Minutes of the
Meeting of the Advisory Committee to the Legislative
Committee to Study the Distribution among Local Governments of Revenue from
State and Local Taxes, NRS 2185388 to 21853886, inclusive February 14, 2001 Carson City,
Minutes of the Meeting of the Advisory Committee to the
Legislative Committee to Study the Distribution among Local Governments of
Revenue from State and Local Taxes, NRS 2185388 to 21853886, inclusive
February 14, 2001
Carson City, Nevada
The meeting of the Advisory Committee to the Legislative Committee to Study the Distribution among Local Governments of Revenue from State and Local Taxes was called to order by Guy Hobbs, Chairman, on February 14, 2001, at 10:00 a.m. in Room 1214 of the Legislative Building, Carson City, Nevada. This meeting was video conferenced to Room 4401 of the Grant Sawyer State Office Building, Las Vegas, Nevada.
COMMITTEE MEMBERS PRESENT IN CARSON CITY:
Guy Hobbs, Chairman, Hobbs, Ong and Associates
Mike Alastuey, Committee on Local Government Finance
Bruce Brooks, Humboldt County
Gary Condes, City of Fallon
Marvin Leavitt, City of Las Vegas
Janet Murphy, Tahoe-Douglas District
Dave Pursell, Executive Director, Department of Taxation
Linda Ritter, City of Elko
John Sherman, Washoe County
Terri Thomas, City of Sparks
COMMITTEE MEMBERS ABSENT:
Kester Rick, Committee on Local Government Finance
LEGISLATIVE COUNSEL BUREAU (LCB) STAFF PRESENT:
Kevin Welsh, Deputy Fiscal Analyst, Fiscal Analysis Division
Ted Zuend, Deputy Fiscal Analyst, Fiscal Analysis Division
Kim M. Guinasso, Principal Deputy Legislative Counsel, Legal Division
Rochelle Trotts, Committee Secretary
Exhibit A is the Meeting Notice and Agenda
Exhibit B is the Attendance Record
I. Call to order.
Chairman Guy Hobbs called the meeting to order at 10:00 a.m.
II. Approval of Minutes from the November 2, 2000 Meeting.
The Chairman indicated that aside from the approval of the minutes there are four other items on the agenda including public testimony. The Chairman requested approval of the minutes from the November 2, 2000 meeting. Mike Alastuey moved adoption. The minutes were approved.
III. Discussion and Possible Action Regarding the Ongoing
Review of the Consolidated Tax Distribution Formula.
Chairman Hobbs noted that issues arise from time to time that cause the committee to look at different parts of the formula as it has an on-going charge to monitor the formula as it is. He said he wanted to identify some of those issues and have discussion with the Technical Committee on how best to evaluate the performance of the formula under each area. He indicated the discussion could be divided into two areas. Though they are not mutually exclusive as they deal with the same formula, he thought they could be discussed as two completely different elements. Chairman Hobbs identified the areas as follows:
The first deals with the performance of the base and the excess over time, including whether or not the excess should be separated from the base or rolled into the base, as has been the practice for the first three years. Also included will be discussion on the application of the Consumer Price Index (CPI) to the base with or without the excess being rolled into the base. He noted that what is being seen throughout the state is a degradation of the amount of excess that is available. This is partially caused by the CPI and partially caused by the performance of the revenue. The idea over time is to have as much excess as possible in those counties that are experiencing growth; however, the opposite is occurring. In various counties there are insufficient revenues to fully fund the base plus the CPI, let alone provide for any excess.
The second issue revolves around the application of statistics in the formula itself as they relate to the excess. Referring to previous discussions regarding the performance of the one-plus statistic in the formula and the gross statistics themselves (the population and the five-year moving average on assessed evaluation), Chairman Hobbs indicated the committee needed to consider whether or not those should be added in their current form, or whether there was redundancy between the two statistics. He reiterated that he thought those kinds of issues could be viewed together as they relate to that part of the formula. He said he would like the committee to provide specific directions to the Department of Taxation as to the type of analysis in either area that the committee deems appropriate.
Marvin Leavitt, Special Assistant to the City Manager, City of Las Vegas, pointed out the importance of the relationship between how well the formula is producing tax-wise, independent of how it is distributed, and the distribution of the tax. He gave the following example:
A situation where the formula is producing very well, where the local government is experiencing a large population growth, and the moving average for the assessed valuation is a benefit to them. If a particular entity’s growth comes when there is a large amount of growth in the tax itself, this produces a large excess that flows through into the base of the local government forever. Once you get that amount coming in, it then becomes the basis for the next year. If a particular local government is growing a large amount, but it comes at a time when the tax is producing a very small amount of growth, then a very different situation exists because that growth could exist and the population growth would never be recognized in the formula as long as excess did not exist.
Mr. Leavitt said the committee needs to consider the interplay between the computation of the excess and how it works into the future, as opposed to the amount of growth that a particular entity has at a particular moment in time. Mr. Leavitt said he did not know the best way to handle this situation because to give consideration to that at any moment in time, there would almost have to be two formulas running. One formula would have the base plus the CPI running side by side to this other formula where the growth statistics run separately. He believes this relates to some entities currently in Clark County where the tax is growing approximately 5-7 percent and where they might have growth equal to 15-20 percent in a particular year. Obviously, any excess over and above the CPI, which is approximately 2-4 percent, is the available revenue that is flowing into this excess. Mr. Leavitt asked how this could be done differently? The entity has a 20 percent growth, but there is only 3 percent available going into the excess. It is almost a guarantee they will feel their growth has not been recognized.
Mr. Alastuey noted that from time to time this committee has discussed possible measures to more closely synchronize the period over which the combined growth statistic is formulated with the period over which the excess is determined. He pointed out the necessity to avoid the dissonance between the spike or flattening of revenue, and the spike or flattening in the growth statistic. He said experimentally Clark County has recently run some scenarios, specific to Clark County, which would have, in some people’s perception, shown the benefit of washing some of those issues out. Perhaps at some point, he observed, those can be shared as illustrations with the committee for consideration in the long term. He said it is very clear that actions by local government or economic changes or economic realities can, over time, smooth out these relationships, but when there is a one-year revenue growth spread in a fashion that may not align with the growth statistics, the outcome is exactly as Mr. Leavitt stated.
