MINUTES OF THE SENATE COMMITTEE ON GOVERNMENT AFFAIRS Sixty-eighth Session May 17, 1995 The Senate Committee on Government Affairs was called to order by Chairman Ann O'Connell, at 3:20 p.m., on Wednesday, May 17, 1995, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Ann O'Connell, Chairman Senator Randolph J. Townsend, Vice Chairman Senator Jon C. Porter Senator William J. Raggio Senator William R. O'Donnell Senator Dina Titus Senator Raymond C. Shaffer GUEST LEGISLATORS PRESENT: Assemblywoman Joan Lambert, Assembly District 29 Senator Mike McGinness, Central Nevada Senatorial District Assemblywoman Marcia de Braga, Assembly District 35 STAFF MEMBERS PRESENT: Dana Bennett, Principal Research Analyst, Legislative Counsel Bureau DeLynn Gillentine, Committee Secretary OTHERS PRESENT: Caesar Caviglia, Priest, Concerned White Pine County Citizen G. P. Etcheverry, Financial Consultant, Smith Capital Markets, Nevada State Bank Bill Flangas, Concerned Citizen Peter Etcheverria, Concerned Citizen Mike Lemich, Concerned White Pine County Citizen Michael Pitlock, Executive Director, Department of Taxation Marvin Leavitt, Legislative Affairs Coordinator, Las Vegas David P. Pursell, Chief, Division of Assessment Standards, Department of Taxation Douglas C. Thunder, Director, Fiscal Services, Nevada Department of Education Dale Erquiaga, Chief Deputy, Office of the Secretary of State Marvin Leavitt, Legislative Coordinator, City of Las Vegas David Howard, Vice President, Legislative Affairs, Reno/Sparks Chamber of Commerce Carole Vilardo, Lobbyist, Nevada Taxpayers Association Jan Needham, Principal Deputy, Legislative Counsel Bureau Senator O'Connell opened the hearing with a discussion on White Pine County and Assembly Bill (A.B.) 536. ASSEMBLY BILL 536: Provides procedure for financial administration of local government in a severe financial emergency. Caesar Caviglia, Priest, Concerned White Pine County Citizen, stated when the major industry leaves the area, small towns in Nevada are impacted. He said the leadership of the towns seem to leave also. He cited this as an example of the situation in White Pine County. He explained they passed three bond issues in anticipation of new mining industry interests in the county. He stated environmental demands closed the mining interests and that created a shortfall for the county. He stressed the response to the situation was negligible until the Department of Taxation brought the crunch to their attention. He asked the committee to restructure the debts of White Pine County, not to be punitive to the county, and to grant a 5-year line of credit. He stated: I am not a spokesman for White Pine County. I don't think there are many spokespersons for White Pine County at the moment. I don't think they are even showing up for the meetings even under duress. From what I understand, a $1-million line of credit over a period of time, no less than 5 years, would handle not only the amortization of their existing debt of $2.8 million, but also would include some of the additional costs of the district of about $947,000. The line of credit could be negotiated in terms of a lower interest rate. Even the interest rate that is offered now, it is a 5.74 percent interest, over that period of time debilitates that community by about $700,000 a year. That's a lot of money for that little town. If that could be negotiated downward . . . ...We would also like to see something to give some backbone to the school district or whatever is needed there, maybe an oversight committee so there's a little more liaison taking place between the school district and your body here, and the Department of Taxation to give them some support. That advisory body, being given some kind of authorization, would lend itself to that kind of support to the community. I was going to go for maybe raising the cap on the taxes, but I don't think I will even talk about that. Senator O'Connell responded, "Good move, Father." G. P. Etcheverry, Financial Consultant, Smith Capital Markets, Nevada State Bank, testified next. He stated they are willing to restructure the $947,000 debt, but they have not discussed any other portion of the White Pine County loan. He stressed they would do what they could to keep students and teachers from being hurt. He said everyone knows the law has been broken in White Pine County and no one is paying attention to it. He stressed his company will be helping to find a solution to the White Pine County situation. Bill Flangas, Concerned Citizen, testified next. He explained that White Pine County experienced hard times due to the cessation of the copper mining in the county. He stressed the upkeep of the infrastructure and the county structure. He said, "They refused to die and become a ghost town." He said the copper mine was shut down before because of the Environmental Protection Agency and due to regulatory requirements. He also cited lower copper prices as a reason for the decline in the business. He reminded the committee that Magma Copper will be expanding in the area for at least 2 decades. He stressed Magma Copper wants to become the world's leading producer of copper. He said all the economic indicators were pointing upward. He said there have been oversights, negligence, and over-optimism of the mine that set the county back about 18 months. He told the committee they are looking for a reasonable restructuring that will enable that county to pay its own way. He urged the committee to take a good look at what is happening in the county and to give it a chance. Mr. Flangas cited a 4.5 percent school dropout rate compared with 9.6 percent for the rest of the state. He said the top third of each class participates in extracurricular activities. He said the students in 1993-1994 had ACT scores of 22.9 compared with 22.2 for the state versus a 22.0 