MINUTES OF THE JOINT SUBCOMMITTEE MEETING OF SENATE COMMITTEE ON FINANCE AND ASSEMBLY COMMITTEE ON WAYS AND MEANS Sixty-eighth Session March 24, 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 7:40 a.m., on Friday, March 24, 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. Sandra Tiffany, Chairman Ms. Chris Giunchigliani, Co-Chairman Mrs. Jan Evans Mrs. Maureen E. Brower Mr. Bob Price Mr. Dennis L. Allard STAFF MEMBERS PRESENT: Bob Guernsey, Principal Deputy Fiscal Analyst Ronald T. Steele, Program Analyst Debbra King, Program Analyst Cristin Buchanan, Committee Secretary OTHERS PRESENT: Rose McKinney-James, Director, Department of Business and Industry Alice A. Molasky, Esq., Commissioner, Insurance Division, Department of Business and Industry Robert L. Crowell, Lobbyist, Farmers Insurance Group Fred L. Hillerby, Lobbyist, NML Insurance Company Birgit K. Baker, Administrative Services Officer, Department of Business and Industry John F. Wiles, Advocate, Office of the Advocate for Insurance Customers, Department of Business and Industry Ron Swirczek, Administrator, Division of Industrial Relations, Department of Business and Industry DeeAnn Parsons, Chief, Nevada State Energy Office, Department of Business and Industry Charles Horsey, Administrator, Housing Division, Department of Business and Industry Lon DeWeese, Chief Assistant, Housing Division, Department of Business and Industry Business and Industry Administration - Page 693 Senator O'Donnell questioned the meaning of a "One Stop Shop." Rose McKinney-James, Director, Department of Business and Industry, explained that a "One Stop Shop" will be the mechanism the department will use to consolidate information on regulatory and permit requirements to enable a caller to obtain all the necessary information in one phone call. Mrs. McKinney-James indicated she receives complaints from the business community as to the difficulty in gathering information. Senator O'Donnell asked how many complaints the department has received. Mrs. McKinney-James asserted she can provide the committee with that information at a later date. Senator O'Donnell asked how important it is to establish the "One Stop Shop" insofar as the information is currently available from other agencies. Mrs. McKinney-James opined the consolidation of information is a concept toward services the Department of Business and Industry should be providing to the business community. She stated the department is not only responsible for protecting the public interest by regulating and overseeing businesses, but it also has a responsibility to provide expeditious service to those businesses. Senator O'Donnell requested an example of what steps a business person will need to take to obtain a state license and Mrs. McKinney-James briefly described the necessary steps. Senator O'Donnell asked if the "One Stop Shop" should be housed within the Nevada Development Authority. Mrs. McKinney-James observed the Nevada Development Authority (NDA) typically refers calls to the Department of Business and Industry or the Commission on Economic Development. She pointed out the responsibilities of the NDA are the promotion and marketing of the state. Mrs. Brower questioned if an individual is able to obtain all of the necessary forms from one agency. Mrs. McKinney-James stressed that is what the department is trying to achieve. Senator O'Donnell posed the hypothetical question, "I make a phone call to you...what happens? Does somebody get on a computer and start typing?" Mrs. McKinney-James responded the computer equipment would enable the department to access information regarding what type of permit is required for the business on which a caller is inquiring and what agency would regulate that business. She indicated the call would be entered into the database for recording purposes. Senator O'Donnell queried if the identity of callers will be public information and Mrs. McKinney-James answered in the affirmative. Senator O'Donnell cautioned he is not certain a "One Stop Shop" will serve the purpose for which it is intended. Business and Industry Industrial Development Bond - Page 701 Senator O'Donnell requested a breakdown of the costs in the Cost of Issuance category. Mrs. McKinney-James stated a breakdown for that cost has been provided (Exhibit C). Senator O'Donnell asked if the total fees collected will be expended. Mrs. McKinney-James responded by citing the difficulty in projecting the amount of fees to be expended due to the variable costs associated with issuing bonds. Senator O'Donnell requested the division to revise the budget to show the detailed expenditures as outlined in Exhibit C. Senator Jacobsen questioned whether the department is complying with the recommendations contained in the audit. Mrs. McKinney-James answered in the affirmative. She indicated that with respect to the recommended site visits, the department is restricted due to the cost of travel. She clarified the cost of travel will now be included in the cost of the project to allow for those on-site visits. Senator Jacobsen asked if the auditor has assisted the department in any way. Mrs. McKinney-James explained the auditor was instrumental in helping the department understand the strengths and weaknesses of the programs. Insurance Regulation - Page 709 Senator O'Donnell asked for clarification regarding funds being transferred from the General Fund into this account. It is his understanding during the 1993 session, insurance companies were charged more for examinations and as a result, this fund transfer is a reversion back to the insurance division to lower those charges. Alice A. Molasky, Esq., Commissioner, Insurance Division, Department of Business and Industry, concurred. She testified when the former commissioner and deputy commissioner met with the Interim Finance Committee (IFC) in June, 1994, it was anticipated the division would be able to maintain a reserve level of $250,000 at the end of the biennium. Yesterday, she disclosed, the division began liquidation of a domestic insurer by filing a temporary restraining order, which was granted. The domestic insurer does not have sufficient assets to meet their legal obligations nor does the division expect they are going to be able to pay the cost of the liquidation, she proclaimed. Ms. Molasky demonstrated that