MINUTES OF THE meeting
of the
ASSEMBLY Committee on Ways and Means
Seventy-Second Session
March 24, 2003
The Committee on Ways and Meanswas called to order at 8:17 a.m., on Monday, March 24, 2003. Vice Chairwoman Chris Giunchigliani presided in Room 3137 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Ms. Chris Giunchigliani, Vice Chairwoman
Mr. Walter Andonov
Mr. Bob Beers
Mrs. Vonne Chowning
Mrs. Dawn Gibbons
Mr. David Goldwater
Mr. Josh Griffin
Mr. Lynn Hettrick
Ms. Sheila Leslie
Mr. John Marvel
Ms. Kathy McClain
Mr. David Parks
Mr. Richard Perkins
COMMITTEE MEMBERS ABSENT:
Mr. Morse Arberry Jr. (excused)
GUEST LEGISLATORS PRESENT:
Mr. Pete Goicoechea, Assembly District No. 35
STAFF MEMBERS PRESENT:
Mark Stevens, Assembly Fiscal Analyst
Steve Abba, Principal Deputy Fiscal Analyst
Brian Burke, Senior Program Analyst
Susan Cherpeski, Committee Secretary
Carol Thomsen, Committee Secretary
Vice Chairwoman Giunchigliani called the meeting to order and announced the agenda would be heard out of order. Assembly Bill 180 and Assembly Bill 181 would be heard first, and she invited those who wished to speak to come forward.
Assembly Bill 180: Makes appropriation to Interim Finance Committee for allocation to White Pine County for purchase and restoration of 120 miles of Nevada Northern Railroad track that connects Ely to Union Pacific track near Wells. (BDR S-806)
Assembly Bill 181: Makes appropriation to White Pine Historical Railroad Foundation for renovation of historic buildings and Locomotive 40. (BDR S-807)
Assemblyman Pete Goicoechea, District No. 35, testified in support of A.B. 180 and indicated there were many supporters from White Pine County in the audience. Mr. Goicoechea said he had gone to school in Ely, Nevada, 50 years before, and he had observed the gradual decline in the economy of White Pine County. As a teenager, he had worked at the Nevada Northern Railroad warehouse loading boxcars of wool, but that rail line and the sheep were no longer a part of that community’s economy.
Assembly Bill 180 requested an appropriation of $500,000 to acquire and renovate a portion of the Nevada Northern Rail system. Mr. Goicoechea mentioned the Ely Ghost Train and said it was a major component of Ely’s tourist industry, but more was needed. White Pine County had been proposed as the site of a power project because it had the water, the airshed, and the desire to pursue the project, but it did not have the rail system, and without the rail system the coal for the project could not be transported into eastern Nevada.
Mr. Goicoechea indicated that A.B. 180 was contingent upon negotiating with the Los Angeles Department of Water and Power for the sale of that rail line. It was also contingent upon having an industry willing to relocate to Cherry Creek, Nevada. Cherry Creek was the proposed site for the White Pine Power Project, and that 60-mile portion to Cherry Creek would be the first part of the rail line retrofit.
Mr. Goicoechea concluded his statement by saying that the people in attendance at the meeting were proud people from eastern Nevada, who did not want to ask for money from the Legislature, but there was no other option. Mr. Goicoechea asked the Committee to support A.B. 180 and help the White Pine community. He offered to answer any questions, but indicated there were others present who had worked very hard on the issue and were more knowledgeable on the specific aspects of A.B. 180.
Vice Chairwoman Giunchigliani agreed that White Pine County needed an industrial base to supplement the tourist economy. She asked if the mine at McGill was closed, and Mr. Goicoechea responded that was correct. Vice Chairwoman Giunchigliani asked if there were any other industries in the area. Mr. Goicoechea indicated that members of the Economic Development Board and the Chamber of Commerce for White Pine County would be better able to answer those questions.
Assemblyman Marvel asked if there was any possibility of a power company moving into White Pine County. Mr. Goicoechea opined that, as the water rights on the White Pine Power Project now were held by White Pine County, the power project could move ahead if the rail line could be acquired and retrofitted and the environmental assessment could be completed. He reiterated that there were others present who were more knowledgeable on the subject. Mr. Marvel clarified that the power project would have to be powered by coal. Mr. Goicoechea said White Pine County did have the airshed clearance and the project was ready if there was a rail line. He conceded that it was a large amount of money and the state was in a difficult financial situation, but $500,000 would be of great help to White Pine County. Mr. Marvel indicated that he had helped White Pine County obtain the prison, and Mr. Goicoechea said that had been very beneficial as that was one of the few industries in White Pine County and had bolstered the local economy. White Pine County’s economy had traditionally been based on mining with an agricultural base, and with the erosion of the agricultural base, it was important to the community to find another way to help the economy.
Paul Johnson, White Pine County Commissioner, addressed the Committee. He said the communities of White Pine County were bringing two bills before the Legislature through Senator Rhoads and Assemblyman Goicoechea. Mr. Johnson conceded it was not the best time to request an appropriation, but he had prepared a PowerPoint presentation in order to acquaint the Committee with the economy of White Pine County. Vice Chairwoman Giunchigliani directed the Committee’s attention to Exhibit C, which detailed the presentation.
Mr. Johnson gave a brief economic history. He pointed out that there was only one mine in operation in White Pine County, and that mine was expecting net proceeds to increase in the next year, which would help the county and prevent the further erosion of the employment base. He presented statistics from FY1997 to FY2002 to demonstrate what had happened to White Pine County’s economy. There had been a 23 percent reduction in the employment base, a 12 percent decrease in population, a 23 percent decrease in the student population, and a 40 percent decrease in assessed valuation. The decrease in assessed valuation was directly related to general obligations and capital levies that the county had been unable to assess in an effort to assist with infrastructure. Taxable sales had also decreased 40 percent since FY1997. The $3.64 tax cap had been an inhibitor as far as fiscal constraint with capital improvements and infrastructure. White Pine County had been unable to issue bonds and capital projects levies, which had removed about $750,000 per year that would have gone to the school district for improvements of school facilities. That burden had to be shifted to the operating fund and other smaller capital improvement funds. Recent estimates that had been confirmed with the Department of Taxation showed that the tax base in White Pine County had to triple before any of the entities would have the ability to assess a capital levy or bond. White Pine County’s tax base was approximately $120 million; it would have to be at $350 million in order to do those things. Mr. Johnson stated that economic development was the key to capital improvement.
Vice Chairwoman Giunchigliani asked if Mr. Johnson meant the bond issues had been defeated in a public vote. Mr. Johnson explained that White Pine County was unable to even bring a bond issue to a vote because in order to secure general obligation bonds, the property tax rate had to be higher than it was. Even if the voters wanted to build a school, White Pine County would be unable to do that because the county was “capped out.” Mr. Johnson pointed out that in 1998, the White Pine County School District had two years remaining on a capital levy, but had lost those two years because of the tax cap. Vice Chairwoman Giunchigliani commented she had chaired a committee on school construction at that point, and there had been some appropriations to White Pine County to help that situation.
Mr. Johnson indicated he had obtained information from the Nevada Department of Employment, Training and Rehabilitation (DETR). He showed a chart comparing employment rates in December 1997 to employment rates in December 2001 (Exhibit C). There had been approximately an 80 percent job loss associated with the mining industry, and the total job loss was approximately 23 percent. Mr. Johnson noted that if more current data were available, it would show an additional decrease in employment since December 2001. In the previous month, three businesses had closed in White Pine County, and those employment numbers would continue to decrease if no changes were made.
The largest support of the economy, government services, had realized a gain. Mr. Johnson said there had been 70 jobs available at Ely State Prison; 50 of those jobs had been filled upon closure of the mines. That had been a significant factor in maintaining and stabilizing the exodus of employment in White Pine County.
Mr. Johnson described the situation with assessed values using a chart (Exhibit C). The property values had decreased approximately 40 percent. Another chart showed a decline in the Local School Support Tax, which was a reflection of the drop in sales tax. Page 6 showed the combined tax rate, and Mr. Johnson noted that White Pine County had been at the tax cap since 1997. He pointed out the city of Ely no longer received operating funds from property taxes, which had been “crippling” to the local government. The state rate would remain, and any gains in the property tax would benefit the state through the $.15 rate that the state received. There was a graph that showed the decline in the White Pine County population as well as the decline in student enrollment.