national score. He stated they do not want to see an entire generation of kids penalized because of poor, past planning. Peter Etcheverria, Concerned Citizen, stated the students from White Pine County should have the same opportunities as any other place in the state. He asked the committee to help them do something about White Pine County. Mike Lemich, Concerned White Pine County Citizen, told the committee he wanted to bring the White Pine County School Board members with him but, "they are scared to come." He stated his greatest concern is that the Legislature will penalize the White Pine County students. He said if extra curricular activities are taken away from the students, the kids have nowhere to go. He stressed that keeping the extracurricular activities is imperative. He told the committee he is not impressed with the committee selling the school buses. He asked if the committee expected the students to walk to school? He told them it costs more money to do business in White Pine County than it does in more populous places. He said they have to travel 250 miles just to interface with any school for any extracurricular activity, whether it is athletics, band, or debate. Senator O'Connell stressed that the committee is as concerned about White Pine County as all of the people who have come to testify. She emphasized their concern about the school district, students, and faculty. She said, "We intend to work in good faith with you. We do have a very serious problem there that came about over a period of 5 years . . . We do have the interest of that county at our heart as well. Whatever we do, we will involve the people from White Pine [County]." Senator Raggio asked, "Does this group object to the processing of the measures which are being considered by the committee at this time; that is, the authority for the loan? Do you support that portion of it?" Father Caviglia asked if he meant the $2.8 million for the bailout? Senator Raggio asked if they supported that proposal. He stated he understood that was something the county wanted. He asked if they were suggesting something besides that, which is not in the measure at which the committee is looking. He asked for details of their request. Father Caviglia explained the total package has to be assembled so the committee can see in detail what White Pine County needs. He stated there is still information coming from the county. He said they need more than has been reported so far. He stated they need money to open the school. He stressed the White Pine County schools are in safety defaults. He said they would not pass any safety tests. He explained the fire marshal came in and had a few words to say about the buildings. He emphasized that all the schools are all from post turn of the century. He stated it is a necessity to have work completed. He said he was sure some extravagances were spent on the new building. He explained the March report from the Nevada Tax Commission had items that require clarification. He said they need the entire package of what has not been compiled. Senator Raggio responded that they need this information quickly to get consideration of the bailout revenues. He reminded everyone that the end of the session is near. Senator O'Connell added there is a joint Senate and Assembly meeting scheduled for Monday, May 22, with the tax commission to examine the plan. Michael Pitlock, Executive Director, Department of Taxation, testified next. He provided handouts (Exhibit C and D). He explained this is detailed information for a tentative White Pine County School District budget for 1995-1996. He said: We've basically got a situation that because of the financial obligations that the school district entered into, namely the leases, combined with the debt service associated with the $2.8 million loan, we're in a situation where the debt-service requirements for the school district have increased by about $1-million per year. That's the $1 million number you have heard mention of. In trying to deal with that situation, the Local Government Advisory Committee started dealing with the budget to see if the budget could accommodate cuts to cover that $1 million. Frankly, when you are talking about a county of that size, it is virtually impossible to cut that budget enough to cover that $1 million without totally destroying the educational process in White Pine County. Obviously, none of us wanted to do that. So, we're left with the situation where we have to look at the other alternatives. In my mind, it is going to take a combination of smaller fixes to deal with the situation, as opposed to looking at one simple solution where $1 million somehow appears into the budget. On one hand of the spectrum, you would have the ability to generate a million in additional tax revenue, if a similar bill was passed as to what was passed last session that would allow the school district to buy down all the other entities in the county. Obviously in dealing with a county the size of White Pine, a $1-million tax increase is not reasonable by any stretch of the imagination. A bill has been introduced in the Legislature that would appropriate $2.8 million to the county. It appears to me that the actual solution to the problem is somewhere in between the two extremes. If we look at a combination of factors, a combination of a reasonable tax increase in White Pine County; reasonable cuts to the budget, and a restructuring of the debt to spread out that $1-million debt service over a longer period of time to bring that number down to a reasonable number. Senator O'Connell asked if Magma Copper would be open and running by August 1, 1995? Mr. Pitlock responded he had heard that information mentioned. He said Magma Copper provided a significant amount of information at a meeting on May 16. He stressed that the Department