ordinarily, the reserve in the examination fund is used for the float at the end of each fiscal year and also to support potential liquidations. In most liquidations, it is expected expenses will be recovered. In this case, she alleged, it is doubtful that expenses will be recovered. Ms. Molasky anticipated it is going to cost approximately $20,000 per month to operate this particular insurance company over the next 2 years, as substantiated by the projected budget depicted in Exhibit D. When this situation arose, Mr. Hall, Deputy Commissioner of the Insurance Division, considered several sources of funding, she disclosed. One mechanism considered to support the liquidation, was to increase the fees. Providing a historical overview, Ms. Molasky explained in 1991, fees were doubled. The industry did not protest because they believed that increase was going to offer increased funding and increased services by the division. "I have heard outcries of frustration and dismay from our industry and that includes all of our insurers as well as our agents and brokers," she emphasized. The division considered increasing the tax by .015 of 1 percent, however, that was not appropriate under the Governor's policy of no new taxes. Referring to Exhibit D, Ms. Molasky declared as a result, the agency has projected that it will be necessary to increase the administrative override as to examinations that occur by 10 percent, for the next 2 fiscal years. She concluded, "We will also find it necessary to increase the administrative fee for the remaining part of this fiscal year...and then the added 60 percent projection..." Senator O'Donnell queried when the division filed the complaint. Ms. Molasky replied the Petition for a Temporary Restraining Order was filed March 29, 1995. Senator O'Donnell asked when did Ms. Molasky realize there was a problem. Ms. Molasky stated: We found out approximately 2 weeks before the petition was filed. We had heard that there were difficulties within this company. We sent an examiner down and he came back with a report to us. We met last Friday and our deputy attorneys general worked over the weekend to prepare the appropriate documents to seek both a Temporary Restraining Order, Permanent Injunction and a Petition of Receivership naming the commissioner as receiver. Senator O'Donnell questioned if the Governor has been notified. Mrs. McKinney-James interjected the Governor has not yet been notified. Senator O'Donnell affirmed, "Let me get this straight...You are...asking us for a 10 percent increase in the administrative fee to cover this problem?" Mrs. McKinney-James pointed out, "We are exploring with you the options that we think we have available to us. According to the division, this is the option that they feel makes the most sense, we are just presenting it to you..." Senator O'Donnell recounted: As the Division of Insurance and Department of Business and Industry, you are coming forth with a 10 percent increase. You are telling me that you have not talked to the Governor about it, and that the problem was that you did not want to go with a .015 percent increase in the taxes because that was against the Governor's policy of no new taxes and yet the Governor is not aware of the new taxes here? Ms. Molasky countered the proposed increase is not a tax. She declared, "This is the administrative override on the examination expenses." Mrs. McKinney-James admitted the proposal needs to be discussed with a variety of individuals. She concluded, "The reality is that we have an emergency, one that was not anticipated. This document simply sets forth for the committee the options which the division is currently considering." The chairman declared the budget held until Mrs. McKinney-James and the Governor have conferred. Ms. Giunchigliani encapsulated: I want to get a handle on the bigger picture, which appears that last session we transferred money to ease General Fund use and we took it out of the Examiner's Fund. Is that how this happened? And then we had to expend all of that. That reserve is at zero, basically...and we have now had a private sector insurance company go under, of which we now have an obligation to pick up. Is that the right way to look at this? Ms. Molasky responded the reserves in the examination fund come from a 50 percent override or administrative charge on examinations and the transfers are made for the support of the department. She reflected: This year...49.6 percent was transferred into our general operating account for the general operating expense. We have attempted to maintain that 50 percent administrative cost without any raise in that cost. With this insolvency, we will not have the reserve at the end of this fiscal year. Ms. Giunchigliani characterized: So we have two critical issues. One, we did a bad policy move last session because we did not go in and bother to deal with general funds, so now we have got to offset a budget with General Funds because we raided it. And secondly, we have a private sector company that went under that did not maintain its obligation to its consumers, so we are bailing them out. Right? Mrs. McKinney-James responded in the affirmative and added it is her understanding the override is a mechanism that has been built into the insurance division's budget in anticipation of this very event. The problem is complicated by the fact the agency is in the process of budget review. Senator O'Donnell informed the division of his concern that it was not appropriate for the division to address the committee on the increase in fees without first discussing the issues with the Governor. Mrs. McKinney-James indicated the responsibility for responding to this situation lies with the Insurance Commissioner, as outlined in the statutes. Senator O'Donnell reiterated: Rose [Mrs. McKinney-James], you have that flexibility in levying those charges for examinations. You have that authority. But it has to be in the budget and it has to be approved by the administrative branch of this government. We have an approved figure and we discarded the extra 10 percent, or the extra amount of money that we were going to put into this fund...because essentially the Governor said no new taxes. Now you come through the back door, it appears to me, asking for additional charges. You do have that flexibility and it is up to