John Sherman asked for clarification on the two issues of the consolidated tax that possibly could be discussed by the committee: Did Mr. Hobbs recall that some months ago the Advisory Committee had already agreed to look at the performance of the base and the excess over time, and how those two worked in the current formula versus some other alternative, to perhaps look toward pushing more of the dollars into the excess column over time?
Mr. Hobbs agreed, and stated his first recollection was during the last session when they became aware of the language that had been put into the bill, and the fact that the Department of Taxation was compelled to roll the excess into the base. He recalled that had created some initial concerns which are still concerns today, thus prompting his thought that it would be helpful to talk about how best to evaluate those things. Continuing, he made the following statements:
He believes that whether they are talking about the CPI or about the rolling of the excess into the base, they are really talking about the same thing. They are talking about trying to do something to preserve or generate as much excess as possible to be applied against the growth statistics. The growth statistics could be handled a number of different ways, but if there is no revenue, it really does not matter. That is why he thinks they are two very separate but important parts of the calculation.
He thinks from time to time there has been talk about simply going back and trying to separate the excess from the base and only rolling the base forward from year to year. He noted the committee had talked about the CPI’s effect on that, vis-à-vis the growth in the overall revenue, and assuming there will be no additional revenue beyond those sources that are current in C-tax (Consolidated Tax Distribution Fund), it does present a problem.
Mr. Hobbs asked the members for their thoughts that hopefully would culminate in some direction to the Department of Taxation, such as:
To help run some numbers on different scenarios that the committee thinks might make some logical sense – not simply to run the numbers - but if the members could talk for a few moments on how important the CPI is, for example, to the ongoing formula, where in the state would it be a pressing problem if there was a removal of the CPI or some factoring down of the CPI? Also, whether or not, philosophically, it makes sense to separate the excess from the base going forward or separate them to some level.
He believes Mr. Leavitt stated correctly that if you decouple the two at some point under certain revenue growth assumptions where the excess might form 10 percent of the total, you could see the inverse happening in the future if there was not some moderator put on that. Is that necessarily bad if that were to happen?
Mr. Hobbs concluded, saying he thought those were the kinds of questions the committee would like to address because it seems that dealing with the base in excess and the CPI issue, or whatever devices are modified, if any, is something that could be done in fairly short order determining whether or not there is any negative impacts created on any entities by modifying or removing CPI, for example. He said the growth statistics on the other side, and all of the different combinations of things that probably need to be evaluated, is a more complex task than simply looking at the base in excess at this point.
Mr. Leavitt wondered if they could use the last several years since they have been using the formula, as an example, to try to run it. He proposed the following run:
Take the base originally established based on the average of these two years and establish a column for that. The only change in that column would be to add to that every year the CPI so that the guarantee would be the base they started out with the CPI added every year so that becomes the guarantee rather than going from the last year and adding the CPI and then determining the excess. In the next column would be computed whatever excess is available in any year and a running total would be kept. That could be distributed by the one-plus or by the actual computing of the growth in any one particular year. If you did it as the growth in one year and had an excess that includes prior years, you really could not use the one-year growth statistic. You would have to use the one-plus, or use the total growth since inception of the formula. That way you would be keeping the base and excess separate, and the end result would be that if you end up in the county that has any time along the road, fairly substantial growth, the CPI loses its meaning because in that first column there is nothing but that, so you have no guarantee of CPI on an annual basis. You only have it as a guarantee from the original base.
Mr. Leavitt noted that over time the meaning would be lost, but it would have the effect of putting a lot more money into the excess.
Mr. Hobbs agreed that was part of what they were talking about, but he thought the analysis might have been done in some form by the Department of Taxation doing base plus CPI without rolling the excess in over the history of the formula. He stated that was one analysis that they should see. The second analysis would be the base without the CPI in it, to see what that would have done, as statewide as possible. He theorized that the concern is less in faster growing areas that have more revenue than in the slower growing areas. However, he said, the opposite might also be true. Mr. Hobbs affirmed that those two as basic runs would be helpful for the committee to examine because there are two issues: (1) getting enough into the excess column over time; and (2) what do you do with it once it is in the excess column? He said this gets the committee pointed toward an answer on the first part. He proposed the following questions.
Is there an issue with too much excess over time as was raised earlier? If so, what would that be? Are there any general concerns about considering the removal or factoring of the CPI, that is applying some value to it that would allow more of the growth in revenue to flow into the excess column as opposed to the base?
Mr. Hobbs concluded, saying he wanted to ensure that the entire Advisory Committee was of a common mind in asking for these analyses.
Mr. Alastuey agreed it was wise that the committee, at lease in the initial scenarios, aught not forget about the notion of putting some kind of a collar on the low end, because over time simply adding CPI to a base would probably lose meaning and gradually may fall completely out of touch with the formula as a result, rather than receive some poll from it. He said the committee could put in a rolling retrospective using the original base plus CPI, accept that, and then introduce some bottom end constraint. He indicated he did not know what that bottom end constraint would be and welcomed ideas from the Technical Committee, whether it would be some retrospective going back, whether it would be some percentage relationship, or what otherwise would have been calculated.
Mr. Leavitt asked if the committee were to do something with the CPI that made it meaningless, is there any real logic in having the whole excess? He explained as follows:
The idea of having an excess seems to guarantee something that is meaningful, and if there is money left over it will be called the excess. Since all CPI raises would move everything forward at the same percentage, the amount in any one year that a local government receives from the tax, you multiply that times the growth. In this case is it logical to do both the population and the assessed value growth as that duplicates the same growth in some instances? But if you took the last years, add to that the percentage relationship because of the growth, that becomes a new number. Everything is distributed by that new number. In other words, it is just a running value. We do not recognize anything to do with CPI but we take where you were last year, add growth to that, and distribute everything by that new number. Maybe in the long run that becomes the same thing as isolating the CPI in the other column. It gives a county in which there is a reasonable amount of growth, say several years of 7-9 percent growth, and the CPI is moving by 3 percent, I would expect that without seeing the numbers that the column for the CPI becomes meaningless as far as the calculation goes. Another thing the committee needs to look at is the CPI factor in those counties that have growth over the last several years that has not been meaningful. I think if you run the numbers we will see they are about the same regardless of whether anything is done with the CPI or not because there has been enough growth to cover that. Maybe that would be more meaningful if we did not have the one-plus which tends to moderate that out. If we distribute everything only by growth, perhaps that CPI would be more meaningful.
Mr. Leavitt suggested this is something the committee should examine.
Mr. Alastuey suggested the removal of the CPI, hypothetically, does have an effect, but it does not have nearly the effect of removal of a stabilizer like one-plus. He noted together they would have an effect that, over time, would be more than additive, but the CPI does have an effect. He pointed out that intuitively if there is 6 or 7 percent growth in money and 3 percent is swept off the table for CPI, then certainly growth response is left to whatever is left. So there is an effect, he concluded.
Mr. Sherman wanted to separate concepts when talking about the CPI and the growth of the underlying revenue stream. There are real anominal dollars, and the difference between those two, obviously, is inflation, and that is what the CPI is trying to get at. Fundamentally, the use of the CPI indexing of the base has meaning in that because we are still trying to get dollars to provide the underlying bundles of services to the population we are serving. Keeping that statistic in there makes sense because there are growth and revenues but not all of it is real dollars. Some of those are inflationary dollars and those local governments are still going to need to cover their cost base.
Mr. Alastuey agreed, stating that is why the committee has come to a fork in the discussion:
1) Should the committee have CPI treatment as it is now where it takes a current year growth and segments what amounts to a large portion under current economic conditions, to the base or the base-plus, leaving a lesser amount of dollars for growth allocation in the current context; or
2) Do we recognize in some form the CPI, even if it is on a base off an original year.
He noted the committee should not lose touch with it, even if it becomes less meaningful over time, and he did not want to see it go away entirely, but CPI in combination with the fact that we have a very restrictive base definition currently does have an impact. He concluded that if you leave everything else constant in the formula but remove CPI, that is the scenario in which he said there is some visible impact although not as material as other more drastic changes.
Mr. Sherman surmised that if the committee goes back to the originally defined base of the averaging of those two years, and index that with the CPI, that would be one mechanism. Dealing with the excess dollars past that, in some other form made sense to him.
Mr. Leavitt reasoned that if the committee went back to the basis of the original formula, it reads whatever amount of money received this year, if there is any additional money available in the next year, over and above that amount, the first thing that money will be used for is to make everyone whole as it relates to changes in price levels. Then, he continued, if money is left over after that, the next thing is to make money available to those entities that are growing as opposed to those entities that are not. He surmised there is a threshold question: is it a logical argument that the first money always is available to make everyone whole as relates to price changes, and anything over that goes toward growth? He pointed out that if that is changed so that there is one column, for the base plus the CPI, even though it looks like we have kept the same thing it will forever change that one basis of thought.
Linda Ritter agreed, saying she thought they must not lose touch with the fact that one of the reasons the committee included the CPI factor was that there are communities in the state that are not growing, and those communities need some protection from the loss. She said the focus is on communities growing at a rapid pace and the activity of the formula allegedly not keeping pace for a variety of reasons discussed. She concluded stating that the committee needs to keep in mind the communities that are either declining in growth or simply not growing for geographic or other reasons.
Mr. Hobbs asked how many entities exist in the state where the CPI is not an issue because the revenues do not provide enough to cover accumulated CPI over time? He stated there are two problems, that being one, and the other a number of areas in the state where the revenues do not achieve that level of base plus CPI so it is defaulting to some other distribution proration. He continued, saying there is the issue that in faster growing areas it is a less material impact because there is high revenue growth. He asked how pervasive that first problem is?
Dave Pursell replied that data is available and could be assimilated. It would be easy to review the CPI effect by the entities; it could be extracted from the database.
Mr. Hobbs asked if it is the feeling that part of what the committee wants to see happen with the formula is to make the excess over time a more sufficient component as it is applied to the growth statistics, despite any issues or concerns about the growth statistics themselves?
Mr. Leavitt concurred they want to have a situation where an entity that is growing very rapidly can take advantage of the excess. However, there is also the feeling there needs to be some type of protection built into the formula for those entities not growing at all. Conceivably, he asserted, a situation could exist where one community in a county is not growing and the rest of the county is growing fairly rapidly. If a meaningful CPI factor is not there, their revenue will remain stable in actual dollar terms forever without having any growth for CPI. He said it would not be reasonable to put anyone in that condition.
Mr. Alastuey agreed, saying he too would not want to see a complete disappearance of some notion of real dollars CPI. He said the question is: should a CPI component be applied to a fixed base rolling forward, or should a CPI be applied to the last year’s receipts which consisted of base plus excess distribution as it is now determined? He noted that is where the interplay exists between the one-plus stabilizer and the combined growth statistics, and underlying it is the level of reward that communities would receive for growing or for not growing, in the formula, because that level of reward is then placed into the base on which CPI is multiplied. He asserted that is the key difference.
Mr. Sherman touched on a more fundamental question: understanding that one of the goals of the current formula is to provide revenue to communities that are growing, whether because of population or assessed valuation, indicates some growth and demand for services, there must be the revenue streams to pay for the cost of providing those services. He said he understood that but there is the potential of behaviors that would cause local governments to make different decisions to go after consolidated taxes as opposed to having those dollars flow through to provide the basic services that were required. He said he was struggling with how one constructs a formula that does not cause unintended consequences of governments making decisions solely based on how many new C-tax dollars will be flowing to their jurisdiction.
Mr. Alastuey concurred that is the critical point, and said what Mr. Sherman pointed out was very much underlying some discussions that had recently taken place within Clark County. He declared those discussions are exceedingly important, not only in managing the differences and the relationships among entities within a county but, more importantly, toward the key policy question that only the legislators can make: how much reward for response for growth should the formula have? He described the discussions currently taking place between Henderson, the City of Las Vegas, and Clark County, as follows:
In a county where the combined growth statistics among entities are, on a sustained bases year and year, the highest in the state, these are examples at the extremes of the formula where the combined growth statistic, how it is calculated, and the application of the one-plus stabilizer have the most pronounced effects. Updating the committee, he reported that last week the managers and finance staff of Henderson, the City of Las Vegas, and Clark County met and heard proposals from the City of Henderson. He thought the committee had familiarity with these. First was to remove entirely the one-plus stabilizer to increase the allocation of growth dollars and increase the growth responsiveness or reward in the formula, again an example of an entity with high sustained combined growth statistic. Second was to entirely remove CPI from the formula for the same reason: to increase growth responsiveness and flow of growth dollars to those entities. Third was a proposal to re-base among the various Clark County entities with Henderson expressing views going back to the 1981 tax-shift, going back to the conversion to the consolidated tax formula, and a variety of numbers in terms of dollars were discussed. At the conclusion of the meeting, the managers directed their staffs to examine the proposals and report to the managers who were expected to meet this afternoon.
Some other very important discussion took place at that meeting. First, if a change is warranted, all other Clark County entities involved must be considered before any action or recommendation is made. Secondly, if a change is warranted, what is the proper instrument? Should it be by interlocal agreement, by statutory change that would be recommended by the Legislative Committee on Distribution of State and Local Taxes, or a combination depending upon the combination of changes that may be recommended? One line of reasoning is that if re-basing is considered compatible among the entities, perhaps that is best done by interlocal agreement because of the unique infrastructure and service relationships of a number of contiguous urban entities. The number is unduplicated throughout the state. For that reason, Mr. Alastuey threw out the notion that if a re-basing is considered, it might best be done interlocally. If there is a formula change, even if it is unique to Clark County and indeed the combined growth statistics in Clark County are unique, that might best be done by statute. That would also involve the other cities in Clark County and other entities in special districts. This afternoon the managers plan to meet and some of the outcomes may include a formulation of individual and collective views among the involved managers, consideration of the possibility of changes within Clark County. It is not suggested that these are issues that are typical statewide, considering the impact on other entities and the venue which other entities can be fairly treated and considered. Also, which instruments, whether interlocal or statutory or a combination, should best be involved, and if a statue is considered, give the information that comes from those discussions to the Department of Taxation so that they can run the scenarios in a fair and impartial way so that any findings that come out of the Clark County situation could be available for enactment by the legislature this session. Finally, the Technical Committee needs to be kept advised. He asked that the Technical Committee be prepared to hear any possible changes that may come of these meetings in Clark County and that the Department of Taxation also be prepared to run the scenarios and test the calculations thoroughly so that the findings are available for enactment this session.
Taking it to another level, Mr. Alastuey shared something that happened within the meeting and with other discussions. “I want to say for the record I know all of our perceptions of our role here are that the Technical Advisory Committee is a technical advisory committee only. Our role is to give legislators the alternatives they need to make the policy choices they need to make. It appears some have mistakenly believed this Technical Advisory Committee has acted as an appeals board and an appeal, if you will, of last resort in a chain of events that have had effects on some local entities to their determent, and I think we know that is not the case. I think there has been a lot of confusion and mistaken impressions that this committee is a committee of last resort, and that somehow it is in a position to not only hear appeals but to deny them. We know that the Legislative Committee on Distribution of State and Local Taxes is the appropriate authority to consider these changes and the Nevada Legislature is the proper authority to enact them. There may be some confusion in terms of the appeal mechanism. We know that there is a one-time appeal, not through this committee, but through that committee of local government finance upon the occasion of the conversion from the old formula to the new consolidated tax formula. That was a one-time appeal mechanism, it is no longer active, and we all know there is not an appeal mechanism through this committee. With that said, I think we need to stand ready to examine any proposal and see how growth is rewarded, be able to express any observations we make to our Legislative Committee in that context, and be ready to seek direction from the Legislative Committee as to how growth responsive, or how much reward for growth, this formula should offer.” Those are some comments he expressed to merge some of this discussion with the discussion taking place in Clark County.
Mr. Leavitt asked if it would be appropriate to ask the Department of Taxation if they would run a statewide scenario using actual data for the last three years where the one-plus is eliminated so the committee could see what the actual effect is. He said he would not be averse to changing the statistics where a 15 percent growth in revenue would artificially be provided. He said that the different rates of growth such as 15, 10 and 5 percent can be used to see the real effect of the different growth scenarios. He assumed the one-plus would have much more meaning when there is a large amount of revenue growth as opposed to when there is a very small amount of revenue growth. If the committee does not get into excess it will not make any difference at all. If there is a total of 5 percent of growth in revenue, a CPI of 3 percent, there is 2 percent remaining to follow growth. It seems that percentage-wise the effect of eliminating the one-plus in that situation would be more different than the percentage difference in eliminating the one-plus in a situation where there is a 15 percent growth where the CPI factor is much less significant. It may or may not work out that way in the formula, but, he said, that scenario had better be run so the committee can verify what it has thought is true. If that can be run on a statewide basis there would be enough different scenarios among the various counties that would give us the characteristics that we are going to have.
Mr. Alastuey asked if the Department of Taxation could do a separate run showing only what would happen if the base were established at the conversion year and the base would roll forward at 3 percent. That would show by entity the effect at various levels of assumed growth. It would show each of these effects with all other factors being held to the current statute. We could then test combinations of those again to see if some of those effects are additive or have a compounding effect.
Mr. Leavitt agreed with that idea. He asked Mr. Alastuey if when he spoke about making the one column 3 percent if he thought about running it up by the CPI. Yes, responded Mr. Alastuey.
Mr. Hobbs said the Department of Taxation should run one scenario that has substantially lower revenue growth to compare the performance as well as three growth scenarios, one a little over CPI, one somewhere mid-point, and one with high growth.
Mr. Leavitt agreed, adding it needs to be done that way so the committee can see the effect under varying conditions. He said that way the committee could pick up a situation like the Henderson situation where there is high growth at a time when the tax is producing a fairly low amount of growth. In that situation a dilemma exists: where a government in a county is growing much more rapidly than the revenue growth. In some counties that is not possible because they are so tied to one economy. Clark County has a situation where entities are losing population to entities having very rapid population growth. The formula needs to work on the long-term basis for entities that are growing rapidly, for entities that are not growing at all, and someplace in between. If it does not work for all three then it is deficient.
Mr. Hobbs reported on an additional variation of those runs he would like to see, going back to the point about the growth statistics and how much overlap exists between the growth statistics or redundancy. To throw a number out, one that would apply a 0.75 factor to the additive growth statistics to see what effect factoring down of some of that redundancy would have. He said he had no idea whether or not 0.25 represents the degree of redundancy, but it would give an indication of what kind of effect that has.
Mr. Leavitt agreed that was also important. If the one-plus was eliminated where growth becomes much more important, if a situation exists where there is both of them, the same growth is probably being recognized twice.
Mr. Hobbs responded that regardless of what is done with one-plus, whether it remains one, whether it is factored down to some other decimal to provide some level of stabilization and some level of relief on the other side, or whether anything is done with the growth statistics, if we do not have resources in the excess column all of that becomes meaningless as it has in a few counties throughout the state thus far. He did not think the committee should spend a lot of time thinking about their excess and how the growth factors are applied because they simply do not have the revenue to arrive at that part of the equation. The committee does not want to run into that situation and it is fundamentally important that the excess be sufficient over time to provide, through whatever math ultimately evolves from the formula, that it is meeting its objective. Both parts of that are equally important in the long run. If we think about it in the short run while we have sufficient amounts of money in the excess column, more focus on some people’s part is thrown over to the growth statistics in the one-plus. In the longer run he doubted whether or not that is the wisest course to take.
Mr. Leavitt agreed with Mr. Hobbs’ idea that it needs to work in the long run over all conditions. Over time, every local government in the state is going to go through all three of these scenarios: one where there is substantial growth, and then drops off, and then a period without any growth. It would be wise for the committee to work out something. He suggested having a working session when all the data is available to go through the different scenarios so they can outline the effect on different entities.
Mr. Hobbs suggested having enough variations on the scenarios to think of the kinds of questions that might come up, the kind of sensitivity testing that is needed.
Mr. Hobbs suggested the committee meet again within a month’s time. He asked what the Advisory Committee feels is appropriate to currently focus on. There has been discussion about the excess side of the equation. That seems to be achievable if the committee identifies adjustments to the CPI, or removal, or separation of the base in excess, and validate that it would not have substantial impact on some of the local governments that are not being considered as out front on this issue. That would be a fairly simple thing to do, language-wise and otherwise.
Mr. Sherman stated that in terms of time frames, it seems the point Mr. Hobbs raised would lead to the conclusion that the very simple analysis the committee is asking the Department of Taxation to perform regarding the CPI indexing of the base only and various growth parameters could possibly be done in a relatively short time frame and returned to the committee. The concern is if it takes a month to get the results, and then there are some other issues to work through, and then we have to go back to the Department of Taxation for additional analysis, we will be behind the eight ball. Perhaps this can be accomplished in two or three weeks as opposed to a month.
Mr. Hobbs thought the question would probably be as the department prepares those numbers: is it appropriate to share them, as they are prepared, with the members of the committee so that additional variations could be asked for at that point by individual members? Once the numbers are available the committee can set the date of the meeting.
Mr. Leavitt agreed that made sense to him. One scenario that might be interesting to run would be as follows: if there are two columns, the first one the original base plus the CPI for every year and whatever amount we come to in any year becomes the guarantee for that year. In other words, three years down the road the guarantee is the base plus CPI for three years. In the second column is the base also and added to that every year an amount equal to the growth percentage for that year plus the amount in the prior year. That is reflective totally of growth and any year with growth is included. If there is growth in the first year, no excess, it makes no difference because that will be added on. In other words, start with a base: if there is a 10 percent growth in the next year, say you start with $1,000, the growth is 10 percent. Added to that is $100 to equal $1,100. The next year there is 5 percent growth, 5 percent is added to that. In this manner the excess is distributed by that amount which recognizes growth. Once the amount is determined for that year you combine that with all the other local governments in the county and distribute the excess by that relationship. It will never agree with what the actual dollars are, nor does it need to. It will reflect the base plus everyone’s growth whenever they have it since the time of the base.
Mr. Sherman added there must still be a connection between the growth of the jurisdiction and the relative growth of the revenues themselves. If there is a high growth in population-assessed valuation, but a lower growth in revenues, those dynamics are taken into account over time.
Mr. Leavitt agreed, saying you never lose the result of your own growth whenever it occurs, and added it might be an interesting scenario simply to see how different that might be from what is currently happening.
Mr. Alastuey asked Mr. Leavitt if he was talking about synchronizing the period over which excess revenue is determined with the period over which the combined growth statistic is determined, as near as possible?
Mr. Leavitt responded that is correct. It does not make any difference when the percent of the total when the growth and revenue occurs, the share is going to be independent of that. Currently, a situation exists where one government has growth in year one, another government has growth in year two. The total growth is the same but since there is excess in year one and no excess in year two, the end result three of four years down the road could be substantially different.
Mr. Sherman added it would be confusing if any members of the Advisory Committee, after looking at the initial runs, were to ask Mr. Pursell’s department to produce more runs independently. He suggested the committee members go through Mr. Leavitt or Mr. Hobbs to coordinate those requests.
Mr. Leavitt agreed that made sense to him.
Mr. Pursell agreed that was a good idea, and gave the following example. Currently, his department is working on actual statistics to get the revenues to the committee for December’s returns. That is the only priority that will come before this. If that is not accomplished it will not matter if there is any excess or not. The only time the department will not be able to give it any attention is when it does that month’s activity for the actual distribution.
Mr. Hobbs asked for other comments from the committee or the audience. He thought the direction was clear.
Mr. Pursell asked for a restatement on which scenarios the committee wanted him to look at now so there was no question in his mind.
Mr. Hobbs clarified that the committee wanted to see going back for three years base with just CPI and not rolling the excess and base without CPI on that side of the equation. Most of the other requests were Mr. Leavitt’s concerning one-plus and different variations of growth on the one-plus side, and probably in combination with assumptions about base.
Mr. Leavitt said yes. Eliminate the one-plus and apply various assumptions of actual revenue growth to that with a high of 15, one of 10, and one of 5, and down to where growth is less than CPI - three different levels of growth assumptions. Another situation is where the base plus the CPI which serves as the guarantee, and then the base plus the running total of growth which determines how the excess is distributed.
Mr. Hobbs said there is at least one more: apply a .75 moderator to the additive growth statistics to see what effect that has on the redundancy issue and do that on some of these different combinations to see how that works with and without the one-plus, for example.
Mr. Alastuey added that in addition recognizing the proportion between the one entity and the typical growth statistic around the state which is usually a single digit or low double digit decimal. For example, .75, .50, .25, and .10 to find a level of growth reward, or range of growth award, throughout the whole continuum that people can fix their support to.
Mr. Hobbs wanted to make sure he was clear on what Mr. Alastuey was saying. Was he talking about a factor to be applied against the additive total of population and assessed value, or in the place of the one?
Mr. Alastuey replied in place of the one. He said he thought Mr. Hobbs had mentioned .75 as a substitute for the one. He suggested .5, .2, and maybe even a .1.
Mr. Hobbs said he was referring to a factor that would be multiplied times the additive of the population and the assessed valuation statistic to remove any redundancy. He was not convinced that .25 is that amount.
