Budget impasse could hurt state’s bond rating

Wednesday, July 2, 2003 | 9:17 a.m.

Although it was caused by lawmakers who didn't want to raise taxes, starting the fiscal year without a revenue package could still cost Nevada taxpayers, State Treasurer Brian Krolicki said Tuesday.

Investment analysts with the three major bond-rating companies are closely monitoring the wrestling over the Legislature's failure to pass a tax bill to support the state budget or the budget for public schools. Those analysts' conclusions are crucial to saving taxpayers millions in debt-service payments.

Krolicki said he is fielding calls every day from investors worried about the effect of the budget impasse on about $2 billion in bonds already outstanding. On June 19, because of the budget impasse that has only grown worse in the last two weeks, Krolicki indefinitely postponed issuing another $200 million in bonds for parks, cultural resource projects around the state and for refinancing of previous bonds sold at higher interest rates than would be available today.

That meant the state could not take advantage of record-low 2.7 percent interest rates for the newest bonds.

Now, Krolicki said, he is concerned that the states fiscal woes could prompt a revaluation by the bond-rating companies, something he is not eager to see while the impasse continues.

The ratings from Moody's Investment Services, Standard & Poor's and Fitches are critical to buyers of state and municipal debt. A one-tenth of 1 percent change would cost taxpayers millions in long-term costs for the bonds, which are the instruments for funding major capital improvement projects.

Karl Jacob, director of state and local government analysis for Standard and Poors, said his company is looking at cash flow. Nevada's cash flow to pay off existing debt is secure for the moment, but the Nevada Supreme Court could throw uncertainty into that picture if it tinkers with the existing revenue stream. Most observers say that's an unlikely scenario, so far.

But until the impasse is resolved, uncertainty over the financial picture means new bonds need to be kept out of the market, Krolicki said.

"The prospect of bringing in the investment agencies when we don't have our financial house in order is not prudent," he said.

Gov. Kenny Guinn, who, like Krolicki, is a Republican, and is unhappy with the tax-increase holdouts of his own party that have blocked a constitutionally required balanced budget and school funding, at 12:01 a.m. Tuesday petitioned the Nevada Supreme Court to force the Legislature to act.

Chief Justice Deborah Agosti said after a five-minute hearing Tuesday that legislators had until 5 p.m. Monday to file responses to Guinn's lawsuit and that the court would probably file an order next Tuesday.

But no one knows what the court's remedy will ultimately be, although a first step will likely be to require the Legislature to come back to Carson City to finish its job. If that doesn't work, "no one knows what the justices will do," Krolicki said.

"They could affect existing revenue sources," he said, and that could include sales or property taxes that now are directed to debt service on bonds.

"That has every possibility of substantially affecting our revenue," he said.

Krolicki warned that schools and local government agencies also could be hurt by any hit on state bond ratings. In many cases, local projects are funded in part or completely by the state, or local bonds are backed by the state's guarantee, he said.

"There is no doubt in my mind that not only is the state liable for re-evaluation and potentially a downgrade, but local governments and schools," he said.

Pat Ford, a Moody's analyst in San Francisco, said he also is taking numerous calls from worried investors. So far, his company hasnt cut its rating for the state, schools or local governments.

"We're still adopting a wait-and-see attitude," Ford said. He said one advantage the school and many local agencies have is that they get much of their operating budgets from existing revenue streams, such as sales and property taxes.

But Ford said his company and the rest of the industry is worried about what the court, and the rest of the Nevada government, will do with financing.

Krolicki said the bond analysts also won't like the fiscal conservatives' attack on the "rainy day fund" for financial emergencies. The companies like a healthy safety margin for unexpected demands -- such as those that whittled Nevada's $138 million fund to about $1 million today.

The Assembly holdouts have frequently cited the fund's proposed $30 million level as a good potential cut, but Krolicki said cutting the fund could be penny wise and pound foolish.

He said the rainy day fund could play an important role in the evaluations performed by the professional analysts, and cautioned that taxpayers should take that seriously. "When you're talking billions of dollars, a small effect will cost millions," he said. The analysts agree.

"It heightens our concern," Jacob, with Standard & Poor's, said of the emergency fund's dwindling value.

Krolicki said it is frustrating for him, as the custodian of Nevada's good "AA" or better rating with the major companies.

"I don't have a vote. I don't have a veto," Krolicki said. "I just have the responsibility of managing the state's finances with the outside world."

If he has any consolation, it may be that Nevada is not alone. Five other states have also failed to deliver balanced budgets and are mired in similar controversies. All of them, according to bond analysts, face threats to their ratings. California is the standout, facing a record $38 billion deficit and a budget impasse that threatens to shut down the state government.

Jacob said two years ago, the 50 states had cash reserves of about $40 billion. Today they have $5 billion in reserves, and those funds are rapidly shrinking.

"Hands down, its the worst financial situation for the states in the last half-century," Krolicki said.