the Insurance Commissioner, but it is not a balanced budget. It does not reflect in the books and the sheets that we have here. That is my objection. If we can get that squared away and the Governor says, 'yes I will sign off on this, this is great', come back to us and we will review it at that point. In a liquidation, Ms. Molasky explained, the failed company is expected to obtain some sort of recovery. In this particular instance, she reflected, it is doubtful the division will be reimbursed. Addressing Ms. Molasky, Senator O'Donnell affirmed it is her responsibility to immediately inform the director when these types of emergency situations occur, "so she is not blindsided by the committee in terms of the questions we have for her. Did you let her know last night?" Mrs. McKinney-James interjected there was an assumption that because it was communicated to the director's office that it meant she received the communication directly. "...Unfortunately, it was not and everybody is most apologetic," she insisted. Robert L. Crowell, Lobbyist, Farmers Insurance Group, testified by virtue of Senate Bill (S.B.) 245 of the Sixty-sixth Session, fees were increased, with the consent of the insurance industry, raising approximately $2.7 million. SENATE BILL 245 OF THE SIXTY-SIXTH SESSION: Makes various changes in provisions governing insurance. Mr. Crowell reported at the close of the session, those funds were transferred to the General Fund instead of being sent to the Insurance Division for insurance regulatory purposes. He stated: My reading of the budget here today, shows that the $916,000 and the $737,000 is exactly that, although it is not the full $2.7 million. Our purpose is to say we wholeheartedly support that General Fund allocation and if the allocation can be increased to the full extent that it was when we increased it in 1991, through S.B. 245 of the Sixty-sixth Session, we would not oppose that either. Fred L. Hillerby, Lobbyist, NML Insurance Company, testified: ...In 1991, we agreed with S.B. 245 of the Sixty-sixth Session to fund the Insurance Division. That $2.7 million translates to $2,450 a year fee on insurance companies in addition to a host of other fees that are paid. On top of that falls this administrative fee. I just want to describe it to you so you understand my concern about the policy issue here. Clearly the insurance industry...needs to have good, strong regulation. It needs to be examined...by law...at least once every 3 years...but the incentive...whether it is ever taken advantage of or not, is if you need more money for your division, you examine more frequently and you do not have any reason to tell your examiners, `be efficient in your examination.' The longer they are there, the more money the insurance division makes in its override. I think that is a perverse incentive. And then to increase it now from 50 percent to 60 percent is another problem. That 10 percent falls unevenly because the companies that this division is most likely to examine and easiest for them to examine are the domestics, those companies that are in Nevada...If there is a need to raise more money for this liquidation, the quickest and easiest way you do that is to send the examiners to Nevada companies and that is where this money is going to come from...It seems to me that the General Fund is where you need to look if there is a need for additional revenues for the division to do its job, including a liquidation of a company.... Ms. Giunchigliani affirmed the $1.6 million General Fund appropriation for the biennium is a portion of what was allocated to the General Fund from the division in 1991. Mr. Crowell answered in the affirmative and stated, "Of the $2.7 million that was raised, $800,000 went back to the insurance division." Ms. Giunchigliani clarified the General Fund owes the division an additional $200,000 to $500,000. She reflected: ...Because we reduced that reserve, and we have an obligation now, because of a liquidation, to pay $20,000 per month for the next 2 years, which is about a $500,000 cost to that reserve, we need to not only shift money back in just to cover that obligation, but if any other obligations come in. So that is part of the dilemma that we are looking at. What you are maintaining is that you already took a large enough hit, and because we diverted that revenue, it should not come back on the industry at this point in time. Mr. Crowell answered, "That is correct." Ms. Giunchigliani questioned if the division has a schedule for examining foreign insurance companies. Ms. Molasky answered the division is required to examine domestic insurers at least once every 3 years. The examinations consist of both financial and market conduct examinations, she stated. Ms. Giunchigliani asked if the division collects 50 percent from both types of examinations. Ms. Molasky answered in the affirmative. She indicated the division will conduct approximately 36 domestic insurer examinations and 31 foreign insurer examinations over the biennium. She stated Nevada is part of the western region of the National Association of Insurance Commissioners (NAIC), and examiners are called to participate in "zone call" examinations of insurers who operate in Nevada. Ms. Giunchigliani reiterated her question, "Are the foreign companies examined at least one time every 3 years, as well?" Ms. Molasky replied, "Nevada is not an accredited state by the National Association of Insurance Commissioners. Under the provisions for examinations for those states that are accredited...laws...require insurers to be examined every 5 years..." Ms. Giunchigliani commented foreign insurer examinations cost the division more in staff time and travel than domestic insurer examinations. She asked if the division has a schedule of fee assessments for each kind of examination. Ms. Molasky responded there is a standard rate charged for examinations which is set by NAIC. She indicated examiners are paid the federal conus rate of $222 per day for expenses incurred for lodging and meals. Ms. Giunchigliani asked if the conus rate covers the state's cost. Ms. Molasky declared: No, that is for the examiner. That is what the examiner earns under his contract, then the 50 percent administrative override is the area that we are talking about. So it would be 50 percent, per day, on that $222. That does not apply as far as the travel expenses, the lodging and meals. It is only on the rate that is charged to an insurance company for the actual work performed in that insurance company. Ms. Giunchigliani queried, "Do we have, within the budget, the opportunity to do the audit cycle for your foreigns, so you are also hitting them just as frequently as you are your domestics?" Ms. Molasky replied the division has a higher level of responsibility to monitor the domestic companies and that is why 36 domestic insurers will be examined in the next biennium versus 31 foreign insurer examinations. Ms. Giunchigliani asked if the ratio of 36 domestic examinations to 31 foreign examinations is equitable. Ms. Molasky responded the division examines foreign insurers based on two factors. The first factor being that the division must be invited by the NAIC Western Zone to conduct an examination. The second factor that determines when a foreign insurer will be examined is if a consumer complains of severe market conduct problems with a particular foreign insurer. When that occurs, the division will conduct a market conduct examination of that insurer to determine if the complaints are valid. Ms. Tiffany voiced her aversion to the revised budget proposed by the division. She stated, "I do not think that any of us should be making the decision here how to bail you out. I think the Governor should be making this decision...I do not think the industry should have to pay for this mistake." Mrs. McKinney-James responded: I am not sure that the representation that you have made is exactly accurate...clearly the budget office has a responsibility for presenting, to this body, a recommendation on behalf of the Governor...unfortunately, what happened was during the budget process...far more of the funds that were...generated from this industry, were placed in the General Fund than were placed in the Insurance Division's budget...In an attempt to defend the circumstances, it was a joint responsibility, because it was the Legislature who ultimately approved and processed the budget...I think that the insurance industry made a commitment. They are most deserving of a return on that investment...I will also state for the record, that the manner in which this budget was developed, falls short of what we need to support this division. We will have to accept the responsibility for not having enough experience...I had the responsibility for presenting that information to the budget office and to the Governor for their approval. Senator O'Donnell assured Mrs. McKinney-James of his commitment to work with the division to develop a revised budget for the division. He clarified Mrs. McKinney-James needs to meet with the Governor and his staff before the committee will consider this budget. Mrs. Evans questioned whether the NAIC or the State of Nevada sets the examiner's override fee. Ms. Molasky replied the fee is set by Nevada. Mrs. Evans asked how Nevada's 50 percent administrative override rate compares with the override rate charged by other states. Ms. Molasky affirmed she does not know that figure and would provide the information to the committee at a later date. Mrs. Evans asked, "How many domestic and how many foreign companies total, do we have?" Ms. Molasky indicated Nevada has between 1,700 and 1,800 insurance companies, 22 of which are domestic insurers. Ms. Giunchigliani directed the division to revise the cycle of examining foreign insurers so as to make examinations of domestic and foreign insurers an equitable practice. She attested: We do have an opportunity to change the structure of how this agency is funded...If you need additional auditors or examiners or staffing, then we have an obligation to pay that in order to protect the consumer as well as work with the industry that has decided to reside here and provide that service. Ms. Giunchigliani asked if this budget is usually funded through fees charged. Mrs. McKinney-James indicated it has always been funded through a combination of fees raised and the General Fund. Ms. Giunchigliani asked whether the intent of S.B. 245 of the Sixty-sixth Session was to fully fund this budget or to balance the Executive Budget. Mr. Hillerby responded according to the insurance industry, the intent of S.B. 245 of the Sixty-sixth Session was to fund the division. Referring to Ms. Giunchigliani's concerns over equalizing domestic and foreign insurers, Mr. Hillerby stated, "The policy issue of this examination fund...becomes budget driven, not need driven. That is my problem with it. If you need to be examined, examine us, but do not build their budget on having to examine us to have enough money to run their division." Ms. Giunchigliani recognized Mr. Hillerby's concern and stated, "I agree and I appreciate that. That is not the right way to be doing business." Turning her attention to Ms. Molasky, Ms. Giunchigliani asked if the division looks for certain indicators to determine when a company will be examined. Ms. Molasky replied other than the regular 3-year examinations, market conduct examinations are conducted when consumer complaints are filed. Ms. Giunchigliani stated she would like examples of the types of excessive complaints that instigate the division to perform market examinations. Ms. Molasky asserted: ...As far as examinations of the foreign insurers, unless we have a particular problem with an insurer, normally those zone calls where we are called in by the NAIC Western Zone...are based on the participating state's premium, and Nevada, in many instances, does not have the high level of premium that other states do...because of our economic demographics. Ms. Giunchigliani asked why the division has to comply with NAIC rules if Nevada is not a member. Ms. Molasky clarified Nevada is a member of NAIC, however, it is not an accredited state. Ms. Giunchigliani questioned if the division can add to or change the rules of NAIC based on Nevada's needs. Ms. Molasky indicated the state in which an insurance company is domiciled has responsibility for the financial solvency of the company. She emphasized the NAIC has guidelines as to which states are selected for the purpose of examining companies. "It is not our choice in those instances," she stated. Senator O'Donnell queried if the division examined the home warranty company