Mr. Johnson stated that White Pine County’s most significant problem was the lack of funding for infrastructure and improvements. He listed infrastructure resources and explained why those resources were not options. He said that bond issues and a capital construction tax override were not options due to the property tax cap. Medium-term financing had to be paid back, which would come from the operating fund, and meant obtaining performance contracts, which was hard to justify through local government operation. Lease/Purchase financing had to be paid back as well. A.B. 353 rollover would not be available for 16 years, which was the amount of time left on the bonds issued to build the high school. A residential construction tax had not been imposed as it was based on new construction, and as new construction was scarce in White Pine County, the tax might be seen as an incentive for people to buy older homes and fix them up rather than buying new homes with a higher property value. Another option was a school bond guarantee, which was not available due to the tax cap. Mr. Johnson noted that White Pine County School District had previously taken advantage of that option, and had refinanced its debt to take advantage of lower rates. The final option was A.B. 597, which had already been implemented, and White Pine County received approximately $80,000 per year. It appeared that the only option was an appropriation from the Legislature.
Mr. Johnson provided a list of the efforts White Pine County had made toward economic development. Those efforts included:
Mr. Johnson stated the bottom line was that White Pine County needed support from the state and the federal government in order to achieve economic development. He said that funding for infrastructure was inadequate and economic development was the key to White Pine County’s independence.
With that in mind, the White Pine County Coalition had been formed, which was comprised of local governments and agencies in White Pine County, in order to identify primary issues with which White Pine County needed assistance each legislative session. The issues for the current legislative session were the acquisition and renovation of the rail line and the renovation of a locomotive, which was vital to the tourism industry in White Pine County.
Mr. Johnson indicated that there were several important components to the purchase and renovation of the rail line. One of those components was the purchase price. The Los Angeles Department of Water and Power was asking a price approximately half of what the value was, and there was a market. Another entity could buy the railroad, scrap it, and sell it to another short line railroad, which would be devastating to the economy of White Pine County. Another component was environmental indemnification, which provided Los Angeles Department of Water and Power with an incentive to sell. The final components were the negotiation of a surety bond and the cost of renovation.
Mr. Johnson directed the Committee’s attention to page 13 (Exhibit C), which listed estimated project costs. He noted those costs would change based on the implementation. The project was estimated to cost $2.5 million, and it appeared that White Pine County had $2 million secured. Federal funds had been identified, as well as a Community Development Block Grant for $250,000, a Rural Utility Service Loan, a Mt. Wheeler loan, in-kind community support, and the legislative request. Those sources would provide the funding.
Mr. Johnson pointed out there were economic benefits to the project. It was a critical marketing tool, not only for tourism and recreation, but also for economic development. Mr. Johnson opined that White Pine County had lost the opportunity for 300 jobs by not having the rail service. Those 300 jobs would have helped mitigate the impact of the decrease in mining and provided a more stable workforce. Other economic benefits were the possible establishment of a power project and the preservation and development of the oil industries. Three counties—Elko, White Pine, and Nye—could greatly benefit from the purchase and renovation of the rail line. Mr. Johnson indicated his presentation was over and he would be willing to answer questions.
Vice Chairwoman Giunchigliani asked what the total population was in White Pine County. Mr. Johnson said the population was approximately 8,600, but it had been over 10,000 in 1997.
Vice Chairwoman Giunchigliani observed that it appeared White Pine County had worked hard and found additional sources of funding, rather than approaching the Legislature first. She requested that Mr. Johnson provide information as to how much money was received from the Commission on Economic Development and the Tourism Commission. She asked if the White Pine County Commission had taken a position regarding the Governor’s proposed tax increases.
Mr. Johnson replied that the White Pine County Commission had not taken a position, but in his capacity as a school district finance officer, he was in favor of more state revenue as 75 percent of the school district budget was dependent on that revenue.
Vice Chairwoman Giunchigliani remarked that would be a question asked of those groups coming to the Legislature for money. In response to Mr. Johnson’s observation that White Pine County was facing a significant reduction in the school district budget, Vice Chairwoman Giunchigliani acknowledged White Pine County School District would be affected by the hold harmless policy. She commented that the tax cap of $3.64 was a policy issue that needed to be discussed at a later time. Raising the cap would provide greater flexibility, but that would need to be addressed as a policy issue.
Assemblywoman Chowning remarked that she had participated in a rural Nevada tour and had had the opportunity to ride the Ely Ghost Train several years earlier. The city officials had expressed concern at that time regarding the economic situation. Mrs. Chowning asked if the depletion in population had affected the state of housing in the area. She wanted to know if there would be a sufficient number of people to take the jobs and available housing for them if the economic development plan was successful. She also asked if the railroad belonged to a national society or a group that would promote tourism and would bring people to White Pine County if the rail line was renovated.
Mr. Johnson said there had been indications that industry would have located in White Pine County if the rail system had been available. He mentioned that Duraflame, the makers of synthetic logs, had considered locating in White Pine County, but had not because rail services were unavailable, and rail services decreased the import and export costs of goods and materials. Mr. Johnson conceded that it was not certain that industry would move into White Pine County with the rail system, but he stated it was certain it would not without the rail system. He indicated that Karen Rajala, Coordinator, White Pine County Economic Diversification Council, would be better able to address the housing question.
Ms. Rajala responded to the question and said that White Pine County had housing available. She explained that houses had been built while Kennecott Copper Mine was open, and when it closed those houses became available. That housing stock had stabilized the market when the prison opened. Additional housing had been built when the mine reopened, but with the mine’s closure and subsequent loss in population much of that housing had been vacated. Ms. Rajala indicated that there had been movement in the housing market as Clark County residents had purchased homes as second homes or summer homes. She assured the Committee there was still housing available if industry were to move into White Pine County. Ms. Rajala remarked that people with a long-term history in White Pine County who had left for employment opportunities often returned when jobs became available, and many of those people still owned homes in White Pine County. She repeated that White Pine County had housing available and would be able to meet that need.
Mr. Hettrick related an experience he had riding Engine 93 in Ely. He and his grandson had the opportunity to ride the train and hear the personal experiences of John Mariani, who had worked for the Nevada Northern Railway for many years (See “Nevada Northern Railway” pamphlet in Exhibit D). Mr. Hettrick described the experience with great enthusiasm, and he commended White Pine County for its efforts in preserving part of Nevada’s heritage. He expressed admiration for the hard work and innovative ways in which White Pine County was raising money.
Assemblyman Parks requested a map of the 120-mile track. Mr. Johnson displayed a large map and explained where the track was in relation to Ely and the Union Pacific Railroad. He noted that half the track was in Elko County, and the Elko County Commission had been approached regarding A.B. 180 and had unanimously endorsed the project.
Mr. Hettrick interjected that there was economic viability in purchasing the track and connecting to the Union Pacific Railroad, and it would help White Pine County. He mentioned that a similar project had been discussed in Minden, Nevada, for the same reason—rail transport was very economical for industries.
Vice Chairwoman Giunchigliani noted that Section 2(a) of A.B. 180 mentioned the purchase of the track and 2(b) mentioned the industrial need, and she said that seemed to indicate a marketing plan was needed. She asked if a marketing plan had been done.
Ms. Rajala explained that White Pine County had worked with the federal Economic Development Agency (EDA) on this project and had received funding from the EDA and the Housing and Urban Development (HUD) Community Development Block Grant. That money had been used to conduct studies through RL Banks & Associates, a Washington, D.C. consulting firm specializing in railroad issues. A business and feasibility study and an engineering study had been done, as well as an environmental review, and that information had been used to estimate costs.
Ms. Rajala pointed out that the oil industry in Railroad Valley needed the railroad and had needed it for the past two years. She indicated that Steve Wilson, the manager of the Nevada operations for the Foreland Refinery, was present if the Committee wished to have more information about the oil industry in Nevada. She said the business plan had examined sustaining the oil industry, allowing the refinery operation itself to expand, and allowing that business to expand into auxiliary projects.
