PUBLIC SERVICES COMMITTEE
The Public Services Committee was assigned three studies. Section 1 of House Bill No. 1386 directed a study of laws requiring a surety bond, the state bonding fund, availability of private surety bonds, and the appropriateness and necessity of bonds. Section 4 of Senate Bill No. 2008 directed a study of the feasibility and desirability of transferring inspection and standards functions conducted by various state agencies to the Public Service Commission. The Legislative Council limited the study, however, to agriculturally related functions. Senate Concurrent Resolution No. 4016 directed the study of the provisions of North Dakota Century Code Title 4 which relate to the powers and duties of the Seed Commissioner and the State Seed Department.
Committee members were Senators Aaron Krauter (Chairman) and Jerry Klein and Representatives Randy Boehning, Rod Froelich, Chet Pollert, Arlo E. Schmidt, Mike Timm, and John Warner.
The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2004. The Council accepted the report for submission to the 59th Legislative Assembly.
BONDING OF PUBLIC EMPLOYEES AND PRIVATE SECTOR LICENSEES STUDY
Section 1 of House Bill No. 1386 directed a study of:
- North Dakota Century Code (NDCC) provisions requiring public officers and other individuals and entities to provide bonds.
- Whether the state bonding fund is an appropriate entity to provide those bonds.
- Whether private entities within the state provide bonds for public officials and other individuals and entities required to be bonded.
- Whether the bonds required by statute are appropriate and necessary.
As introduced, the bill expanded the public employees who are bonded under the state bonding fund to include any employee or official required by statute to provide a bond. This change would have included a person employed by an occupational and professional board or commission. The bill also would have required a public employee who elected to purchase a bond from a surety company, instead of being bonded by the state bonding fund, to purchase the bond from a company located within this state. The legislative history reveals that the bill was introduced to address the problem of auctioneers and auctioneer clerks being able to secure a bond solely from out of state. The solution was to have a state bonding fund provide the bond, thereby keeping the fee for the bond in this state.
Bonding of Public Employees
Statutory Framework
Generally, there are two separate groups of people which are required by law to be bonded--public employees and licensees. Although a public employee may be bonded through a surety company under NDCC Section 26.1-21-23 and personally pay for the bond, most public employees are bonded through the state bonding fund. In addition, under Section 26.1-21-19, the Insurance Commissioner may cancel the liability of the fund for an act of an employee or official. If that happens, the official or employee may secure, at personal expense, a bond executed by a surety company.
Research does not reveal any requirement in NDCC Chapter 26.1-21, the state bonding fund law, for public employees and officials to be bonded through the state bonding fund. Requirements for bonds come from other statutes requiring bonds in limited circumstances.
Upon application and approval by the Insurance Commissioner, the state bonding fund provides a fidelity bond to public employees and public officials. Under NDCC Section 26.1-21-01, a public employee is any person employed by the state or any of its political subdivisions, officers and employees of a nonprofit organization providing services and programs for senior citizens, the treasurer and district employees of a water resource district, and an officer or employee of the International Peace Garden. "Public employee" does not include a person employed by an occupational or professional board or commission or the State Bar Association of North Dakota. "Public official" is any officer or deputy required to be bonded by law except for an officer of an occupational or professional board or commission or the State Bar Association. "State" means the state departments, agencies, industries, and institutions and the International Peace Garden. "Political subdivision" means a county, township, park district, school district, city, and any other unit of local government which is created either by statute or by the Constitution of North Dakota for local government or other public purposes.
Under NDCC Section 26.1-21-06, the bond provided by the state bonding fund is limited to that of a fidelity bond, unless otherwise provided by statute. A fidelity bond is a bond covering an employer for loss due to embezzlement, larceny, or gross negligence by employees. Under Section 26.1-21-07, the Insurance Commissioner determines coverage under the fund based upon money or property handled and the opportunity for defalcation. However, the commissioner may not set the coverage in an amount less than is otherwise required by law. Black's Law Dictionary, 6th Edition, defines defalcation as the act of embezzling, the failure to meet an obligation, the misappropriation of money held in any fiduciary capacity, and the failure to properly account for these funds.
Under NDCC Section 26.1-21-02, the Insurance Commissioner manages the state bonding fund. Under Section 26.1-21-04, the Attorney General is the attorney for the commissioner in matters relating to the fund. Under Section 26.1-21-05, the State Investment Board invests the fund.
Under NDCC Section 26.1-21-09, the Insurance Commissioner determines the premium for the bond. Premiums are waived unless the bonding fund falls below a certain level. Once the bonding fund falls below a certain level, premiums must be resumed until the bonding fund reaches a certain cap.
The bonding fund began operation in 1915. In 1915 the fund had the following cap: once the bonding fund reached the amount of $100,000, any excess was distributed to the various political subdivisions for which entities within the subdivision were required to be bonded in an amount in proportion to the amount of premium paid by the political subdivision. In 1947 the law provided that premiums are triggered when the bonding fund is depleted below the sum of $1 million. The cap for the termination of collection of premiums was set at $1.2 million. In 1953 the law provided that the trigger for the collection of premiums was $2.5 million. The cap for the termination of collection of premiums was $3 million. A premium has not been charged for coverage since 1953. In 2003, Senate Bill No. 2015 amended Section 26.1-21-09 to lower the trigger for the collection of premiums from $2.5 million to $2 million. The threshold for the termination of collection of premiums remains at $3 million.
The return on investment of the fund has outpaced claims. So much so that in the bienniums since 1993, the Legislative Assembly has twice transferred money from the bonding fund to the general fund. During the 1993-95 biennium, House Bill No. 1005 transferred $2.5 million from the bonding fund to the state general fund. During the 2003-05 biennium, Senate Bill No. 2015 transferred $2.8 million from the bonding fund to the state general fund.
Under NDCC Section 26.1-21-11, claims on a bond must be presented to the Insurance Commissioner within 60 days after discovery of a default or wrongful act. Under Section 26.1-21-13, the Insurance Commissioner audits all liability claims against the fund. The Attorney General must approve an audit. Under Section 26.1-21-14, an action may not be maintained against the fund on a claim unless the claim first has been presented for allowance and the allowance of the claim has been refused.