Mr. Alastuey retracted his suggestion because it was in the context that perhaps Mr. Hobbs had suggested a substitute for the one. If he talked about something to take the redundancy out of the population assessed valuation additive he would agree with Mr. Hobbs.
Mr. Leavitt responded the committee should run both because he did not know if they would have the same effect.
Mr. Hobbs agreed with Mr. Leavitt. He thought Mr. Alastuey’s point was well taken and wanted to make sure from Mr. Pursell’s perspective, the committee was clear what was being applied where. He wanted to see the sensitivity in responsiveness of applying a factor to the additive growth statistics. It may or may not do much. With one in there it probably does not do that much but we will see. Whether the number needs to be a whole number of one, or a fraction between zero and one to give everyone a sense at what levels would actually achieve any difference. Most committee members who have run those understand it is somewhere below .5 in the place of .1 where we actually start to see some real responsiveness. We might want to do one, .5, .25, and .10, just to have an idea in place of the one. That is a lot of different variations, but it would tell us a lot and allow us to work most expediently at the next meeting.
Mr. Leavitt thought that once one of these gets set up, the changing from .25 to .5, or whatever, the committee will have essentially done the work. We should provide enough latitude so that after one of these is run, if it is obvious that something else needs to be done that can be accomplished before we meet again.
Mr. Sherman wanted to make it clear in his mind: all of the various scenarios, we are going back through the last three years of actual performance under the current formula and will have a side-by-side comparison of the scenario under analysis versus the actual.
Mr. Hobbs confirmed. We will end up with more than six or seven scenarios because some need to be done in combination with others to test responsiveness of not just making one change at a time, but making one, two, or three changes at a time. We can work with Mr. Persell’s staff to identify those and get them out as soon as possible. He reminded the committee that all numbers must come through the Department of Taxation to be verified.
IV. Discussion and Possible Action Regarding the
Mr. Hobbs asked Mr. Leavitt to inform the committee of the findings in Mineral County.
Mr. Leavitt reported there had been discussion at a prior meeting that one of the things proposed to begin the process of determining the fiscal health of the counties was to make actual on-site visits. Members of the committee visited Mineral County with representatives of the department, the Nevada Association of Counties (NACO), and Bruce Brooks.
Mr. Brooks reported the objective was that before the committee started any data gathering they hear from the Board of County Commissioners regarding what they perceived the issues that were facing Mineral County. A tour of Hawthorne was taken before the meeting, including driving through the streets and looking at the condition of the infrastructure. For all the issues facing Mineral County, we came away with the idea that they have been doing pretty well. The infrastructure was not dilapidated, the Sheriff’s vehicles were fairly new, as were their street or road vehicles. They have done a lot but what we heard from them is that in the last several years they have laid off employees and have given no wage increases for three years. Of real concern for most of us was their cash position. It looked, at least from what we heard, as if they may have some difficulty making payments toward the end of this fiscal year. One major issue they brought up is that they are losing value, industries, and some of the mines are closing. Another major issue is that they floated a school bond issue in 1996 and the tax rate went up to pay the debt service on the school bond. As that rate increases, the county rate decreases. It is phenomenal: they are at the cap, 364. They virtually cannot do any infrastructure improvements to entice new industry. They cannot help themselves because they are at the cap. They are continually losing value. This upcoming fiscal year they are going to have additional lay offs. The reason Mineral County was chosen to tour was that it appeared, at least from listening to Bob Hadfield from the Nevada Association of Counties (NACO), that Mineral County has tried to do everything on their own and have not run to the legislature and asked for money or bailouts. The committee wanted to get their perspective of how they have been able to cope with some of the dramatic changes in their economies. It was Mr. Brooks’ opinion that if the committee does not come up with some solution, not just Mineral County but a number of other counties will be facing those same issues. No financial data had been looked at to date. The members of the tour were not there to tell Mineral County they had made a good or bad decision in any particular area, but simply to hear from the people who live in the community what the issues facing them are. There is a possible refunding of the school bond that may provide at least one or two cents of relief for the General Fund. The plan is to visit three of four other entities within the state but that cannot be done until after the legislative session and probably after budgets are filed. Rural economies are facing more difficult times than they have faced in 10 years and it will take some extra effort on all parts to ensure service is maintained for the rural areas.
Mr. Leavitt concurred with Mr. Brooks. In Mineral County there was a situation different than what was seen in other counties, particularly in those that have double duty on this committee and the Committee on Local Government Finance. There are some local governments that are responsible for their own problems. They have not done what they should have. They over spent. They do not have adequate accounting records, etc. Mineral County has done everything they could. They had a very good handle on the cash flow; they knew just where they were. They have been trying to think of everything they could to try to continue to improve the situation, but they are getting very close where they are not going to be able to provide the basic service the county needs to provide for its residents. The committee will try to visit several other counties. He said that if anyone would like to participate on those visits, they are welcome to, and to let either Mr. Brooks or himself know. This project is one of the major projects for the next year or so. If the committee does not do something fairly quickly and make some recommendations that can be implemented, there will be very severe financial problems, plus the inability to provide basic services in some of the rural counties.
Mr. Hobbs agreed. The committee has been talking about these rural issues hypothetically for the past couple of years and there are different degrees of problems in different counties. Nonetheless, the problems are getting worse and worse. One of the highest priorities is to begin to address that issue. By the next time the committee meets, or shortly thereafter, it will be very important to begin to develop a work plan to approach this analysis so that things can get started. The Department of Taxation is burdened with the normal things they have at this time of year with budget preparation and the things we asked of them today. It is going to be an extraordinarily important project and one that can be undertaken and recommendations made before a substantial crisis, or multiple crises, exist.
Mr. Leavitt said there are things that could be done even during the legislative session such as analyses on the financial statements and budgets from the counties.
Mr. Hobbs suggested that what it would evolve into is a discussion of regional economies as first tier centers for distribution. First year distribution can be a very sensitive matter. There are more and more of these kinds of circumstances in not just rural areas. One exists between Carson and Douglas with development on the boarder. It has existed for some time with Elko and Eureka and it will exist at some point in northern Clark County. One of the natural points of evolution of this is that kind of discussion which has come up topically before. Hopefully, the committee can, between now and the next interim, focus on that as well.
Local Government Tax Implications of Deregulation.