Ms. Rajala indicated there were other businesses already in the White Pine community, and other businesses interested in moving into the community that could use the railroad and help sustain its operation. Those other industries included metal fabrication plants, electronic assembly factories, a coal-fired plant, and the copper mining industry. Ms. Rajala informed the Committee that Kennecott Copper had been in contact with the rail foundation and had discussed reestablishing the rail line into Ruth, Nevada, as the mine might reopen given the national and international situation. There was also the option of another industry using the facilities at the mine property itself. The studies had examined all those levels and analyzed the long-term potential of the project.
In response to a question posed by Vice Chairwoman Giunchigliani regarding the EDA, Ms. Rajala responded that the EDA was part of the U.S. Department of Commerce. Vice Chairwoman Giunchigliani asked if the state had provided funding. Ms. Rajala said no and indicated that there was the possibility of additional funding from the EDA in order to complete a full renovation of the track to allow the trains to travel at higher speeds and carry heavier loads.
In response to a question regarding environmental impact, Ms. Rajala told Vice Chairwoman Giunchigliani that the track had been the subject of several environmental studies conducted from the early 1980s to the present. The process had been repeated in 2002 to account for new environmental laws and standards. As far as the coal-fired plant at Cherry Creek, a full environmental impact study would need to be done, as the last one had been done in the early 1980s and was out of date. Vice Chairwoman Giunchigliani noted that the earlier study could be used as a starting point. She asked if White Pine County had received any funding from the Commission on Tourism or the Commission on Economic Development. Ms. Rajala indicated there was a $250,000 HUD community development block grant, which came through the Commission on Economic Development. She said the county received $43,000 per year from the Commission on Economic Development for operating costs. Vice Chairwoman Giunchigliani said that money was for staffing, not for the project. Ms. Rajala pointed out that staff time had been spent on the project, but she repeated that there had not been a specific amount allocated to the railroad project.
Vice Chairwoman Giunchigliani inquired as to how the $500,000 appropriated in A.B. 180 would be used. Mr. Johnson explained that the total cost of the project was $2.5 million. The renovation process would cost $1.3 million, and the rest would be used for the purchase of the rail line. White Pine County had already procured approximately $2 million and was requesting $500,000 from the Legislature.
In response to Vice Chairwoman Giunchigliani’s inquiry as to whether it was a one-shot appropriation, Mr. Johnson said he was hoping it was a one-shot appropriation. He did not expect to return to ask for more money; however, the White Pine County tax base had to triple in order to allow the county to issue bonds and the purpose of the request was economic development. Mr. Johnson indicated that if White Pine County reached the goal of $350 million in economic development, which was approximately $250 million in assessed value, the state’s $.15 rate would generate approximately $40,000 to $50,000 per year for the state, which meant the appropriation would pay for itself in 10 to 15 years.
Assemblyman Goicoechea interjected that A.B. 180 was contingent upon the purchase of the rail line for the proposed amount as well as the relocation of industrial projects to White Pine County. Vice Chairwoman Giunchigliani thanked him and said the Committee would hear public testimony.
Terrill Trask, Student Body President, White Pine County High School, spoke in support of A.B. 180 and A.B. 181. He said that with the passage of those bills, job opportunities for returning college graduates would increase. Very few job opportunities currently existed in White Pine County. Mr. Trask noted that a population increase would add revenue from taxes, which would benefit the budget of the school district. He said that from the end of his eighth grade year to the beginning of his sophomore year of high school, the size of his class had dropped from approximately 140 to approximately 100 students, and there had been a 23 percent loss school-wide. Mr. Trask said that A.B. 180 would benefit returning graduates who had families and would like a strong education program. The railroad would create many new jobs, and he said that many businesses had been lost due to the fact that transporting goods was expensive. Mr. Trask concluded his statement by saying that he would like to return to White Pine County after attending college at the University of Nevada, Las Vegas (UNLV), but that was contingent upon being able to find employment. He urged the Committee to support A.B. 180 and A.B. 181.
John Tyson, a locomotive engineer on the Nevada Northern Railroad and a feature reporter for KOLO News Channel 8, voiced his support of A.B. 180 and A.B. 181. Mr. Tyson related a story that had taken place in 1987. The town of Curry had received its first telephone, and Mr. Tyson had been there to “see history come alive” as the 15 people of the Curry community benefited from the use of that telephone. Mr. Tyson said the story illustrated how the “past was still very much the present” in the rural communities of Nevada. In the rail yards of east Ely, the equipment and the materials were still there as though the employees had left for lunch and never came back. Mr. Tyson stated that it was the most complete and historically accurate museum in the country because it had not been built—it had been preserved.
Nevada’s short line railroad history began with the building of the Virginia & Truckee (V&T) Railroad in 1869. Mr. Tyson said the railroad had made Nevada a state by aiding the mining industry and connecting the communities. The old railroads no longer existed, with the exception of the Nevada Northern Railroad. Mr. Tyson described riding the train and said it was a remarkable experience. He praised the resiliency of the rural communities and said conditions would improve with the railroad project. Mr. Tyson conceded that it was contingent upon acquiring the railroad from the Los Angeles Department of Water and Power, but he believed that White Pine County would take advantage of the opportunities presented. He strongly urged the Committee to support A.B. 180.
In response to a question from Vice Chairwoman Giunchigliani regarding specific uses of the train, Mr. Tyson replied that there were many possible uses for the train. He referred to Mr. Hettrick’s earlier testimony and said that he had observed the way people reacted to the train. For many people, it brought back wonderful memories. He related the story of a woman whose husband had died before he was able to fulfill his wish of riding on the train, but Mr. Tyson had taken the woman and her son on the train, and it had been “a dream come true for a family that had waited many years for the opportunity.”
Vice Chairwoman Giunchigliani thanked Mr. Tyson for his testimony and informed those who wished to testify that the Committee would hear testimony on both A.B. 180 and A.B. 181.
Ray Rivera, Junior Class President, White Pine County High School, testified in support of A.B. 180 and A.B. 181. He said A.B. 180 and A.B. 181 would be a great help to the community. Three businesses had left White Pine County in the previous month, and the funding was needed in order to help the citizens of White Pine County help themselves. Mr. Rivera said it was very important to the citizens of the community to be self-sufficient. The members of the community worked together for the good of the community. He said that if the money were appropriated by the Legislature, White Pine County would work to realize the needed economic development. Mr. Rivera said that without the Legislature’s help, the economic situation would become worse. He hoped to attend UNLV and pursue a career in the pharmaceutical field, and he would like to return to Ely, Nevada, but without the economic development that would come from A.B. 180 and A.B. 181 that would not be possible. Mr. Rivera urged the Committee to support those bills.
Mark Bassett, Executive Director, Nevada Northern Railway Museum, spoke in favor of A.B. 180 and A.B. 181. In regard to A.B. 180, he said the museum felt the saving of the rail line was critical to the saving of the museum; that rail line was the connection to the outside world. Locomotive 93 had been used in Utah during the 2002 Winter Olympics to haul passengers. It was very important to the museum that that connection was maintained and once the track was purchased, the museum would volunteer to help move freight over the line. The museum locomotives and the museum crews would be used until the economics justified hiring additional employees.
Mr. Bassett then addressed A.B. 181 and said that many people were unaware of the railroad museum and facilities in Ely, Nevada. The museum was given to the community by Kennecott Copper and consisted of 49 buildings and structures on 40 acres of land. The entire complex was the Nevada Northern Railway East Ely Yard and Shops National Historic District. Mr. Bassett said the museum had been working with the state’s historic preservation office to change its status to national landmark status. If national landmark status were to be awarded, that would be critically important to the community as it would ensure the Nevada Northern Railway a place in history.
Mr. Bassett said the railway collection consisted of three steam locomotives, and the oldest locomotive was 94 years old. There was a steam rotary snowplow and a steam crane. Mr. Bassett indicated the museum was in the process of restoring the crane and once it was operating, it would be the only operating steam crane in the country, and possibly the only operating steam crane in the world. There were five historic diesel locomotives, the oldest of which was 60 years old, and six coaches, the oldest of which was 117 years old. There were 30 miles of track, and the museum had raised over $2 million in the past years in order to maintain the complex.
