MINUTES OF THE JOINT SUBCOMMITTEE MEETING OF SENATE COMMITTEE ON FINANCE AND ASSEMBLY COMMITTEE ON WAYS AND MEANS Sixty-eighth Session April 13, 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 Thursday, April 13, 1995, in Room 352 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 Mr. Dennis L. Allard Mrs. Maureen E. Brower Mrs. Jan Evans Mr. Bob Price: STAFF MEMBERS PRESENT: Mark Stevens, Fiscal Analyst Bob Guernsey, Principal Deputy Fiscal Analyst Ronald T. Steele, Program Analyst Debbra J. King, Program Analyst Larry L. Peri, Program Analyst Marion Entrekin, Committee Secretary OTHERS PRESENT: Alice A. Molasky, Esq., Commissioner, Division of Insurance, Department of Business and Industry David Hall, Deputy Commissioner, Division of Insurance, Department of Business and Industry Deborah A. Erickson, Budget Analyst, Budget Division, Department of Administration Fred L. Hillerby, Lobbyist, NML Insurance Company Robert L. Crowell, Lobbyist, Farmers Insurance Group Birgit K. Baker, Administrative Services Officer, Division of Insurance, Department of Business and Industry Nancyann Leeder, Nevada Attorney for Injured Workers, Department of Business and Industry Bryn Armstrong, Executive Director/Secretary, State Dairy Commission, Department of Business and Industry Robert R. Barengo, Chairman, State Dairy Commission, Department of Business and Industry Jackie Burris, Certified Public Accountant, State Dairy Commission, Department of Business and Industry Donald L. Bailey, Sr., Chief, State Printing and Micrographics Division, Department of Administration James Manning, Budget Analyst, Budget Division, Department of Administration Tom Tatro, Chief, Purchasing Division, Department of Administration Insurance Regulation - Page 709 Insurance Examiners - Page 725 Senator O'Donnell inquired about the status of the Home Warranty Program. He noted during a hearing held on March 24, 1995, regarding the Insurance Examiners budget account, a 10 percent increase in the administrative fees was to be added to the Examiner's Fund to increase the amount of funding the division requires for the Home Warranty Program. Alice A. Molasky, Esq., Commissioner, Division of Insurance, Department of Business and Industry, replied the division has another revised budget for the Insurance Examiners account. She explained the March 24, 1995 presentation before the joint subcommittee on General Government regarding unexpected home warranty liquidation was done in haste. At that time, the division also submitted a revised budget request designed to address the budgetary effect of the liquidation. She explained a temporary receivership has been imposed on the home warranty company involved, and is still under judicial process. Ms. Molasky introduced David Hall, Deputy Commissioner, Division of Insurance, Department of Business and Industry, who testified at the time the original budget proposal was prepared, the division had considered cost savings in the Insurance Regulation budget account 3813 to decrease transfers from the Insurance Examiners budget account 3817 to continue funding operations within the division and control the situation of the potential liquidation. Mr. Hall explained the division did not have the opportunity to properly review paperwork to determine the potential assets available to the home warranty company prior to the hearing of March 24, 1995. He clarified since that time the division has had an opportunity to determine available assets to assist with cashflow to reduce the division's financial responsibilities. Mr. Hall stated the Insurance Regulation budget account was also studied to determine what reversions could be returned to the General Fund. In association with the Budget Division, the division prepared Exhibit C, Insurance Examination Fund Revised Budget, which Mr. Hall distributed to the committee. He stated the revised budget provides for a reduction of $150,000 in the transfer to the Insurance Regulation budget to cover the costs of the liquidation. In addition, the division has reduced the liquidation costs from $20,000 per month as initially presented on March 24, 1995, to $10,107 per month. The provisions recommended in Exhibit C will allow the division to conduct liquidation with existing resources and not require an increase in the administrative charge as initially requested. The revision also provides for three contingencies in the event additional funds are needed. Senator O'Donnell asked about the status of the affected home warranty company. Mr. Hall stated the division was granted a temporary injuction to allow them to be the conservator of the company. They are scheduled for a hearing on April 24, 1995, to grant a permanent receivership to enable the division to take over the operation of the company. A division examiner has been situated at the company on a daily basis to maintain operations while reviewing the liabilities and assets. He pointed out the division will face many challenges regarding the actual liquidation process. Senator O'Donnell noted the reserve amount in the Insurance Examiners' budget account started out at $912,538 and is now $264,352. He asked if the division can operate with the revised reserve. Mr. Hall replied although the division will have to maintain close scrutiny of expenditures from the account, a reserve of $264,352 will suffice. He pointed out if the company does survive the receivership process, it will reduce the division's liquidation expenses and will increase the Reserve account. Deborah A. Erickson, Budget Analyst, Budget Division, Department of Administration, emphasized most of the activitity affecting the balance forward in the Insurance Examiners' budget will take place in 1995 when the initial liquidation process takes place and charges for liquidation expenses will be added to the existing budget. She commented the Budget Division's position regarding the decreased reserve amount of $264,352 will be offset by the three contingencies listed at the bottom of Exhibit C, not included in the projections. Senator Jacobsen referred to the Insurance Regulation budget on page 709 of the Governor's Executive Budget and indicated his concern regarding progress the division is making toward acquiring accreditation from the National Association of Insurance Commissioners (NAIC) for the state. He noted Nevada is one of the last 50 states not NAIC-accredited. Ms. Molasky clarified that Nevada is one of six states not yet accredited. She said at the present time statutes are not in place to permit accreditation, although a bill draft request may be proposed for this purpose. Staffing plays a big part in the accreditation efforts, Ms. Molasky said, and the division will not know exactly what the NAIC will require until an accreditation review has