Mr. Leavitt said this would be one of the major financial problems or opportunities in the state over the next several years because there is a situation where one company owns the generation plant and one that owns the lines and one that sells the power to the ultimate consumer. We are moving into a time where one company, or several companies, owns the generation plant, another company owns the lines, and multiple companies sell the electricity to the ultimate consumer. In some counties, over half the assessed valuation comes from the electric utility. The assessed valuation is distributed based on line miles. There is a provision in the law that states that even if these items are owned by separate companies there is still a way to distribute the assessed valuation of the assets by a method that recognizes the whole. However, problems exist. For instance, an electric generation plant located in only one county with no other assets in the state. If the overall tax rate is lower in that county than it is in some of the others in which the lines pass, there might be an argument about whether they think they should to be taxed differently. There is the company that owns the lines which might pass through several counties. They receive money for the rental of those lines. Power brokers buy the electricity and sell it to the ultimate consumer, and they might not own any assets in the state - they simply sell. The committee has been able to look at the entire operation. If there is profit earned on the generation plant, through the lines, and at the ultimate sale, that is considered one transaction. That data is used as it relates to income earned to add that back into the value of the assets.
Mr. Pursell wanted the technical committee to focus on NRS 361.320, paragraph 5. He paraphrased: this is the language that says if there are two or more persons who perform separate functions that collectively are needed to deliver electric services, they would be treated like any other centrally assessed property. Those properties are valued at a state level and then that property tax is distributed to the locals. What that means is exactly what Mr. Leavitt said. Take, for example, a new power plant built in Storey County. Those owners are not going to own the transmission or distribution lines. Currently, with the public utility, they own everything, the state collectively values that total property then allocates to a county and then further allocates down to the local governments based on the line miles. In this way, the state treats separate ownerships the same just because those transmission lines are needed to get electricity to its destination. Mr. Pursell said he had talked with various individuals who said exactly what Mr. Leavitt said. These are the owners. Someone has a power plant in Storey County and the tax rate is, for example, $3. Someone else buys that power and their transmission line takes it into three or four different counties with a tax rate higher than $3. How can the power plant be taxed a higher tax rate when its property is located within one county?
Mr. Leavitt said this is going to be another major project for the committee over the next couple of years. Responsibility for determining how to handle taxation is heading in our direction. We have some big problems associated with this, both as it relates to the computation of distribution of property taxes and as it relates to distribution of sales tax among the various entities when we get into a different scenario than we have had before.
Mr. Alastuey suggested one of many directions this could lead would be an examination and assumption of additional analysis and responsibility, both on local governing boards and on the state legislature on the distribution of costs. The committee can be concerned about the treatment of centrally assessed property, how that is handled, and how the various facilities that formerly were under one ownership are now under several ownerships, how those properties are assessed, and what revenues they bring in for the benefit of the public in various counties. There are a number of other authorities, including not only the legislature and local governing boards, but the Public Utility Commission, that are probably going to be concerned about the benefit or detriment to the consumer and how rates are structured. For example, if properties change ownership and part of either generation or transmission, or any utility facility, comes under public ownership, then some people could demonstrate possible benefits to the consumer and possibly quantify those in a dollar sense. That would have to be offset against people’s calculations of any tax revenue that may be lost as a result of assumption of public ownership in these cases. It actually gets out into the relationship of what normally is provided by the private sector in this state, and bridges over from governmental responsibility into consumer relations.
Kay Grosulak, Director of Strategic Development, Sierra Pacific Power Company and Nevada Power Company, concurred with earlier discussion in that she believed centrally assessed versus locally assessed is an issue. She said it is her interpretation in reading the Nevada Revised Statutes that there is a conflict and it is best to get that resolved now. Currently, she said, there are signed agreements for seven out of nine generation units for Sierra Pacific and Nevada Power Company. Those units are expected to close as early as this summer. The state consumer advocate has asked for a moratorium, and the legislature is going to be looking at slowing down or halting all together the divestiture, but it could, under the current timetable, occur as early as the summer of this year.
Mr. Leavitt said this is a big problem and the committee will end up with a huge amount of work with the understanding that it will try to maintain some kind of financial equilibrium. It is a major problem for us when we talk about how to make whole the individual counties of the state that have been receiving money under another system. If, for instance, there is the ability to provide tax money in total equal to what has been in the past, how is that distributed to the various counties when the new situation might be very different, particularly to counties where half or more than half of their total assessed valuation comes from a source representing line miles going across the county. They probably do not have anything but line miles and they obviously are not selling very much. It is a major project.
Mr. Leavitt said these bills have now been introduced. The committee, however, is not in a position to change them. This is an informational item with a chance to review the bills and see if they represent what was intended when the committee recommended them to the full legislative committee. If there is a problem with the language, or if the language doe not represent what was requested initially, Mr. Leavitt told the members he would be glad to pass that information on to the committees of the legislature when they are heard.
Kim Guinasso said the committee members might notice the bill regarding regional facilities was absent. The reason is that we cannot set up a system without setting up a taxing district to use just the unincorporated area of a county. The intent was that no taxing district would have to be set up, but that must be done unless you want to simply make it county-to-county, which is the arrangement in Chapter 62. Those provisions contemplate counties agreeing to this. Ms. Guinasso said she needed some additional direction from the committee in terms of whether to allow counties to do this apart from just those counties that are permitted in Chapter 62 and make it regional facilities as a whole relating to the language in Public Health Safety Justice, etc. Should it be done that way or should it be done where a city has to participate and be a taxing district in an unincorporated area of the county. If the city does not participate, then they cannot create one of these things.
Mr. Leavitt said the committee is running into the situation where there is an agreement entered into by a city and a county. If a tax is levied in the city and the county levies a tax throughout the entire county, then the people in the city are paying twice. It was hoped a county could levy a tax in the unincorporated area, a city levy a tax, and then have everyone paying the same rate. As Ms. Guinasso mentioned, there is a problem. There is no ability to levy in the unincorporated county unless some kind of a taxing district is established. The committee has, of course, attempted not to establish any more of these special districts. Now it is faced with exactly what to do in this particular case.
Mr. Hobbs said he gathered from past discussions with Linda Ritter that the City of Elko represented one of the areas that may be interested in using this particular approach. Mr. Hobbs felt sure Ms. Ritter would suggest the creation of a taxing district to facilitate a city’s ability to participate along with the county. Absent that, this would have to be limited to county-to-county and thus, cooperatively, a city and a county could not avail themselves of this. Whether or not it is an issue to allow the creation of another taxing district to facilitate this is probably what we should to do.
