in performing BPR functions. Ms. Giunchigliani questioned if the BPR positions would act as "roving teams" in helping various state agencies perform BPR studies. Mr. Comeaux said the BPR personnel would conduct small BPR studies and help outside contractors with larger BPR studies. The state BPR personnel could be written into the independent contractor's agreement which would be a cost savings to the state. Ms. Giunchigliani inquired how often a BPR study would be performed on an agency. Mr. Comeaux responded a BPR should be done every 10 years. Ms. Giunchigliani asked for a breakdown on the costs associated with BPR personnel versus an outside BPR contractor. Ms. Tiffany stressed, "You can't have government employees doing this to other agencies. It just won't work." She related she likes the concept, but maintains the studies should be performed by independent contractors. Independent contractors have more experience and education in conducting BPR studies. State employees would initially have to be trained and take yearly continuing education classes. Ms. Tiffany suggested a pilot study be conducted before an in-house program is implemented. She recommended that BPR studies should be performed by outside contractors. Mr. Comeaux responded independent contractors do not actually perform the BPR study; contractors act only as facilitators. BPR studies take up a tremendous amount of staff time. Mr. Comeaux stated contractors make the agency participants "systematically examine what they are trying to accomplish and how they are going about accomplishing it." He reiterated the state BPR personnel will only act as facilitators by assisting agency personnel in finding solutions to the agency's problems. Senator O'Donnell said he agrees with Ms.Tiffany regarding the hiring of outside contractors. He stated independence is an important element when conducting a BPR study. Mr. Comeaux noted he is not opposed to changing the proposal as long as problem is addressed in some manner. Mrs. Brower indicated, after hearing discussions on BPR in other meetings, it is her impression outside contractors are recommended in order to provide a fresh point of view. She noted DIS had provided the committee with a list of agencies considered for BPR studies and asked if the personnel request is based on the DIS list. Mr. Comeaux replied, "No." He related he asked Ms. Kavanau to provide him with a list of agencies which have information services problems. He noted, "I asked her for a list of the agencies that were going to explode if we did not do something sometime reasonably soon, and to try and give them to me in the order in which they would explode." The list only contained the top 10-12 agencies. Mr. Comeaux commented the two BPR personnel would not be able to conduct a study for a large entity. He indicated the outside contractor, who conducted the BPR study on the Integrated Financial Systems, utilized three company employees to help with the study. Mr. Allard questioned if Mr. Comeaux envisions BPR being done entirely in-house in the future. Mr. Comeaux responded he does not foresee all BPR studies being conducted in-house. He related it is important to have the most up-to-date approaches and ideas and outside contractors usually provide this type of information. Mr. Allard noted agencies complain that in-house evaluations are not objective and the state lacks the trained personnel to conduct the evaluations. He asked how long does it take to complete a BPR study. Mr. Comeaux explained the BPR on the Department of Human Resources may not be completed within a biennium. BPR studies on all state agencies would take approximately 10 years to complete. Mr. Allard asked if the BPR studies could be accomplished quicker if outside contractors are hired. Mr. Comeaux replied, if the BPR studies are performed too quickly, the state government will experience too much change in a short amount of time. Changes in state government must be managed. He suggested several studies be performed and if the changes are handled well, then the process could be speeded up. Senator O'Donnell stated: There have been a number of cases where the number of positions that are transferred from one agency to another don't really get reflected in these budgets. Are you going to make a commitment to me that during the next fiscal session that those positions will be truly reflected in these budgets. Mr. Comeaux replied: I am going to try and get that fixed. The Executive Budget system as it now exists will add new positions, but it will not pick up in the count the deletion of the position from the base. I know that makes this thing [budget] hard to work with and we will try and fix it. Internal Audit - Page 473 Pat Eischeid, Chief, Office of Internal Audits, Department of Administration, and Tracy Raxter, Chief, Administrative Services Division, Department of Administration came forward to testify on the budget. Mr. Raxter explained the Executive Budget splits the budget between the Pre-Audit section and the Internal Audit function. The Pre-Audit section is included within the base and the Internal Audit function is reflected in E125. Senator O'Donnell noted the budget has four positions and is scheduled to sunset on July 1, 1995. The senator asked how many audits the office performed in 1994. Ms. Eischeid