it is currently liquidating, within the last year. Ms. Molasky declared the insurance company was examined 2 years ago and it was put onto a quarterly reporting requirement. She stated when the examiner conducted the examination 2 weeks ago, it was discovered the insurer did not have funds in its accounts. Senator O'Donnell asked if the division conducts any kind of follow-up with at-risk companies. Ms. Molasky indicated at-risk companies are required to submit quarterly financial statements whereas all other companies submit an annual financial statement. Senator O'Donnell commented: ...This substantiates what Mr. Hillerby was saying, in that we are examining these companies to drive the budget of the insurance regulation. I am not sure that by examination, we are able to circumvent or preclude the activities of a faltering insurance company. The evidence is here this morning, that even by examination 2 years ago, there was no follow-up examination last year, and the analysis of the report was not effective because we had an insurance company that went defunct...I think we need to do some analysis as to what the mission statement is and how we are going to proceed from now on in this particular agency. Senator O'Donnell asked how much of a deficit the agency will have at the end of the upcoming biennium as a result of this liquidation. Birgit K. Baker, Administrative Services Officer, Department of Business and Industry, answered the reserve will be at zero. John F. Wiles, Advocate, Office of the Advocate for Insurance Customers, Department of Business and Industry, provided a brief history of the creation of the office. He addressed the proposed abolishment of the office and stated: I am not in favor of increasing those [taxes, fees and assessments] to fund my office...There is money there...automobile insurance customers pay approximately...one-third of the total premium tax revenue. The issue is...whether or not you believe you should continue to fund my office... Mr. Wiles indicated that the Insurance Division and the Director of the Department of Business and Industry believe the advocate's office has been ineffective. He reflected, The reality is, I have made and requested substantial reductions in rate increases...my job is to serve your constituents and I can tell you that when I talk to them on the phone...and try and help them with their insurance problems...they want somebody who understands...and they want someone to offer them solutions. My role is not just limited to arguing rate cases, and I guarantee that if you tell your constituents that there is no longer an advocate...they are not going to be too happy... Senator Mathews requested clarification of comments made by Mr. Wiles to abolish the office. Mr. Wiles declared, "When I talk about abolishing my office, what I am talking about is abolishing it in the context of a governmental agency...I think that the best model for my office is one that is privatized..." Senator Mathews declared, "I want the record to reflect that I am in favor of the advocate's office. I was just concerned that the person who is here now, advocating for the advocate's office, had at some point been on the opposite side of the track." Mrs. McKinney-James testified due to the variation of opinions within the Legislature, the Governor will revisit the possibility of retaining the consumer advocate's office. She advised the department has been conducting discussions with Mr. Wiles and other interested parties to restructure the office and she is considering transferring the consumer advocate's office from the Division of Insurance to the Consumer Affairs Division. In the absence of the consumer advocate's office, Mrs. Brower questioned who can consumers call if they have an insurance problem. Mr. Wiles responded the Division of Insurance has compliance officers who can advise constituents on insurance problems. He clarified: I would say that my activity, in response to constituents, generally takes a little bit different form and function. I actually work for them and become their advocate in many ways. I think that Senator Titus has provided you with a letter from a constituent (Exhibit E) that clearly identifies that I helped him develop a case...That is above and beyond the expertise and commitment of the insurance division at the present time... Mrs. Brower asked if the Insurance Commissioner's job description provides authority for her to advocate for the consumer. Mrs. McKinney-James replied, "Not to the extent that most people understand the role of an advocate. However, statutorily, the Commissioner of Insurance is supposed to be positioned to protect the interest of the consumer." Ms. Giunchigliani stated she receives many calls from constituents relating to insurance problems. I can not go back to my district and tell them that we abandoned or got rid of an advocate for them...I am pleased to...hear that...we are revisiting it...but I do not think funding should be `Where are the dollars going to come from?'...I would hope that the message that is not being sent back to us from administration or the budget division is `You go find it, but if you cannot find it,...then this position is not going to be there.'...Is that the message I am hearing?.... Mrs. McKinney-James answered in the negative. She implied the message being sent by the administration is asserting the current source of funding for the advocate's office is inappropriate. She stated the division is willing to explore other sources of funding to continue the consumer advocate's office. Mr. Price questioned if other states have a similar consumer advocate's office and whether or not they are successful. Mr. Wiles indicated other states have similar offices, however, he does not have information available as to the success rate of those offices. Mrs. Evans commented: I am pleased that you are willing to revisit this...When it came up that it was going to be abolished, I too, received a number of calls of protest...I am concerned about the statement about finding funding...To me, there is already money there. I do not know if we need to go out and attach some other little fee or something to kind of support this...This is a small thing for us to give back to consumers who are being tapped. Ultimately, the consumers are the ones who are paying for