Mr. Leavitt wondered if the committee could provide in the legislation to allow for the creation of a special taxing district for the sole purpose of providing regional facilities. It would clearly state they are not to provide any other functions, are not allowed to receive sales tax, or any other taxes.
Mr. Hobbs agreed with Mr. Leavitt, and with the caveats he placed upon it. That, he said, is what the committee is trying to avoid. However, we do not want to restrict an entity’s ability to participate in something like this.
Mr. Leavitt said the legislation should provide that the creation of one of these cannot result in the levy of taxes by two different entities for the same property for the same function.
Ms. Guinasso said that in order to do this, a county which had a city in it would have to agree with that city and then be able to do it in the unincorporated county only. For example, if those two counties were a county with one city inside, it would then be able to agree with another county/city combination, or if there were no cities, the county could do it entirely. Is that what we are looking at?
Mr. Leavitt wondered if something needed to be provided. For example, if there were an unincorporated area of a county in which a tax was levied and they entered into an obligation to finance something. Subsequent to that time, the city annexes that particular area that was in the unincorporated area of the county. Of course, the county cannot diminish the security for the debt. A system would have to be provided by which we get beyond that for this particular item. If the county had to levy on that property for the debt, and it is now in the city, and the city levied throughout the entire city, conceivably a situation could exist where both of them levy for the situation.
Carol Vilardo, Nevada Taxpayers Association, reported she had talked to Ms. Guinasso about it because she had became a contact person on this bill since it had been put to the committee. We want it within all the other property tax and financing statutes. She knew the committee did not want to do additional districts. When it was brought to the committee it was brought originally as strictly county-to-county. She thought there was a number of issues that need to be straightened out and scenarios such as Mr. Leavitt has discussed. What happens if boundaries change because of this annexation – there is potential for duplication. Her suggestion was that the committee return to the original county-to-county. At this point, that regional facility within a county could be done by interlocal agreement. Let the committee figure how to expand it on the interim so that all potential problems are covered so that we are not creating this proliferation of districts.
Janet Murphy concurred with Ms. Vilardo. The original idea was county-to-county, and she wanted to see it go through county-to-county before broadening it.
Ms. Guinasso said this is based on the original language Ms. Vilardo submitted and that the Legislative Committee voted on. Regional facility means the facility. It is used by each local government that levies a tax for its operation. This is based on old language that would probably need to be rewritten. A regional facility used by those entities that are levying for its operation, and provide services related to public safety, health or criminal justice. She specifically included within the definition a regional facility for children as that term is defined in Chapter 62.845.
Mr. Leavitt addressed Ms. Guinasso, saying that as far as logistics were concerned, the Legislative Committee approved this bill to be introduced. The committee does not have the ability to change what they have done. He did not know how much detail was included, and that might be the question.
Ms. Guinasso said that was exactly the question. The draft that Ms. Vilardo presented was based on moving Chapter 62 into Chapter 354. If county-to-county was drafted she did not think that would preclude an interlocal agreement for the use of that regional facility by an entity within the county. It would affect the intent and build upon it. That would be within what the legislature voted to approve.
Mr. Leavitt responded that was good. There would still be the ability to print an interlocal agreement that would not be at variance. The committee could do the intent and do some additional work as it relates to the overlapping situation.
Ms. Murphy made the same comment she said she always makes: “When you come into words as far as using public safety, that keeps it pretty broad and we are all on the same definition as far as that can be any type of utility.”
VII. Public Testimony.
Ms. Vilardo said she was not going to say anything until Mike Alastuey made one comment on the electric deregulation and she did not feel it was appropriate at that time to make the comment. He talked about the possibility of a government taking over because of electric rates providing electric service. She knew that has been discussed in some quarters. For a government to take over any part of it means a loss of tax revenue. The committee should run the scenarios thinking that a government who provides any sort of utility service must pay the same tax. They are going to have to because you are going to compound the problem. There might be potential impact on school districts. There might be a potential of creating a formula like the Supplemental City-County Relief Tax (SCCRT) where part of this value would recognize an entity because of the situs situation. Even if it would mean centrally assessed, situs has been a big issue. That property tax goes back on situs, but a percentage of it, because it is centrally assessed in such a peculiar situation, transitions into something that does not further hurt anybody more than already, particularly in the rural areas.
Mr. Leavitt responded he thought the committee had an interesting situation related to the taxes that came from these. It has the pesky uniform and equal provision in the constitution regarding property taxes. Currently, we distribute assessed value to the various counties and at a levy at which they levy on all other property in the county. A distribution formula tries to distribute property tax by some formula that does not take that into account. It would be interesting to see how the committee can adopt that to the constitutional provision. That is one of the challenges. Because there are differential property tax rates in the various counties, how do we adapt this kind of thing to that, and at the same time provide the revenues that they need for their operation.
Ms. Vilardo added it might be interesting to find out if the committee were to create the property tax version in this situation of the SCCRT-type of distribution, where it has at this one level money going in guarantee counties and counties that are exporting and importing. Once you solve the situs situation and how you are going to treat that, you would be looking at the rate of that county. Currently, Clark County is an exporting county to guarantee counties, and Washoe and Elko are exporting counties. It might be a case where a percentage of the revenue received, which is over what was received under the old formula, would be allowable and there would be no problem under the constitution. That is something that should be examined.
Mr. Leavitt believed the committee would have to look at that to determine if the individual taxpayer could pay the tax based on the rate in the county. Then you take that money and somehow distribute that in a different way.
Ms. Vilardo admitted she had a problem with that because it is similar to the buy downs. A letter was received by Senator O’Connell which requested this committee take a look at that issue from the Governor’s Committee. The letter was signed by Joann Kelly. Nobody had looked at the tax implication. This committee is the expert on taxes so it was thrown over here. That being the case, if you can come to some resolution that can protect some of these counties for this next budget year, the policy makers who are working on deregulation, need to know what these problems are and they need to know them before we get out of session.
Mr. Leavitt responded this simply illustrates the difficulties the committee has in dealing with this.
Mr. Hobbs thanked everyone for their attendance at the meeting. He informed the committee they would be receiving information from the Department of Taxation in the coming days, and the committee would meet again as quickly as possible. The meeting was adjourned at 11:53 a.m.
Guy Hobbs, Chairman