replied, "One." She related the office audited the Division of Agriculture and discovered a number of problems. Thirteen recommendations were made to the Division of Agriculture and all will be implemented. The office will follow up on the audit in 6 months to see if the necessary changes have been made. The audit office continues to provide the division with problem solving advice. Ms. Eischeid said she has received numerous audit requests, mostly from smaller agencies, asking for help in developing internal controls. Senator O'Donnell asked what is the budget total for the Division of Agriculture. Mark Stevens, Fiscal Analyst, Legislative Counsel Bureau, answered appropriated funds total $2.5 million. Senator O'Donnell noted his concern that only one audit was completed by the office. Ms. Eischeid explained she was not hired until January 1, 1994, and it took her 4 months to hire, train, and organize a staff. The Division of Agriculture's audit was estimated to take 6 weeks, but in actuality it took 19 weeks. The office began the audit in August and an exit interview with the division was held on January 31, 1995. The audit office only has two staff members. Senator O'Donnell questioned how many audits the office will be performing in 1995. Ms. Eischeid explained she has compiled a list of 10 smaller agencies the office intends to audit in the next 2 years. She related smaller agencies are being addressed because the office does not have enough personnel to handle the larger agencies and the smaller agencies seem to have more risk. Senator O'Donnell questioned who determines the type of risk an agency is experiencing. Ms. Eischeid indicated risk is determined by former audit results or the types of revenue transactions handled by an agency. The office narrows its audit focus to the area of risk. Ms. Eischeid related the Division of Environmental Protection has requested an audit of the State Petroleum Fund. The office has been advising and working with the Dairy Commission to help improve its internal controls. She noted a number of agencies call the office on a daily basis for information and guidance. Senator O'Donnell inquired about the number of staff employed by the internal audit office. Ms. Eischeid responded, the office employs a management analyst and two auditors. The other six staff members perform pre-audit functions. Senator O'Donnell asked for clarification of pre-audit functions. Ms. Eischeid. explained the Board of Examiners is charged with the responsibility of reviewing all appropriated expenses. The board has delegated this duty the to Pre-Audit section. Pre-Audit examines all payment and journal vouchers prior to disbursement. Ms. Eicheid noted three Accountant Technicians, a supervisor, and an Administrative Aide are assigned to the Pre-Audit program. She stated the escalation in paper volume has increased to the point where the employees are having difficulty keeping current. An Administrative Aide position has been requested in order to help with the paper volume. The audit office stored 204 boxes of budget paperwork for 1993 with the Division of Archive and Records and it is anticipated 409 boxes will be stored in 1995. Senator O'Donnell questioned whether the Department of Agriculture will realize any savings because of the internal audit. Ms. Eicheid said she could not provide an answer to the question because the audits are not set up specifically to provide cost savings. Senator O'Donnell stated, "We spent $231,000 for one audit. Did we save $231,000 in efficiency? Did we save $231,000 in lost revenue?" Ms. Eicheid responded the $231,000 includes all the start-up costs for the office. She related auditing costs primarily involve salaries and travel expense. Senator O'Donnell contended agencies need to justify their work product and expenditures. Ms. Giunchigliani asked if the Pre-Audit program sunsets and Ms. Eicheid replied, "No." Ms. Giunchigliani questioned if the employees working for the Office of Internal Audit are aware the program may sunset in July, 1995. Ms. Eicheid responded all the employees were informed before being hired that the program could sunset in 1995. Ms. Giunchigliani noted the budget's performance indicators reports no audits have been performed, but one investigation has been conducted. She asked whether the agency conducted an audit or an investigation. Ms. Eicheid explained the audit office performed two investigations and one audit during 1994. She related the Governor asked the audit office to investigate a problem with the Division of Forestry. In addition, the office was requested to investigate a theft which took place at the Nevada Department of Transportation's Las Vegas yard. Ms. Giunchigliani stated she would like to see a specific audit schedule developed by the audit office in order to prevent duplicative audits by other state entities. She related she does not want the office used as an "investigative or a hit squad." Mr. Comeaux stated the function of the internal audit office is to systematically review the internal controls in the various state agencies. The statute requires the office to make a risk assessment and develop an audit plan for each year of the biennium. He said it is the administration's intention to keep investigations at a minimum. Mr. Comeaux noted it is hard to measure the