Legislative History
In 2003, Senate Bill No. 2185 repealed NDCC Sections 44-01-08, 44-01-09, and 44-01-10. These sections applied when a public officer gave a bond other than one by the state bonding fund. Under Section 44-01-08, the bond must have been approved by the Governor as to its sufficiency and the Attorney General as to its form if the bond were given by a state officer and approved as to its sufficiency by the board of county commissioners or other governing body and to form by the state's attorney if the bond were given to an officer of a county or other political subdivision. Under Section 44-01-09, the bond of a state or district officer must have been filed with the Secretary of State, and the bond of any officer must have been filed with the county recorder.
According to the Secretary of State, these sections were repealed because they were obsolete because the Secretary of State's office never filed these bonds. In addition, a survey conducted by the Secretary of State's office of this state's 53 county recorders found that of the 21 recorders who responded, only one found evidence of a bond filing and that filing occurred in the 1930s. Although the Secretary of State no longer has the duty to file bonds under NDCC Section 44-01-09, under Section 54-09-02 the Secretary of State is required to record and maintain records of the official bond of any state official who furnishes in lieu of the bond furnished by the state bonding fund a bond by a duly authorized surety company.
In 1999, Senate Bill No. 2360 removed a number of requirements on state officials and employees of furnishing a bond in a particular amount. The legislative history reveals that the reason for the removal was that the bonds required by these statutes were separate from the bond provided by the state bonding fund. Testimony stated the bonding requirements were removed because the individuals being bonded were already covered by the state bonding fund. Although many individuals who are not required to obtain a bond do so because there is no premium charged, technically they would not need to obtain a bond.
This legislative history does not contain testimony on the two sections of law that may have provided reasoning to the contrary. Under NDCC Section 26.1-21-07, the coverage under the bonding fund may be greater, but not less than, the amount required by law for the position. Under Section 26.1-21-10, the provisions of the chapter on state bonding "and of any statute requiring a bond constitute the bond of each and every public official for the purpose of any law of this state requiring such bond and constitute the entire contract between the fund and the state or its political subdivisions, respectively, as the obligee in any such bond." These two sections show the consideration of other statutes that require bonds and place certain conditions on bonds and appear to incorporate them into a bond obtained under the state bonding fund.
Bonding of Private Sector Licensees
State law also requires that certain persons be bonded to be licensed to engage in certain kinds of work. For example, NDCC Section 55-08-05 requires concessionaires in state parks to be bonded in an amount determined by the director of the Parks and Recreation Department. In addition, many cities require certain persons to be licensed to engage in certain kinds of work. The City of Bismarck requires concrete companies to be bonded to work on sidewalks that are in the city right of way. These persons must obtain bonds at their personal expense from the private surety bond market. Premiums and availability of bonds in the private market are determined by the type of activity to be bonded. Generally, surety bonds may be obtained through insurance companies located in this state.
A surety bond is a three-party agreement in which the issuer of the bond--the surety--joins with the second party--the principal--in guaranteeing to a third party--the obligee--the fulfillment of an obligation on the part of the principal. The obligee is given the benefit of the bond and is protected by the bond against loss.
The reasons for requiring surety bonds from licensees can be divided between the intended beneficiary of the bonds--consumers and the governmental entity. Consumers are protected because they can make a direct claim to a surety company if the licensee acts contrary to the law or the work is not completed in a workman-like manner. Generally, insurance cannot cover code violations. Insurance covers liability caused by damage to property or to persons. Bonds may cover code violations.
The bonding of licensees provides a benefit to governmental entities because most licenses are conditioned on having a bond. If the bond is revoked, then the person is no longer licensed by the governmental entity. Bonding companies encourage compliance with applicable laws and have the option to withdraw a bond if there is a deficiency or noncompliance. This aids the governmental entity in the enforcement of its laws. In addition, before a bonding company will issue a licensee a bond, the bonding company will conduct an investigation of the licensee's financial and technical ability. Because the bonding company has the right of recourse against a bonded person who has a claim on the bond, the bonding company needs to ensure that the licensee can be financially responsible for the amount of the bond.
Testimony and Committee Discussion
Review of Statutory Bond Requirements
The committee reviewed every North Dakota Century Code provision requiring bonds.
The committee reviewed each statute to determine who obtains the bond, if there is an option other than a bond, if there is a related entity that has discretion over the bond or the amount of the bond, the type of bond, and whether the bond is mandatory or permissive. In addition, the committee reviewed each statute to determine whether a bond is required of a public entity and if so, whether the entity was a state or political subdivision entity.
As an example, the committee reviewed the bond of the Secretary of State. Before 1999 the Secretary of State was statutorily required to be bonded for $10,000. According to the Secretary of State, this statutory requirement was removed in 1999 because the amount of the bond had not changed since 1943 and did not seem to be appropriate because since that time the budget of the office of Secretary of State has increased to more than $4 million.
The committee also reviewed the bond of county coroners. Although the county coroner is required to be bonded for $500, this amount is a minimum. In fact, a county coroner is covered under the blanket bond of the county.
Review of State Bonding Fund
The committee reviewed whether the state bonding fund is an appropriate entity to provide bonds under the reviewed statutes. The issues under this area of study were whether private entities should be included in the state bonding fund and whether public entities should be bonded under the state bonding fund or should be required to buy private bonds.
The committee reviewed whether private entities should be included in the state bonding fund. The committee was informed that the Insurance Commissioner could handle the inclusion of other groups in the state bonding fund. The committee had a number of concerns with the idea of including private entities in the state bonding fund. Committee discussion questioned the unknown aspect of whether the fund is actuarially sound and whether adding additional entities to coverage should be done until it is known whether the fund is actuarially sound. There could be enormous liability for the inclusion of entities such as grain elevators. Another concern was the state competing against private industry for issuance of bonds. In addition, there was the major issue of whether to make inclusion in the state bonding fund for other entities voluntary or mandatory.
The committee decided to review any request by any group that is privately bonded to be included in the state bonding fund. A request of this type, however, was not made by any privately bonded group.
The committee reviewed private bonding as an alternative and decided to review the state bonding fund to determine if any changes were needed to better the operation of the fund.
