Budget Committee on Government Administration

BUDGET COMMITTEE ON GOVERNMENT ADMINISTRATION

The Budget Committee on Government Administration was assigned three studies. Section 3 of Senate Bill No. 2007 provided that the Legislative Council study the management structure and oversight of the Veterans Home and the selection process for the commandant or administrator of the home. Section 14 of House Bill No. 1003 provided that the Legislative Council study the Racing Commission, including its authority to schedule, promote, support, and regulate live or simulcast racing in North Dakota. Section 5 of Senate Bill No. 2159 provided that the Legislative Council study highway construction and maintenance funding, including revenue sources and distribution formulas for the state, cities, and counties. Committee members were Senators Tim Mathern (Chairman), John M. Andrist, Dave Nething, David O'Connell, and Tom Trenbeath and Representatives Larry Bellew, Curtis E. Brekke, Rex R. Byerly, Bruce Eckre, Rod Froelich, Kathy Hawken, Keith Kempenich, William E. Kretschmar, Andrew G. Maragos, Lisa Meier, Laurel Thoreson, Elwood Thorpe, and Dave Weiler.

The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2002. The Council accepted the report for submission to the 58th Legislative Assembly.

VETERANS HOME STUDY

Section 3 of Senate Bill No. 2007 provided for a Legislative Council study of the management structure and oversight of the Veterans Home and the selection process for the commandant or administrator of the home. The study also included a review of the timing of general fund expenditures by the Veterans Home.

Management Structure and Oversight

Statutory provisions related to the management structure and oversight of the Veterans Home and the selection process for the commandant are included in North Dakota Century Code (NDCC) Chapters 37-15 and 37-18.1.

The Veterans Home is under the direct supervision and governance of the Administrative Committee on Veterans Affairs. The Administrative Committee on Veterans Affairs consists of three ex officio nonvoting members and 15 voting members. The Adjutant General, the center director of the Veterans Administration, and the executive director of Job Service North Dakota are the ex officio members. The Governor appoints the other 15 members--three of whom are nominated by the American Legion, three by the Veterans of Foreign Wars, three by the Disabled American Veterans, three by the Veterans of World War II, Korea, and Vietnam (AMVETS), and three by the Vietnam Veterans of America. From its membership the Administrative Committee on Veterans Affairs designates two subcommittees--one responsible for oversight of the Veterans Home and one responsible for the oversight of the Department of Veterans Affairs.

The Administrative Committee on Veterans Affairs appoints the commandant of the Veterans Home. The commandant must be a North Dakota resident and a veteran, have a four-year college degree and a North Dakota nursing home administrator's license, and live in the commandant's residence at the Veterans Home. The commandant is appointed for two-year terms, beginning on July 1 of each odd-numbered year. The commandant of the Veterans Home is responsible for appointing all other officers needed to operate the home, subject to legislative appropriations.

The Veterans Home organizational structure is presented below:

			GOVERNOR \|
		ADMINISTRATIVE COMMITTEE ON VETERANS AFFAIRS
			\|
		SUBCOMMITTEE FOR VETERANS HOME
			\|
		COMMANDANT
			\|
\| ADMINISTRATION 5.0 FTE	\| MAINTENANCE 4.0 FTE	\| DIETARY 14.72 FTE	\| NURSING 45.87 FTE	\| ACTIVITIES 3.6 FTE	\| SOCIAL SERVICES 3.22 FTE	\| HOUSEKEEPING 9.6 FTE

The committee learned the following regarding the oversight of the Veterans Home:

The Veterans Home subcommittee reviews information relating to the Veterans Home, including reports on daily activities; daily resident census reports; minutes of safety, inspection, and fire meetings; State Department of Health and federal Centers for Medicare and Medicaid Services (CMS) surveys; audits; and budgetary information;
The Veterans Home subcommittee, in biennially selecting a commandant, conducts an evaluation in May of each odd-numbered year which considers the commandant's performance, input from residents and staff, and the dedication of the commandant;
The Administrative Committee on Veterans Affairs began placing a greater emphasis on its oversight and supervision of the Veterans Home during the 2001-02 interim by meeting monthly rather than quarterly and by changing its subcommittee structure by expanding the membership of the Veterans Home subcommittee from seven to eight members and reducing the size of the Department of Veterans Affairs subcommittee from seven to six members;
Representatives of the Administrative Committee on Veterans Affairs indicated that the current selection process for the commandant works well and does not need to be changed; and
Members of the Administrative Committee on Veterans Affairs and other veterans organizations discussed the possibility of reducing the size of the Administrative Committee on Veterans Affairs, with testimony supporting and opposing any change in the membership size of the committee.

Administrative Committee on Veterans Affairs - History and Compensation

The Administrative Committee on Veterans Affairs was created by the Legislative Assembly in 1971. The committee originally consisted of 12 voting members--three from the American Legion, three from the Veterans of Foreign Wars, three from the Disabled American Veterans, and three from the Veterans of World War I, USA. The committee membership was expanded in 1985 by three members from 12 to 15. The three additional members represent the Vietnam Veterans of America. The 1985 Legislative Assembly also replaced the Veterans of World War I, USA, with the Veterans of World War II, Korea, and Vietnam (AMVETS). Since its inception, statutory provisions relating to the Administrative Committee on Veterans Affairs have precluded committee members from being compensated for performance of their duties; however, members receive reimbursement for travel expenses in connection with their duties.