benefits an agency receives from performing an internal audit. He noted many of the recommendations and findings of the audit office will possibly keep agencies from having problems in the future. Senator O'Donnell questioned who is provided with an audit report copy. Mr. Comeaux explained a copy of each audit report is given to him and the agency head. Senator O'Donnell asked if the legislature receives a copy of the internal audit. Mr. Comeaux responded audit copies are provided to the Legislative auditors, but not the Legislative Commission. Senator O'Donnell noted a copy should be supplied to the Legislative Commission in order to have some "checks and balances." Ms. Giunchigliani commented the work performed by Ms. Eischeid's office has been very good; however, the mission of the office has not been followed. She related her concern regarding the office's investigative activities and noted an audit cycle should be "developed, published, and carried out." She requested a list of the state agencies who already have an internal auditor and a list of the state agencies the internal audit office intends to audit in the next biennium. Mr. Allard stated one of the duties of the office is to test the reliability and integrity of performance indicators. He commented one of the major complaints of the joint subcommittees with the majority of agency budgets is the lack of reliable performance indicators. He said, "I find it very ironic that an agency whose stated mission is to test the integrity of performance indicators, has itself provided such obscure performance indicators." Senator O'Donnell interjected, because of the large reorganizational efforts implemented by the 1993 Legislature, many state agencies are not "up to speed" with performance indicators. Mr. Comeaux responded the performance indicators for the internal audit office will be examined and improved. He commented the office did not become fully functional until May of 1994. Rose McKinney-James, Director, Department of Business and Industry, related the Department of Agriculture's audit results indicated a variety of internal controls need to be established. As a result of the audit, the department is aware of changes which need to be implemented for the protection of the agency. The Audit Division has a huge audit cycle, so problems cannot always be addressed in a timely manner. Senator O'Donnell asked Ms. McKinney-James to provide the members of the joint subcommittee with a copy of the Department of Agriculture's audit. Senator Jacobsen questioned what the difference was between an investigation and an audit. Ms. Eischeid explained an investigation is a narrow exploration of an allegation. She noted the investigation regarding the Division of Forestry's helicopter purchase was limited only to the allegations. She explained the focus of an audit is wider and concentrates on internal controls to ensure the proper treatment of revenues, expenditures, safeguarding of assets, and segregation of duties. Senator Jacobsen related he was informed the investigative findings on the Division of Forestry's investigation could not be publicized. Ms. Eischeid pointed out an investigative report is considered an internal document. She explained a copy of an investigative report is provided to Mr. Comeaux and he makes the final decision as to who receives a copy of the report. An audit report becomes a public document, once Mr. Comeaux receives a copy of the report. Audits are distributed to the department head, the division head, Mr. Comeaux, and Gary Crews of the Legislative Counsel Bureau (LCB) Audit Division, she explained. Mr. Comeaux stated the purpose of the internal audit office is not to play "gotcha," but to point out agency deficiencies and make suggestions on how to correct problem areas. He said it was his decision to have a limited distribution regarding audit reports. Ms. Eischeid interjected a copy of the list of audits the office intends to perform is provided to Gary Crews of the LCB Audit Divison to prevent a duplication of efforts. Senator O'Donnell asked how many copies of the Division of Forestry's investigative report were distributed. Ms. Eischeid responded, "Nine." Copies were provided to the volunteer firefighters and Patty Becker, former Chief of Staff for Governor Miller, at a meeting held to discuss the results of the investigation. Ms. Becker collected the copies at the end of the meeting because the report was considered an internal document and not available for general distribution. Senator O'Donnell questioned who made the decision that the investigative report was not available for general distribution. Ms. Eischeid replied, "I don't know." She explained names of state employees providing information about the agency are kept confidential in order to protect the employee and to keep lines of communication open. Benefit Services Fund - Page 481 David R. Thomas, Chief, Risk Management Division, Department of Administration, came forward and distributed a handout (Exhibit C) detailing revisions made to the division's budget. In addition, Mr. Thomas distributed an Operations Audit Report (Exhibit D. Original is on file in the Research Library.) of the employee benefit program. He stated, in addition to the Employee Benefit Program, the budget also provides funding for state workers' compensation