Mr. Bassett explained that there were difficulties with the federal requirements that had been mandated by the Federal Railroad Administration (FRA). He explained that the steam locomotives were a “mobile pressure vessel.” The steam in the locomotive was approximately 300 degrees Fahrenheit with 185 pounds per square inch of pressure. If the locomotive was not maintained and the crews were not trained properly, there could be a “catastrophic failure” of the locomotive, which meant the boiler of the steam locomotive exploded, lifting the locomotive off its running gear. If the train was moving, the train would continue to move forward while the boiler dropped back down, which was extremely dangerous. Mr. Bassett informed the Committee that a tourist railroad in Pennsylvania had experienced a partial catastrophic failure, and members of the crew were injured seriously. That incident had prompted the FRA to become involved, and the FRA had discovered that maintenance standards were not consistent throughout the country. The FRA had devised new standards that the museum had to meet in order to keep the steam locomotives running.
Mr. Bassett said the museum had raised and spent approximately $300,000 to keep Locomotive 93 in service, and that locomotive now met all FRA requirements. Meeting the FRA requirements had allowed the museum to use Locomotive 93 and take it to Utah for the 2002 Winter Olympics, which had been a positive way to represent the community to the world. The museum had discovered that, while Locomotive 93 only powered 30 percent of the trains, 70 percent of the passengers during the last season had ridden behind Locomotive 93. The steam-powered locomotives were the biggest tourist draw, and if the museum was unable to comply with federal requirements and was unable to use the steam locomotives, there would not be as many tourists. If there were not as many tourists, revenue would be lost and White Pine County would be in a very difficult situation. Mr. Bassett noted that the museum had doubled its operating schedule, which had increased the number of riders. If Locomotive 93 and Locomotive 40 were in service, the steam train schedule could be increased to seven days a week. That would be critically important during the centennial celebration, which would begin in 2005 and continue through 2006.
Mr. Bassett explained that other tourist railroads in remote areas hauled 50,000 to 200,000 passengers in a season. The museum had only hauled 7,200 in its last season, and the goal was to have 20,000 passengers per year. With the proper development, Mr. Bassett hoped that number could be as high as 50,000 passengers. He said that the railroad had come to Ely in 1906, and there had been a special train brought from Salt Lake City, Utah, to commemorate the occasion. The museum was working to bring the convention of the American Association of Private Railroad Car Owners to Ely in 2006 for the centennial celebration.
Mr. Bassett said the museum was also training the next generation to take care of the equipment. The museum was a member of the Tourist Railroad Association and the Association of Railroad Museums, and the museum had advertised throughout the country. Mr. Bassett showed the Committee a tourist handbook and a magazine that contained an ad for the Nevada Northern Railroad Museum, which said “still steaming.”
The museum also offered the opportunity to rent and operate the locomotives on the main line. There was only one other tourist railroad operation in the country that offered a similar opportunity, and so people from around the country came for that unique experience.
Assemblyman Marvel mentioned that he had been the chairman of the Committee on Ways and Means in 1985 when an appropriation of $125,000 had been given to restore the warehouses. He asked if the museum still possessed over $2 million in inventory.
Mr. Bassett indicated that was correct and explained that when the Kennecott Copper Mine closed, the company left all the equipment and tools behind. The spare parts and tools were sufficient to maintain the equipment, but it required specialized knowledge to be able to use the tools in order to maintain the equipment and meet the FRA requirements.
Mr. Goicoechea addressed the Committee regarding A.B. 181, which appropriated funds for the White Pine County Historical Railroad Foundation for the renovation of museum buildings and Locomotive 40. Mr. Goicoechea requested that those from White Pine County in attendance stand to demonstrate their support. Much of the audience stood, and Mr. Goicoechea indicated that it was a long trip, but many of the citizens of White Pine County had come to show their dedication to the community.
Mr. Goicoechea emphasized that A.B. 180 and A.B. 181 were separate bills with separate appropriations. A.B. 180 was focused on economic development, while A.B. 181 was focused on maintaining the existing infrastructure of the railroad, which was extremely important to the tourism industry.
G.P. Etcheverry spoke to the Committee and identified himself as the former mayor of Ely. He had also served as a city councilman in Ely from 1963 to 1977, and as the executive director of the Nevada League of Cities from 1977 to 1993. He was born and raised in Ely and McGill. He had served in the United States Navy and eventually returned to Ely and worked for Kennecott Copper. Mr. Etcheverry said he had the opportunity to run Engine 40 during the summers when he was younger, and he loved the railroad. He indicated that he had approached the Legislature several years earlier to obtain funding for the initial railroad project, and he felt the history of the project was important.
Mr. Etcheverry concluded his remarks by stating that he was proud to be from White Pine County and he was proud of the other citizens of White Pine County who had come to show support. He urged the Committee to support A.B. 180 and A.B. 181.
Robert Hadfield, Executive Director, Nevada Association of Counties, voiced his support of A.B. 180 and A.B. 181. He said the Nevada Association of Counties believed that the renovation project and the rail line project were part of the state’s overall economy. Those projects were an important part of maintaining economic viability throughout the various regions of the state. Mr. Hadfield opined that the railroad was an incredible treasure, and he indicated that he was a member of the State Railroad Commission, which was attempting to rebuild the Virginia & Truckee Railroad. He said that the 17 counties of Nevada urged a continued commitment to maintaining historical treasures in Nevada and maintaining the economic viability of White Pine County, which would help every community and county in the state.
Joe Guild, representing the Southern Nevada Water Authority, expressed his support of A.B. 180 and A.B. 181. He said that the Southern Nevada Water Authority was interested in White Pine County due to the water issues, and the Southern Nevada Water Authority was committed to helping White Pine County secure appropriations from the Legislature. He urged the Committee to support A.B. 180 and A.B. 181.
Benjamin Blinn, a citizen from Elko County, addressed the Committee. He reminisced about a high school rivalry between Elko and Ely and expressed his support of his old rivals. He thought it was important to work with the rural counties to import jobs rather than export them, and he urged the Committee to support A.B. 180 and A.B. 181.
Speaker Perkins echoed the sentiments expressed by Mr. Hettrick and said he had also had the opportunity to visit the northeastern part of Nevada. He noted that it was a long trip from Ely on a Monday morning, and he commended the resiliency and dedication of the White Pine County citizens. He expressed a desire to help the community if it were possible.
Vice Chairwoman Giunchigliani also commended the representatives from White Pine County for their presentations. She closed the hearing on A.B. 180 and A.B. 181.
Vice Chairwoman Giunchigliani introduced a list of BDRs for the Committee’s consideration.
ASSEMBLYMAN GOLDWATER MOVED FOR COMMITTEE INTRODUCTION OF BDR 35-1258.
ASSEMBLYWOMAN CHOWNING SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
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ASSEMBLYMAN GOLDWATER MOVED FOR COMMITTEE INTRODUCTION OF BDR S-1326.
ASSEMBLYMAN PARKS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYWOMAN CHOWNING MOVED FOR COMMITTEE INTRODUCTION OF BDR S-1260.
ASSEMBLYMAN GOLDWATER SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN GOLDWATER MOVED FOR COMMITTEE INTRODUCTION OF BDR S-1227.
ASSEMBLYMAN BEERS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN GOLDWATER MOVED FOR COMMITTEE INTRODUCTION OF BDR C-300.
ASSEMBLYMAN HETTRICK SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN GOLDWATER MOVED FOR COMMITTEE INTRODUCTION OF BDR S-1321.
ASSEMBLYMAN GRIFFIN SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYWOMAN McCLAIN MOVED FOR COMMITTEE INTRODUCTION OF BDR 23-1316.
ASSEMBLYMAN BEERS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYWOMAN CHOWNING MOVED FOR COMMITTEE INTRODUCTION OF BDR 3-1246.
ASSEMBLYWOMAN GIBBONS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN GRIFFIN MOVED FOR COMMITTEE INTRODUCTION OF BDR 53-1263.
ASSEMBLYMAN PARKS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYWOMAN LESLIE MOVED FOR COMMITTEE INTRODUCTION OF BDR S-1228.