North Dakota is unique in having a state bonding fund. Most other states use the open market to provide bonds. This is the case for private entities in this state for which there are 106 companies that issue fidelity bonds, with $2.2 million in premiums written. Surrounding states bond through private bonding companies. Montana purchases a fidelity blanket bond for all state employees which has a $2 million limit per occurrence. The counties in Montana buy a bond in the amount of $5 million through an association of counties. Other political subdivisions cooperate through different groups to purchase bonds on the private market. South Dakota purchases a blanket bond for public employees in the amount of $100,000 per occurrence and for specific positions that handle more money the state purchases bonds in higher amounts. The cost per year is approximately $50,000 for coverage of almost 13,000 employees. Minnesota provides protection through a master property policy for public employees in the amount of $25,000 per occurrence. Certain employees with more opportunity for defalcation have a higher bond.
The committee reviewed the approximately 2,920 entities covered by the state bonding fund and the amounts for which they are bonded. The committee was informed that most governmental entities are bonded through the state bonding fund because there is nopremium charge for the bond and because political subdivisions, such as counties, purchase a blanket bond that covers every employee. The amount of coverage varies greatly. Some amounts are extremely high because there is no premium charged for the coverage. Ironically, some of the amounts are extremely low because there is no premium charged. The reason being that if a bond does not cost anything, there is no reason to review the bond. The state bonding fund does not challenge or have guidelines for the appropriateness of the amount of bond requested.
The committee was informed that the exposure to liability of the state bonding fund is $575,550,821 and there has never been an actuarial study to determine if the fund is financially sound. The committee was informed that if the fund were to be depleted below the $2 million trigger, the Insurance Commissioner would conduct an actuarial study to determine premiums. In addition, the committee was informed the Insurance Commissioner can reinsure for large losses but has not.
The main tool to prevent large claims is regular audits and controls on handling of funds. The committee was informed that as a general rule every entity should have a bond of at least 25 percent of the money in control of the public officials or employees for which the bond is requested for the preceding year based on daily balances. Generally, this is the amount recommended by the State Auditor when conducting an audit. Because of this recommendation, most state entities generally update bonding amounts after an audit which is done on a biennial basis. In addition, counties, cities, most school districts, and park districts are audited on a biennial basis. These entities are audited by the State Auditor or a private firm. Townships and other political subdivisions are not required to have a biennial audit.
The committee reviewed claims against the state bonding fund. In early 2004 there were 23 claims against the state bonding fund for a total of $522,132. The claims were for theft of money and the amount of these claims could change during the legal process. At least one-half of that amount will be paid this biennium because of one claim from the Fargo Park District. This will be the largest claim ever paid by the bonding fund. The claim is for approximately $250,000, consisting of $226,000 plus interest from the date of the claim.
The funds in the bonding fund at the beginning of the 2003-05 biennium totaled $5.3 million. The Legislative Assembly has provided for the transfer of $2.8 million from the bonding fund to the general fund for the biennium. The committee was informed that this transfer, in addition to the 23 claims, may result in the fund falling below the $2 million trigger, but the trigger most likely will not be reached this biennium because of projected investment income of the fund.
The committee was informed it is very difficult to collect on claims paid because the party that stole the money usually does not have any money. Some individuals are incarcerated. In addition, the legal system must be used to collect from these individuals and that is administratively burdensome. The recovery rate compares with the 10 percent recovery rate of the private sector.
The committee considered a bill draft to clarify state bonding law, to remove references to the requirement for a bond for a particular state public employee or officer, to apply the requirement for a bond generally to all public employees and officers, and to provide guidelines to determine an appropriate amount for a requested bond. The bill draft created an application procedure under the state bonding fund. The goal was to have an application procedure in which an obligee requests a bond in an amount based on the amount of money and property handled and the opportunity for defalcation. The bill draft placed more responsibility on the obligee to provide information to the Insurance Commissioner and to review matters relating to the bond. The main substantive provisions required an application on a biennial basis or when there is a change in coverage requested and required the application to include certain information, including 25 percent of the money in control of the public officials or employees for which the bond is requested for the preceding year based on total monthly balances. The bill draft exempted state agencies and political subdivisions from the application procedure if another statute places the bond within the discretion of that state agency or political subdivision. The bill draft also continued the concept initiated by Senate Bill No. 2360 in 1999 to remove specific references to state officials being required to have a bond. Under the bill draft, governmental entities are required to have a bond en masse. The bill draft also provided that interest on a claim runs from the date of filing of the claim. The bill draft also limited liability of the fund to two years before the date of filing of the claim. This places the responsibility to find wrongdoing within two years on those in a position to find the wrongdoing.
The committee amended the bill draft by adding a sentence that coverage for a state legislative or judicial branch agency may be determined by the Legislative Council or Supreme Court, respectively. The addition of this sentence confirms that legislative and judicial branch agencies are included in the state bonding fund and respects concerns over separation of powers.
The committee received testimony in support of the bill draft from the Insurance Department. The testimony included a suggested change that the language that required the application to include a list of conditions covered under the bond, beyond the basic blanket bond conditions, would be difficult for most agencies and political subdivisions to compile. The committee was informed that this list of conditions may make the application procedure administratively burdensome for the person completing the application and for the Insurance Department by having to answer questions about the list of conditions. The committee amended the bill draft to remove that language.
Review of Private Surety Bonds
The committee reviewed whether private entities within the state provide bonds for public officials and other individuals required to be bonded. This area of study applied to persons required to be bonded but not bonded through the state bonding fund. The committee reviewed alternatives to obtaining bonds from private companies, including the state bonding fund, or through separate bonding or recovery funds for each endeavor.
State law requires that certain persons be bonded in order to be licensed to engage in certain kinds of work. These bonds are obtained through private surety companies and not through the state bonding fund. Two examples of occupations that do not buy surety bonds but instead pay into a special fund that pays for certain bad acts are electricians and real estate brokers and salespersons.
