First The Elections, Then The Legislature

(Ed. Note: Here are two areas of Nevada law that need serious updating. The Nevada Observer Publisher David Thompson gives specific detail. As the weeks go on before the legislative session begins in February 2005, there will be more of these. For hopeful legislators, for the general public, even for those who disdain the theory of the public's right to know, these can be looked on as opportunities to improve our life.)

Listen Up Legislators, An Opportunity Knocks

by David Thompson

In legislature after legislature, the public has seen elected officials trying to find laws to sponsor and support. There’s never any shortage of suggestions from heavy campaign contributors and squalling special interest groups, so we at The Nevada Observer thought we’d add our voice to the din.

Here are some ideas for legislation that we think would benefit the entire State, instead of benefiting the interests of just a few.

State’s Financial Administration Needs A Legislative Update

Last year, the State of Nevada enacted $833 1/2 million worth of new taxes, which our readers are now obliged to pay.  Under these circumstances, waste and inefficiency in state government shouldn’t be tolerated.  So what mechanisms are in place to see that State expenditures are made strictly according to law?  The short answer is, almost none.  Nevada’s finances operate according to a weak, nearly blind and toothless administrative scheme, which makes a joke of any serious effort to monitor waste and inefficiency.  Let’s take a look at it.  

The State’s financial administration is regulated by NRS Chapter 353, which has no general criminal penalties for violations.  The lack of fundamental common sense and ordinary prudence in this scheme is incredible.  The Chapter does, however, specifically provide that it is a misdemeanor for the legislative auditor to fail to count the money and securities in the state treasury, NRS 353.080, that a person who uses an appropriated sum of money for a different purpose may be fined not more than $500, NRS 353.255, and that a person who spends more money than has been appropriated for his agency is guilty of a misdemeanor, NRS 353.260.  In other words, the only criminal penalties provided by this statutory chapter are the same as those for a person who shoplifts a pack of cigarettes.  Did the legislature think that all of the thieves in the state were in the grocery stores?

Internal accounting and administrative control in state agencies is regulated by NRS Chapter 353A, which also has no general criminal provisions for violations.  The goal of this system -- a uniform system of internal accounting and administrative control for agencies -- are set forth in NRS 353A.020.  The statute provides that the “elements of the system must include, without limitation:

                (a) A plan of organization, which provides for a segregation of duties appropriate to safeguard the assets of the agency;

                (b) A plan which limits access to assets of the agency to persons who need the assets to perform their assigned duties;

                (c) Procedures for authorizations and record keeping which effectively control accounting of assets, liabilities, revenues and expenses;

                (d) A system of practices to be followed in the performance of the duties and functions of each agency; and

                (e) An effective system of internal review.”

However, section 2 of that statute provides that the director of the state department of administration, an official appointed by the governor, “in consultation with the Committee and Legislative Auditor, may modify the system whenever he considers it necessary.”

Once the director of the state department of administration has set up his system, each state agency must generate written procedures to carry out the system of internal accounting and administrative control.

Pursuant to NRS 353A.025, the head of each agency is responsible for seeing that his agency is in compliance with NRS 353A.020, and they make an annual compliance report to the director of the state department of administration.  The director of the department of administration, in turn, makes an annual status report to the director of the legislative counsel bureau, the governor and the legislative auditor. 

In other words, each state agency head has a report prepared once a year, which tells the director of the state department of administration that they have complied with their own written standards.  The director of the state department of administration then tells the director of the legislative counsel bureau, the governor and the legislative auditor that everything is fine, and the agency heads agree with him.  

Under the director of the department of administration, there is a division of internal audits.  The chief of this division makes reports to the executive branch audit committee.  The executive branch audit committee consists of the governor, the lieutenant governor, the secretary of state, the state treasurer, the state controller, the state attorney general and a member of the public appointed by the governor.  NRS 353A.038.  The executive branch audits committee approves, with or without revision, the chief of the auditing division's annual plan for auditing agencies and his annual report. 

The chief of the auditing division employs a manager of internal controls, who is unclassified and serves at the chief's pleasure, and has such duties as the chief shall establish.  NRS 353A.047.  The auditing division is responsible for determining the adequacy of the internal accounting, administrative control, and financial management of state agencies, pursuant to NRS 353A.055. 

Under NRS 353A.075 a state agency must provide all of its accounts on request to the chief of the auditing division or his representative, with the sole exception being regulatory records involving certain financial institutions.  Incredibly, the auditing division is not allowed to conduct investigations.  NRS 353A.055(2)(b).  The chief of the auditing division is charged pursuant to NRS 353A.085(3) to report alleged illegal acts, on discovery, to the executive branch audit committee.  NRS 353A.100 provides that the auditing division's working papers are confidential and may be destroyed after 5 years.  Before such time as they are destroyed, the working papers are accessible by court order, by request of the legislative auditor, or by request of another state agency in the course of its official duties.    

Accounting and administrative control for state boards and commissions is regulated by NRS 218.825.  That statute requires all state boards and commissions created by NRS Chapters 623 through 625A, 628 to 644, 641C, 654 and 656 to engage and pay one or more public accountants or certified public accountants to perform a regular annual audit, conducted according to generally accepted accounting practices.  The regular audit is then filed with the legislative auditor and the director of the budget.  This regular audit is the same kind of annual audit that accountants prepare for companies like, say for example, Enron, in the years just before it declared bankruptcy.  There is a routine disclaimer that the audited agency chose what the auditors got to look at, and if the auditors had been able to see everything, they might have a different opinion.  

The legislative auditor may perform a special audit and/or investigation of any such board or commission whenever directed to do so by the legislative commission pursuant to NRS 218.825(3) and NRS 218.850(2).  If the legislative auditor finds any improper practices or evidence of illegal transactions, NRS 218.880 requires him to report them immediately to the governor, each member of the legislature, and the attorney general.  NRS 218.870 provides that the legislative auditor's working papers are confidential and may be destroyed after 5 years.  Before such time as they are destroyed, the working papers are accessible by court order, by request of another state agency in the course of its official duties, or when authorized by the legislative commission. 

NRS 204.010 and NRS 204.020 specifically prohibit the unlawful use of public money.  The grade of the offense turns upon the amount of money involved.  Where the amount is $250 or more, the act is a felony; otherwise, it is punishable as a misdemeanor.  The same penalty gradation applies to public officers who engage in offenses involving misappropriation of public money, and/or the falsification of accounts.  NRS 204.030.

So that’s an overview of the state’s financial administrative structure.  How does this work in practice?  That depends on who you are.  If you’re the governor or a state agency head, it works splendidly.  For the taxpaying citizen of Nevada, it works poorly.  There are no regular serious audits, ever, in the state system.  The State doesn’t conduct such audits, nor does it require such audits be regularly performed.  State agencies have nothing to fear from the chief of the auditing division of the state department of administration, since NRS 353A.055(2)(b) forbids that agency to conduct any investigations.  No state grand jury oversees and reviews the state’s expenditures.  No state agency need worry about a serious audit unless the agency chief runs afoul of powerful members of the state legislative commission. 

Even assuming that a legislative audit is ordered of the agency, nothing serious may come of it.  In December 2002, a State legislative audit discovered that the state Department of Information Technology (DOIT) had paid $300,000 in overtime to its employees.  $131,000 of that went to only five employees (yes, that averages out at over $16,000 per employee) who had claimed 3,200 hours worth of overtime.  According to news reports at the time, information technology workers claimed and were paid for overtime when they weren't even on the job.  The lead auditor said there were virtually no controls on payroll at the department.  While DOIT director Terry Savage claimed that the employees worked far more overtime than they were paid for, there were no records to substantiate his claim.

NRS 218.880 regulates reports of improper practices following a legislative audit.  Section 1 of that statute provides:  “If the Legislative Auditor finds, in the course of his audit, evidence of improper practices of financial administration or inadequacy of fiscal records, he shall report these practices immediately to the Governor, each member of the Legislature and the head of the agency affected.”  Section 2 provides “If the Legislative Auditor finds evidence of illegal transactions, he shall forthwith report these transactions to the Governor, each member of the Legislature and the Attorney General.”  In the case of the DOIT audit, Legislative Auditor Paul Townsend said he would not be referring the audit findings to the state Attorney General for possible prosecution because the employees had been supported by DOIT’s management, which didn't see the actions as criminal.  Townsend said that since DOIT’s managers viewed these overtime claims and payments as only record-keeping discrepancies, there was no criminal intent shown. According to the language of NRS 218.880(2), this was not Townsend’s decision to make. 