ASSEMBLYMAN BEERS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYWOMAN McCLAIN MOVED FOR COMMITTEE INTRODUCTION OF BDR 42-1257.
ASSEMBLYMAN ANDONOV SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYWOMAN McCLAIN MOVED FOR COMMITTEE INTRODUCTION OF BDR 23-1319.
ASSEMBLYWOMAN LESLIE SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
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ASSEMBLYWOMAN CHOWNING MOVED FOR COMMITTEE INTRODUCTION OF BDR 52-1249.
ASSEMBLYMAN PARKS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN GOLDWATER MOVED FOR COMMITTEE INTRODUCTION OF BDR S-1253.
ASSEMBLYWOMAN GIBBONS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYWOMAN CHOWNING MOVED FOR COMMITTEE INTRODUCTION OF BDR 43-1259.
ASSEMBLYWOMAN McCLAIN SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN ANDONOV MOVED FOR COMMITTEE INTRODUCTION OF BDR 40-1252.
ASSEMBLYWOMAN GIBBONS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN HETTRICK MOVED FOR COMMITTEE INTRODUCTION OF BDR 45-1261.
ASSEMBLYMAN BEERS SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
ASSEMBLYMAN PARKS MOVED FOR COMMITTEE INTRODUCTION OF BDR S-1219.
ASSEMBLYMAN GOLDWATER SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
********
Upon finishing the BDR introductions, Vice Chairwoman Giunchigliani called a short recess at 9:35 a.m.
Vice Chairwoman Giunchigliani called the Committee back to order at 9:53 a.m. She read a statistical report to the Committee regarding the number of budget accounts reviewed and the number of bills heard. She commended the Committee for their hard work. Vice Chairwoman Giunchigliani then indicated the Committee would hear additional explanation of the Treasurer’s budgets.
ELECTED OFFICIALS – TREASURER HIGHER EDUCATION TUITION ADMINISTRATION (101-1081) – BUDGET PAGE ELECTED-92
John Adkins, Chief Deputy Treasurer, Office of the State Treasurer, informed the Committee that Mr. Krolicki, the State Treasurer, had a prior engagement and would not be in attendance. Mr. Adkins would be speaking in his place. He indicated that information had been provided to the Committee, and he would answer any questions regarding that information.
Vice Chairwoman Giunchigliani said she wished to discuss the actuarial studies and the value of investments. She quoted from Exhibit E, the “Actuarial Valuation of the Nevada Prepaid Tuition Program,” which had been prepared by Milliman USA and stated, “. . . the Nevada Prepaid Tuition Program does not have sufficient assets, including the value of future installment payments, to cover the actuarially estimated value of the tuition obligations under all contracts outstanding as of the valuation date. . . .the Fund has assets that fall short of the best estimate of the obligations by roughly $4.6 million or 6.6 percent of obligations. Unfavorable future experience would adversely affect this position.” She asked Mr. Adkins to address that information.
Mr. Adkins pointed out that the $4.6 million total included loan repayment. In response to Vice Chairwoman Giunchigliani’s question regarding the loan, Mr. Adkins explained that the loan was $2.6 million. If the amount of the loan was removed from the total, the actual liability of the program itself was approximately 3.9 percent.
Vice Chairwoman Giunchigliani commented that the loan needed to be repaid to the state regardless, and she pointed out that the recommended amount for payment on the loan was only $25,000 per year. Mr. Adkins said that $25,000 was the amount for the first two payments. After FY2005, the monies from the College Savings Plan and the Prepaid Tuition Trust Fund would be used to pay the debt, and the schedule would allow the debt to be paid in ten years. Vice Chairwoman Giunchigliani remarked that the source of the loan payback was a policy decision that had not yet been made. She noted that the Treasurer’s Office had recommended that the College Savings Plan pay $125,000. Mr. Adkins indicated that was correct, and said the schedule outlined payments of $25,000 in FY2004 and FY2005 and a payment of $125,000 in FY2006. After FY2006 there would be a yearly increase of $50,000 per year, and the final payment would be made in FY2013.
Vice Chairwoman Giunchigliani returned to the discussion regarding the Prepaid Tuition Trust Fund and said that the actuary for the fund, Milliman USA, estimated the fund balance had a 39 percent probability of adequately satisfying program obligations. She remarked that Mr. Krolicki had previously indicated that percentage was closer to 62 percent, but the actuary rated it at less than 40 percent.
Vice Chairwoman Giunchigliani asked how many people were involved in the Prepaid Tuition Trust Fund, and Mr. Adkins replied that there were approximately 8,400 individuals. Vice Chairwoman Giunchigliani asked if it would be possible to “freeze” the program and stop accepting new individuals while a determination was made whether it was the market that was causing the problems or the program itself. Freezing the program should prevent further harm to the 8,400 individuals already enrolled.
Mr. Adkins indicated that would require a change in the parameters of the program, but he thought the focus should be on finding a way to handle the excessive increases in tuition. He said that if tuition had remained the same as originally projected, the program would have been able to absorb the losses in the stock market. He pointed out that the actuarial valuation was dated June 30, 2002 (Exhibit E), and the stock market had improved since then. The program was approaching a 50 percent probability of satisfying program obligations and only needed approximately $5 million over the next 15 years. Mr. Adkins conceded that the program did have problems, but the problems were not as severe as they had been in June 2002.
Vice Chairwoman Giunchigliani acknowledged that tuition increases were a very large problem, but she wanted assurance that the individuals who had already enrolled in the program would not be hurt.
Assemblyman Goldwater informed the Committee that he intended to offer a motion at a later date to remove the marketing costs from the base budget. He opined that spending $370,000 for marketing was excessive. In reply, Mr. Adkins said the $370,000 was the total amount for Budget Account 1092 and Budget Account 1081. Mr. Goldwater reiterated his intent to offer a motion eliminating the marketing expenditures. He said he had received a breakdown of the expenditures from the Treasurer’s Office, which detailed the costs of public relations and contracts with outside agencies, and he felt those were unnecessary. He insisted that “word of mouth” was the best and most effective marketing tool, and with the current problems, there should not be active promotion of the program. Mr. Goldwater commented that $370,000 put back into the program would help the program meet its obligations.
Assemblyman Beers agreed with Mr. Goldwater. He then asked if a person who had purchased a five-year contract the previous year would have an increased payment the second year due to the tuition increases. Mr. Adkins indicated that would not be the case as the contract had already been purchased for a specific amount. Mr. Beers verified that the individual who had purchased a contract at the previous year’s tuition amount would not pay more the next year, even if tuition had increased. Mr. Adkins indicated that was correct and said it was a fixed payment. An individual who purchased a new contract would pay a different amount as the increased tuition would be taken into account for the new contract. Mr. Beers commented that entering into a long-term contract with a fixed payment to fund a changing liability seemed irresponsible. Mr. Adkins explained that it was a fixed rate with respect to the individual’s purchase, but the Treasurer’s Office used the rate for investment purposes. The 7.5 percent interest rate over a long period of time would account for tuition increases with interest earnings.
Mr. Beers inquired if there were federal requirements that mandated the amount of payment be fixed. He opined that the unfunded liability would worsen with the increasing tuition and a fixed payment would not solve that problem. He suggested that the increasing tuition be taken into account with each year of the contract. Mr. Adkins said that the pricing was adjusted annually to take into consideration the increased tuition.
Mr. Beers voiced his confusion and said it seemed that the long-term contracts did not anticipate an increase in tuition above the current price of tuition as the payments were fixed. Mr. Adkins assured him the contracts did include that in the form of a 5 to 8 percent increase. Mr. Beers clarified that in addition to the time value of money that was built into the contract payments, there was a 5 to 8 percent increase in tuition costs as well. Mr. Adkins confirmed that and said if it was determined the tuition increases would be more than 8 percent, adjustments would be made.