of Taxation has not seen all of the details of that. He said they have not had an opportunity to compare that with the estimates that they have been working with internally. He noted the Department of Taxation hoped to be able to do that over the next few days. He stated the Department of Taxation wanted to have that information while they are working on solutions for the county. He told the committee that there will be growth in the assessed value in the county. He stated the number of dollars which are allocated to a tax increase solution may not necessarily come from an increase in the rate. It could be generated over time to an increase in the assessed evaluation. He informed the committee this information must be worked into the equation. Senator O'Connell asked if the new assessment would be about $171 million? Mr. Pitlock stated: At the current time, based on the numbers we are working with for the upcoming fiscal year, we are looking at an assessed value of $162 million. That million dollar number that I mentioned earlier is predicated on an assessed evaluation and the revenue associated with $162 million. If that number changes over time, the ability to generate additional revenue without an actual increase in the rate will improve. In addition to dealing with that ongoing problem, there's still one more piece of this that is a one- time problem for the upcoming fiscal year. We still have two $85,000 buses, that are on order, that we have not been able to get any other district to buy. We were able to, through the efforts of the people on the committee, get two of the buses [to be] purchased by Nye County. But we still have two left that are committed. We have other people looking at them, but at this time, the school district is still on the hook for two $85,000 buses. Senator O'Connell asked Mr. Pitlock if he had spoken with the Douglas County School District to see if they might be interested in the buses? She stated the Douglas County School District is currently looking to buy some additional buses. She suggested they contact the district. Mr. Pitlock stated that the Carson City School District is considering one of them, but they were concerned about the number of options which had been put into the buses. He stated, "These are obviously very expensive buses at $85,000 apiece." He said the other situation in the upcoming fiscal year is the completion of the high school. He stressed there is still a significant amount of cost, probably roughly $750,000, that will be expended beyond the amount included in the $2.8 million. He emphasized a source of funding has to be secured for that. He opined there may be a source of funding being held for that, but it is another piece of the overall debt service. Senator O'Connell asked if that $750,000 included the paving and landscaping around the school. Mr. Pitlock responded it does include the paving, but he does not believe that landscaping is included. He said: I think the situation is going to be that we are going to have to tell them, `You have "x" number of dollars to complete the school. That's all there is. You have to prioritize what needs to be done because there are no more funds available.' One of the other comments you have heard . . . is that . . . many of the school sites are in terrible condition. It appears that there has not been as much expended upon maintenance as there should have been in the past. We may be left with some more significant drains on the budget in the upcoming years. We have to be careful that we don't mortgage the future too much, because there are still going to be infrastructure costs out there in the upcoming years that have to be dealt with. We will continue to work on trying to come up with a solution to this problem. Hopefully by adding together a combination of a lot of minor fixes, we can come up with an overall solution that doesn't single out one entity for all of the burden. There are enough burdens here to be spread as far as we can spread it. That is the task now. Marvin Leavitt, Legislative Affairs Coordinator, Las Vegas, stated his endorsement of the work which the Department of Taxation has completed. He stated Mr. Pitlock has adequately expressed the situation that the Local Government Advisory Committee found as they were going through the budget in detail. He stated they looked over possible cuts on May 16, to try to equal a million dollars. He said it is really true that if they eliminated enough positions, they could save the million dollars. He stressed the elimination of these positions eliminates the educational program of the district and that is not the intention. He stressed there have to be alternatives other than that. Senator Porter asked for the total cost to the school, as opposed to the amount bonded. Mr. Pitlock responded that it was supposed to be a $7 million school that turned into a $10 million school. Senator Porter asked how much has been spent to date on the school. Mr. Pitlock responded, "$10 million." Senator Porter asked if they still owed part of that? Mr. Pitlock responded, "The cost has been incurred, the funds have not necessarily been expended. For instance, on the $2.8 million, we have not drawn down anywhere near the total amount on that yet, but there are liabilities outstanding." Senator Porter asked if some bond revenue had been used for other expenses? Mr. Pitlock responded, "Everything went into one pot, and wherever the school district could find the funds, they would use them. As long as there were financial institutions willing to extend the leases, they would take all of the money they could get and they would spend it . . . wherever they needed it. Everything got commingled into one big pot." Senator Porter asked, "Are you saying they spent $10 million on just the school?" Mr. Pitlock responded, "It's the school, the