North Dakota Century Code Chapter 43-09 provides for the regulation of electricians. Electricians are required to be licensed under Section 43-09-09. Under Section 43-09-14, before doing electrician work, a master electrician must deposit a bond of $5,000 and a Class B electrician must deposit a bond of $4,000 with the State Electrical Board. In addition, a master electrician must deposit $50 and a Class B electrician must deposit $40 in lieu of a surety bond. This deposit is placed in a special fund to be used for the completion of installations abandoned by electricians in the amount of $5,000 for a master electrician and $4,000 for a Class B electrician. The deposit is waived if the special fund exceeds $50,000. Presently the fund is over $50,000.
A representative from the State Electrical Board explained that the special fund was created to allow safety problems caused by improper installations to be addressed quickly, e.g., when a bond was required, bond companies took too much time in paying claims. Although electricians are exempt from surety bonds, under NDCC Section 43-09-20 a master electrician must have public liability insurance of $100,000 and a Class B electrician must have public liability insurance of $50,000.
Real estate brokers and salespersons are regulated under NDCC Chapter 43-23. Brokers and salespersons are not required to be bonded; however, the secretary-treasurer of the Real Estate Commission must be bonded in the amount of $60,000. The secretary-treasurer handles fees collected from brokers and salespersons, including a fee of $20 which is credited to the education, research, and recovery fund. The fee is not required for the renewal of a license unless the fund is less than $60,000. Under Section 43-23.2-03, a person who obtains a final judgment from a court against a broker or salesperson on the grounds of fraud or dishonesty may file an application with the court for payment out of the fund for a loss up to $15,000 that is unpaid on the judgment. Although brokers and salespersons are exempt from purchasing a surety bond, under Section 43-23-19 brokers and salespersons must carry errors and omissions insurance.
The committee also reviewed bonds provided by private surety companies in this state. This review focused around the bonds provided to auctioneers because the study resulted from concerns of auctioneers. It was noted that any private entity could come to the Legislative Assembly and ask for the removal of a bond requirement as individuals in the storage business had done in the past. Auctioneers were the only group to bring the issue of bonds provided by private surety companies to the committee.
Review of Appropriateness of Bonds
The committee reviewed whether the bonds required by statute are appropriate and necessary. The committee received testimony on the bond requirements for auctioneers and auction clerks. Auctioneers indicated that they are required to purchase bonds that are not used and bonds are only available from out-of-state companies. The committee was informed the reason a bond is never used is because if a bonded auctioneer has a claim on that auctioneer's bond, that auctioneer must pay back the amount of the claim to the surety or lose the bond. If an auctioneer is not bonded, an auctioneer loses the auctioneer's license.
There are 149 companies that are licensed to issue surety bonds in this state, with $8.83 million in premiums written. Of the companies doing business in this state for surety and fidelity bonds, one is domiciled in North Dakota--Dakota Fire Insurance. The committee was informed that the dominant bond company in the state is Western Surety Company. Western Surety Company had surety premiums written in 2003 of $1,067,000 and losses of $72,000.
In particular, there are 21 companies that provide bonds to auctioneers and auction clerks; however, Western Surety and Merchants Bonding Company are the most common. Western Surety is in South Dakota and Merchants Bonding Company is in South Carolina.
Western Surety is one of the oldest and largest surety companies. In 1997 Western Surety became a wholly owned subsidiary of CNA Surety. There are 252 insurance agents in this state which sell Western Surety bonds. The commission paid to an agent is 20 to 40 percent of the price of the bond. In 30 states, Western Surety pays 12 percent out on claims against the bonds of auctioneers. Although auctioneers have a high amount of claims compared to other bonded individuals, Western Surety has not paid a claim on a bond in North Dakota for an auctioneer in recent years. There have been no claims against auctioneers in this state in the last four years.
The committee was informed the prices of the bonds are based on what the market will bear and what is the cost to a surety company. Western Surety charges at least $100 for a bond. The present bond required for an auctioneer is in an amount not less than $5,000 and the bond required for an auction clerk is in an amount not less than $10,000. The $5,000 limit for auctioneers and $10,000 limit for auction clerks is an aggregate liability for a year. As a matter of practice, an auctioneer purchases a $5,000 bond and purchases a $10,000 bond for the clerk. Each bond costs $100 if purchased from Western Surety. The cost for a larger bond is $5 per $1,000 of coverage with a $100 minimum. There are companies that will write an auctioneer bond for approximately $50. Western Surety's market share has dropped from 80 percent of the market 15 years ago to 63 percent.
The committee was informed the amount of coverage required for bonds may not be sufficient. There is a concern that auctioneers are not bonded enough because they sell single items, such as tractors that cost between $80,000 and $100,000. Auctioneers would pay an enormous amount for a bond that provided full coverage for customers. Most states require bonds for auctioneers in the range of $10,000 to $20,000. The highest bond requirement is approximately $25,000.
Committee discussion included that $10,000 in bond coverage does not cover the amount of money brought in during most sales and raising the amount of bond may place an unnecessary burden on auctioneers. In addition, increasing the bond for auctioneers would set a precedent that would place a burden on other businesses in this state. Committee members stated opposition to raising any required minimum for a bond.
A representative of Western Surety provided testimony on bonds provided to auctioneers. The committee was informed that a surety bond is a form of public protection. An auctioneer bond is to ensure that a consumer receives proper payment for goods sold by an auctioneer and in some states the bond covers fees and taxes that are paid to the state. One of the major protections afforded by a bond is the review and investigation of the person bonded by a surety company. A bond is similar to a bank issuing a letter of credit and there should not be any claims on a bond if the surety company does a good review before issuing a bond.
Western Surety evaluates three areas when underwriting. The first area is the number of years in business and the reputation of the person seeking the bond. The second area is the financial stability and ability of the person seeking the bond. The third area is considering the agent's recommendations as to character issues. A bond is canceled if a claim is made on a bond because it is shown that a person is a harm to the public.
The committee considered allowing auctioneers and auction clerks to have a special fund instead of using a private surety company. The committee was informed that auctioneers may be interested in applying the concept of a special fund, such as used by electricians, to auctioneers.
Some states have special funds, called recovery funds, instead of requiring a bond. Louisiana had a recovery fund but it is returning to private bonding. Minnesota has a recovery fund for contractors and Virginia has a recovery fund for motor vehicle dealers and both states are investigating a return to private bonding. A negative with a recovery fund is that most recovery funds require that all legal means be exhausted before there is recovery from the fund. In other words, a person first must obtain a judgment in a court.