safety and loss control program, the prison inmate medical program, and transfers from the indigent accident accounts. Mr. Thomas said the Committee on Benefits has made several recommendations which might necessitate further budget revisions. Jeanne Adams, Chairman, Committee on Benefits, testified the operation's audit was conducted by Ernst & Young LLP and as a result of the audit the committee received 51 recommendations. The committee received the audit findings on March 6, 1995, and has already adopted two of the recommendations surrounding the most critical issues. The first major finding addresses organizational responsibility of the committee to restructure the internal operation of the program. She stated the report found a direct line of authority needs to be established from the chief operating officer to the Committee on Benefits. The second critical recommendation involves the reorganization of benefit activities into three distinct sections: eligibility, member services, and accounting. The report noted the Benefit Service Fund is understaffed, operating with under-trained staff, and directed by "uncredentialed" management. The committee will provide a full response to the audit findings after its March 22, 1995, meeting. Ms. Adams noted an audit summation and recommendation report (Exhibit E) was also provided to the joint subcommittee members. Mr. Allard asked why budget performance indicators 1,2, and 3 remain stagnate, since the division has been mandated to implement safety programs and a back-to-work program. Mr. Thomas explained the programs mentioned by Mr. Allard do not impact the performance indicators 1,2, and 3. Senator O'Donnell inquired if employee benefits have been restored to normal levels. Mr. Thomas responded all the benefits have been restored, with the exception of the $7,500 coinsurance threshold. Funding has been requested in the budget to also reestablish this benefit. Senator O'Donnell noted the joint subcommittee is concerned about the 11.74 percent increase in state contributions for Fiscal Year (FY) 1996 and the 8.46 percent increase for FY 1997. The senator questioned if the medical Consumer Price Index (CPI) used to generate the increases can be justified. Ron Dewsnup, Actuary/Consultant, W.F. Coroon, stated contribution rates are developed to cover expenses after dealing with reserve changes. In addition to reserve changes, there are benefit restoration changes. Benefit restoration changes were adequately covered in FY 1994 and FY 1995, but to continue the restorations the contribution level must be increased for FY 1996. Medical trend calculations include inflationary provisions, changes in utilization patterns, changes in technology, leveraging, and cost shifting. He explained the medical CPI presently is running 4 - 5 percent. When the contributions and expenses were projected for the 1995 plan year, an 8 percent trend figure was utilized. Mr. Dewsnup said the 8 percent trend projection is a conservative estimate in "today's market." Recently, there has been some moderation and mitigation with medical trend indicators. Mr. Dewsnup has not finished the analysis on the inflationary trend factor for the Preferred Provider Organization (PPO). Because benefits have been restored, the company expects a higher utilization rate than what has been experienced in the past. He stated the 8 percent rate might be conservative, but because a full analysis has not been completed, an exact percentage is not presently available. Senator O'Donnell inquired about the dental CPI rate. Mr. Dewsnup explained the dental portion is contained within the medical CPI. The medical CPI for all health care services averages 4-5 percent. He noted the committee should remember that medical CPI is only one component of the overall trend. Senator O'Donnell asked why Mr. Dewsnup stated utilization rates will increase. He related insurance utilization increases after benefit restoration because the insured no longer has to pay for the benefit. He stated the increased utilization factor and technology changes totaled about 1.5 percent of the estimated 8 percent increase. Senator O'Donnell observed, "So you are saying the 4-5 percent medical CPI is the base. When the utilization is added in, you're looking at a conservative 8 percent." Mr. Dewsnup responded, "That is correct." Senator O'Donnell asked how the 11.74 percent contribution increase was calculated. Mr. Dewsnup explained funds were utilized from the Reserve account to cover benefit restorations for 1994 and 1995 plan years. Contribution rates have been flat, but expenditures have been increasing. Reserves were used to handle some of the expenditure increases, but contribution rates need to be raised in order to handle the plan's projected expenses. The benefit restorations were paid for by surpluses in 1994 and 1995 and the surpluses are projected to be used up by the end of plan year 1995. Mr. Dewsnup said, "When benefits worth 2-4 percent are restored and have trend on top of that, you have a compounding effect." He explained the 11.74 percent figure includes 8 percent for trend indicators and approximately 3.5 percent for benefit restoration. The 3.5 percent benefit restoration was paid for by surpluses, but once the restorations are contained within the base, a cost escalation is