been conducted. Additionally, Ms. Molasky said the basic organization of the division will be reviewed by NAIC to determine how financial oversight and examinations, including increased education for members of the staff, are conducted. Senator O'Donnell asked if claims made by policyholders against the home warranty company currently under liquidation will be satisfied. Mr. Hall responded, "Only if we are able to recover all of the funds that are due into the companies that have been removed from the company. There will probably be a shortfall to the policyholders." Senator O'Donnell asked if the company is still capable of selling policies. He also inquired if the department has notified the Real Estate Division as well as the various real estate boards in Nevada regarding the liquidation proceedings against the company, since insurance policies handled by the company are actually sold by realtors. Ms. Molasky replied the division ordered the company to cease and desist selling policies. She said when the company was still in operation they effectively abandoned operations, and policies were no longer issued. She pointed out realtors should have been aware of the fact the company was ordered to stop selling policies and there should not have been further transactions made by the realtors with the company. Senator O'Donnell asked the name of the company, and Ms. Molasky replied, "First United Home Warranty." Senator O'Donnell suggested a letter from the Division of Insurance be issued to the necessary real estate boards that First United Home Warranty can no longer sell their product. Ms. Molasky said a news release was prepared but not circulated, because the division's efforts have been temporarily halted by the respondents in the proceedings. The division is in the process of litigating the order that was issued and removing the action to another courtroom. On April 12, 1995, the division filed a motion to shorten the time for a hearing regarding the various issues. Regarding the liquidation proceedings, Ms. Tiffany noted the division had discussed hiring outside counsel. She asked why this is being done instead of utilizing the staff of the Office of the Attorney General. Ms. Molasky answered a deputy attorney general and a private attorney are now working on the case. She said the outside counsel already retained by the division is experienced in the process of liquidation, and has been contracted and paid for from the existing funds of the First United Home Warranty. Ms. Molasky pointed out the private attorney and the company under receivership are both located in Las Vegas, and it is cost effective to have the outside counsel located where legal documents must be prepared. Ms. Tiffany countered she is bothered by the comment the private attorney is experienced, implying the deputy attorney general is not. Ms. Tiffany pointed out the private attorney is being paid for from company funds that could be returned to the policyholders. She stressed, "The hiring of a private attorney really bothers me." Ms. Molasky answered retention of a private attorney is not unusual by any insurance agency or any insurance regulatory body. Ms. Tiffany inquired if the division currently retains attorneys outside of the Office of the Attorney General. Ms. Molasky replied there are two insurance attorneys: one is primarily devoted to the Medical Legal Screening panel, and the other is responsible for many of the division's insurance actions. She said two deputy attorneys general are also assigned to the division and represent the division in administrative hearings and all court actions. Ms. Tiffany replied, "You have four people you could reallocate and set this as a priority because $500,000 is a priority." Ms. Molasky said one of the attorneys is primarily devoted to the interest of the company. It would be a conflict of interest if the deputy attorney general also represented that company because the division has the interest of the company at stake. Ms. Tiffany declared she does not think hiring outside counsel is necessary when there are already four attorneys working within the division. Senator O'Donnell pointed out at the March 24, 1995 hearing the department requested $20,000 per month to be used for liquidation costs. If the committee would have reacted to the request, they would have unnecessarily encroached upon the assets of the company. Ms. Tiffany asked what is meant by the statement, "There will be a shortfall to policyholders." Ms. Molasky replied although the situation could change, the division does not believe it will be possible to pay claims at the present time. She explained there is an order of distribution that will take place, by law, if any assets are discovered. The first is the payment for the administration of the estate, the second is the payment due to employees, and the third priority is the payment of claims. Ms. Tiffany asked if there is a contingency plan for the payment of claims made by a policyholder. Ms. Molasky replied the procedures are well defined in the law, and the department must operate according to NAIC standards. Ms. Tiffany asked if the policyholders have been notified. Ms. Molasky repeated the division has not been able to issue a news release because of the challenge to the receivership in the district court. Ms. Tiffany asked if the state would have the responsibility for the payment of claims filed by policyholders. Ms. Molasky replied the state would not be responsible for the payment of claims filed against the company. She explained the First United Home Warranty is not covered by the Guarantee Association as are many property and casualty companies. In this case, home-protection insurance is not one of the coverages provided by the Guarantee Association. Mr. Hall remarked: There is a book of business out there and they are trying to determine if there is a value that can be sold to another company so the liabilities can be assumed, and the person buying that company then could get the options for renewal which means the people will be serviced in the long run. We are working very hard trying to establish that piece of it. Ms. Giunchigliani asked if there is a statute that specifies the state is responsible for the payment of claims. Ms. Molasky replied the commissioner has exclusive jurisdiction over delinquency proceedings for all insurers who hold a Certificate of Authority. She clarified the state is responsible for the cost of the receivership, but under ordinary circumstances the costs would be reimbursed from the assets of the delinquent or insolvent company. In the case of First United Home Warranty, the reimbursement from assets is in question. Mrs. Evans joined the meeting at 8:45 a.m. Ms. Molasky said the division has received telephone calls in