Mr. Beers asked if the unfunded liability of the program was due to the increases in tuition, and Mr. Adkins explained that the unfunded liability was associated with the contracts that had already been issued. Mr. Beers asked if that meant the program had added a new component to account for the increase in tuition. Mr. Adkins explained that the program had always taken increasing tuition into account, but the tuition had increased more than was expected. The increase from 5 percent to 7.5 percent in the contracts had not been included in the actuarial valuation. Mr. Beers asked if there had been a 5 percent growth factor for tuition in the initial contracts, and Mr. Adkins replied that there had been. Mr. Beers pointed out that Mr. Adkins said the growth had been between 5 and 7 percent. Mr. Adkins clarified and said that it had been more than that. He said that each contract issued took into consideration the interest rate changes, the tuition increases, and equity appreciation over the length of the contract. The Treasurer’s Office did not control those factors, but rather estimated what those changes would be. Those estimates were used to adjust the cost of a contract, which was then taken to the Board of Education for review and used as the price for the next year. That evaluation was done annually.
Mr. Beers commented that he had expected to hear that the program’s difficulties were due to losses in the stock market. Mr. Adkins reiterated that the problems were due to the tuition increases. Mr. Beers inquired what the increase in tuition had been, and Mr. Adkins said it had been approximately 15 percent, a much greater increase than the 7.5 percent planned for possible increases. Mr. Beers commented that if there were no tuition increase in 2006, the unfunded liability percentage would decrease considerably, and Mr. Adkins agreed. Mr. Beers said the plan would improve in years without a tuition increase but would suffer in years with a tuition increase in excess of the 5 to 7 percent in the contract. Mr. Adkins said the percentage in the contract would be dependent on the future tuition prices, which meant the percentage could be much higher if tuition continued to increase.
Mr. Beers expressed his confusion and said that he thought Mr. Adkins had told him that every contract factored in some percentage of annual increase in tuition. Mr. Adkins said the contract factored in the percentage of increase for the year in which the contract was signed; that percentage stayed with that contract. Mr. Beers said if three years passed without a tuition increase, an individual could purchase a contract the third year, which would have an assumption of no increase in tuition. If tuition then increased the following year, that contract would become unfunded, but being part of the pool would provide some protection.
Mr. Beers repeated that the program currently did not assume an annual increase in tuition, but the price was determined by the current increase in tuition. He pointed out that tuition had increased 15 percent the previous year, and he asked if that meant a contract purchased now would assume a 15 percent tuition increase next year, which was unlikely. He remarked that an individual buying a contract now would be paying too much.
Mr. Adkins replied that the increase in the cost of a contract would actually be between 27 and 50 percent because of the high tuition costs. Mr. Beers said that hypothetically tuition had been raised to a level where colleges were able to operate and colleges might not have to raise tuition for a while, but an individual purchasing a contract would pay for an assumed growth rate based on previous growth. Mr. Adkins indicated that was incorrect. Mr. Beers asked if the contracts sold currently were based on the current cost of tuition. Mr. Adkins explained that the price of the contracts was determined by the current prices, the current interest rates, and the current tuition cost. The cost of tuition was determined by the Board of Regents, and the Board of Regents supplied that information to the Treasurer’s Office. Mr. Beers asked if the contracts included an inflation component, and Mr. Adkins indicated there was an inflation component.
In response to Mr. Beers’ question regarding tuition and inflation, Mr. Adkins explained those factors were taken into account; however, contracts were configured using the current information. The next year’s contracts would change in order to reflect new information, and that process would continue annually. If the Treasurer’s Office was aware that tuition costs would increase a certain percentage over time, that would be used to determine the cost of the contract. The problem was that there had been a large increase in tuition, which had not been accounted for in the contracts sold previously. Mr. Adkins stated that the unfunded amount that the actuarial report mentioned was due to that tuition increase. Mr. Beers reiterated that the contracts had been sold without an assumption that tuition would increase by the time the child was of college age. Mr. Adkins disagreed and said that had been included in the contracts, but the Board of Regents had raised tuition far more than they had projected they would.
Mr. Beers inquired if the formula used to construct the contracts had been created specifically for Nevada’s use or was imposed by an external authority. Mr. Adkins informed Mr. Beers that the Board of Regents determined tuition costs and the Board of Trustees for the Prepaid Tuition Trust Fund had control over the program and the pricing of the product sold. Mr. Beers commented that the Board of Trustees could construct the contracts to assume an increase of 3 percent greater than inflation in the cost of tuition until the time the child would attend college. That would increase the price of the contract and decrease the possibility of unfunded liability. Mr. Adkins said that was correct, and Mr. Beers indicated that Mr. Adkins’ information had been helpful.
Mr. Adkins added that there had been a suggestion that as it was a program for the citizens of Nevada, there might be an agreement between the Executive Branch and the Board of Regents to accept the scholarships at the price paid. Mr. Beers pointed out that Nevada already had one of the lowest percentages of higher education costs borne by tuition, and that would exacerbate the problem.
Assemblyman Hettrick asked if the program could be changed from a defined benefit to a defined contribution. The cost of a contract would be calculated using the same formula, but rather than guaranteeing that the contract would pay for tuition at a future date, the contract would ensure that a specific amount of money would be received, and that amount could be used to pay for tuition without guaranteeing that there would not be an additional cost to the participant. Mr. Adkins said the Board of Trustees could change the program if they desired, and he believed that would be allowed by the federal 529 program.
Mr. Hettrick opined that the Board should offer both types of contracts; the Board should examine the possibility of changing to a contract that would not force the state to guarantee funding if tuition rates were higher than expected or if the stocks did not perform well. He stated that if those contracts were sold, and then tuition increases were greater than projected, the Prepaid Tuition Trust Fund would always need an infusion from the state to pay for the shortfall unless the stock market performed remarkably well. Mr. Adkins reiterated that those changes would need to be made by the Board of Trustees. He advised presenting those ideas to the Board for consideration.
Vice Chairwoman Giunchigliani thanked Mr. Adkins and indicated the Committee might consider sending a letter to the Board of Trustees recommending changes to the plan. She commented that Mr. Adkins had stated the reason for the shortfall was due to tuition, not the poor performance of the stock market. She indicated that there had been a loss of almost $4 million in stocks. Mr. Adkins explained that there had been a decrease in market value at that time, but it was not an actual loss because it was based on fair market value at the time. Any gain that might be made in those stocks would still be of benefit to the program, and the loss was an unrecognized loss that was included in the reserve.
Mr. Beers asked if the unrecognized loss in the portfolio was included in the calculation of the unfunded liability, and Mr. Adkins replied that both recognized and unrecognized losses were included. Mr. Beers pointed out that meant a portion of the increase in the unfunded liability was attributable to the loss of fair market value of the portfolio at the measurement point. Mr. Adkins said that was correct and the loss had been approximately $3.2 million. The tuition increase accounted for $8.5 million of the unfunded liability.
Vice Chairwoman Giunchigliani thanked Mr. Beers for clarifying the situation, and she commented that the actuarial soundness of the program would have been better if the Board of Regents had not increased tuition. Mr. Adkins agreed and pointed out that the Board of Trustees was considering a 27 to 50 percent increase in the cost of contracts to account for the increase in tuition. Vice Chairwoman Giunchigliani observed that including an inflation rate for each year of the contract might be better than increasing the cost by 50 percent. Mr. Adkins said he believed there was an inflation rate included, but the rate might need to be increased as well.
Assemblyman Goldwater said he had calculated a time line of the unfunded liability, and he indicated the liability would be a problem in the future rather than in the short-term. He conjectured that using the $370,000 budgeted for marketing to help the program in the short-term might create a surplus in the long-term. It would be a budget-neutral solution. He pointed out that $275,000 would probably be a large enough sum given the time value of money and an interest rate of 7 percent. In response, Mr. Adkins said that would help, but that amount of money would not be enough to eliminate the unfunded liability because of the increasing tuition costs.
Mr. Goldwater replied that it was a matter of short-term versus long-term, and he defined short-term as five years or less. The tuition increases should not hurt the program within five years unless there had been a problem with the program in addition to the unexpected tuition increases. He conceded that unanticipated tuition growth might be harmful in the long-term. Mr. Adkins agreed and said that the Board of Regents provided 5-year and 10-year projections, and the 5‑year projections tended to be fairly accurate and were already used in constructing the contracts.