still calculated on a year-to-year basis. Ms. Giunchigliani stated it is her understanding the Reserve account totaled $23 million. Mr. Dewsnup responded, currently, the recommended reserve amount is at approximately $11 million. He said the December 31, 1994 financial analysis reconciling the paid claims with the accounts receivable and the accounts payable has not been completed. It is his understanding there has been a decrease in claim payments, but the data is being reviewed for accuracy. He related the $11 million figure was the Incurred But Not Reported (IBNR) recommendation as of September 30, 1994 and it is not the budget requirement for Fiscal Year (FY) 1996 and FY 1997. The reserve recommendation for FY 1996 is $13.6 million and $14.5 million for FY 1997. Ms. Giunchigliani noted the original budget figures indicated the agency had requested $17 million in Reserves, but the Governor recommended $37 million. She asked how the figures were calculated. Mr. Dewsnup explained, due to a miscommunication on how reserves are to be handled, each year's reserve recommendation was added to the prior year's recommendation rather than "spending it down as anticipated." Ms. Giunchigliani remarked it is her understanding that the 8 percent trend figure includes medical, dental, and vision. Mr. Dewsnup replied the medical percentage is 8 percent, the dental is 5 percent, and vision is 4 percent. When these three factors and administration inflationary factors are averaged, the percentage totaled 7.5 percent. Ms. Giunchigliani pointed out Mr. Dewsnup had stated earlier that dental and vision were included in the 8 percent trend figure. Mr. Dewsnup said dental and vision is included in the 4.6 percent medical portion of the cost of the CPI. The CPI measures all health costs, but he segregates the trend costs, due to the different trend applications. Ms. Giunchigliani questioned what trend percentage was used for the revised budget (Exhibit C). Mr. Dewsnup replied the budget was built on a trend assumption of 8 percent for medical, 5 percent for dental, and 4 percent for vision. Ms. Giunchigliani commented medical trends are decreasing, not increasing. Mr. Dewsnup answered medical trends have decreased from 16 percent in 1992 to 8 percent for 1994. Ms. Giunchigliani noted if a high trend rate is utilized, then the Reserve account increases. Mr. Dewsnup said if a high trend rate is used and the utilization level did not increase, then reserve levels will increase. Ms. Giunchigliani asked if Mr. Dewsnup had provided any documentation supporting his statement regarding a higher utilization level. Mr. Dewsnup said the only information he has is the "utilization estimate calculated due to restoration of benefits." Ms. Giunchigliani inquired, "Exclusive of the restorations, what information do you have to show us what the utilization would be?" Mr. Dewsnup replied the projections are also based upon paid claims. He related trend projections were begun in June of 1994, and a base of 5 percent inflation was utilized with an additional 1.5 percent for utilization and technology. Ms. Giunchigliani stated the 8 percent increase seems to be at the high end of the spectrum. She would like to receive information from private sector insurance companies on what trend percentages they are utilizing. Mr. Dewsnup related he has contacted a large local insurer regarding their PPO and was informed they use a trend of 3-6 percent. Ms. Tiffany said she is concerned that current figures are not used to calculate the percentages. Mr. Dewsnup remarked the figures prepared for the budget were calculated in June of 1994. He stated there are more current figures, but a full analysis has not been completed. The PPO contract inflationary component will be approximately 3-6 percent. Ms. Tiffany stated she is disturbed the 8 percent trend factor is being used, when utilization figures are decreasing. Mr. Dewsnup related the 8 percent figure was the best estimate he could make as of June of 1994. He noted there have been decreases in utilization, but the analysis on the decrease has not been completed. He stated: I do need to provide the following caution. I feel it very important to say this. In 1992, plans nationwide were experiencing double digit inflation in the mid to high teens. In 1995, we are seeing mid single digits....I can't guarantee that it won't go from perhaps a lower than 8 percent level right now, up to a 10 percent in FY 1997. Ms. Tiffany asked when the analysis will be completed. Mr. Dewsnup replied he will have the revised figures ready the last week in April, 1995. Senator O'Donnell noted although utilization appears to be down, he was informed there might be some unpaid claims which have not been addressed. Mr. Dewsnup explained he has been working with Coresource because of the "extraordinary dips" in the paid claims' figures. Coresource has not provided him with an explanation regarding the paid claims' figures. He needs this information before the analysis can be completed. He should be able to provide the committee with trend rate analysis on April 25 or April 26. Senator O'Donnell asked if there is any latitude in the projected trend rate figures. Mr. Dewsnup replied, yes, and stated the figure may vary by a couple of percentage points in terms of the overall trend rate. Mr. Close