actual physical facility, the equipment for the school, the band equipment, the sports equipment, the uniforms, everything that you can think of is included in there." Senator Porter asked, "What is happening . . . at the school board level? What actions are they taking with their staff? Is the superintendent still on board?" Mr. Pitlock responded: The superintendent is no longer on board. We have, through the Local Government Advisory Committee, selected a financial manager to take over the district on an interim basis. The day-to-day operation is being handled by two principals that have offered their services. One mainly focused on the education side. One mainly focused on the finance side. But all of the major decisions are being made through the Department of Taxation. The local government entity is not making any decisions on their own any more. Senator Porter asked how the payroll was met for April? Mr. Pitlock responded that payroll was met in April through part of the proceeds of the $2.8 million. He stated that was the initial drawdown of those funds? Senator O'Connell asked if there is a bond surety in White Pine County? She asked if there was a bond surety, what are the terms? Mr. Pitlock stated they are looking into that. He assured the committee the Department of Taxation will get a copy of whatever bond is in existence, review the terms, and if possible, file a claim to recover any fees possible. He stressed the Department of Taxation will take whatever steps they can to attempt to recover any of the costs which they feel were inappropriately incurred. Senator O'Connell stated, "I have heard some information and I would like it verified for the record. When Mr. Cahill turned in his resignation, it was to be as of June 30? Is he being paid through August?" Mr. Pitlock responded: I believe that might be the case because of the way the contracts are structured. We talked a little bit about that at the meeting this morning. My reaction to all of that was . . . I intend to take steps to terminate that contract immediately and stop any further payments to the ex-superintendent. David P. Pursell, Chief, Division of Assessment Standards, Department of Taxation, informed the committee, "I had made the statement that I thought that his salary was being accrued through August. It was brought to my attention, so I called the district to find out for sure. I was told his contract runs from July 1 to June 30. If that is the case, he is being paid through June 30 not into August." Senator O'Connell asked that being assured that the money in the bill is protected money was imperative for the committee and cannot be used for any salary negotiations. She asked if they currently list this provision in the bill they are considering. Mr. Leavitt responded that it is in the bill to authorize the $2.8 million. Senator O'Connell stated that was a special act and she said it expires in June. She stated concern that everything they do is protected from negotiations. Mr. Pitlock responded they discussed this issue when they heard the bill, and there were proposed amendments which address this. He stated he did not think they were adopted. He said the issue needs to be addressed. He said he is concerned that the way the bill is currently drafted, that the funds may not be protected. He said that making the necessary changes to ensure that this happens is important. Mr. Leavitt stated that A.B. 536 has a provision to grant the Department of Taxation the authority to negotiate all contracts. He said at the time that all of the budget and factors are known, they need to address what revenues are and are not available for negotiations. Senator O'Connell asked if they can include this provision in the final bill? Mr. Leavitt opined they can address it. He asked the committee to move forward. Mr. Pitlock read a section from the bill which addressed this issue. He said this is the language which addresses concerns that a possible arbitrator's decision could undo much the work being done. Assemblywoman Joan Lambert, Assembly District Number 29, gave the committee some background on the language of the bill. She said it comes from the existing financial difficulty statutes. She said the committee considered the problems of going in and overturning all of chapter 288 of the Nevada Revised Statutes with this bill, and if they can do that. She said if there is no money to negotiate with, the fact finder cannot find any money. She said they assumed since they excluded the $2.8 million loan from bargaining, that any other revenue that may be bailout revenue would also have that attachment; they are not to be the subject of bargaining. Senator O'Connell asked Senator Mike McGinness, Central Nevada Senatorial District, and Assemblywoman Marcia de Braga, Assembly District Number 35, if they had anything to add to this portion of the testimony before she temporarily closed it to hear other bills? Mrs. de Braga explained that she has little to add. She said that everyone is trying to resolve the problems. She added that a long-term plan for White Pine County is that there is truly a need for more buildings there. She said no one wants to hear that, but it needs to be part of the plan. She emphasized the students are crowded into unsafe buildings. She added she hoped the long-term plan will include the future as well. Senator McGinness agreed with Mrs. de Braga. He said he supports the extensions so that the payback does not significantly affect the quality of education. He said they have heard testimony that this would happen. He said, "For the sake of the children, that's what we are trying to avoid. I don't think anyone in White Pine County is trying to avoid any of this payback; they are just saying, `Give us a little better terms.' I think we can support that." Senator Porter asked if the school