The committee considered allowing auctioneers and auction clerks to have insurance in lieu of bonds, similar to real estate salespersons. A real estate salesperson is required by law to have errors and omissions insurance but this insurance is relatively expensive compared to the cost of a bond. Some auctioneers already have errors and omissions insurance because they are also real estate salespersons. Insurance is a narrowly tailored contract for a particular purpose, however, and an errors and omissions policy for a real estate agent most likely would not cover errors and omissions of an auctioneer. In addition, the committee was informed that most auctioneers carry liability insurance.
The auctioneers were requested to provide suggested legislation to remedy the concerns relating to auctioneer's bonds. As a result of that request, the committee considered a bill draft that provided auctioneers and auction clerks the option of providing at least $100,000 per occurrence and $500,000 annual aggregate limit of public liability insurance and errors and omissions insurance instead of providing a bond. The minimum limit of public liability insurance is the same minimum limit as for a master electrician. The minimum limit for errors and omissions insurance is the same as is required of a real estate broker or salesperson.
A representative of Western Surety provided testimony against the bill draft. The committee was informed that bonds provide coverage if a dishonest act occurs, while insurance policies do not provide this coverage. The committee also was informed that insurance does not cover violations of law, as does a bond. Premiums for surety bonds are largely a service charge for weeding out unqualified candidates. This process provides consumers a degree of certainty they are operating with a reputable business.
Committee discussion included that the cost of $200 to cover an auctioneer and clerk seems to be a minimal amount to protect the public. Committee discussion included consideration of the fact that although the state needs consumer protection, auctioneers do not need to pay for something to keep them honest.
The committee concluded that the bill draft will not affect many auctioneers but may reduce costs for auctioneers who are real estate agents.
Recommendations
The committee recommends Senate Bill No. 2043 to create an application procedure under the state bonding fund.
The committee recommends House Bill No. 1039 to allow auctioneers and auction clerks the option of providing insurance instead of bonds.
AGRICULTURAL INSPECTION AND STANDARDS FUNCTIONS TO PUBLIC SERVICE COMMISSION STUDY
Senate Bill No. 2008 directed a study of the feasibility and desirability of transferring inspection and standards functions performed by various state agencies to the Public Service Commission, including the potential cost-savings and efficiencies that may be realized by training and certifying employees to conduct multiple inspection duties. This study was limited to agriculturally related functions. There was testimony during the legislative session to the effect that there may be redundancy in having multiple agencies inspect anhydrous ammonia tanks.
Statutory Framework
Under NDCC Section 64-02-02, all weighing or measuring devices in this state must be supervised and controlled by the Public Service Commission. A weighing or measuring device, as defined in Section 64-02-01, is any scale, weight, measure, instrument, or device used or offered for use for weighing or measuring in commerce. Under Section 64-02-13, the owner of any weighing or measuring device is responsible for its accuracy and condition and must have it tested at least every 15 months. The commission or the owner may have the device tested annually. The commission has jurisdiction over measuring and weighing agricultural commodities and products, including food and seed.
Under NDCC Section 64-02-10, the Public Service Commission collects fees to test the following agriculturally related scales, devices, or meters: railroad track and truck scales used to haul agricultural products, livestock scales used by auction markets, scales used by elevators, scales used in the retail sale of bulk food or seed, meters used to measure agricultural chemicals or liquid fertilizer, and other agriculturally related scales, devices, or meters. Under Section 64-02-12, the fees collected by the commission are deposited in the general fund of the state treasury. There are some exceptions, however, to the commission's authority over weights and measures.
Under NDCC Section 64-02-13, only the State Dairy Department may inspect and test farm milk bulk tank equipment. Under Section 64-02-13.1, weighing or measuring devices used to conduct sales by a transient vendor are exempt from the authority of the commission. Under Section 64-02-01, a transient vendor is a wholesale or retail seller of produce, fruit, nuts, or seafood which sells to the public from a temporary location, on a seasonal basis, and is open fewer than 120 business days each year. This may include the scales used by sellers at a farmers' market.
Under NDCC Section 19-01-18, the State Department of Health at the request of the Public Service Commission must perform the duties relating to weights and measures as usually performed by the commission. The fees collected by the department are kept, accounted for, and disposed of as provided in Chapter 19-01. Under Section 19-01-07, all fees collected under Chapter 19-01 are placed in the general fund. However, if the funds are accepted for contract services of analytical and inspection work, the funds are deposited in the operating fund of the State Department of Health.
Possible Function Transfers
In the same way that it may be desirable for the State Department of Health to inspect scales when it is doing health-related inspections of food-related businesses, the study directed a look at the feasibility and desirability of transferring inspection and standards functions to the Public Service Commission when the commission is otherwise conducting inspections at agriculturally related businesses.
The commission regulates a number of agriculturally related businesses--grain elevators, facility-based grain buyers, roving grain buyers, hay buyers, auctioneers, and auction clerks. The main form of regulation of these entities is the licensing of these entities. As a rule, the commission may inspect the records of these entities. When the commission is inspecting the records of one of these entities, there may be some inspection and standards function done by some other agency that the commission may do to gain efficiency besides any internal efficiency gained by conducting the weights and measures functions the commission already performs. However, any new function would not be related to anything the commission staff is trained to do at present. To the contrary, there are similarities between the regulation by the Seed Commissioner of wholesale potato dealers and the regulation by the commission of grain or hay buyers, and this may be an area for consolidation.
An example of when there are multiple agency inspections for which the Public Service Commission conducts an inspection is in the case of anhydrous ammonia storage facilities. The Public Service Commission makes regular onsite tests of scales and meters used to measure the sale of anhydrous ammonia. In addition, there are onsite inspections under the anhydrous ammonia tank inspection program. The anhydrous ammonia tank inspection program provides initial and periodic inspections of anhydrous ammonia storage facilities, including storage containers, system piping, safety equipment, and nurse tanks. The focus of the inspection is safe storage. The program is administered and enforced by the Agriculture Commissioner, and the inspection is done by the Insurance Commissioner through the boiler inspection program.
Under NDCC Section 19-20.2-01.1, the inspection program only applies to anhydrous ammonia storage facilities exceeding a capacity of 6,000 gallons. Under Section 19-20.2-07, these tanks are periodically inspected at least once every five years. The boiler inspector may inspect a farm transportation wagon or vehicle designed to apply anhydrous ammonia which is in the vicinity of the facility during the inspection. Under Section 19-20.2-08, all fees collected for licensure are used by the Agriculture Commissioner for the inspection program. In addition, under Section 19-20.2-08.1, the anhydrous ammonia tonnage tax of 20 cents per ton under Section 19-20.1-06 must be deposited in the anhydrous ammonia storage facility inspection fund.
House Bill No. 1352, enacted during the 2003 legislative session and codified as NDCC Section 19-20.2-11, provides for the Insurance Commissioner to identify a critical methamphetamine users' zone in this state and to establish appropriate security measures for owners and users of anhydrous ammonia nurse tanks in the zone. These security measures are implemented as part of a pilot project and include the requirement of locks on nurse tanks.
Theoretically, the Public Service Commission could take the functions of the boiler inspector. However, the commission would need to have a person specially trained as a boiler inspector, and the Insurance Commissioner would still need a boiler inspector to inspect boilers that are not inherently agriculturally related.
Testimony and Discussion
Anhydrous Ammonia Tank Inspections
The committee was informed there have been complaints about the number of inspectors that inspect a certain business, such as a grain elevator that sells anhydrous ammonia and has gas pumps and a convenience store. This business could have inspectors come from the anhydrous ammonia tank inspection program, a heavy-duty inspector, a light-duty inspector, and a private inspector. In addition, business owners have expressed frustration over the increased costs of having law enforcement, the Public Service Commission, and the boiler inspector inspecting anhydrous ammonia tanks.
Committee discussion included that while it appears there are too many inspectors for anhydrous ammonia tanks, anhydrous ammonia is a dangerous commodity that requires special skills to inspect for different purposes.
The committee received testimony on agriculturally related inspection and standards functions administered by the Public Service Commission. In addition, the committee received testimony on revenues and expenses associated with the Public Service Commission grain elevator licensing functions and the agricultural-related weights and measures functions. The committee was informed that the Licensing Division does onsite inspections of the records of grain warehouses not inspected by the federal government. During this inspection, inspectors do some measuring to determine the capacity of an elevator. These inspections are done every 12 to 15 months. The Testing and Safety Division's weights and measures inspections are conducted by five inspectors--two heavy-duty inspectors and three light-duty inspectors. These inspectors conduct over 22,000 inspections per year. Each device must be inspected every 12 to 15 months. There are licensed service providers that may do inspections, but they charge more than the state. The Testing and Safety Division also conducts pipeline safety inspections to ensure the safety of pipelines.
The committee was informed that one entity could do all inspections for anhydrous ammonia facilities, but inspections would take multiple inspectors because of the different skills required for the different inspections. Under the Public Service Commission, pipeline safety inspectors could do safety inspections and weights and measures inspectors could do inspections for measuring devices on anhydrous ammonia tanks. As for the Insurance Department, the boiler inspector has the same skill set as needed for anhydrous ammonia tank safety inspection in that both involve pressure vessels.
The committee received testimony on the boiler inspection program. The anhydrous ammonia tank inspection program began in 1995. The boiler inspection program began in the Workers Compensation Bureau and was transferred to the Insurance Department. The boiler inspector inspects 8,700 objects per year. Not all insured boilers are inspected by the inspector, but the boiler inspector reviews the paperwork on insured boilers inspected by insurance companies. Generally, the boiler inspector accepts inspections done by insurance companies.
The committee concluded that the anhydrous ammonia tank inspection program appears to be a good fit with the boiler inspector. Committee discussion included consideration of transferring of the boiler inspection program to the Public Service Commission, which might result in some efficiencies, but the study was limited to agriculturally related functions. If only agriculturally related functions were transferred, there would appear to be no efficiencies gained by the transfer of the boiler inspection program.
The Public Service Commission has made an effort to make the inspection program self-sufficient. The light-duty fees were increased by 10 percent and the heavy-duty fees were increased by 60 percent during the 2003 legislative session. Although the fees obtained from weights and measures inspections are deposited in the general fund, the inspections are self-funding due to the most recent increase in fees. This is true inasmuch as the fees cover the costs of the inspections and inspectors but do not cover all administration costs. It was noted that the boiler inspection fees of the Insurance Department also were increased during the 2003 legislative session.
Wholesale Potato Dealer Licensing
At the request of the Seed Commissioner the committee considered a bill draft that would have transferred regulation of wholesale potato dealers from the State Seed Department to the Public Service Commission. The idea to transfer all duties relating to wholesale potato dealers to the commission surfaced with a request that the bonding duties be transferred. Because the commission has experience in administering other bonded entities, it was argued that the commission would be better suited to administer the bonds for wholesale potato dealers.
The Seed Commissioner provided testimony on the bill draft. The committee was informed that the bill draft was meant as a point of discussion and after discussing the concept of the bill draft with the Public Service Commission, the commission and the Seed Commissioner agreed to work together to make the law more effective. The committee was informed that the bill draft may not be adequate because it provided for a straight transfer of duties and more may need to be changed because at present the regulation of wholesale potato dealers is not an effective program.
The main reason the Seed Commissioner requested the transfer was because of large processors purchasing large volumes of potatoes. The current program is not fitted to these types of entities. Historically, the State Seed Department has regulated wholesale potato dealers because the department administers most everything else related to potatoes. The committee was informed that the program has outgrown the State Seed Department because the department is a seed agency, not a regulatory agency.
Committee discussion included some support for the transfer of duties to the Public Service Commission because the sale of potatoes is the sale of commodities that are otherwise regulated by the Public Service Commission. The committee was informed that there probably will be no additional cost to transfer the present program to the commission. However, there would be additional costs if duties were added to meet the changes in the wholesale potato dealer industry. The cost depends on the regulatory scheme the Legislative Assembly decides is best.
After working on the issue, the Seed Commissioner and the Public Service Commission recommended continuing licensing of wholesale potato dealers through the State Seed Department. The committee was informed that the State Seed Department will pursue legislative action to improve producer protection with focus on major processors.
Conclusion
The committee does not make any recommendation relating to the transfer of agriculturally related standards and functions to the Public Service Commission.
STATE SEED DEPARTMENT STUDY
Senate Concurrent Resolution No. 4016 directed the Legislative Council to study those provisions of NDCC Title 4 which relate to the powers and duties of the State Seed Commissioner and the State Seed Department. The reasons for this study were that seed laws have been adopted over the years without regard to the interrelationship of the laws; the laws do not have clear objectives or directives for administration; and the laws are duplicative, inconsistent, illogically arranged with unclear intent and direction, and inapplicable to the manner in which agriculture is conducted in the 21st century. The legislative history reveals that the intent of the study was to update language and not make major changes in policy.
Recent Legislation
During the 2003 legislative session five bills were introduced which affected the State Seed Department--Senate Bill Nos. 2124, 2256, 2326, and 2206 and House Bill No. 1026. Four of the bills passed and one failed to pass.
Senate Bill No. 2124 updated references to a federal law governing tolerances for seed labeling. This state's tolerances are the same as those used under the Federal Seed Act except that the tolerance for yellow starthistle must be zero, and the State Seed Commissioner may establish tolerances that are stricter than the federal Act.
Senate Bill No. 2256 exempted from this state's open records requirements the records of any plant or seed analysis or testing, any variety or diseased determination conducted by the State Seed Department on a fee-for-service basis for a nonpublic person, and information received by the State Seed Commission from a nonpublic person that the nonpublic person determines is proprietary or trade secret information.
Senate Bill No. 2326 updated and clarified the statutes regarding the licensure of wholesale potato dealers and the process to be followed by the Seed Commissioner in taking action against the bond of a licensed dealer.
Senate Bill No. 2206 removed the sunset date of August 1, 2003, and retained the tolerance for restricted noxious weed seeds at 25 seeds, instead of a return to 90 seeds, per pound.
House Bill No. 1026, which failed to pass, would have required the creation of a transgenic wheat board. The Seed Commissioner was to be a member of the board.
During the 2001 legislative session, seven bills passed which related to the State Seed Department.
Senate Bill No. 2235 authorized the Seed Commissioner to inspect, analyze, and verify the genetic identity or physical traits of seeds or crops.
Senate Bill No. 2169 expanded the State Seed Arbitration Board to include the Seed Commissioner.
Senate Bill No. 2103 authorized the Seed Commissioner, with the approval of the State Seed Commission, to establish and charge fees for making commodity grade inspections.
Senate Bill No. 2104 provided that the director of the Experiment Station is a voting member of the State Seed Commission. The bill also removed the requirement that the commission must hold meetings during each November and June and requires instead that the commission hold meetings at least twice each calendar year.
Senate Bill No. 2389 required that the Seed Commissioner permit a North Dakota potato grower to sell or transfer certified seed potatoes to another North Dakota potato grower who may, in turn, plant the seed potatoes only for commercial production.
House Bill No. 1442 established procedures that must be followed if a person believes that a farmer has infringed upon the patent applicable to a genetically modified seed.
Senate Bill No. 2204 directed the State Seed Commission to establish, for annual crops and perennial crops, a seed classification system that references tolerances for each restricted noxious weed species.
Trends in Budget and Fees
The apparent trend is that the total appropriated funds for and the actual expenditures of the State Seed Department have remained constant for the last eight budgeted years. Within that overall stability, there has been growth in the laboratory services program but a reduction in the potato program. There has been a reduction in the field seed program; however, during the 1999-2001 biennium the seed laboratory and diagnostic laboratory were moved from the field seed program into other programs.
There have been two fee increases in the last 10 years at the State Seed Department. The revenues of the department primarily consist of certification and inspection fees. The first increase was for fees related to potato field inspections. The fee was increased from $15 to $18 an acre effective June 2002. The second increase was for laboratory fees. Generally, these fees were increased by $1 to $2 per test for seed laboratory determinations and slightly more for certain diagnostic laboratory determinations.
The two noteworthy accomplishments highlighted in the audit of the State Seed Department were technology upgrades, including the construction of a web site and completed inspections and final certifications of record acres and bushels of certified seed while operating expenses remained almost static during the period.
Statutory Framework
In 1931 the Legislative Assembly established the State Seed Department. The department's main offices are located on the campus of North Dakota State University in Fargo. In addition, the department operates a regional facility in Grafton where the primary function is the support of field operations for the potato certification program. The main field operation is to provide the potato industry with official grade inspection services.
The State Seed Department is managed by the Seed Commissioner and is under the control of the State Seed Commission. The commission is a nine-member commission that sets policy guidelines, approves budgets, approves major program changes, approves fee schedules, and appoints the commissioner. The commission is composed of members of various industries that represent a broad cross-section of agricultural commodities grown in this state.
There are a number of chapters and other provisions of the North Dakota Century Code which relate to the State Seed Department. These chapters include NDCC Chapters 4-09, 4-09.1, 4-10, 4-11, 4-25, 4-26, and 4-42. These seven chapters may be divided into five different programs--the potato program, the field seed program, the laboratory services program, the regulatory program, and the administration program. The potato program provides for field inspection and certification of seed potatoes, grade inspections for seed growers and commercial growers and processors, licensing and bonding of wholesale potato dealers, approval for seed quality of imported potatoes, winter disease testing, promotion of North Dakota-certified potato seed, and the production and distribution of foundation seed stocks.
The field seed program provides for field inspection and certification of crops, final certification or grading of seed, inspection and approval of certified seed conditioning plants and bulk retail facilities, acceptance of imported seed, development of custom programs, and promotion of North Dakota-certified seed.
The laboratory services program provides diagnostic laboratory testing to determine seed quality. Testing includes germination testing, seed disease and pathology testing, seed trait analysis, and genetically modified organism event testing.
The regulatory program enforces state and federal seed laws. The field staff inspects seed lots offered for sale to ensure proper labeling and adherence to state standards for purity and other quality factors.
The administration program provides for the administration of the facility, equipment, technology, and support services of the department.
Chapter 4-09
North Dakota Century Code Chapter 4-09 primarily relates to the basic structure of the State Seed Department, designates the department as the state agency responsible for seed certification and seed-related issues, provides enforcement authority to the department, and establishes seed labeling and sale regulations for the consumption and use of seed.
