Photo By Dennis Myers Acting Gov. Brian Krolicki, right, has fiscal experts talking about his plan for bonding state operating expenses.

Come Hand: A hand that needs to improve to win
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Betting and raising with an incomplete hand is called “betting on the come.”
—Henry Stephenson in his book Real Poker Night

Acting Gov. Brian Krolicki last week recommended that Nevada bet on the come.

Betting on the come may seem like an ordinary play in a gambling state, but Krolicki is a cautious investor. As a banker and then as state treasurer and now as lieutenant governor, he has been regarded as both a political and fiscal moderate.

But then, it’s been a while since Nevada found itself in such calamitous financial straits.

“We are truly in, I think, one of the most dire fiscal situations Nevada’s faced in recent memory or perhaps even long term memory,” Krolicki said. He was acting as governor while Jim Gibbons was visiting Iraq. Gibbons has since returned. “You know, according to Bill Raggio, which is a significant memory, he’s never seen it like this. We were just lopping off about a billion dollars to make our current biennium be balanced. And I suspect in the next biennium we’re looking at, at least, another billion dollars. Those are extraordinary amounts of money to Nevada.”

Krolicki suggested the state sell $775 million or more in bonds that would be redeemed later with payments the state now gets from its lawsuit settlement with the tobacco industry. The money realized could be used to make up about three fourths of the nearly billion-dollar shortfall the state is experiencing.

It represents a third way in a situation that up to now has been regarded as offering only two choices.

RAGGIO

“It’s got to be in perspective,” Krolicki said. “Right now we have two options on the table. We can either cut expenditures by a billion dollars, and I’m not sure how we are going to be able to do that and it’ll probably be very hurtful … or we can raise taxes a billion dollars, and I don’t think I’m very excited about that, especially in a sluggish economy. Maybe there’s a third way.”

A bond issue for normal operating expenses is not the way governments usually like to work, and Nevada is not known to have done it before. Krolicki’s solution may be compared to the recommendation of California Gov. Arnold Schwarzenegger that his state balance the budget by borrowing against future lottery earnings. Both are reflections of how calamitous the state budgets are at a time when the public’s demands on social services are at their greatest. In good times, the public has less need to turn to government.

In fact, Schwarzenegger himself turned to a Krolicki-style solution when he first became California’s governor in 2003, calling for a voter approved $15 billion bond issue to solve the state’s urgent budget crisis.

“Normally this banker type would not suggest using 20 years worth of resource for a two-year fix,” Krolicki said. “But I think the situation is that critical, that we must, as long as we do it thoughtfully and use the next two years to truly do that white paper on how to reconstruct and engineer Nevada’s revenue structure. You know, I think it’s worth it.” (Because the Nevada Legislature meets only every other year, its budgets are written for two years.)

The bonds would serve as a bridge until times improve. That’s the betting on the come part. In poker, it’s a bet that later cards will be better cards. Krolicki says they will be.

“We know we’re going to have a good economy in a year and a half or so. We’ve got $35 billion worth of new hospitality industry opening up in Las Vegas. New hotel rooming, the national economy, everything is cyclical, so it will come back.”

Implementation of Krolicki’s plan would require a special session of the legislature, or waiting until the 2009 regular session.

But others are made uneasy by the proposal and say that while times may get better, that doesn’t mean that the tobacco industry will. Nevada has already suffered some from the decline in smoking, and the tobacco lawsuit formula tied the money Nevada gets to how much people smoke.

“Because the way that formula works … it is impacted not by what happens in Nevada for smoking, but across the United States, and as smoking declines, that revenue is less and less,” Vilardo said.

Vilardo said she might feel differently if earlier proposals for Nevada to cash out its share of the tobacco settlement and create a trust fund had been approved. Then, she said, the money to be expected from those funds would have been more predictable and betting on its future viability would have been a better bet. (Both former assemblymember Lynn Hettrick and Krolicki when he was state treasurer proposed cash outs that the legislature failed to approve.) But she is not critical of Krolicki’s proposal, saying that it needs scrutiny as the state’s situation unfolds.

VILARDO

“My preference for bonds … is that there be some capital behind it, that it be for a capital expenditure so that you have an asset,” Vilardo said. “California has had a major problem with the bonds that they have sold for operating [expenses] and so that’s definitely a concern of mine.”

She also argued that the state has experienced worse budget crises and still coped without such unusual remedies as bonds for operating expenses. She said Nevada is only one of many states going through revenue shortfalls right now.

“Not to minimize it, it’s one of the worst situations we’ve been in but not the worst. And we will survive and we will be here and it’s going to happen again in the future,” she said.

In those earlier crises, though, remedies were nearly always severe cuts that set the state back years in programs in which it had invested millions and spent years building. Mental health has been decimated repeatedly. This boom-and-bust pattern is not exactly cost effective, which is why Vilardo believes that her business-oriented membership might respond favorably to Krolicki’s proposal.

“And I think that this would be something that, if it looks like we have to do cuts that are that substantial next year, will definitely make his proposal look palatable,” Vilardo said.

The Nevada Legislature’s Interim Finance Committee, which acts on money matters when the full legislature is out of session, last week approved almost $300 million in cuts in state programs, with efforts to stop cuts in mental health and parole and probation programs failing. Acceptance of the cuts recommended by Gov. Jim Gibbons had to be approved, said legislative leaders, in part because his administration had already begun implementing the cuts without waiting for IFC to act. “Some of us don’t like the cuts, we don’t like the amounts, but there is nothing else we can do at this particular time,” said Assembly budget chief Morse Arberry of Clark County.

Krolicki’s insistence that his proposal not be implemented unless the legislature seriously commit itself to a major reform of the state’s tax structure to solve the state’s chronic budget crises fits in with plans by Sen. William Raggio of Washoe County, the Senate GOP leader, who is planning such a project (“Will it ever stop?” RN&R, May 1).

Raggio, who chairs the Senate’s budget committee and also favored cash-out of the tobacco money, is reluctant to talk about the severity of the state’s situation, but does favor a look at Krolicki’s proposal because it does not involve new taxes.

“Well, you know, I hate to put adjectives on it,” he said. “We’ve been dealing with these declining revenues, we made serious cuts, we may have to look at more going into the next biennium, as you know. He’s [Gov. Gibbons] asked for some serious scenarios that will cut deeply without additional revenues. So if there are sources that aren’t taxes or new taxes, we ought to take a look. I’m not going to say dire. They tell us we’re not in a recession, but we’re certainly in a serious economic downturn, and we need to look at whatever might be available as well as cost-cutting and efficiency reviews. I’ve suggested, as you know, complete analysis of our revenues and expenses.”

One of the problems with paying the bonds back from the tobacco moneys is that the tobacco moneys are already committed, principally to education and health programs. Krolicki says those commitments can still be honored with some juggling when times get better—more betting on the come.

“Well, it’s allocated, but there are ways to reallocate or re-source it,” he said. “For example, [for] the Millennium scholarship, we use unclaimed property money, and we’ve done one-shots, general fund money, into it in the past, as well as 40 percent of the tobacco settlement moneys.”

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Dennis Myers

Dennis Myers was the news editor of the Reno News & Review. He was a journalist for more than four decades. In 1987-88 he was chief deputy secretary of state of Nevada. He was coauthor of Uniquely...