southern Nevada concerning First United Home Warranty customers who have had mechanical breakdowns. The division has recorded their claims to document the records. Senator O'Donnell said there will be many real estate agents upset with the Division of Insurance regarding the claims that will not be satisfied on policies issued prior to the insolvency proceedings. Senator Mathews asked if the division prepared the measurement indicators for the Division of Insurance based on an accreditation report. Mr. Hall replied the division's measurement indicators were based upon the budget as presented, but are not necessarily reflective of accreditation. He stated the measurement indicators are based upon the number of companies the division is able to examine within a certain period of time. Senator Mathews remarked the measurement indicators should be based upon accreditation even if the division is still trying to obtain NAIC accreditation based upon certain standards that should be met. Mr. Hall said the standard the division discussed with the NAIC is still an unknown measurable quality and not something that can be quantified. He said accreditation for the measurement indicators would include a review process of the work the division is performing and the completed product. Mr. Hall stated the division originally included portions of the NAIC review process in their budget proposal, but because there were no statistics to support the numbers reflected, this information was removed. Senator Mathews stated it would be logical for the division to include accreditation as a part of the performance indicators. Mr. Allard stated he spoke to representatives of the Real Estate Division who are aware of the receivership proceedings involved with First United Home Warranty. He asked if the division can require that company to issue a letter to their customers advising them they are out of business, and their insurance coverage is null and void, and suggest they obtain coverage elsewhere. Ms. Molasky responded once the division's legal position is firm, the division will notify the policyholders. She opined a news release will be the quickest method for issuing public notice of the receivership, to be followed by written notice to the policyholders. Mr. Hall asserted the insurance examiner assigned to First United Home Warranty is advising customers who contact the company of the receivership situation. He explained the division is attempting to recreate records removed from the company, and once the list is put together identifying all the policyholders, they will be prompty notified their insurance coverage is null and void. He estimates approximately 1,500 customers are involved. Senator O'Donnell asked if the court challenge can be accelerated in order to issue written notice to the policyholders. He expressed his concern for the real estate agents who issued insurance policies on behalf of First United Home Warranty who will also be contacted by the policyholders. Mr. Hall reiterated the court date is scheduled for April 24, 1995, but the division is trying to move up the date. Fred L. Hillerby, Lobbyist, NML Insurance Company, expressed his appreciation to the committee for delaying action on the proposal to impose a 10 percent administrative fee increase to be added to the Insurance Examiner's Fund discussed in the March 24, 1995 hearing. Mr. Hillerby said he was contacted by representatives from the Division of Insurance who addressed the issue of increasing the administrative fee from 50 percent to 60 percent, and voiced his appreciation to the division for keeping him informed. Robert L. Crowell, Lobbyist, Farmers Insurance Group, echoed Mr. Hillerby's comments. Senator O'Donnell asked Ms. Molasky to explain what the outcome will be if insurance claims cannot be honored because First United Home Warranty is defunct. Ms. Molasky responded there are many avenues the division must pursue before it can be determined whether or not claims can be paid. She stated the first step the division must take is to establish a legitimate receivership, which can only be accomplished through the judicial process. The division is attempting to recover assets that may or may not exist, and to pursue a purchaser, in which case the claims can be satisfied. Ms. Molasky pointed out the division is embarking on a lengthy legal process, and are recording claims that have been identified. The division will be in a position to reimburse the policyholders if there are sufficient assets upon which to draw. Senator O'Donnell recalled Ms. Molasky's testimony of March 24, 1995, in which she stated the company did not have sufficient funds to pay the claims that are coming in, and it was estimated $20,000 per month would be needed for a 2-year period to cover the number of claims that must be paid. Ms. Molasky insisted the $20,000 per month was not requested to pay claims, but to manage the administrative costs involved with the company. She stressed no calculation was included in the projection for the payment of insurance claims. Senator O'Donnell asked if the division can approximate the amount needed to pay the insurance claims. Ms. Molasky replied the division is unable to predict the amount at this time. Senator O'Donnell asserted the Division of Insurance was established to protect consumers. He pointed out the defunct insurance company was examined 2 years ago and problems were detected, but the company was not examined again for another 2 years. He queried, "Somebody has a responsibility, and who is it, the state? Are the people that bought homes and home warranty insurance through the company [First United Home Warranty] out of luck?" Ms. Molasky responded the division received quarterly financial statements from First United Home Warranty that were reviewed by insurance examiners. The financial statements indicated the company had sufficient assets, surplus, and reserves to pay the claims that were estimated. It was later determined the figures and calculations reflected on the financial statements were not correct. Senator O'Donnell inquired whether the division was made aware of the company problems 2 years ago when an audit was conducted by the insurance examiners. Ms. Molasky responded the division detected that problems existed with the company approximately 2 years ago. Senator O'Donnell assumed from testimony heard on March 24, 1995, that no follow- up audit was conducted. He asked if his assumption is correct. Ms. Molasky confirmed at the time of the first examination there was a requirement that cash be infused into the company, and the division received evidence that funds were infused into the company. The division also required that quarterly financial statements be submitted, rather than an annual statement, so that the division could follow the quarterly statements to determine the company was maintaining a solvent position. Ms. Giunchigliani asked if the division is taking any steps to prevent a similar situation from recurring in the future. Ms. Molasky answered financial examinations are conducted to determine if a company's financial condition is other than what appears on the financial statement. She stated there are also other indicators, such as delayed payment of claims, that would indicate financial difficulties may exist with a company. Ms. Giunchigliani concluded First United Home Warranty apparently falsified its records. She suggested the division should consider tracking the company's records to determine how the company altered their records to arrive at a pattern that may assist the division in the future. Ms. Molasky said presently the division has an examiner working with the company to identify why the financial statements were incorrect. She pointed out the records must be compiled before they can be examined, which will be a lengthy process since the company did not maintain accurate records. The division has ascertained some of the records may have been removed when it was discovered a problem existed. Senator O'Donnell stressed the division should do everything possible to sell the company so the policyholders will not be left "holding the bag." Ms. Molasky remarked another insolvency situation arose within the last couple of weeks that was instantly resolved because affiliates of the company have taken it over, thereby avoiding legal proceedings. Senator O'Donnell asked if the latest situation involves a major company, and Ms. Molasky replied it does not. She remarked, "These companies only have to have $20,000 of surplus but standard insurers are required to have $1.5 million in capital and surplus." Ms. Giunchigliani conjectured $20,000 in a surplus fund may not be adequate. Ms. Molasky stated a bill may be introduced before the Legislature to increase the surplus amount to $50,000, but the division believes the amount should be at least $100,000. She also believes a notice should be included in the home warranty insurance policy that the Guarantee Association does not provide coverage in the event of insolvency. Senator O'Donnell recalled there are two vacant positions in the budget for the Division of Insurance. He asked about the status of the positions. Ronald T. Steele, Program Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, replied within budget account 4681 for the director's office, decision unit 901 on page 698 of the Executive Budget reflects a proposal to transfer three positions from the Commission on Economic Development to the director's office, but only one of the positions has been filled. Birgit K. Baker, Administrative Services Officer, Division of Insurance, Department of Business and Industry, stated the only position that has been filled is the Chief Associate of the small business section under the Commission on Economic Development. She said the Associate and Management Assistant positions are still vacant. Senator O'Donnell asked if the division has considered the possibility of placing John F. Wiles, the advocate for insurance customers, into one of the vacant positions within the director's office instead of creating a new budget or division. He pointed out this move would save the state approximately $250,000 over the biennium, and allow the advocate to have support staff. Ms. Baker said the new budget that was submitted for the insurance advocate was a separate budget to create a stand-alone office and a stand-alone budget. She said the department would compare salaries and consider Senator O'Donnell `s suggestion to fill one of the vacant positions by placing the insurance advocate in the director's office. She pointed out one set of operating costs the advocate would continue to incur that is not currently considered in the transfer unit, involves a contract the advocate has for actuarial services amounting to $30,000 per annum. Senator O'Donnell asked if the actuarial services contract involves revenue coming in or an expense, and Ms. Baker responded it involves a separate expense, up to $30,000 per year, in addition to the expenses he incurs in the Examination Fund. Ms. Giunchigliani remarked if the responsibilities of the advocate could be broadened, it may be possible to use some of the revenue from the Insurance Verification Fund of the Department of Motor Vehicles and Public Safety to fund the position. She said there is approximately $1 million in the Insurance Verification Fund not being utilized that could be used to fund the insurance advocate position rather than drawing from the General Fund. She asked the Fiscal Analysis Division to review this possibility. Senator O'Donnell concurred Ms. Giunchigliani`s suggestion should be pursued. He asked for input from the committee regarding the retention of the advocate position. Ms. Giunchigliani stated she is in favor of keeping the advocate position, but she believes the responsibilities should be broadened and should not remain a separate position. Senator O'Donnell stated it is his intention to inform the Executive Branch the subcommittee supports the retention of the consumer advocate position. Mrs. Brower stated she supports Senator O'Donnell's suggestion to place the advocate in the director's office, which will be cost-effective for the state. State Industrial Claimant's Attorney - Page 907 Senator O'Donnell asked how many referrals the Nevada Attorney for Injured Workers (NAIW) received that result in a case that must be processed. Nancyann Leeder, Nevada Attorney for Injured Workers, Department of Business and Industry, said in 1994 the office received 2,375 case referrals which may or may not result in an actual hearing. She pointed out cases can be remanded, withdrawn, transferred to another attorney, or result in a voluntary dismissal in which case no hearing is conducted. Senator O'Donnell asked what incentive the office has to settle a case. Ms. Leeder stated many of the cases are settled. When it appears the claimant's case may be lost, the office will attempt to settle the case first. She clarified most court cases are settled because there is usually a risk of the outcome to both sides when a case is brought to trial. Senator O'Donnell commented the NAIW represents an injured worker who has filed a claim against an employer, and the injured worker is then represented by an attorney paid for by the employer against the system designed to help him. It is his understanding the employer is prevented from providing input regarding the action. He asked if the representation can be done on a privatized basis. He stated he needs assurances regarding why the office for the NAIW exists, because