Budget and Operations

The Veterans Home consists of a basic care unit and a skilled nursing care unit. The basic care unit is licensed for 112 beds, and the skilled nursing care unit is licensed for 38 beds. The average length of stay for individuals in the skilled nursing care unit is three years while the average length of stay for residents in the basic care unit is seven years.

The following schedule presents the legislative appropriations and authorized FTE positions for the Veterans Home for recent bienniums:

Biennium	FTE	General Fund	Estimated Income	Total
1997-99	82.71	$2,038,504	$5,370,495	$7,408,999
1999-2001	84.61	$2,272,926	$6,150,712	$8,423,638
2001-03	87.01	$3,332,074	$6,099,935	$9,432,009

Sources of funding for the Veterans Home include the general fund, medical assistance funding, federal Veterans Administration funding, rent collections from residents, interest income, income from permanent lands distributed by the state Land Department, meal income, and miscellaneous income.

The committee learned that the Veterans Home receives between $130,000 and $140,000 per month from the federal Veterans Administration per diem paid on behalf of eligible veterans. The Veterans Administration rates were $22.93 per day for the basic care unit and $51.38 per day for the skilled care unit in federal fiscal year 2001 and $24.40 per day for the basic care unit and $53.17 per day for the skilled care unit in federal fiscal year 2002. The committee learned that during the 2001-02 interim the Veterans Home began applying for the Veterans Administration payments on a monthly rather than quarterly basis.

North Dakota Century Code Section 37-15-14 states that the Veterans Home general fund appropriation is only to be used for expenditures at the Veterans Home when special and federal funds of the Veterans Home are not available to pay for Veterans Home expenses. Based on information provided by the Office of Management and Budget, the committee learned that funding codes have been assigned in the statewide accounting system requiring expenditures to be charged first to special funds; however, agencies do have the flexibility to change these codes based on funding availability. The committee learned that as of February 2001, the Veterans Home had spent its entire general fund appropriation for the 1999-2001 biennium while the Veterans Home special fund cash balance was $704,000. The cash balance in the Veterans Home special fund at the end of the 1999-2001 biennium was $300,000.

At each committee meeting the Veterans Home reported on the status of its 2001-03 budget and operations. The status of the Veterans Home budget through July 2002 is listed below.

	Appropriation	Percentage of Total Appropriation	Expenditures Through July 2002	Percentage of Total Spent
2001-03 biennium appropriations and expenditures by funding source
Salaries and wages	$6,908,537	72.9%	$3,520,578	71.9%
Operating expenses	2,137,631	22.6%	1,165,710	23.8%
Equipment	88,675	.9%	29,516	.6%
Capital improvements	344,460	3.6%	178,523	3.7%
Total	$9,479,303	100%	$4,894,327	100%
Federal funds	$3,123,000	33.0%	$1,030,631	21.1%
Special funds	2,976,935	31.4%	1,709,518	34.9%
General fund	3,379,368 ¹	35.6%	2,154,178	44.0%
Total	$9,479,303	100%	$4,894,327	100%
¹ This amount includes $47,294 for the agency share of the $5,000,000 funding pool appropriated to the Office of Management and Budget for special market equity salary adjustments for classified employees.

	Federal Funds	Special Funds	Total Other Funds
2001-03 biennium appropriation of estimated income	$3,123,000	$2,976,935	$6,099,935
Projected collections through July 2002	$1,611,459	$1,498,131	$3,109,590
Actual collections through July 2002	1,879,006	1,524,440	3,403,446
Actual over (under) projections to date	$167,547	$26,309	$293,856

The committee learned that the 2001-03 Veterans Home budget was based on 95 percent occupancy in the skilled care unit and 88 percent occupancy in the basiccare unit. The committee reviewed the number of vacant beds and the occupancy percentage at the Veterans Home since 1997 as follows:

	Skilled Care		Basic Care
	Average Number of Vacant Beds	Occupancy Percentage	Average Number of Vacant Beds	Occupancy Percentage
January 1997 - December 1998	0.7	98.2%	14.3	87.2%
January 1999 - December 2000	1.1	97.1%	14.2	87.3%
January 2001 - December 2001	.6	98.4%	20.5	81.7%
January 2002 - July 2002	.1	99.7%	14.6	87.0%

The committee heard testimony from representatives of the Administrative Committee on Veterans Affairs and the Veterans Home that:

Broadening statutory eligibility criteria for the basic care unit of the home may reduce the number of vacant beds.
Reducing the residency requirement for veterans from one year to 30 days could allow easier access to the Veterans Home for veterans who live in surrounding states.
Eligibility for placement in the skilled care unit of the Veterans Home is determined by Medicaid regulations; therefore, veterans from other states are eligible for placement in the skilled care unit.
Veterans homes in 26 states and private nursing homes consider a veteran's service-connected compensation as a source of income when calculating a veteran's contribution of care. The Veterans Home does not consider this income because of a statutory limitation.

The Administrative Committee on Veterans Affairs suggested the following statutory changes relating to the Veterans Home:

Reduce the residency requirement for veterans to be admitted to the Veterans Home from one year to 30 days.
Change admission requirements for spouses and surviving spouses of veterans by reducing the number of years the spouse or surviving spouse must be married to a veteran from five years to one year and by eliminating the requirement that the spouse or surviving spouse be at least 45 years old.
Allow a veteran's service-connected compensation to be included in the calculation of the veteran's contribution to the cost of care at the Veterans Home.

The committee learned that if the proposal to reduce the residency requirement for veterans to be admitted to the Veterans Home from one year to 30 days results in an additional 10 residents at the Veterans Home, the general fund appropriation for the Veterans Home could be reduced by $201,180 as follows:

Item	Biennial Estimate
Veterans Home revenue increase	$238,120^1,2
Veterans Home cost increase	$36,940³
Potential reduction in Veterans Home biennium of general fund appropriation	$201,180
¹ Assumes all 10 residents would be eligible for federal Veterans Administration per diem ($24.40 per day). ² The revenue increase relates to federal Veterans Administration per diem ($178,120) and resident rent collections ($60,000). ³ The cost increases relate to meals ($31,026) and plant services ($5,914).

The Veterans Home anticipates the fiscal impact associated with the proposal to change the requirements for admission of spouses or surviving spouses to the Veterans Home to be less than $5,000 per biennium.

The committee learned that based on Veterans Home estimates, the proposal to allow the Veterans Home to use a veteran's service-connected compensation in the calculation of the veteran's contribution to the cost of care could result in additional collections from $20,000 to $25,000 per biennium for each eligible veteran.

Performance Audit

Section 2 of 2001 Senate Bill No. 2007 provided that the State Auditor conduct a performance audit of the Veterans Home during the 2001-03 biennium. The section authorized the State Auditor to use the services of a consultant and to review the contractual arrangements for physician services at the Veterans Home as part of the audit. The State Auditor's office contracted with Pathway Health Services, a consulting firm from Minnesota, to assist in the performance audit at a cost of $16,800, which was paid by the Veterans Home.

The committee received the performance audit report at its last meeting, which contained the auditor's findings and recommendations in the following areas:

Management and administrative structure:
1. Enhance the administrative structure and organization.
2. Improve the monitoring and oversight of the commandant.
3. Change the membership structure of the Administrative Committee on Veterans Affairs.
4. Develop a strategic plan.
5. Improve the accounting, budgeting, and financial systems.
6. Improve the admission process.
7. Update the North Dakota Administrative Code.
8. Improve personnel management.
Financial resources:
1. Ensure compliance with state laws relating to the use of the general fund appropriation.
2. Generate additional revenue from sources other than the general fund.
3. Make improvements to the use of the commandant's custodial fund.
4. Improve accountability for the use of appropriated funds.
5. Improve project accounting.
6. Improve the procurement process.
7. Automate the skilled care unit accounting process.
8. Reimburse employees for mileage at the statutory level.
9. Establish new policies for accounting, budgeting, and other financial areas.
10. Close the "petty cash" account.
Staffing and level of care:
1. Improve levels of care.
2. Improve staffing levels.
3. Monitor employee satisfaction.
4. Monitor resident satisfaction.

Refer to the report of the Legislative Audit and Fiscal Review Committee for detailed information on the Veterans Home performance audit report.

Other Activities and Testimony

The committee learned that the Veterans Home bond payment is approximately $276,000 per biennium and that nine years remain on the bond issue. The bonds were initially issued in 1990 for $1,169,000 for construction of the nursing home wing, new heating and ventilating systems, and road and parking lot improvements.

The committee learned that 1999-2001 expenditures from the veterans' postwar trust fund for veteran-related programs totaled $519,652 and the estimated June 30, 2003, balance in the veterans' postwar trust fund is $4.4 million. Money in the veterans' postwar trust fund is spent by the Administrative Committee on Veterans Affairs for veterans' purposes pursuant to a continuing appropriation.

Residents of the Veterans Home testified regarding the Veterans Home study, including comments that:

The Veterans Home provides high-quality care to its residents.
No changes are needed at the Veterans Home.
Any negative findings are not reflective of the high-quality care provided at the Veterans Home.
The staff and management of the Veterans Home listen to the concerns and ideas of residents to improve the quality of care and services.

The committee conducted a budget tour of the Veterans Home, including the gazebo, skilled care unit, chapel, multiuse room, conference room, basic care unit, and exercise room areas.

Recommendations

The committee recommends House Bill No. 1027 to change the residency requirement for a veteran to be eligible for admission to the Veterans Home from one year to 30 days.

The committee recommends House Bill No. 1028 to change the requirement for a spouse or surviving spouse of a veteran to be admitted to the Veterans Home. The bill reduces the number of years the spouse or surviving spouse must be married to a veteran from five years to one year and eliminates the requirement that the spouse or surviving spouse be at least 45 years old.

The committee recommends House Bill No. 1029 to allow a veteran's service-connected compensation to be included in the veteran's contribution to the cost of care at the Veterans Home.

The committee recommends House Bill No. 1030 to provide for a Legislative Council study during the 2003-04 interim of the future role of the Veterans Home, including the development of a strategic plan for the operations of the home and the implementation of the recommendations included in the performance audit. The bill includes a $30,000 general fund appropriation to the Legislative Council for hiring a consultant to assist in the review of the future role of the Veterans Home and the development of a strategic plan for the Veterans Home.

RACING COMMISSION STUDY

Section 14 of House Bill No. 1003 directed the Legislative Council to study the Racing Commission, including its authority to schedule, promote, support, and regulate live or simulcast racing in North Dakota. The study was also to address the effectiveness of the commission's authority to both promote and regulate racing and whether the authority is appropriate for the commission.

History and Statutory Authority of Racing Commission

The Racing Commission was established and parimutuel horse racing was authorized by the 1987 Legislative Assembly in Senate Bill No. 2319. Initially the Racing Commission was established in the office of the Secretary of State. Original members of the commission were the Secretary of State and four other members appointed by the Governor.

The 1989 Legislative Assembly approved House Bill No. 1184, which moved the Racing Commission from the Secretary of State's office to the Attorney General's office. The Secretary of State was removed as chairman of the commission, and one other member appointed by the Governor was added. This bill also established the breeders' fund and purse fund. The bill provided that one-half of 1 percent of the parimutuel pool and other wagering pools for each day of racing were to be deposited in the breeders' fund, one-half of 1 percent were to be deposited in the purse fund, and depending on the total of the pool, either 3 or 4 percent were to be deposited in the state general fund. The bill also authorized offtrack wagering on races held either in state or out of state.

The 1991 Legislative Assembly approved House Bill No. 1260 that replaced the offtrack wagering statute enacted by the 1989 Legislative Assembly with a similar statute providing for simulcast wagering for in-state or out-of-state races. This bill also created the promotion fund and provided that unclaimed tickets and breakage from each live race or simulcast program be deposited in the promotion fund. The bill also provided that the money in the breeders' fund, purse fund, and promotion fund be spent by the commission pursuant to a continuing appropriation. In addition, the bill reduced the percentage of the pools deposited in the state general fund from 3 or 4 percent to 2 or 3 percent.

The 1991 Legislative Assembly approved Senate Bill No. 2354 providing that of the Governor's five appointees, the chairman and one each must be nominated by the state chapter or affiliate of the American Quarter Horse Racing Association, the United States Trotting Association, the International Arabian Horse Association, and the North Dakota Thoroughbred Association.

The 1993 Legislative Assembly approved Senate Bill No. 2155 authorizing simulcast dog racing in the state.

The 1995 Legislative Assembly approved House Bill No. 1365 providing that for each live race or simulcast wagering pool, excluding win, place, and show pools, one-half of 1 percent of the pool must be deposited in the promotion fund. The percentage deposited in the general fund from these pools was reduced from 3 to 2.5 percent.

The 2001 Legislative Assembly approved Senate Bill No. 2381 authorizing parimutuel wagering to be conducted through account wagering and providing that an account wager may be made on an account only through a licensed simulcast services provider authorized to operate the simulcast parimutuel wagering system under the certificate system.

The 2001 Legislative Assembly also approved House Bill No. 1003, the Attorney General's appropriations bill, which appropriated $300,000 for the operating expenses of the Racing Commission of which $150,000 was from the general fund, $50,000 from the promotion fund, $50,000 from the purse fund, and $50,000 from the breeders' fund.

The bill also changed statutory provisions relating to the Racing Commission and parimutuel horse racing included in NDCC Chapter 53-06.2 to provide that:

The Racing Commission is under the supervision of the Attorney General.
The Attorney General may charge the Racing Commission for services provided to the commission.
The Attorney General rather than the Emergency Commission may authorize the Racing Commission to spend up to 25 percent of the promotion fund for operating expenses of the commission.
Compensation of Racing Commission members is $75 per day, which is an increase of $35 per day from the previous rate of $40.

Funding

The following schedule provides the legislative appropriations for the Racing Commission since 1993:

Biennium	General Fund	Estimated Income	Total
1993-95	$222,421		$222,421
1995-97	$211,300		$211,300
1997-99	$219,744		$219,744
1999-2001	$222,067		$222,067
2001-03	$150,000	$150,000	$300,000

Racing Taxes and Fees

Racing-related taxes and fees include:

For each live race or simulcast program wager on win, place, and show parimutuel pools:
1. One-half of 1 percent is deposited in the breeders' fund;
2. One-half of 1 percent is deposited in the purse fund; and
3. 2 percent is deposited in the general fund.
For each live race or simulcast program for daily double, quinella, exacta, trifecta, or other wager combining two or more horses for winning payoffs in a pool:
1. One-half of 1 percent is deposited in the breeders' fund;
2. One-half of 1 percent is deposited in the purse fund;
3. One-half of 1 percent is deposited in the promotion fund; and
4. 2.5 percent is deposited in the general fund.
Unclaimed tickets and breakage from each live race or simulcast program are deposited in the promotion fund.