this. Mr. Allard asked whether other states have consumer advocate offices in the exact forum as Nevada's. Mr. Wiles asserted he is not aware of any states that contain a consumer advocate office which is structured exactly like Nevada's. Mr. Allard affirmed he has met with members from the insurance industry who claim the advocate's office may stifle competition by driving premiums up. He asked, "We do have some of the highest insurance rates in the country, do we not?" Mr. Wiles answered in the affirmative, and stated the last measure taken in 1993 ranked Nevada as having the 12th highest premium rate. He referred the committee to the Nevada Division of Insurance Report on the Nevada Insurance Market, dated February 1, 1995 (Exhibit F. Original is on file in the Research Library.) Contained in the report is a list of insurance providers which have over $1 million worth of premiums. The report also shows an additional 60 or 70 companies operating in the state which market automobile insurance. Mr. Allard questioned how those figures compare with other states. Mr. Wiles said, "I would say that that is probably well within the normal range. I have not compared that, so I cannot give you a straight answer on that." Mr. Allard requested Mr. Wiles to gather that information, stating, "I would like to see that before I cast my vote. I would like to know how that compares, if this office is stifling competition." Mr. Wiles confirmed he would provide Mr. Allard with the requested information. Mrs. McKinney-James reflected: I think it is clear that certain segments of the industry take issue with the office, primarily because of the participation in the rate aspect of it as an intervener....I do not think you are going to find any segment of industry who is going to welcome a consumer advocate. There is a balance that has to be achieved...I do not think there is any argument that consumers find insurance matters confusing. It is a complex industry and it costs a lot of money...I should indicate that some of the discussions that are ongoing do include representatives from industry. Mr. Allard indicated a need to review the statistics on insurance premium rates since the establishment of the advocate's office. He queried, "Do you think that the existence of the office has stifled competition and helped contribute to the fact that Nevada is paying some of the highest insurance rates in the country?" Mrs. McKinney-James reflected the existence of the office can not be held as a primary contributing factor. She indicated the insurance industry is concerned with the possibility of the consumer advocate stifling competition; however, no data can be produced to support such a concern. She indicated the office may stimulate competition based on the advocate's duty to participate in rate cases and show deficiencies in the structure of rate increases. A memorandum from Senator Titus regarding support for the Office of Advocate for Insurance Customers, dated March 23, 1995 (Exhibit G), was distributed to the committee members. Self Insured - Workers Compensation - Page 721 Senator O'Donnell asked if the division's request for two additional positions is predicated on proposed legislation passing without a sunset clause for the State Industrial Insurance System (SIIS). Ms. Molasky answered in the affirmative. Senator O'Donnell reflected, "I think that is probably going to happen. I think we need to look at these two positions and if we need to fund them, we need to look carefully at doing that." Ms. Giunchigliani asserted, "...I recall Commissioner Rankin, before the committee in 1991, saying `Oh, this is no problem, this is just a standard practice...that we can just implement this.' So now we are really saying that there is a fiscal impact...in order to do this group insurance." Ms. Molasky stated the group insurance associations essentially are similar to domestic insurers, requiring many of the same regulations. Ms. Giunchigliani asked if they will be required to pay insurance premium tax. Ms. Molasky answered in the negative, indicating the group insurance associations are still considered self-insurers. Ms. Giunchigliani inquired why the self-insured groups do not have to pay insurance premium tax. Ms. Molasky indicated the division is not responsible for regulating self-insured employers. She clarified the self-insured associations will be subject to annual examinations and the examination fee. Senator O'Donnell interjected that the Employment Retirement Income Security Act (ERISA) contains loopholes for insurance companies to avoid certain insurance regulations. Ms. Molasky stated that should the proposed legislation pass, a new budget account will have to be established for a group self-insured insolvency fund. The insolvency fund will be funded through an annual 5 percent assessment of the security deposit each association has on deposit. Industrial Relations - Page 737 Senator O'Donnell asked how many audits the division completed last year. Ron Swirczek, Administrator, Division of Industrial Relations, Department of Business and Industry, answered 22 audits were performed last year. He summarized that a total of 47 audits have been completed in the past 3 fiscal years. Senator O'Donnell queried the number of self-insured employers. Mr. Swirczek indicated as of November 30, 1994, there are 196 self- insured employers, plus the State Industrial Insurance System (SIIS). Senator O'Donnell questioned whether any problems were found during the audits. Mr. Swirczek summarized due to Senate Bill (S.B.) 316 of the Sixty- seventh Session, self-insured employers increased substantially. SENATE BILL 316 OF THE SIXTY-SEVENTH SESSION: Makes various changes to provisions governing industrial insurance. Mr. Swirczek indicated several problems were discovered and the division is currently addressing those issues. He stated due to the dramatic increase in self-insured employers, the division has found that it cannot perform full compliance audits. Senator O'Donnell questioned if the statutory requirement calls for a full compliance audit. Mr. Swirczek responded the statute states only that each insurer must be audited at least once every 3 years. Senator O'Donnell inquired: Is it your desire to have some sort of cursory audit instead of a full-blown audit? I know that businesses who