he believes a conflict of interest exists. Ms. Leeder responded the employer does have the right to intervene at any stage, and often does participate in litigation action. The workers' compensation adjudication system is designed as a substitute to district court, Ms. Leeder qualified. Without the administrative system, the claimant would have the right to go to district court which is far more costly. Ms. Leeder stated it is to the benefit of the insurer and/or employer to have the entire system handled administratively. The courts allow an administrative system to be present, but to be permissible, due-process rights must exist whereby the parties are represented by experienced individuals. Ms. Leeder remarked: The insurers and employers field attorneys into the administrative area at both the hearing officer level and the appeal officer level. We do not go into the hearing officer level. The claimant goes in by himself or is represented by either an unpaid agent or a union representative. If he loses and he still feels he has a claim, and nobody has convinced him that he does not have a claim at that point, then he appeals and we can be appointed....We benefit the system. All of the workers'compensation entities are paid out of the same fund, which is a user fund for the benefit of employers and insurers who pay for the entire system as opposed to the general taxpayer, which is what will happen if it went to district court. Ms. Leeder reported on a statewide basis the office for the NAIW is currently processing about 40 percent of all of the cases that must go before an appeals officer, and the office would not be able to add to the current work load with existing staff. Although the office is overloaded, it is Ms. Leeder's opinion a private attorney would be unable to handle the work load. Ms. Leeder remarked private attorneys will accept only cases for which they will receive attorney fees, and are usually compensated by receiving a percentage from lump-sum settlements. She reminded the subcommittee of the State Industrial Insurance System (SIIS) bill before the Senate Committee on Commerce and Labor in which the elimination of lump-sum settlements has been proposed. If the bill passes, the work load for the NAIW will double, Ms. Leeder said. Senator O'Donnell opined the NAIW could do the same job representing an injured worker as would a private attorney. Ms. Leeder disagreed. She said attorneys in the NAIW office must be appointed at the second tier of the administrative system, whereas a private attorney is normally hired by a claimant who seeks assistance in going through the claims process. The private attorney will negotiate for the claimant with the insurer and/or employer and will proceed to the hearing officer level for the claimant. The NAIW does not. Senator O'Donnell asked how an injured worker can progress to the second tier without first seeing a private attorney and going to court. Ms. Leeder replied one of the rights an injured worker has is the right to appeal. She stated the individual is informed of appeal rights when a determination letter is sent denying the benefits sought. She mentioned one of the problems the office has encountered since Managed Care Organization (MCO) procedures have been implemented is their failure to notify individuals of their appeal rights and the existence of the administrative procedure for the adjudication of grievances through a hearing or appeal officer. There is now an agreement, Ms. Leeder understands, that will go into the regulations directing the MCO to disseminate the same information. Senator O'Donnell is concerned the office for the state industrial claimant's attorney will be impacted if the SIIS bill is passed. He suggested before the budget can be closed the Chairman for the Senate Committee on Commerce and Labor, and the Chairman for the Assembly Committee on Labor and Management, be contacted to determine the impact that will be imposed on the office for the NAIW. Dairy Control - Page 917 Senator O'Donnell turned the gavel over to Ms. Giunchigliani at 10:15 a.m. Ms. Giunchigliani noted that a mission statement was not submitted with the agency's budget or the Governor's Executive Budget as required. She requested an updated mission statement be submitted. Bryn Armstrong, Executive Director/Secretary, State Dairy Commission, Department of Business and Industry, agreed to submit the requested document immediately. Ms. Giunchigliani asked Mr. Armstrong to briefly describe the mission of the State Dairy Commission. Mr. Armstrong testified the State Dairy Commission was created in 1955 with the mandate it establish procedures to insure the people of the state have an adequate, healthful supply of dairy products. The commission was established in an effort to save an industry that was in threat of extinction because the state was being flooded with inexpensive milk from surrounding states. The existence of a domestic industry was threatened. Mr. Armstrong stated milk was being sold below cost with no health controls imposed. At the time the commission was created, there were approximately 200 dairies located throughout the state. There are now 45 dairies and three processing plants in operation in Nevada. Mr. Armstrong summarized the commission seeks to carry out their mission of insuring the people of Nevada will continue to have an adequate and healthful supply of dairy products through investigation and auditing. He said the commission employs investigators who inspect retail outlets to make certain they are providing dairy products that have been approved by health authorities, either in the State of Nevada or in the state of origin. The commission also verifies the outlets are selling under labels approved and licensed by the State of Nevada, and are not in violation of a state statute that prevents dairy distributors from selling products below cost. Mr. Armstrong said auditors are sent to more than 150 licensees on a scheduled basis to insure there is compliance to the law against the sale of products below cost, and that the licensees are paying the assessments required on products distributed in the state. Mr. Armstrong stressed the commission carries out their mission with due regard to the statutes of the state and the constitution of the United States, including due process for those who are accused of violating any of the statutes or regulations. Ms. Giunchigliani noted the commission has progressed from a protection agency to regulation of the dairy industry. She opined there may no longer be a need for a regulatory oversight within the commission. Mr. Armstrong replied the dairy industry is highly competitive with major processors located in adjoining states who could place the state's domestic industry in jeopardy. Ms. Giunchigliani