said he is disturbed about the amount of time it takes to calculate the average benefit cost per employee. He requested that performance indicators 1-5 be compared to national averages. Mr. Thompson said the comparison has already been provided to the fiscal staff. Mr. Spitler questioned when the revised budget figures (Exhibit C) were calculated. Mr. Dewsnup said the trend figures were based on the original figures prepared in June of 1994. Mr. Spitler noted revised budget figures have not been provided to the committee since January 25, 1995. Mr. Thomas replied the budget figures have basically remained the same, except for a few revisions. Senator O'Donnell asked the fiscal staff when they received the revised budget figures. Debbra J. King, Program Analyst, Legislative Counsel Bureau, stated the figures were provided to the fiscal staff at 11:30 a.m. on Monday, March 13, 1995. Mr. Thomas disputed Ms. King's statement. Ms. King interjected she received a revised budget on Monday, but the budget did not indicate the date it was revised. She stated the revised budget is still incorrect because it does not reflect the changes to contract amounts discussed with Mr. Dewsnup on March 2, 1995. She advised the committee the budget still contains a $3.5 million error in self-insured program costs. Mr. Dewsnup pointed out the $3.5 million costs refer to a discrepancy in how the Health Maintenance Organization (HMO) costs were projected. When HMO rates were projected for the original budget submission, they were projected by using the combined rates of medical, dental, vision, and other insurance. He said this incorrect method of calculation for HMO rates caused dental, vision, and other insurance rates to be "double counted." The miscalculation amounts to a $3.2 million difference in FY 1996 and a $3.5 million difference in FY 1997. Because of the miscalculation, revenues and expenses need to be adjusted in the budget. Mr. Thomas clarified: After our [Benefit Service Fund] first budget hearing with the Assembly Committee on Ways and Means, there were numerous questions we received in writing from your analyst. Those were responded to ... around the first part of March....In that response was this revised budget [Exhibit C]. What Ms. King is referring to now is the formal document that they received yesterday from the budget division. They received nothing from me yesterday.... Ms. King stated the budget submitted to the fiscal staff on March 2, 1995, did not include Module E127 which supported the transfer of the Risk Management Division to a private building. She did not receive a budget, until March 13, which "somewhat reflects some of the changes that have been discussed." Mr. Thomas said the budget has undergone numerous changes. The budget submitted on March 2, 1995, has been changed to reflect a significant change in Reserve figures. He related he was under the impression in October of 1994, the funding for the proposed move was included in the Governor's recommended budget. Once the division realized the funding for the move was not included in the budget, a revised budget was submitted. Senator O'Donnell questioned why the Budget Division did not include the funding for the move in the budget. Mr. Comeaux stated funding for the move had been discussed during the budget building process and it was an oversight on the part of the Budget Division not to include the funds in the budget. Ms. Giunchigliani asked if the Governor's budget recommends a 3.7 percent contribution rate increase for benefit restoration. Mr. Dewsnup replied, "Correct." Ms. Giunchigliani inquired whether "benefit buy back" is the same as utilization. Mr. Dewsnup answered, "benefit buy back" is viewed as the "major component in the difference in what the plan will pay for it now, and what the plan will pay for it under the new benefit structure." The "benefit buy back" does not take into account that once benefits are restored, more people might utilize the benefits. Ms. Giunchigliani expressed her concern regarding Mr. Dewsnup's assumption that benefit utilization will increase because of benefit restoration. She noted the Reserve figures are based on 2.5 months and asked if claim payment lag time is factored into the trend rate. Mr. Dewsnup explained lag time is not factored into the trend rate, but is only an estimate of how long it takes to pay a claim. Ms. Giunchigliani questioned whether administrative costs are built into the 2.5 months Reserve figure. Mr. Dewsnup replied 8-10 percent of the Reserve is for administrative costs. Ms. Giunchigliani requested the joint subcommittee be provided with an exact dollar and percentage figure for administrative costs. Senator O'Donnell stated the budget will need to be reviewed again before it can be closed. The senator noted the joint subcommittee needs correct figures in order to determine what the policy should be on the budget. Mr. Dewsnup said the figures he will provide the joint subcommittee in April will be more current, but actuarial figures are just a projection of what will happen in the future. He cautioned the joint subcommittee that trend rates can increase as quickly as they can decrease. Ms. Giunchigliani asked when the insurance contract with Coresource will be renegotiated and if the state will receive a refund from Coresource, since