Chapter 4-09.1
North Dakota Century Code Chapter 4-09.1 provides the Seed Commissioner with the ability to establish commodity grade inspection services for the agriculture industry. This chapter, in addition to Chapter 4-42, expands the duties of the State Seed Department beyond seed certification and regulation. In practice, this chapter has been used to establish commodity standards in North Dakota Administrative Code (NDAC) Article 74-06 for rapeseed, buckwheat, and mustard.
Chapter 4-10
North Dakota Century Code Chapter 4-10 is similar to Chapter 4-09 except that it provides the commissioner authority to act as the certifier and grade inspector of potato seed. The chapter outlines the specific responsibilities of the commissioner in seed certification, labeling, grading, regulation, enforcement, and fee disposition in much the same manner as Chapter 4-09. The significant differences between the chapters are contained in Sections 4-10-04 and 4-10-06.1.
Section 4-10-04 designates a system of potato grades which is modeled after the United States Department of Agriculture standards. Potato grade designations differ from other certification standards in that each grade denotes a series of physical qualities that are standard throughout the industry as opposed to health and disease standards that may vary from state to state. The grade standards generally reflect physical appearance, such as potato size, defect, or internal problems that may not be readily visible to a buyer.
Section 4-10-06.1 outlines the requirements and the exceptions to the requirements for a producer to plant certified seed on commercial acreage. In general, the seed potatoes must be certified or field-inspected to be planted for the purpose of selling the crop.
Chapter 4-11
North Dakota Century Code Chapter 4-11 provides the Seed Commissioner the authority to license and regulate persons or companies engaged in the commerce of potatoes in wholesale quantities. Chapter 4-11 operates similarly to provisions covering the Public Service Commission's regulation of grain buyers and hay buyers and the Department of Agriculture's dairy licensing. Chapter 4-11 was rewritten during the 2003 legislative session in Senate Bill No. 2326.
Chapter 4-25
North Dakota Century Code Section 4-25-02 applies to seed transactions involving nonresident seed dealers. The rules contained in NDAC Chapter 74-02-02 which effectuate this section relate to the licensing and bonding of nonresident dealers.
Chapter 4-26
North Dakota Century Code Chapter 4-26 provides for the formation and operation of a seed control area for Irish potatoes. This chapter describes the specific steps in formation, the powers and duties of the Seed Commissioner in the process, and the duties of the Seed Potato Control Area Committee in the operation of the control area. One potato control area presently exists in this state.
Chapter 4-42
North Dakota Century Code Chapter 4-42 allows the State Seed Department to expand services beyond seed certification and regulation to provide the agriculture industry with services related to the testing and to identify preservation of agricultural commodities. The chapter outlines the process by which the Seed Commissioner establishes testing, sampling, field inspection, labeling, and identity preservation services.
Other Provisions
North Dakota Century Code Section 4-24-13 provides for the procedure by which a person holding a patent on a genetically modified seed may enter upon the land farmed by another for the purpose of obtaining crop samples.
Testimony and Discussion
The committee received testimony on the scope of the study from the Seed Commissioner. The committee was informed that the State Seed Department has tried to do housekeeping changes in the law as changes are made in the seed law during each legislative session. However, the department has recently done major work on the statutes relating to noxious weeds and wholesale potato dealers.
The committee considered a bill draft that clarified statutes relating to seed regulation. The bill draft was prepared after reviewing state laws on seed regulation, excluding potatoes. Although the bill draft contained substantive changes requested by the State Seed Department, most of the changes were meant to clarify the language. The substantive changes included providing compensation to the State Seed Commission members at the rate of $75 per day, requiring seed handlers to keep records for three years instead of two years, and lengthening the time allowed between a germination test and the sale of seed. The per diem of $75 was set after reviewing other per diems in the North Dakota Century Code of approximately $50 to $100 and choosing a midpoint. In addition, the most common amount of per diem for commissions similarly situated to the State Seed Commission is $62.50 and $75. The per diem was created to help cover the expense of hotel rooms that exceed the state rate and address a concern in the department's last audit report. The increase of duration of time from two to three years for seed handler records retention was to make the records retention uniform with federal law and other states' laws.
The increase in time between germination tests, generally from 9 to 12 months, is more workable for the industry. The committee was informed that the increased time for the sale of seed from a germination test is not detrimental to consumers because the labeler is still responsible for the condition of the seed regardless of the time of the germination test. However, after further consideration, the State Seed Department reversed the position of extending germination testing and proposed a change to return to 9-month germination testing instead of the proposed change of 12 months.
The committee was informed that all states vary as to germination testing for seeds. Minnesota and Montana are 12 months and South Dakota is 9 months on some and 12 months on others. A seed company must label as to the law of the receiving state. The committee was informed that seed companies are accustomed to the nine-month germination testing standard in this state.
The committee was informed that the 12-month germination testing standard was considered to provide consistency. However, a consumer protection issue is addressed by a nine-month standard. Soybeans and edible beans are fragile and the 12-month standard may not provide adequate consumer protection. The main issue with a 9-month or 12-month standard is seed carried over from one year to another. A 12-month standard would allow some seed to be carried over to the next year without a retest. The committee was informed that because the germination testing standard only applies to carryover seed it would only apply to a small amount of seed in limited circumstances. Those circumstances might arise if there is a shortage of seed.
The committee amended the bill draft by adding additional changes requested by the Seed Commissioner. A specific authorization for the commissioner to employ, appoint, or contract with agents was added so that the Seed Commissioner may have an agent sign vouchers. The committee was informed that in a 1998 audit the State Auditor stated that no one but the commissioner can sign vouchers because there is no specific statute authorizing other people in the office to sign vouchers.
Recommendation
The committee recommends Senate Bill No. 2044 to clarify state seed law. The bill provides for the housekeeping and substantive changes described under Testimony and Discussion. Although the bill primarily makes technical corrections and other changes to promote consistency among the states, some substantive provisions include the provision of a per diem for seed commission members; the power of the commissioner to employ, appoint, or contract with agents; and longer periods between germination tests for certain seed.