board has accepted responsibility yet? Mr. Leavitt stated, "My own personal feeling is that I still don't think they really have accepted the responsibility. I still have a concern in that area." Mr. Pitlock responded, "I would echo those comments." Mrs. de Braga stated she has not talked with all seven members. She stressed many the members have not even come to her, called her, or inquired as to the depth of their problem. She added the members who have asked are reluctant to accept their responsibility. She suggested the reason for this attitude is that they felt safe in relying on the advice of the superintendent as the "expert in the field" and did not understand the depth of their problem and their responsibility. She agreed with everyone that the responsibility of their actions has not "hit home" with the school board. Senator Porter stated that the school board needs to accept responsibility very soon. He said the Legislature is trying hard to resolve this. He said it is like many problems; unless there is acknowledgment of a problem, it cannot be addressed. Mrs. de Braga told the committee that there is a recall petition plus the grand jury. She wondered if this would be enough to force the school board to face their part in the situation. Senator McGinness stated that the committee may know more about the situation than some community members or even the school board members. He stressed that the Legislature gets direct reports from the Department of Taxation. He noted that they have known from the beginning how bad the situation is. He opined that only now does the community and the school board understand the depth of their problems. He said there is intense loyalty to the kids and to the district. He said the recall and the grand jury on the local level are going to help everyone to understand. He stated it will enlighten the community. He emphasized that the Legislature might have an unfair advantage because they have been provided with more information than the community and have been on top of the situation longer. He said they looked to their superintendent for so long for good advice and they trusted him too long. Senator Porter said the White Pine County School Board members should have been camped out in Carson City to find out exactly what is going on. He stressed they should have been communicating daily with staff just to see where the situation stands. He said their loyalties have caused them more problems than they needed to have. Mr. Flangas addressed the committee again. He said: Some incredible mistakes were made. I have served on lots of public boards and almost all of them have one thing in common. If you have a 10-man board, there are generally two or three of them that really read their mail and rely on their subject matter expert . . . I have detected there was a supreme overreliance on his [the superintendent's] judgement. I am appalled at the number of signals . . . that were not really needed. I was impressed with the data that we got from the tax people today. Apparently there are some things that could possibly be done in their role to strengthen it. They requested certain reports that were not sent. Apparently they do not have the authority to force somebody to give them that report. Had that surfaced earlier and louder, I suspect that we could have avoided a lot of this unpleasantness. Senator O'Connell stated the committee has been meticulous about addressing every level where a red flag was sent up. She noted there was nothing in the law that allowed anybody to come in and take the steps needed at the time. She stated it has been a good lesson from that standpoint. She emphasized it is the first time that the state has ever faced anything like this. She said there will be a total of five bills that have done nothing but address the White Pine situation by the time the session ends. She said the two other bills that are being worked on are more general to identify any county which is in trouble, and any entity in a county which is in trouble. She noted that the Legislature is earnestly addressing any signals. She reminded the committee that two bills were passed in the 1993 session that they thought would address this situation, but The White Pine County School District ignored those laws. She said, "I do think we have pretty well covered the situation that gives the Department of Taxation the ability to identify and go in and require." Mr. Flangas stated he is impressed with the good-faith efforts in this direction. He did state disappointment that somewhere in the statute "we had a fire and no one really rang the alarm. Or, the alarm was rung, but the appropriate people did not hear it. It is a unique situation. The point is, though, this is a good county and I think what we are doing is worth salvaging." Douglas C. Thunder, Director, Fiscal Services, Nevada Department of Education, and also a member of the Local Government Advisory Committee (LGAC), stated he sensed disappointment that there were not people from the school board present at this meeting. He informed the committee that at least one of their members has been present at all of the LGAC meetings which were convened for the situation. Mr. Etcheverry explained some of the rules of the LGAC. He said the worst thing for a small county is to be called before the Department of Taxation because they violated rules of the LGAC. He made the analogy that it was like "sitting on the right hand of God and atoning for your sins." He stated that during the legislative process, when the duties of the LGAC were revamped to make them responsible for the incorporation of new cities, the important duties of the committee were left out, including punitive statutes. Senator O'Connell temporarily closed the hearing on A.B. 536 and opened the hearing on Assembly Bill (A.B.) 280. ASSEMBLY