the state has been performing billing and eligibility tracking functions. Mr. Thomas said the Committee on Benefits meets on March 22, 1995, to discuss the Coresource contract. He stated he understands the contract with Coresource indicates the company will not bill for service costs once the Benefit Information System of Nevada (BISON) becomes operational. The BISON system became fully operational on December 6, 1994. Coresource interprets the contract terms regarding the billing charge differently. The Committee on Benefits at its March meeting will address the problem and try to reach a resolution. Ms. Giunchigliani noted the state has continued to pay the billing charge for January and February of 1995 and questioned if the state will be refunded for the overpayment. Mr. Thomas said the overpayment can be deducted from other payments due Coresource. Mr. Dewsnup interjected the revised budget (Exhibit C) does not take into account an increase in the number of state employees. The budget reflects the number of plan recipients as of July 1994. He noted, at the time of the budget building process, he was not aware there was a projected 10 percent increase in state employees. Mr. Thomas related the division is postponing development of a new network system and requesting that the two positions recommended for the project be kept in the budget. The division will use the funding to hire an accountant and a members' services person. He related the five eligibility employees are trained as processors and during the open enrollment period, September through December, receive 75-80 calls per day, per employee. Because of the enormous amount of telephone calls the employees handle during this time period, the paperwork is not being processed. The Operations Audit Report recommendations (Exhibit E) suggested the establishment of a members' services unit to handle eligibility telephone calls on a year-round basis. Ms. Giunchigliani asked, once the re-projections are finalized and the Committee on Benefits has met, will the joint subcommittee receive a budget reflecting the new trends, and information on which recommendations the committee has accepted from the audit report (Exhibit E). Mr. Thomas replied the revised budget will include all the information requested by Ms. Giunchigliani. Senator O'Donnell expressed his concern the Committee on Benefits will design the benefits and then let the joint subcommittee know what the budget will include. He stated the joint subcommittee should be informed what the actual figures are before they are presented to the Committee on Benefits. The senator stressed the Legislature needs to know the correct figures in order to determine the appropriate funding. Mr. Dewsnup related the information the committee receives at its March meeting will not be the same information the committee will be provided in June or July, when it determines benefit and premium rates. The budget will need to be closed before the final decisions on benefits and premium rates can be made, remarked Mr. Dewsnup. Ms. Giunchigliani questioned what were the concerns expressed in the audit regarding the BISON system. Paul Mead, Representative, Ernst & Young LLP, stated the BISON system has been under development for a considerable period of time and is attempting to take charge of the entire record keeping system for all the fund's programs. He related Ernst & Young had some concerns regarding transferring 20,000 employee records to a new computer system. The fund is relying exclusively on the new system to run a $100 million program. Mr. Mead said the system needs to be monitored closely for several months and contingency plans need to be developed in case of an emergency. In addition, the Committee on Benefits should increase their oversight during the transition period to ensure the integrity of the system. He stated the committee does not have a direct accountability link for any of the operational functions. Referring to the audit report (Exhibit D), Mr. Mead noted every administrative service is "out-sourced" so there is no accountability to the committee. He stressed support functions should be directly accountable to the committee. Senator O'Donnell questioned if the agency ran a parallel system when the BISON was first implemented. Mr. Thomas replied, a parallel system ran from April 1994 to December 1994. He stated the agency has worked closely with the Department of Information Services (DIS) and Coresource to ensure the integrity of the data and ensure contingency plan development. Mr. Mead stated BISON has the ability to incorporate the electronic enrollment process which is being proposed by the agency. He said 18 vendors are currently involved with the program. The audit found consolidation should reduce costs, increase efficiency, and simplify the program. Senator O'Donnell noted because of time constraints, the remaining budgets on the agenda will be rescheduled for a later date. The meeting was adjourned at 10:45 a.m. RESPECTFULLY SUBMITTED: Pamela Jochim, Committee Secretary APPROVED BY: Senator William R. O'Donnell, Chairman DATE: Assemblywoman Chris Giunchigliani, Chairman DATE: Assemblywoman Sandra Tiffany, Chairman DATE: Senate Committee on Finance Assembly Committee on Ways and Means Joint Subcommittee on General Government March 14, 1995