asked if the commission's goal is to protect 45 businesses that exist in Nevada, rather than allowing businesses from adjoining states to take over. Mr. Armstrong reiterated the commission's goal is to guarantee the people of the State of Nevada have a reasonably priced, adequate, and healthful supply of milk. Ms. Giunchigliani asked if other states have dairy commissions that regulate prices, assess fines, and approve labels. Mr. Armstrong responded he did not have a list before him but believed there are approximately 18 states with similar operations. Ms. Giunchigliani asked that a copy of the list be provided, and Mr. Armstrong responded in the affirmative. Ms. Tiffany said there have been many changes within the state since the creation of the commission. She pointed out there is practicing participation with out-of-state suppliers, and federal oversight that was not in place at program inception. She asked if the commission changed their mission statement to reflect what is occurring at the present time, and how the change will impact on the way business is presently being conducted. Ms. Tiffany specifically wished to know if changes are contemplated in the fee structure, what is the size of the organization, and whether job descriptions exist for the employees. She asked if an in-depth review of present practices has been considered to determine if changes are in order. Mr. Armstrong replied he has not done so but believes the commission has carried out the goals set forth by the Legislature. He said principles of firmness and fairness are applied toward the enforcement of the laws while adhering to the welfare of producers and consumers. He pointed out without a domestic industry, the state will be victimized by large organizations who, through the convenience of supply, will be in charge and will increase prices to the consumers. Ms. Tiffany stated she would like to see someone perform an in-depth review, because she believes the assessments, reserves, and priorities of the commission should be investigated. She asked for a document to be submitted to the subcommittee providing the information. Robert R. Barengo, Chairman, State Dairy Commission, Department of Business and Industry, interjected when he was appointed to the position by the Governor 2 years ago, the commission had not undergone any legislative audits or reviews. At his request, an audit was performed wherein deficiencies were detected and subsequently resolved by the commission. He pointed out Mr. Armstrong was appointed the Executive Director, and Larry W. Swecker was appointed the commission's Public Accountant Representative. The commission's Agriculture Economist Representative, C. Richard Capurro, was appointed approximately 3 years ago. In the last 2 years, Mr. Barengo said many changes have taken place including new staff and regulations. He called attention to the fact the commission is now applying the policies set forth. Although not documented, the in-depth review of prior practices as suggested by Ms. Tiffany has also been accomplished, he said. Mr. Barengo affirmed the nature of the dairy industry has changed, and although the commission's mission is somewhat the same, goals have to be accomplished through tighter regulation and control. Ms. Tiffany asked if deregulation has been considered by the commission. She asked if it would make sense to allow competition since it may be better for the consumer versus the protected 45 dairies in the state. Mr. Barengo responded all of the dairies and producers in Nevada want regulation. He does not believe they would be supportive of a divestiture or deregulation of the dairy industry due to problems that could occur if out-of-state producers came into the state. Mr. Barengo asserted the State Dairy Commission has kept dairy prices low, and he believes deregulation would cause dairy prices to increase. Ms. Tiffany asked what policy or procedure the commission uses in deciding which dairy products it will and will not assess. She also asked how the Reserve account balance is determined, and whether an analysis has been made of the Reserve account. It was noted the commission's budget summary reflects a reserve of $372,052 for Fiscal Year 1995 - 1996, and $333,641 for Fiscal Year 1996 - 1997. Mr. Armstrong replied the amount of assessment and the items to be assessed are set forth in the statute. He recognized the commission allowed the reserve to accumulate to approximately $350,000, but commencing in October 1994, assessments on certain items were dropped. As a result, assessments are now being collected on cottage cheese and butter. It is anticipated by the end of the current fiscal year the reserve will be approximately $275,000, Mr. Armstrong said. Mr. Armstrong remarked the commission is endeavoring to perform audits on all of the state's licensees on a 3-year cycle. At the present time, they are processing audits of major processors who have not been reviewed for a 10-year period. He stated the commission is applying strict internal controls, which will be in written form. Ms. Tiffany noted the commission is assessing butter and cottage cheese, but the assessment of yogurt, fluid cream, fluid milk, and frozen items has been dropped. She asked, "What is the policy? What do you assess? How do you determine what you assess and what products are assessed? How did you determine what the proper reserve amount should be?" Mr. Armstrong replied, "It is a value judgement." Jackie Burris, Certified Public Accountant, State Dairy Commission, Department of Business and Industry, responded some years ago legislators recommended the commission maintain a Reserve account of approximately $250,000. With the growth in the Las Vegas area, assessments were considerably more than was budgeted, and the reserve surpassed the recommended level. The commission took measures to lower the reserve, and the areas in which reductions were imposed were the areas with the largest volume. She agreed to review the assessments in order to maintain a constant, lower reserve balance. Upon ascertaining the recommended reserve balance of approximately $250,000 is not contained in the statutes, Ms. Giunchigliani indicated the subcommittee will consider redirecting the amount of the reserve balance. She asked if the rate assessment is governed by statute, or if the commission makes the assessment determination. Ms. Burris answered the rate of assessments are stated in the regulations, and the possibility to reduce the assessment is also stated in the regulation. Since there appeared to be confusion as to whether or not assessment information is contained in the statutes or regulations, Ms. Giunchigliani said she would review the statutes. Ms. Giunchigliani asked how many people work for the commission