BILL 280: Makes various changes to provisions governing notaries public. (BDR 19-930) Dale Erquiaga, Chief Deputy, Secretary of State, testified: Assembly Bill 280 deals with notaries public . . . [and] makes significant changes to chapter 240 [NRS]. As this committee will probably remember, chapter 240 [NRS] regulates the appointment of notaries public in this state. The bill is the outgrowth of work that was done in 1993. The Legislature passed the uniform law and notarial acts which were not requested by the secretary of state, but which former Secretary of State, Lau spent a great deal of time traveling around the state and meeting with notaries to implement. From those town meetings that we held, we learned that there were significant gaps in the current statutes. The secretary not only appoints notaries, but can revoke those appointments. In the last year and one-half the secretary of state's office has undertaken three or four administrative hearings to address notarial misconduct. With each of those hearings, we found additional problems. So this bill attempts to close those loopholes and clarify duties for notaries public. Mr. Erquiaga presented and discussed Exhibit E, his section by section testimony on A.B. 280. He explained there are more than 20,000 notaries in the state; however, there is only one person at the Office of the Secretary of State to deal with them. He noted the bill will help in the administration of that position. Senator O'Connell closed the hearing on A.B. 280 and opened the hearing on S.B. 456. SENATE BILL 456: Authorizes local government to establish certain funds for local financial administration. (BDR 31-1661) Mr. Leavitt told the committee that the bill provides for the establishment of several funds by a local government for extraordinary maintenance, repair, or replacement of government buildings. Senator Porter testified: The first few sections are very similar to A.B. 48 in establishing these funds for local government. Having come from local government and with many of the problems we have been facing, not only in Nevada, but in other states and other cities, I thought it was prudent to find a way to establish these funds with direction from the state. As I mentioned, the first, few sections are very similar to A.B. 48. ASSEMBLY BILL 48: Provides for establishment of funds for extraordinary repair, maintenance or improvement of certain buildings of local government. (BDR 31-402) Senator Porter continued his testimony: Section 2 says, by resolution, the local government is to have extraordinary maintenance and repair. On through section 2, the funds may only be used for extraordinary maintenance and repair. Number 5, the annual budget and audit report must specify and identify the fund and the amount of money . . . They must specify any proposed extraordinary maintenance, they must identify the plan accumulation of revenue in the fund. Also number 6 on page 2, as used in this section, extraordinary maintenance, repair or improvement means all expenses ordinarily incurred not more than once every 5 years, so there is a definition. Section 3 discusses the fact that the fund, may by resolution set up a fund for construction of capital projects specifically. It explains what capital construction projects are and that they must also be reported upon an annual budget. Most specifically, we go down to section 4, which I think is the major difference between this bill and A.B. 48. Section 4, 5 and 6, section 4, states the governing body may, by resolution, establish a fund. Number 2, the money in the fund must be used only if the total actual revenue of the local government falls short of the total anticipated revenue in the general fund in the fiscal year in which the government uses that money. The money in the fund at the end of the fiscal year may not revert to any other fund or be a surplus for any purpose other than the purpose specified in this subsection. Section 5 is also a critical difference. The total amount of money which may be transferred in the fiscal year from the general fund of the local government to the funds established pursuant to 2, 3 and 4 sections. This act must not exceed 10 percent of the total amount of the budgeted expenditures of the general fund plus any money transferred from the general fund other than the money transferred to those funds for that fiscal year. This has been a consensus of the local governments that I have spoken with. I think this gives local governments a true fund that is very public. It is established in their budget and must only be used for those sources such as emergencies. I think that is good business in today's environment. Senator O'Donnell asked about if there is a provision in the bill which allows the governing body to place up to 10 percent the first year. He stated his concern is that the governing body chooses to place 10 percent in one reserve account instead of paying wage increases for nonclassified employees. Senator Porter explained there are incremental steps built into the process. He stated the bill allows for only a 10 percent reserve. He said that very few local government entities will be able to make the 10 percent reserve during their first year. Senator O'Connell reminded the committee that the local governments have a difficult time achieving the 8.3 percent ending fund balance. Mr. Leavitt stated no local governments are in the position to take 10 percent of their revenue in any year and deposit it in a reserve account. He said counties in Nevada have experienced unusual periods of extremely rapid growth. He stated during these times revenues come in so rapidly that a mechanism needs to be provided to stabilize revenues. He reminded the committee how just a shift in the sales tax can affect budgets. Senator Shaffer asked Mr. Leavitt if employees, who are seeking a pay increase, could access the funds in the reserve account. He stated that at the end of the year if a county did not want to pay a wage increase, the county officials could dump 10 percent of their budget into the reserve fund and avoid entertaining any idea of a pay increase for employees. Mr. Leavitt responded there is a two-way protection in this bill. He stated a plan must be adopted to accumulate and to spend the reserve revenue. He said if the plan states that the reserve fund is for emergency expenditures or stabilization expenditures and not for operational funds, then it cannot be accessed to pay salary raises during negotiation processes, but could be accessed to pay regular salaries if an emergency arose and the payroll could not be met. Mr. Leavitt stressed if a local government wants to put money away where competitive bargaining cannot touch the money for salaries, the local government will still want that money accessible to them. He emphasized that without a plan, this revenue is not accessible. He stated he did not feel this fund would be used in a dishonest attempt to circumvent unions from getting pay raises. Senator Porter stated history has shown that the bulk of local government expenses is salaries. He reminded them of White Pine County School District which had no contingency fund to pay staff. He stated this reserve fund is a prudent business practice to set aside money to maintain the payroll if an emergency occurred. He cited White Pine County as a prime example. Mr. Leavitt stated diversions have never been a problem with local government the way they have been with the state. He stressed the state problems are caused because the Legislature is in session 6 months out of every 2 years, and at the end of that year, diversions come back when the Legislature is not in session. He said local governments meet every 2 weeks. He emphasized these budget matters are held on a regular, routine basis. He stressed these are different situations. David Howard, Vice President, Legislative Affairs, Reno/Sparks Chamber of Commerce, testified next. He stated local government needs a business plan, a fiscal plan to guide them through tough times. He told the committee he was a councilman for the City of Reno during the 1980s. He emphasized they could have used this legislation to guide and help during that period of time. He said the resolution is good because it allows each individual community to structure their plan to meet their needs and goals. He said by resolution, the local government is allowed to structure a plan which will meet their needs. He stated the demands upon a local budget are tremendous, not only from an employee point of view, but from the total community that looks to the city council to solve every problem. He said the establishment of the fund and the money staying to meet the plan will give the local governments what they need for guidance. Carole Vilardo, Lobbyist, Nevada Taxpayers Association, stated support of the bill. She said this bill will be an excellent tool if the local governments use it. She emphasized she would like to mandate that it be used, but the language is permissive. She said it gives local governments flexibilities to determine if they want one, two, or three mechanisms set up. She stressed there are two important elements in the bill. Number one, it cannot be used as a "slush fund" to keep cash away from people, because it is restricted to 10 percent and it is identified that it is for emergencies. She reminded the committee that a state stabilization fund was created for this purpose. She stated if the state stabilization fund had been in place and partially funded prior to 1991, the state would have leveled out and not had the reductions in force that were necessary. She stressed this is a protection for the residents to maintain government at a minimum level of operation without curtailing operations. She emphasized it is a good-faith measure and maintains the integrity of employee contracts. She reminded the committee there is a stabilization bill for the school distributive account. Ms. Vilardo testified that when the MGM Grand Hotel and Casino came on line, it created a windfall in sales tax distribution of the Supplemental City-County Relief Tax (SCCRT). She said the overall sales tax on the construction of the project was $50 million. She stated if a stabilization fund had been available, this project would have been "a perfect augmentation of an unanticipated revenue, or a level of revenue, not expected, and that would not be ongoing to that level. That is the type of thing I can see being transferred because it would be a general fund revenue." She emphasized anything can be misused, but the bill has good safeguards to protect the taxpayers and the employees. She urged the committee's support of the bill. Senator O'Connell closed the hearing on S.B. 456 and called a short recess to enable Jan Needham, Principal Deputy, Legislative Counsel Bureau, to arrive and to testify on Assembly Bill (A.B.) 536. Senator O'Donnell asked for an opportunity to have some concerns answered by Mr. Pitlock until Ms. Needham arrived. He asked how much money the bill would be addressing. Senator O'Connell told him that this bill has no money in it. Senator O'Donnell asked what the bill allows the Department of Taxation and the LGAC to do? Mr. Pitlock responded that the bill gives expanded authority to the Department of Taxation in cooperation with the Committee on Local Government Finance (formerly LGAC). He said it gives them the ability to go take control of a local governmental entity which is found to be in extreme financial difficulty. He added that it ratifies all of the actions taken to date when dealing with White Pine County. He said this bill is the sum total of all the new things they learned as they went through the process. He said something like this should have been in the statutes years ago. Senator O'Donnell asked if the Legislature is going to have to come up with money. Mr. Pitlock responded that this bill does not address the financial situation of White Pine County. He noted there is a potential fiscal impact of the bill because one of the things that the Department of Taxation discovered is the kind of activity required by the department to deal with White Pine County is not something that is routinely built into their budget. He stated they do not anticipate having a White Pine County situation every year. Senator O'Donnell asked who is going to bail White Pine County out of this situation. Mr. Pitlock opined a combination of "little fixes," that spread the burden to a lot of different places, will add up to the kind of dollars necessary to deal with the situation. Senator O'Donnell asked what kind of dollars they are talking about? Mr. Pitlock responded, "A million dollars a year for the next 5 years, potentially that much money." Ms. Needham arrived to address Senator Raggio's concern that there is due process for the entity. Senator Raggio drew her attention to section 4. He said NRS 354.650 allows the department to find whether there is a condition of financial difficulty. He noted under the existing provisions, the Department of Taxation is required to hold a hearing relating to the conditions of financial difficulty, indicating the need for corrective action, and the nature of the proposed corrective action. He said the following section relates to approval of the State Board of Finance. They can require that the governing body submit a financing plan, and that the state and local tax distributions be withheld. He asked what this bill provides that is not now in the law? Ms. Needham explained to the committee that this bill goes a step further and allows the Department of Taxation to take certain actions that they are not authorized to take under the statute quoted by Senator Raggio. She stated the appointment of a financial manager is an example. She said the bill would provide for the Department of Taxation to take over the management of the local government, rather than requiring the local government to take certain measures to manage itself. Senator Raggio asked about page 3, subsection B, lines 1 and 2. He said for an entity to be deemed to be in the condition of a severe financial emergency, the governing body of the local government has to adopt a resolution. He said it means that they have to say they are unable to pay their expenses for 1 or more months. He asked if that resolution is required before this bill can operate. Ms. Needham responded that it is a requirement. She noted the local government will not be deemed to be in a condition of a severe financial emergency, unless the local government entity passes that resolution. Senator Raggio stated what would happen if the governing body does not pass that resolution, even though the emergency is a fact? Ms. Needham answered that according to the provisions in the law, they would not be deemed to be in a condition of severe financial difficulty. Senator Raggio stated that under the existing law, the local governing body does not have to trigger anything in; the Department of Taxation can do it on its own initiative. He asked if this bill is a way for the local governing body to trigger the fact that they are in extreme financial conditions. Mr. Leavitt responded there is work underway to add a list of conditions to help provide guidance under what conditions an emergency situation is declared. He said once all of those conditions are outlined, then this could be deleted in a future bill. He said the bill which is being worked on now is designed for when the Legislature is not in session and an emergency arises. He said there is a whole list of possibilities. Senator O'Donnell brought the committee's attention to the fact that a ballast in the ceiling lights was burning out. The committee stayed in the room for a few more minutes to complete testimony on the bill. Senator Raggio stated he wanted to be sure that presently there is a law where the Department of Taxation, on its own initiative, can find there are conditions of financial difficulty. He asked if this bill enlarges what the role would be of the Department of Taxation, but that is only triggered if the local government body admits that it is in a situation of financial difficulty. He reminded the committee that the local government entities are usually composed of elected people. He said he does not want to circumvent them without due process. Mr. Pitlock stated the existing statute provides certain authority that the Department of Taxation can take without resolution from the local government entity. He explained the due process in that situation is before the Department of Taxation. He noted that with this bill, another step is added to the process that would allow the Department of Taxation to expand its authority to take over a local government entity, assuming that they admit there is a problem and seek the assistance of the Department of Taxation. He said to complete the circle, another piece of legislation is needed to deal with extreme situations where the local entity refuses to admit culpability. SENATOR RAGGIO MOVED TO DO PASS A.B. 536. SENATOR SHAFFER SECONDED THE MOTION. THE MOTION CARRIED. (SENATORS PORTER AND TOWNSEND WERE ABSENT FOR THE VOTE.) ***** As no more testimony was forthcoming on any bill, and as the room was beginning to fill with an acrid burning smell, Senator O'Connell adjourned the hearing at 5:10 p.m. RESPECTFULLY SUBMITTED: Teri J. Spraggins for DeLynn Gillentine, Committee Secretary APPROVED BY: Senator Ann O'Connell, Chairman DATE: Senate Committee on Government Affairs May 17, 1995 Page