perform activity in the state, even if they knew that they were going to be looked at in some small sense, would normally comply, not knowing where your were going to take your audit... Mr. Swirczek replied that the division is working toward cursory audits. Senator O'Donnell queried as to the purpose of the eight new positions the division requested during the interim. Mr. Swirczek stated those eight positions were requested to staff the quality assurance unit. Senator O'Donnell inquired as to the duties of the quality assurance unit. Mr. Swirczek explained the quality assurance unit works with medical providers to insure that quality care is being provided and it also addresses medical billing disputes. Ms. Giunchigliani inquired whether the division has assessed and collected fines from SIIS. Mr. Swirczek answered in the affirmative and stated fines in the amount of $44,000 have been assessed against SIIS since July 1, 1991. He clarified the division has not been able to collect nearly $1 million in fines assessed due to dismissals and reductions of those fines. Ms. Giunchigliani asked how many appeals a self-insured employer or SIIS can file if they are fined. Mr. Swirczek responded a self-insured employer and SIIS have options to appeal at several levels. Ms. Giunchigliani asked whether the division has proposed legislation to reduce the number of appeals. Mr. Swirczek indicated the Senate Committee on Commerce and Labor is considering changes to the entire fine system. One change being considered, he reflected, will allow the administrator to determine whether a fine is warranted or not. Ms. Giunchigliani commented: You are going to look at reducing the scope of the audits, but it will still stay on a 1 year period...do you have five major types of complaints that you are finding within your audits? What is the pattern that is there? I still get complaints from health care providers that their bills are still not paid in a timely manner. What have you done about that part of it? Mr. Swirczek stated the division is addressing medical billing disputes on a one-on-one basis. Ms. Giunchigliani asked if the division fines the self-insured employers or SIIS when they fail to pay the health care providers and whether the division is collecting on those fines. Mr. Swirczek answered in the affirmative and stated, "For the most part, we are." He advised the committee the division has the most difficulty collecting fines from uninsured employers. Senator Mathews addressed the Enhancement 720, New Equipment (E- 720) module and drew attention to the excessive cost. Mr. Swirczek stated the division estimated the cost of the telephone operation. Senator O'Donnell inquired whether the three requested positions will be adequate if the group self-insured bill passes. Mr. Swirczek stated the three positions will be sufficient, "Only if there is not a large response to the passage of the group self- insured bill." Exhibit H, State of Nevada, Department of Business and Industry, Division of Industrial Relations, Industrial Insurance regulation Section, Comparison of Lost-time Claims 1992-1994, and Exhibit I, Nevada Department of Business and Industry, Division of Industrial Relations, Functional Overview, were distributed to the members of the committee. Energy Conservation - Page 827 Senator O'Donnell requested an explanation as to the source of funding for the division. DeeAnn Parsons, Chief, Nevada State Energy Office, Department of Business and Industry, summarized the department previously received petroleum violation escrow account funds in the amount of $300,000 to $400,000 per year for use on energy-related projects. She reflected those funds are now depleted and the division is not expecting to receive additional distributions. "Our situation is that we are completely federally funded and we have to have a nonfederal match for the federal grants that we administer," she attested. Senator O'Donnell questioned the duties and responsibilities of the division. Ms. Parsons responded: We promote energy conservation and efficiency. We promote Nevada's abundant renewable energy resources...We work with alternative fuel vehicles, clean cities program...We oversee the regulations for the conservation of energy in commercial and residential buildings...We try to serve as a catalyst to bring people together to solve energy related problems. That is one of our major functions. Ms. Parsons called attention to a mistake in the budget. She indicated an extra $100,000 for each fiscal year of the upcoming biennium was incorrectly budgeted into the Federal Funds line item in the Base Budget. She indicated the reserve at the end of the biennium will be $36,644, not $236,644. Senator O'Donnell asked if she is comfortable with such a low reserve. Ms. Parsons answered, "No." Senator O'Donnell queried if the division has applied to the Department of Energy (DOE) for grants. Ms. Parsons affirmed the division applies for as many grants as possible from the DOE; however, she indicated not many grants are awarded. Mrs. McKinney-James interjected that she is currently working on merging the energy conservation office with the Division of Minerals. She indicated the mining industry has already agreed to the merger. Housing Division - Page 833 Charles Horsey, Administrator, Housing Division, Department of Business and Industry, distributed Exhibit J for the committee's review. Senator O'Donnell requested an explanation of the funding under Enhancement 125, Accessible, Flexible Responsive Government (E-125) decision unit, for the Down Payment Assistance Program. Mr. Horsey stated the Down Payment Assistance Program assists low income home buyers. He indicated: In order to adequately serve the state's low income home buyers...it was necessary for us to find another revenue center for the division...Establishment of a loan servicing department...would be profitable within a 2 year period...We have pledged that 25 percent of the revenues generated from...Loan Servicing, could be pledged to fund the Down Payment Assistance Program. Senator O'Donnell questioned what the division will do in the case of default by a home buyer. Mr. Horsey replied that most loans are insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA). Senator O'Donnell stressed his concern over the risk factor taken by the