The following schedule details the income, expenditures, and balances of the breeders' fund, purse fund, and promotion fund:

	Breeders' Fund	Purse Fund	Promotion Fund	Total All Funds
1993-95
Revenues	$63,093	$59,534	$126,412	$249,039
Expenditures	$76,196	$68,811	$69,603	$214,610
1995-97
Revenues	$58,683	$56,605	$183,326	$298,614
Expenditures	$110,621	$48,490	$116,759	$275,870
1997-99
Revenues	$136,088	$136,485	$331,237	$603,810
Expenditures	$72,197	$64,500	$220,938	$357,635
1999-2001
Revenues	$1,541,530	$1,541,790	$2,831,934	$5,915,254
Expenditures	$239,446	$263,640	$333,104	$836,190
2001-03(through June 2002)
Revenues	$691,259	$692,036	$1,232,633	$2,615,928
Expenditures	$272,446	$196,637	$432,591	$901,674
June 30, 2002, fund balance	$1,802,601	$1,869,611	$3,576,235	$7,248,447

The following schedule presents general fund revenues generated from racing activities since 1993:

Biennium	General Fund Revenues
1993-95	$331,373
1995-97	$235,521
1997-99	$614,566
1999-2001	$6,418,549
Fiscal year 2002	$3,680,481

Regulatory and Promotion Functions

Racing Commission regulatory functions include:

Promulgating rules and assuring compliance with applicable laws relating to live and simulcast horse racing.
Responding to horsemen's concerns and other inquiries directed toward live and simulcast racing.
Approving and licensing live racing.
Approving and licensing simulcast racing.
Monitoring live and simulcast racing by providing veterinarians, stewards, and other personnel required to assure compliance with applicable rules and regulations.

Racing Commission promotion functions include:

Administering the promotion fund to promote live and simulcast racing and oversee compliance with promotion awards.
Administering the purse fund and dispersing amounts to live racetracks to promote live racing and assure compliance by the award recipients.
Administering the breeders' fund by controlling registration and dispersing awards.

The committee learned that the Attorney General's office provides legal advice to the Racing Commission and assists the commission with its accounting responsibilities. The committee learned that the Attorney General believes it may be appropriate for the commission to be involved in both regulating and promoting racing in the state; however, as betting and racing expands, these responsibilities may need to be segregated.

The Racing Commission suggested that it be allowed to retain its license fee collections for use in performing its regulatory functions, such as hiring veterinarians and stewards, performing drug testing, and paying for other racing-related expenses. These collections, which are currently being deposited in the general fund, include simulcast license fees, live track license fees, breeders' application fees, and fines. The commission collected $15,568 from these collections in calendar year 2000 and estimates collecting from $30,000 to $40,000 in the 2003-05 biennium.

The committee learned that the costs for a three-day weekend race include approximately $2,500 for a race steward, $2,500 for a veterinarian, and $3,000 for related drug testing.

Racing Activities

Live horse races are in Belcourt and Bottineau and over 1,800 horses are registered by North Dakota breeders. Simulcast racing is the wagering on races held at licensed racetracks at another location.

The following schedule details the total amounts bet (handled) each year in the North Dakota simulcast system:

1990	$28,000
1991	$4,500,000
1992	$5,631,088
1993	$6,892,599
1994	$6,961,396
1995	$4,336,330
1996	$5,168,000
1997	$5,970,640
1998	$8,963,637
1999	$88,563,478
2000	$151,883,021
2001	$168,883,021

Of the total amounts bet in the simulcast system, approximately 80 percent is returned to the betters, 5 percent is provided to the track, 5 percent is provided to the simulcast site, 5 percent is provided to the signal carrier, and 5 percent is provided to the state.

The committee learned that the substantial increase in simulcast betting reflected in those numbers began during the 1999-2001 biennium in the Fargo area.

North Dakota Horse Park in Fargo

The committee learned that the Racing Commission in November 2000 committed funding to assist in the construction of a new live racetrack in North Dakota. Fargo and Mandan submitted proposals for a track, and the commission, in December 2000, chose the Fargo proposal. The Racing Commission allocated $2.5 million for the Fargo racetrack, including $1.5 million for the construction of a racetrack, $100,000 per year for five years for operating costs, and $100,000 per year for five years for enhancing the purses at the track.

The committee toured the North Dakota horse park, which is under construction and is located one and one-half miles west of I-29 on 19th Avenue in Fargo. The North Dakota Horse Park Foundation will own and operate the racetrack. The racetrack consists of 113 acres, 99 acres of which are operated by the North Dakota Horse Park Foundation and 14 acres of which are operated by the North Dakota State University Development Foundation. The committee learned that the land for the horse park was donated to the City of Fargo, and the city has leased the land to the North Dakota Horse Park Foundation for $1 per year for 99 years. The North Dakota Horse Park will be developed in three phases. Phase I includes construction of the racetrack, which will be six furlongs (three-fourths mile) in length; parking for 400 cars; parking for horsemen; underground utilities; bleachers for 900 people; a tent for parimutuel betting; and a portable restroom trailer. Barn space will be available for 200 horses as part of the North Dakota State University facility, which will also house the university Equine Sciences Department. Phases II and III will include construction of a grandstand, permanent restroom facilities, two more barns, and additional parking. The first racing events are tentatively planned for four weekends in August and September 2003.

The committee reviewed the funding that has been designated for the horse park as follows:

North Dakota Racing Commission grant	$2,500,000
City of Fargo tax increment financing district	1,000,000
Gift of land	597,500
Cass County economic development - Loan for land purchase	250,000
Fargo-Moorhead Convention and Visitors Bureau	100,000
Total	$4,447,500

Other Testimony

Representatives of the North Dakota Horsemen's Association expressed concerns regarding the 2001 Legislative Assembly's appropriations of funds from the promotion fund, the breeders' fund, and the purse fund for the operating costs of the Racing Commission.

Recommendations

The committee recommends Senate Bill No. 2028 to provide that any money collected by the Racing Commission from license fees and fines be deposited in the Racing Commission operating fund rather than the general fund and, subject to legislative appropriations, may be spent for operating costs of the commission. The committee learned that the estimated fiscal impact of the bill for the 2003-05 biennium is an additional $30,000 to $40,000 being deposited in the Racing Commission special funds with a related reduction of $30,000 to $40,000 in general fund revenue.

HIGHWAY FUNDING STUDY

Section 5 of Senate Bill No. 2159 directed the Legislative Council to study highway construction and maintenance funding, including revenue sources and distribution formulas for the state, cities, and counties.

North Dakota Highway System

The North Dakota highway system is comprised of 86,616 miles--7,378 miles on the state highway system, 18,949 miles on the county highway system, 3,823 on the urban system, and 56,466 miles of other roads.

State Highway Funding Sources

Article X, Section 11, of the Constitution of North Dakota provides:

Section 11. Revenue from gasoline and other motor fuel excise and license taxation, motor vehicle registration and license taxes, except revenue from aviation gasoline and unclaimed aviation motor fuel refunds and other aviation motor fuel excise and license taxation used by aircraft, after deduction of cost of administration and collection authorized by legislative appropriation only, and statutory refunds, shall be appropriated and used solely for construction, reconstruction, repair and maintenance of public highways, and the payment of obligations incurred in the construction, reconstruction, repair and maintenance of public highways.

Revenue sources as dedicated in the state constitution (motor vehicle fuel taxes and motor vehicle registration fees) provide the majority of funds used for state highway purposes. These funds are deposited in the state highway tax distribution fund and distributed in the following proportions to the state, counties, and cities:

State	63%
Counties	23%
Cities	14%
Total	100%

In addition, other revenues are deposited directly in the state highway fund and are not considered "dedicated" for highway purposes, which means those funds are not required by the state constitution to be used for highway construction. Those revenues are estimated to total $34.4 million for the 2001-03 biennium and include truck regulatory fees, driver's license fees, interest earned on the highway fund, and other miscellaneous revenues.

The following charts illustrate the sources, transfers, and uses of state highway funding for the 2001-03 biennium:

Highway Tax Distribution Fund

State Highway Fund

Federal Highway Construction Funds

Congress passed the Transportation Equity Act for the 21st century in 1998. Under this program federal funds for highway construction are provided to North Dakota in the following major categories:

Interstate - For interstate highway projects.
National highway system - For highways in the state designated as major roads or principal arterials. Approximately 2,700 miles of North Dakota highways have this designation, including the interstates and all or portions of Highways 2, 5, 12, 13, 23, 52, 57, 81, 83, 85, 200, and 281.
Surface transportation program - For the remainder of the state highway system and for city and county roads.

The Transportation Equity Act for the 21st century is effective through federal fiscal year 2003. The following schedule presents federal funding available to North Dakota for highway construction projects and required matching funds:

Highway Construction Funds (Amounts Shown in Millions)
	State Projects		County Projects		City Projects			Total
Federal Fiscal Year	Federal Share	State Share	Federal Funds	County Share	Federal Share	City Share	State Share	Federal Share	State Share	County Share	City Share	Total
1997	$70.2	$13.2	$11.1	$2.8	$19.8	$3.7	$1.2	$101.1	$14.4	$2.8	$3.7	$122.0
1998	$93.3	$17.5	$17.4	$4.4	$19.6	$3.7	$1.2	$130.3	$18.7	$4.4	$3.7	$157.1
1999	$103.7	$19.5	$22.1	$5.5	$24.4	$4.6	$1.5	$150.2	$21.0	$5.5	$4.6	$181.3
2000	$112.6	$21.1	$19.3	$4.8	$28.8	$5.4	$1.8	$160.7	$22.9	$4.8	$5.4	$193.8
2001	$124.3	$23.3	$17.1	$4.3	$27.8	$5.2	$1.7	$169.2	$25.0	$4.3	$5.2	$203.7
2002	$141.1	$26.5	$19.8	$4.9	$20.3	$3.8	$1.3	$181.2	$27.8	$4.9	$3.8	$217.7
2003 estimate	$122.6	$23.0	$11.8	$2.9	$40.6	$4.5	$5.4	$175.0	$28.4	$2.9	$4.5	$210.8
2004 estimate	$129.4	$24.3	$20.4	$5.1	$37.2	$5.9	$3.5	$187.0	$27.8	$5.1	$5.9	$225.8

Motor Vehicle Fuel Taxes and Registration Fees

The following schedule provides North Dakota motor vehicle fuel tax rates and collections and motor vehicle registration fee collections since 1992:

Fiscal Year	Motor Vehicle Fuel Tax Rate (Per Gallon)¹	Motor Vehicle Fuel Tax Collections²	Motor Vehicle Registration Fee Collections³
1992	17¢	$70,498,438	$30,086,585
1993	17¢	$72,490,271	$32,466,529
1994	18¢	$77,189,636	$30,227,902
1995	18¢	$80,762,335	$32,440,251
1996	20¢	$88,966,659	$31,975,720
1997	20¢	$97,846,402	$32,420,082
1998	20¢	$98,131,468	$32,287,883
1999	21¢	$96,651,826	$32,833,217
2000	21¢	$103,765,429	$35,596,790
2001	21¢	$103,897,220	$37,954,851
2002	21¢	$102,298,816	$36,553,200
¹ The 1993 Legislative Assembly increased the motor vehicle fuel tax from 17 cents to 18 cents per gallon for the period December 1, 1993, through December 31, 1995. The 1995 Legislative Assembly increased the rate to 20 cents for the period January 1, 1996, through December 31, 1997. In 1997 the Legislative Assembly provided for a 20-cent rate through December 31, 1999. The 1999 Legislative Assembly established the current rate of 21 cents, effective July 1, 1999.
² Motor vehicle fuel tax collections include revenues from gasoline taxes, special fuels (diesel) taxes, the special fuels 2 percent excise tax, and gasohol taxes.
³ Motor vehicle registration fees remained the same from 1991 through 1999. The 1999 Legislative Assembly increased the motor vehicle registration fees by $1 per year on motor vehicles, except for pickups 20 years or older and farm trucks which were not increased.

The committee learned that a one-cent increase from the current 21 cents per gallon tax on motor fuels and special fuels is estimated to generate $10 million per biennium, $6.3 million (63 percent) of which would be deposited in the highway fund and $3.7 million (37 percent) would be distributed to counties and cities.

Other States Highway Financing Systems

The committee reviewed other states' methods of financing highway projects. The committee learned that the majority of states' highway revenues are generated from fuels taxes and motor vehicle registration fees.

Fuels Taxes

North Dakota's fuels tax rate of 21 cents per gallon on gasoline and diesel fuels is slightly above the national average of 19.7 cents per gallon for gasoline and 19.8 cents per gallon for diesel fuel. The following schedule compares North Dakota's rate to other states in our region:

	Tax Rate Per Gallon
	Gasoline	Diesel
Minnesota	$.20	$.20
Montana	$.27	$.27
Nebraska	$.245	$.245
North Dakota	$.21	$.21
South Dakota	$.22	$.22
Wyoming	$.14	$.14

Motor Vehicle Registration Fees

The following schedule compares annual motor vehicle registration fees for selected states:

	Motor Vehicle Registration Fees¹
	Passenger Vehicle	Pickup	Farm Truck	Truck Tractor
Minnesota	$198	$198	$322	$1,760
Montana	$292	$347	$691	$1,664
Nebraska	$308	$338	$814	$2,024
North Dakota	$72	$60	$209	$1,038
South Dakota	$42	$55	$133	$1,457
Wyoming	$292	$290	$786	$2,000
Regional average	$201	$215	$493	$1,657
¹ Motor vehicle registration fees are calculated on a 1999 model year vehicle being registered for the second year in calendar year 2000. Vehicle values and weights are for typical vehicles in each category.

Other Revenue Sources

States generate additional funding for highways from a variety of other sources. The following schedule summarizes select revenue sources that are used for highway purposes in other states in addition to fuels taxes and registration fees:

Revenue Type	State(s)
Sales tax - General	Arizona, Illinois, Kansas, Nevada, Utah, Virginia
Motor vehicle excise tax	Iowa, Kansas, Michigan, Missouri, Nebraska, North Carolina, South Dakota
Motor fuels sales tax	California, Georgia, Michigan
Auto parts sales tax	Michigan
Gaming tax	Colorado
Rental car tax	Florida, Hawaii, Iowa, South Dakota, Utah
Severance tax	Arkansas, Kentucky, New Mexico, Oklahoma, Tennessee, Wyoming
Corporate income tax	Maryland
Lubricating oil tax	Alabama, Mississippi, Texas
Contractor tax	Mississippi

The committee reviewed information prepared by the Florida Department of Transportation regarding alternative transportation revenue sources. Alternative revenue sources identified include:

Vehicle miles of travel (VMT) fees - An annual assessment based on the number of miles traveled in the preceding year.
Weight distance fees - An annual assessment based on factors, including miles driven and vehicle weight.
New vehicle or auto parts sales tax - Taxes on new or used vehicle purchases or on sale of automobile parts.
Emissions fees - An annual fee based on a vehicle's emissions characteristics and on the annual number of miles traveled.
Highway right of way lease income - Collections from leases of highway right of way for fiber optic cables, cell phone towers, or other purposes.
Road-branding fee - A fee charged for naming a segment of a highway for an individual or business.