at the present time, and how many of those individuals are investigators. Mr. Armstrong replied there are 16 employees of which four are investigators. He clarified two investigators are in Reno and two are in Las Vegas. Ms. Giunchigliani asked what standards are used to arrive at an assessment decision. Mr. Barengo responded the commission directs the auditors and certified public accountant to prepare a chart reflecting the flow of revenue, which is used along with the agency budget, to arrive at assessment decisions. Ms. Giunchigliani asked if the commission still engages the services of outside legal counsel. She remarked, "For quite awhile we have tried to get across the message that we wanted you to get rid of outside counsel and begin to use the deputy attorney general." Mr. Barengo asserted since he was appointed to the commission 2 years ago, no such message has been imparted. He stated new legal counsel was recently hired due to criticism received about the previous attorney. The contract for his services is approximately $19,000 per year, which is similar to the contract extended the commission's previous legal counsel. He stressed the need for an outside attorney due to the administrative complexities of the commission. Mr. Armstrong reported the commission is in daily contact with legal counsel over issues regarding licensees. He said a deputy attorney general is also assigned to the office, but this individual is responsible for 10 or 12 other boards and commissions and does not have the time to get involved with the daily questions from consumers, licensees, and members of the industry. Mr. Price recounted appalling events that transpired prior to the inception of the commission being structured as it is today. He believes outside producers will not benefit the state, and is in favor of the State Dairy Commission which protects residents and Nevada businesses. Ms. Giunchigliani remarked dairy prices may be higher than necessary because a large reserve was accumulated based on assessments being paid by consumers. She stated the subcommittee will revisit the issue of the agency's excessive budget reserve. She opined there is no reason to have a reserve of $200,000, let alone $373,000, which will allow the commission to lower assessments and keep the dairy products more competitive. Since the number of domestic industries has dropped from 200 to 45, and assessments were adjusted accordingly, Ms. Giunchigliani asked the commission to provide an adjustment to the reserve. She also noted the commission requested two additional automobiles and asked for an explanation. Mr. Burris replied the two automobiles the agency wishes to purchase will replace two automobiles now being leased through the State Motor Pool, and the purchase of the vehicles will result in a cost savings to the agency. She said the automobiles are standard sedans to be used by the investigators located in Las Vegas. Senator Jacobsen remarked: The State Dairy Commission is a hands-on operation. I have been a protector of the agency since it began....If we give up the regulations, you can kiss the industry goodbye, and things will return to the situation that existed years ago when there were many lawsuits....That is one of the reasons the reserve is there, in case we do get into another confrontation. I chaired the subcommittee on the dairy industry, and the current administration is part of our efforts. In the past, it was controlled by the industry itself, by the producers and processors, and we felt that was a conflict of interest. We removed that and today, what you see is what you have. I want to remind this group this is a self-funded industry. We do not put any General Fund tax dollars into it. We let them run their own show, and I think they do a very good job. I did not like the audit, but the agency has indicated all items that were called to their attention will be addressed. I want to point out the state is in the dairy business. We are currently milking 80 cows out at the prison ranch, and producing milk for all of the prison facilities and other facilities. We are not in competition with private enterprise. If you take away the regulation...competition from the outside will take over. Ms. Giunchigliani requested the commission furnish the subcommittee with information regarding which employees will be assigned the new automobiles, the necessity for the vehicles, the type of vehicles purchased, and whether the cars will be driven home daily. Mr. Armstrong wished to point out the commission has a letter from the Audit Division of the Legislative Counsel Bureau stating every criticism reflected in the 1993 audit has been addressed. Mr. Allard inquired as to the number of individuals that are employed by the dairy industry throughout the state. Mr. Armstrong did not have the information readily available, but stated the information will be immediately furnished to the subcommittee. Ms. Giunchigliani turned the gavel back to Senator O'Donnell. State Printing Office - Page 501 Donald L. Bailey, Sr., Chief, State Printing and Micrographics Division, Department of Administration, distributed Exhibit D, a memorandum from the Budget Division to the Legislative Counsel Bureau, dated April 12, 1995, recommending revisions to the agency's budget regarding the line items Raw Materials, State Cost Allocation, Personnel, and Attorney General Cost Allocation. Mr. Bailey said Exhibit D provides detailed information from the Budget Division pertaining to additional costs for the referenced line items. Senator O'Donnell noted the line item Printing Sales increased by approximately $300,000 over the biennium. He asked for an explanation regarding the adjustment. James Manning, Budget Analyst, Budget Division, Department of Administration, responded the adjustments for the budget are primarily for the inflationary cost for raw materials required by the division. He explained the Budget Division ascertained the cost for raw materials increased by approximately 20 percent during the current biennium, and may increase by as much as 40 percent. Senator O'Donnell asked if the adjustments were cost allocated to all of the budgets for the department. Mr. Manning said the Budget Division is in the process of making the necessary adjustments to the budgets for the agencies that will be impacted. He stated within the next few days, the Budget Division will provide the staff needed to perform the adjustments. He pointed out the Budget Division has not yet had time to perform an analysis of which budgets will be impacted by including the additional revisions required. Senator O'Donnell remarked the Senate Committee on Finance and the Assembly Committee on Ways and Means are in the process of closing budgets. He asked how much longer it will take the Budget Division to provide an accurate budget for the State Printing Office. Mr. Manning indicated the revised budget for the division, attached to Exhibit D, is reflective of what has been recommended to the Governor by the Budget Division. However, Mr. Manning said adjustments will be required to the budgets for the agencies that will be impacted by the inflationary rate increases. Senator O'Donnell stated budget closing action for the State Printing Office will be held pending the receipt of budget adjustment information from the Budget Division. Senator O'Donnell warned if the subcommittee does not receive the information by April 17, 1995, the Budget Division will be holding up the legislative session. He stressed the committees are ready to make decisions and begin budget closing action, but cannot do so without the cooperation of the Budget Division. Ms. Giunchigliani asked Mr. Bailey to provide an in-depth, written explanation of how division overtime is calculated and used. Mr. Bailey agreed to submit the requested information immediately. Motor Pool - Page 519 Senator O'Donnell noted staff of the Fiscal Analysis Division, Legislative Counsel Bureau, made adjustments to the budget predicated upon comments he made regarding the computer equipment requested by the division. Due to uncertainty the division has expressed regarding the type of computer equipment needed, Senator O'Donnell suggested the division hold the revenue required for computer equipment in reserve until a decision is made. Larry L. Peri, Program Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, referred the committee to page 1 of Exhibit E, Budget Closing Action, and reviewed the recommended adjustments with the subcommittee. MRS. EVANS MOVED TO RECOMMEND CLOSING THE BUDGET IN ACCORDANCE WITH STAFF PROPOSALS ON PAGE 1 OF EXHIBIT E. MR. ALLARD SECONDED THE MOTION. THE MOTION CARRIED. (MS. GIUNCHIGLIANI AND MR. PRICE WERE ABSENT FOR THE VOTE.) * * * * * SENATOR JACOBSEN MOVED TO RECOMMEND CLOSING THE BUDGET IN ACCORDANCE WITH STAFF PROPOSALS ON PAGE 1 OF EXHIBIT E. SENATOR MATHEWS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * Motor Pool Vehicle Purchase - Page 525 Mr. Peri explained the budget account is the replacement account for existing motor pool inventory of automobiles that are rented to state agencies on a monthly basis. The automobiles are on a replacement schedule, and the Governor's recommended budget will allow for the periodic replacement of the vehicles within the next 2 years. MS. TIFFANY MOVED TO RECOMMEND CLOSING THE BUDGET AS RECOMMENDED BY THE GOVERNOR ON PAGE 4 OF EXHIBIT E. MR. ALLARD SECONDED THE MOTION. THE MOTION CARRIED. (MS. GIUNCHIGLIANI AND MR. PRICE WERE ABSENT FOR THE VOTE.) * * * * * SENATOR JACOBSEN MOVED TO RECOMMEND CLOSING THE BUDGET AS RECOMMENDED BY THE GOVERNOR ON PAGE 4 OF EXHIBIT E. SENATOR MATHEWS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * Clear Creek Youth Center - Page 565 Mr. Peri reviewed the technical adjustments to the budget account with the subcommittee reflected on page 9 of Exhibit E, items 1 - 3. MS. TIFFANY MOVED TO RECOMMEND CLOSING THE BUDGET IN ACCORDANCE WITH STAFF PROPOSALS ON PAGE 9 OF EXHIBIT E. MRS. EVANS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * SENATOR MATHEWS MOVED TO RECOMMEND CLOSING THE BUDGET IN ACCORDANCE WITH STAFF PROPOSALS ON PAGE 9 OF EXHIBIT E. SENATOR JACOBSEN SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * . Senator Jacobsen asked that a letter of intent be forwarded to the prison system requesting the increased usage of inmate crews. The chairman directed staff to comply with Senator Jacobsen's request. State Purchasing - Page 527 Ms. Giunchigliani advised Tom Tatro, Chief, Purchasing Division, Department of Administration, to be aware of the purchase price of the two vehicles that will be purchased through the division by the State Dairy Commission. She explained the subcommittee asked the dairy commission to provide them with a written report regarding the type of vehicles purchased. Mr. Tatro responded in the affirmative. Commodity Food Program - Page 533 Purchasing - Equipment - Page 539 Surplus Property Program - Page 542 MS. GIUNCHIGLIANI MOVED TO RECOMMEND THE CLOSURE OF THE AFOREMENTIONED BUDGETS AS RECOMMENDED BY THE GOVERNOR ON PAGES 5 - 8 OF EXHIBIT E. MS. TIFFANY SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * SENATOR JACOBSEN MOVED TO RECOMMEND THE CLOSURE OF THE AFOREMENTIONED BUDGETS AS RECOMMENDED BY THE GOVERNOR ON PAGES 5 - 8 OF EXHIBIT E. SENATOR MATHEWS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * ** Marlette Lake - Page 569 Mr. Peri stated the technical adjustments to raw water sales revenue for the account were requested by the agency to more closely parallel the amounts in Fiscal Year 1994 - 1995 of $124,651, and in Fiscal Year 1995 - 1996 of $123,722, which will result in revenue of $127,130 in each year of the current biennium. The increased amounts will be placed into the Reserve category to be used for emergency expenditures. MS. TIFFANY MOVED TO RECOMMEND CLOSING THE BUDGET IN ACCORDANCE WITH STAFF PROPOSALS ON PAGE 10 OF EXHIBIT E. MRS. EVANS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * SENATOR MATHEWS MOVED TO RECOMMEND CLOSING THE BUDGET AS RECOMMENDED BY STAFF ON PAGE 10 OF EXHIBIT E. SENATOR JACOBSEN SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * Carson Water Treatment Plant - Page 573 MRS. BROWER MOVED TO RECOMMEND CLOSING THE BUDGET AS RECOMMENDED BY THE GOVERNOR ON PAGE 11 OF EXHIBIT E. MR. ALLARD SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * SENATOR JACOBSEN MOVED TO RECOMMEND CLOSING THE BUDGET AS RECOMMENDED BY THE GOVERNOR ON PAGE 11 OF EXHIBIT E. SENATOR MATHEWS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * Administrative Services Division - Page 577 Mr. Peri commented regarding items 1 - 2 as shown on page 12 of Exhibit E, and pointed out item 3 requests permission from the subcommittee to adjust the administrative charge in all affected accounts which support the budget. MRS. BROWER MOVED TO RECOMMEND CLOSING THE BUDGET IN ACCORDANCE WITH STAFF PROPOSALS ON PAGE 12 OF EXHIBIT E, AND GRANT PERMISSION TO ADJUST THE ADMINISTRATIVE CHARGE IN ALL AFFECTED ACCOUNTS WHICH SUPPORT THE BUDGET. MR. ALLARD SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * SENATOR JACOBSEN MOVED TO RECOMMEND CLOSING THE BUDGET IN ACCORDANCE WITH STAFF PROPOSALS ON PAGE 12 OF EXHIBIT E, AND GRANT PERMISSION TO ADJUST THE ADMINISTRATIVE CHARGE IN ALL AFFECTED ACCOUNTS WHICH SUPPORT THE BUDGET. SENATOR MATHEWS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY. * * * * * Senator O'Donnell adjourned the meeting at 10:55 a.m. RESPECTFULLY SUBMITTED: Marion Entrekin, 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 April 13, 1995