Well, ladies and gentlemen of the State, that’s how Nevada’s government makes sure it isn’t misspending your money.  If you’re happy with that system, roll over and go back to sleep.  If you’re not, make sure your legislators know about it.

•••

BOND REFORM: SOME GET SPECIAL PRIVILEGES

Nevada has a large number of laws.  One of the more interesting groups of these laws deals with conditional bonds.  A bond is a promise to pay a certain sum of money.  A conditional bond is one in which the promise to pay only arises if a condition is met.    

In Nevada, the State requires bonds for certain businesses and occupations.  These bonds are for the protection of the public.  None are payable unless the bonded person fails to conduct his business in a lawful manner.  Some of the bonds are payable to the State, while others are used as a fund to satisfy the claims of persons injured by the bonded business or occupation.

However, the State of Nevada’s requirements for bonds have a number of problems:

1.  There is no uniform standard for imposing a bond requirement.  The legislature has wisely imposed a bond requirement for financial institutions, and businesses which require prepayment from customers.  However mortgage brokers – businesses which sell whole or fractional interests in trust deeds to investors -- are not required to post a bond to satisfy the claims of investors injured by illegal business practices.  In the past thirty years a number of Nevada-based mortgage brokers have gone bankrupt, costing thousands of investors scores of millions of dollars.  Many of the defrauded investors were elderly folks, and those responsible for their care.  These citizens deserve protection from unscrupulous swindlers, but so far, the legislature hasn’t seen fit to help them.

2.  There is no uniform statewide practice of imposing a bond.  While most bonds require a fixed, set amount, the amounts of some bonds – those for Motor carriers, Taxicab motor carriers and Tow car operators -- are discretionary from the beginning.  Having the amount of the bond be discretionary is a bad idea.  It violates the principle of equality before the law because it allows the authority requiring and setting the bond the power to give one business an advantage, or penalize another.  When the state officer with the discretion to set the bond amount is not an elected official, it violates the principle of accountability as well.  It also provides an unnecessary opportunity for corruption.    

3.  There is no uniform statewide practice of maintaining a bond.  Of the fifty or sixty business and professions requiring bonds, fourteen provide that the unelected state department head supervising that area can favor a business of his or her choice by unilaterally reducing its bond.  It is a bad idea to confide this much discretion in unelected officials.  Furthermore, this arrangement creates an unnecessary opportunity for corruption, in which the department head is rewarded “under the table” for reducing some bonds, or maintaining others.  Finally, in cases where the bond is maintained for the protection of the public or to satisfy persons injured by the operations of the bonded business, allowing discretionary reductions in the amount of the bond undercuts the basic purpose of the statute.  Unelected department heads have the discretion to favor one enterprise over another in these businesses and professions:

Automobile wreckers; Body shop licensees; Driver training schools; Motor vehicle brokers; Motor vehicle fuel taxes; Motor vehicle manufacturers, distributors, dealers and rebuilders; Salvage pool operators; Contractors; Dental care providers; residential facilities for Groups;  Brewers; Cigarette wholesalers; Intoxicating liquor importers; and Wine makers.

In addition to this problem, there is another.  Once the amount of the bond is fixed by the legislature, the requirement stays in that amount regardless of inflation or increased costs.  This means that the amount of the bonds fixed by the legislature need to be periodically checked to make sure that the public is still protected.  The only businesses and professions for which the law allows an increase in the bond amount are:  Bank officers, managers and employees; Employment agencies; Issuers of instruments for transmission or payment of money; and Telemarketing sellers.

For the convenience of reform-minded readers and legislators, here is a list of the types of bonds in Nevada, followed by a list of the businesses and professions for which bonds are required, and the number of the Nevada Revised Statute (NRS) requiring the bond. 

A “bullet” bond is one requiring a single set amount with no exceptions. 

At the very end is a sample NRS bond requirement, with added highlights by The Nevada Observer for points of interest.

For a complete look at all of the various bonds that are available, and the regulations under which they are covered, click here.