Mr. Goldwater repeated his earlier question and asked if an infusion of $275,000 from marketing, given a growth factor of 7 percent, would solve the problem. Mr. Adkins indicated he would have to see the calculations, but he did not think that $275,000, or even the full $370,000, would solve the problem. Because of the large increase in tuition, the problem was associated with prior sales, and he did not think that the $370,000 would be enough to eliminate the unfunded liability. Mr. Adkins said he would be willing to examine that possibility, and he thought it would help, but it would not solve the problem.
Mr. Goldwater stated that he needed to have confidence that when the state started a program, the state had a sound business plan for the program. Mr. Adkins reiterated that if the tuition costs had not increased, the program would not have the current problems. He assured the Committee the Treasurer’s Office was working to improve that situation.
Mr. Goldwater observed that there were many computer programs available for college planning and all of them assumed a very aggressive growth rate of approximately 10 percent annually. Mr. Adkins reiterated that the Treasurer’s Office did not determine the growth rates with respect to tuition. The Board of Regents provided that information. The Treasurer’s Office could assume that function, but that would require more work and more employees. Mr. Goldwater pointed out that Milliman USA did the actuarial assumption, and Mr. Adkins replied that Milliman USA did the actuarial assumption, but that assumption was based on the forecast provided by the Board of Regents. Mr. Goldwater opined that the element of common sense was missing.
Vice Chairwoman Giunchigliani agreed with Mr. Goldwater and remarked that it seemed good ideas were often presented to the Legislature without a solid business plan to ensure success. She commented that the program had been “cheaply sold” and should be changed to include an inflation factor.
Vice Chairwoman Giunchigliani changed subjects and asked Mr. Adkins to comment on the senior deputy reclassification. She did not recall any justification for the position change. Mr. Adkins explained that the reclassification was essentially a transfer. Two positions were being eliminated, and another reclassified, which resulted in a savings of approximately $62,600. Vice Chairwoman Giunchigliani stated that reclassifications were of some concern because they had an impact on the budget later on, and she still had not heard justification for the change. She asked Mr. Adkins to review that request and provide more information. She indicated the Committee would hear the next budget.
ELECTED OFFICIALS – MILLENNIUM SCHOLARSHIP ADMINISTRATION (260‑1088) – BUDGET PAGE ELECTED-96
Vice Chairwoman Giunchigliani asked Mr. Adkins to comment on the sustainability of the Millennium Scholarship payments and the proposed program changes that had been discussed at the previous meeting of the Board of Regents.
Mr. Adkins said that it appeared that the Millennium Scholarship program would be sustainable through 2006 in the worst-case scenario or 2008 in the best. Mr. Adkins indicated that it did not matter which year it was because the problem had to be corrected now due to the increase in the number of individuals opting to use the scholarship, and the program was running out of funds. He opined that the problem could be easily corrected with the securitization of tobacco funds or by changing the eligibility criteria for the Millennium Scholarship.
The criteria changes suggested were an increase in high school grade point average (GPA) from 3.0 to 3.10 for the class of 2005 with an additional increase to 3.25 for the class of 2007. The college GPA would be raised from 2.0 to 2.6, and the scholarship would have to be used within 6 years rather than 8 years, with exemptions for military service.
Vice Chairwoman Giunchigliani asked if those recommendations had been presented to the Board of Regents. Susan Moore, Ed.D., Executive Director, Nevada Millennium Scholarship Program, said the proposal had been presented to the Board of Regents simply to inform them; the Legislature determined criteria.
Vice Chairwoman Giunchigliani remarked that the recommendations seemed to be contrary to the intent of the program, which had been to encourage young men and women, who would not have chosen to attend community college or a four-year college, to attend one of Nevada’s schools. While raising the GPA would reduce the number of students using the scholarships, it would seem to conflict with the original intent. She asked if the Treasurer’s Office had examined the possibility of using a means test on the income of the parents of applicants. Mr. Adkins indicated that particular option had not been examined. Vice Chairwoman Giunchigliani said that might be an alternative to raising the GPA, and she asked if the program could continue to operate without any changes. Mr. Adkins said that without the changes the program would not be able to operate past 2008 or, in the worst case, past 2006.
Mr. Adkins reiterated that securitization would solve that problem, and he indicated that legislation was being prepared. Mr. Hettrick inquired whether it was the securitization or the eligibility criteria that would solve the problem, and he remarked that he would rather keep the eligibility at eight years and add a means test as he felt that would help those who truly needed the scholarship. Those who did not need it would find another way to attend college.
Mr. Adkins repeated that the criteria changes would be at the discretion of the Legislature, and amendments could be made to the bill that had been prepared. Mr. Hettrick indicated that the bill draft request (BDR) for securitization was BDR 18-299, and it instituted the program changes which Mr. Adkins had previously described; however, Mr. Hettrick was under the impression that either the securitization or the criteria changes would solve the problem. Mr. Adkins agreed that either or both would fix the problem. Mr. Hettrick asked what would happen if the changes were implemented without securitization. Mr. Adkins indicated that would ensure the program through 2010. Mr. Hettrick pointed out that adding a means test could change that, and Mr. Adkins said those changes would have to be recalculated. He emphasized that the changes should be made as soon as possible while there was a minimum number of participants in the program.
Mr. Goldwater stated that he was very concerned with Mr. Adkins’ proposal. Mr. Goldwater believed that securitization would not save the program and over time would remove money from the program. He opined that the problems with the program and the way in which the Treasurer’s Office had handled the program did not inspire confidence that a large sum of money from securitization would be a solution. Mr. Goldwater pointed out that the original legislation establishing the Millennium Scholarship Program had given the Board of Regents the ability to determine criteria, including a means test, and he felt those changes currently proposed should be made by the Board of Regents. He voiced his concern that securitization would not fix the problem, and General Fund monies would have to be used.
Mr. Adkins pointed out the projections would change depending on the amount securitized, which would most likely be between $400 million and $500 million.
Assemblyman Andonov said he had noticed in looking at the projected cost spreadsheet (Attachment A of Exhibit F) there were two main factors of that projected cost: eligibility and actual utilization. He asked Mr. Adkins to comment on the decrease in utilization. Mr. Andonov also questioned the percentage of eligible students, as it appeared that even with the changes, there seemed to be a cap of the total number of students eligible in 2007. With grade inflation and the rapid growth in population, it seemed the percentage of eligible students would continue to grow. Mr. Adkins agreed that there was grade inflation and the proposed change in the high school GPA requirement was meant to maintain the integrity of the program.
Mr. Andonov opined that the projected costs understated the actual cost, and that needed to be addressed before a decision was made regarding securitization or any other proposed change.
Dr. Moore responded to Mr. Andonov’s earlier question regarding the decrease in utilization and said that one of the factors used in the projection was the number of eligible students who had chosen not to use the scholarship, and that was approximately 27 percent of eligible students over the three years since the inception of the program. She indicated that she had worked with the University System to determine when those who had used the scholarship would graduate, and many of those individuals would be graduating in 2004 and 2005, which would also account for the decrease in utilization.
Vice Chairwoman Giunchigliani requested that Dr. Moore provide a list of students by high school who had qualified for the Millennium Scholarship, and a list of those who qualified but did not use the scholarship. She commented that it might be a good idea to target those schools that did not have any students attending school on a Millennium Scholarship. Dr. Moore informed the Committee that a baseline study had been approved in the previous legislative session, and the report would be ready in April 2003.
Vice Chairwoman Giunchigliani noted that there was a 2 percent administrative cap in the Millennium Scholarship Fund, and it appeared that would be exceeded. Mr. Adkins indicated that was correct, and said, depending on the scenario, that would affect FY2004 or FY2005. The cap had been exceeded by $3,000, but he claimed that problem would be solved with securitization. If securitization did not occur, adjustments could be made to cover the $3,000, particularly with adjustments to the $74,000 enhancement for a baseline study. He conceded that if the amount increased, it would be a problem.
Vice Chairwoman Giunchigliani reiterated that there was a 2 percent administrative cap in statute, and it could not be exceeded. She asked how Mr. Adkins intended to solve that problem. Mr. Adkins explained that with securitization, the cap would no longer be 2 percent, it would actually be 0.5 percent for the purposes of monitoring the securitization. He suggested that if securitization did not occur, the budget should be altered and the enhancement of $74,000 should be removed.