division. He stated, "I have a problem with the fact that the banks will not do it and the lending institutions will not do it." Mr. Horsey cited the Nevada Housing Division has one of the lowest foreclosure and delinquency rates in the country. Senator O'Donnell turned the gavel over to Ms. Tiffany at 10:30 a.m. Ms. Tiffany requested further explanation of E-125 of the division's request to fund the Down Payment Assistance Program in Fiscal Year (FY) 1996 with profits generated in the fourth quarter of FY 1997. Mr. Horsey answered, "The mathematical progression of the number of loans that we would make in each subsequent month and the portfolio, as it would gain." Lon DeWeese, Chief Assistant, Housing Division, Department of Business and Industry, clarified the Fiscal Analysis Division has been supplied with information concerning the division's proposed funding for E-125. He explained: Like any start-up business, you did not cover all of your initial start-up costs with zero product being sold. As that product's sale increases, then so too, does the revenue...It is our estimation...that...it would be 7 quarters before we would have made up the deficit. Ms. Tiffany questioned what happens if the Loan Servicing department does not turn a profit by the end of the biennium. Mr. Horsey replied: We have several options. Idaho offered to purchase the portfolios of their existing servicers at a premium to give them something for giving that servicing up. We do not think that is the approach we want to take. There are other options. We are having so much loan demand right now that we have the ability, if we go to market with an issue, to structure it in such a fashion that those participating lenders can only originate and not service. We have much more ability to control the amount of business the loan servicing department will handle. It was our management decision to do it gradually as opposed to in one fell swoop. So we can control that volume directly ourselves. Ms. Tiffany questioned how the division can control the volume, the profit, and solvency. Mr. Horsey indicated the division's bond issues are structured to pay itself the fee for servicing its own loans. Ms. Tiffany declared: I do not feel I have gotten an answer. Could you submit...in writing, why you projected it up to 7 quarters and why it magically is going to be solvent and what your program recovery is if it is not. Then you might have it on there why you feel that you control this and how that can happen, because I feel double talked right now. I really do not feel like I got an answer. Ms. Tiffany questioned how many families the division is able to assist since receiving additional bonding authority, and what portion of those families are in the south and what portion will be helped in the north. Mr. Horsey replied the division recently offered proceeds of $30 million, of which 97 percent has been set aside for southern Nevada families. Ms. Tiffany restated her question, "So what is the number - the number of families expected to be assisted?" Mr. Horsey relayed a bond of $75 million for the single family program will help 750 families. Mr. DeWeese stated the division has projected the single family program will serve 739 families in FY 1995 and 795 families in FY 1996. The multi-family program is projected to serve 941 families in FY 1995 and 847 in FY 1996, he recounted. Ms. Tiffany questioned, "With your expanded bonding capability, are you at $30 or $75 million. What is your expanded bond capability?" Mr. Horsey responded the division issues bonds upon demand. He relayed that states have a limit as to the number of tax exempt bonds they can issue. The division has estimated that the state will be given the authority to issue bonds totaling $75 million for the single family program and $50 million in bonds for the multi- family project. Ms. Tiffany asked if the division has already received approval for issuing the budgeted amount for bonds. Mr. Horsey stated the division has received approval for three multi-family projects and three single family bonds. Ms. Tiffany reiterated, "Do you anticipate the $50 million to be approved and the $75 million to be approved during this biennium?" Mr. Horsey answered in the affirmative. Ms. Tiffany inquired as to the impact of the changes currently happening in the federal housing division. Mr. Horsey indicated a huge increase in demand for services will occur with the federal changes. He stated: ...As the Department of Housing and Urban Development (HUD) withdraws from the affordable housing business, it is painfully clear that that burden is going to be put on the states, primarily the Housing Division. Therefore our role is not only going to change significantly, but is going to increase significantly. Ms. Tiffany asked what the impact will be on the Housing Division. Mr. Horsey replied the impact on the division will depend on a number of determining factors, which are unknown to the division. He advised the chairman the division is currently undertaking steps to enter into a contract to prepare and plan for the increased demand prior to the actual increase taking place. Ms. Tiffany inquired if the budget for the Housing Division includes that potential contract. Mr. Horsey answered in the negative. Ms. Tiffany asked what the consensus of other Housing Divisions is regarding this problem. Mr. Horsey indicated the Housing Divisions in other states, "are scared to death." Mr. Horsey explained, "The National Council of Safe Housing Agencies said the primary focus of their lobbying efforts is for some sort of transitional period...as well as funding, if it is at all possible." Ms. Giunchigliani inquired, "The bill I passed last session allowing the nonprofits to be able to bond against local government, are you aware of any that have taken that opportunity?" Mr. Horsey replied that the City of Las Vegas recently utilized such a bond. There being no further business, Ms. Tiffany adjourned the subcommittee meeting at 10:50 a.m. RESPECTFULLY SUBMITTED: Cristin Buchanan, Committee Secretary APPROVED BY: Senator William R. O'Donnell, Chairman DATE: Assemblywoman Sandra Tiffany, Chairman DATE: Assemblywoman Chris Giunchigliani, Co-Chairman DATE: Senate Committee on Finance Assembly Committee on Ways and Means Joint Subcommittee on General Government March 24, 1995