Debt Financing

Congress approved the National Highway System Designation Act of 1995, which provides federal reimbursement for debt financing costs relating to federal aid highway projects. Several states are utilizing this authority by issuing bonds to finance federal aid highway projects. These types of bonds are called GARVEE (grant anticipation revenue vehicles) bonds. Prior to passage of this Act, federal highway funds could not be used to pay interest costs. Payments of principal and interest on the bonds are paid at the same matching percentage as the highway project matching percentage that was financed by the bonds (80 percent federal, 20 percent state for most state highways).

North Dakota Highway System Needs

Based on the Department of Transportation's review of a number of plans and needs studies assessing the current and future needs of North Dakota's transportation system, the committee learned that the North Dakota highway system needs an estimated $528 million per year to adequately maintain the state highway, large city, and county road systems in their current condition and at their current level of services. A total of $710 million per year is needed to improve the roadways in the state, large city, and county road systems. North Dakota's current investment in these three systems is $320 million per year. Therefore, based on the department's report, an additional $208 million per year is needed to maintain the current system or an additional $390 million per year is needed to enhance the system.

The committee learned that based on an urban street and county road funding needs assessment completed in 2000, $72 million of county investment is being made in roads under county jurisdiction and an additional $23 million of funding is needed to adequately maintain the rural road system in the state.

At the committee's request, the Department of Transportation identified the following potential options for providing additional transportation revenue:

Increasing the motor fuel tax on gasoline, gasohol, and diesel fuel (a one cent per gallon increase would generate $5 million per year, or $10 million per biennium).
Increasing motor vehicle registration fees (a $1 increase would generate $700,000 per year, or $1.4 million per biennium).
Increasing the 2 percent special fuels tax (a 1 percent increase, from 2 percent to 3 percent, would generate $2.3 million per year, or $4.6 million per biennium).
Increasing the excise tax on the sale of new and used motor vehicles (a 1 percent increase would generate $10.75 million per year, or $21.5 million per biennium).
Dedicating a portion of the general sales tax to transportation (a 0.25 percent sales tax increase would generate $20.5 million per year, or $41 million per biennium).
Increasing the tax on rental cars (a tax of $1 per day on rental cars would generate $360,000 per year, or $720,000 per biennium, while a 1 percent rental car tax would generate $180,000 per year, or $360,000 per biennium).
Dedicating a portion of severance tax revenues on natural resources to transportation.
Imposing a sales tax on motor fuels (a 1 percent sales tax would generate $6.4 million per year, or $12.8 million per biennium at $1.20 per gallon).
Increasing the sales tax on auto parts (a 1 percent increase would generate $1.5 million per year, or $3 million per biennium).
Shifting the funding for the ethanol incentive program to another source (this change would generate $1.25 million per year, or $2.5 million per biennium).
Providing funding for the Highway Patrol from sources other than the highway fund.
Enacting a personal property tax on vehicles.
Dedicating gambling funds to transportation.
Establishing toll bridges and toll roads.
Developing private/public partnerships.
Enacting a vehicle miles of travel tax.
Enacting a weight distance tax.
Bonding for highway projects; however, a revenue source would be needed to repay the bonds.
Appropriating money from the general fund.
Enacting taxes on other petroleum products.
Utilizing corporate income tax collections.
Developing rest area concessions.
Utilizing traffic fine collections.
Increasing taxes on beer and cigarettes.
Enacting a contractor tax.
Utilizing collections from mineral leases on state-owned land.
Utilizing room tax collections.
Charging for use of highway right of way.
Utilizing collections from an annual insurance underwriters' fee.
Taxing alternative fuel sources.

The committee heard testimony from representatives of the North Dakota Association of Counties and the North Dakota League of Cities indicating that when considering potential highway tax distribution fund revenue enhancements, more traditional tax sources such as vehicle fees and fuel taxes may be more acceptable to the public than generating additional revenue from new sources.

The committee heard testimony indicating that collocating county shops and state section buildings could improve the efficiency of both state and county operations. The committee considered options to allow the Department of Transportation and political subdivisions to do collaborative highway projects with funding generated from a dedicated revenue source. The first option considered by the committee would have allowed the department and political subdivisions to collaborate on highway projects using a dedicated source of revenue and to establish a special fund for depositing and spending the funds for these collaborative projects. The second option would have allowed the department to expand the use of the state infrastructure bank to provide funding for collaborative highway projects involving the state and political subdivisions and to provide that the funds generated from a dedicated revenue source be deposited in the infrastructure bank. The committee learned that the state infrastructure bank was established by the 1997 Legislative Assembly and has been used by the state for providing loans for completing state highway projects eligible for federal participation. The funds borrowed are repaid from subsequent federal allocations and state highway fund money.

Statewide Strategic Transportation Plan

The committee received reports on the statewide strategic transportation plan being developed by the Department of Transportation. Involved in the development of the plan were representatives of the Department of Transportation, counties, cities, economic development organizations, and other state and private entities. The department held numerous transportation forums across the state to receive input from the public on the development of the plan. The vision, mission, and goals for the statewide strategic transportation plan include:

Vision - North Dakota's transportation system is an important part of regional, national, and global systems developed strategically to help grow and diversify the economy and enhance North Dakota's quality of place.
Mission - A transportation system that offers personal choices, enhances business opportunities, and promotes the wise use of all resources.
Goals
Safety - Safe and secure transportation for residents, visitors, and freight.