Vice Chairwoman Giunchigliani asked if that percentage in administrative costs was included in the securitization bill to which Mr. Adkins had referred. Mr. Adkins explained that 2 percent of the large amount securitized would be excessive so the percentage had been reduced from 2 percent to 0.5 percent.
Vice Chairwoman Giunchigliani asked if he had provided that information to the Committee because she wished to see it in writing. She repeated that the statutory limit was 2 percent, and it appeared that the budget had exceeded that 2 percent. Mr. Adkins reiterated that it would change from 2 percent to 0.5 percent with securitization due to the increase in the fund balance. Vice Chairwoman Giunchigliani said that was dependent on securitization, which had not yet been approved by the Legislature. She asked how Mr. Adkins intended to fix the problem without securitization. Mr. Adkins said the elimination of the enhancement of $74,000 would be the other option.
Mr. Beers remarked that if the fund balance were drastically changed, the administrative cap would need to be reevaluated. He pointed out that securitization did not change the fact that the 2 percent administrative cap had been exceeded. With a large increase in the fund, the administrative costs would be less than 2 percent, but the percentage would need to decrease in proportion to the increase. Mr. Adkins agreed and insisted that the change to 0.5 percent solved the problem. Mr. Beers remarked that only the Legislature had the ability to change that percentage, and if they chose they could change that percentage from 0.5 percent to 0.4 percent. Regardless, the current 2 percent cap had been exceeded. Mr. Beers repeated that if the fund balance were increased, the administrative cap would need to be decreased. Mr. Adkins explained that with the current budget proposal, the 0.5 percent of the larger fund was comparable to 2 percent of the current fund. Mr. Beers repeated that the administrative expenses were too high and had exceeded the cap.
Speaker Perkins asked what 0.5 percent of the securitized fund equated to in terms of the current fund. Mr. Adkins said it was approximately the same amount with respect to the administrative costs. Speaker Perkins stated that the administrative cap was 2 percent based on the ongoing cash flow. He inquired whether 0.5 percent of the securitized fund was the same amount of money. Mr. Adkins said the amount was approximately equal.
Assemblyman Hettrick stated that the account had exceeded the 2 percent administrative cap by $3,000, and 0.5 percent of the securitized fund would retain that $3,000. Mr. Adkins admitted that the fund would retain that $3,000 and additionally provide approximately $30,000. Mr. Hettrick said the overall administrative expenditures were increasing with the 0.5 percent of the securitized fund. Mr. Adkins agreed but stated the expenses would not necessarily increase, the amount allowed under the administrative cap would increase.
In a change of subject, Mr. Andonov returned to the intent of the Millennium Scholarship Program and inquired how the success of the program was measured. He said the success of the program was dependent on reaching those individuals who might not have attended college otherwise as well as retaining individuals who might have chosen to attend a college out of state. He remarked that there were individuals from other states who moved to Nevada to get the scholarship and attend school, but then left the state, which was not the intent of the program. He repeated his question and asked how success would be measured in future studies.
Dr. Moore indicated that many of those questions would be answered in the baseline study that had been recommended by Governor Guinn in the previous legislative session. That study would examine the effect of the scholarship on academic performance at the high school level, student intent to attend college, and academic performance at the college level. Mr. Andonov asked if the study examined whether the recipients of the scholarship intended to remain in Nevada after graduation. Dr. Moore said that was a question the University of Nevada, Reno (UNR), Center for Applied Research, would be asking in the next study.
Vice Chairwoman Giunchigliani noted there had been an appropriation of $74,000 for the baseline study during the last legislative session. In response to Vice Chairwoman Giunchigliani’s question regarding the terms of the contract, Dr. Moore replied that the total request for the biennium was $74,000, and the studies would be expanded to include those questions asked by the Committee.
Due to time constraints, Vice Chairwoman Giunchigliani asked the Treasurer’s Office to return in order to discuss the College Savings Trust budget. Dr. Moore and Mr. Adkins agreed to provide additional testimony at a later date.
Vice Chairwoman Giunchigliani introduced a BDR for the consideration of the Committee.
ASSEMBLYMAN BEERS MOVED FOR COMMITTEE INTRODUCTION OF BDR 38-687.
ASSEMBLYWOMAN CHOWNING SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
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Assembly Bill 253: Makes supplemental appropriation to State Distributive School Account in State General Fund for unanticipated shortfall in Fiscal Year 2002-2003. (BDR S-1224)
Vice Chairwoman Giunchigliani opened the hearing on A.B. 253. She informed the Committee that the bill did not need to be acted on immediately, and the information would be more complete at a later date.
Douglas Thunder, Deputy Superintendent for Administrative and Fiscal Services, Department of Education, explained that the supplemental appropriation reflected the downturn in the economy following September 11, 2001, and the subsequent decrease in the receipt of the local school support tax. He said that approximately $44 million from the FY2003 budget had been used to meet obligations in FY2002. The $44 million, coupled with the decrease in the school support tax, meant there was a shortfall of approximately $71.5 million. Mr. Thunder pointed out that the Department of Education had a higher projection, but the projections used in the bill were from the Economic Forum, and the Department of Education supported the $71.7 million recommended by the Governor. There was an understanding that once the sales tax numbers from January were known that amount could be changed. In addition, the war in Iraq might have an effect on the sales tax, and that needed to be taken into account as well. Mr. Thunder assured the Committee the Department of Education would be willing to work with the Legislative Counsel Bureau staff to address those problems as they arose.
Vice Chairwoman Giunchigliani thanked Mr. Thunder and indicated that Mark Stevens, Assembly Fiscal Analyst, Fiscal Analysis Division, would explain Exhibit G to the Committee.
Mr. Stevens agreed with Mr. Thunder that the projections were slightly different, and he explained that the Fiscal Analysis Division had not projected the sales tax numbers extensively as of yet, but Exhibit G was intended to show the Committee the situation with the Distributive School Account (DSA), and whether additional General Fund monies would be needed for the DSA supplemental need. Mr. Stevens directed the Committee to the top of the spreadsheet (Exhibit G) and explained that the amounts were calculated using the current receipts in the state tax account for the first eight months and the next four months were projected using an average of those eight months. Those numbers showed that the account would yield approximately $37.4 million in the current fiscal year, assuming that the projection for the final four months was accurate.
On the expense side, $29.5 million had been built into the DSA by the 2001 Legislature, and an additional $7.8 million was recommended by the Governor to reduce the supplemental need of the DSA in the current fiscal year. Based on the projection for the final four months, there would be approximately $80,000 additional in estate tax funding for the current fiscal year.
On the local school support side, or the sales tax side, the projections were made using the first six months’ experience and applying that to the entire fiscal year. Thus, the in-state local school support tax currently had a 5.6 percent increase compared to one year ago, and that had been projected for the entire year. The out-of-state collections had experienced a 0.8 percent increase, which had also been projected for the entire year. With the expected increase of $80,832 in estate tax funding and the expected decrease of $369,558 in the local school support tax, $288,726 would have to be added to the supplemental need.
Mr. Stevens indicated there would be an additional month of sales tax collection information that would change the numbers slightly. He informed the Committee that in The Executive Budget there was approximately $28.1 million projected in one-time and other reversions. That included $2,774,046 to be reverted from the estate tax account to the General Fund. Based on the projections, that amount would not be available and would create a shortfall in the budget. There was approximately a $3 million need in the General Fund, $288,726 of which was in the DSA supplemental and $2,774,046 in the shortfall in reversions.
Vice Chairwoman Giunchigliani indicated A.B. 253 would be acted on at a later date when there was more information available. Mr. Thunder reminded the Committee the bill would need to be acted on before May 1, 2003, which was the date when the first payment would be due.
Vice Chairwoman Giunchigliani asked if there were any further questions, there being none, the meeting was adjourned at 10:59 a.m.
RESPECTFULLY SUBMITTED:
Susan Cherpeski
Committee Secretary
APPROVED BY:
Assemblywoman Chris Giunchigliani, Vice Chairwoman
DATE: