State owes feds near $900,000 for making interest on unused bond cash
R-C Capital Bureau
The financially strapped state of Nevada is being hit with an unexpected $868,000 penalty by the federal government.
It’s a penalty imposed by the feds for states that invest and make a profit on bond money or federal grants called arbitrage.
In this case, the Public Works Board left some bond money unspent from the 2005 capital improvements program. Director of Administration Jeff Mohlenkamp said in the overall scheme of things, that’s just a tiny portion of the $100 million in bonds issued. But federal law requires the money be used within 24 months. Not only did the state pass three years without using the cash, while that money was in state coffers, it earned more in interest than the interest rate the state was paying on the bonds. In other words, the state made a profit on bond money in the bank.
Mohlenkamp said when that happens, the federal government takes the money.
He said he is reviewing several options for paying the debt – 90 percent of which must be paid by the end of this year. His preferred option, he said, is to take the cash out of the bond interest and redemption fund managed by the treasurer’s office. Controller Kim Wallin, however, said she doubts the state can do that.
“It’s not the arbitrage redemption fund, it’s the bond interest and redemption fund,” she said. “I don’t think statutorily, they can pay arbitrage out of that fund.”
Mohlenkamp said that’s a legal question that will have to be answered by bond counsel.
If that fund isn’t legally available, he said the state would have to pursue General Fund options such as asking for the cash from the Interim Finance Committee’s Contingency Fund.
He said he would rather avoid dipping into limited contingency money in case of a big fire season next year or other emergency.
Mohlenkamp said his other concern at this point is to make sure better reporting is in place to see potential arbitrage penalties coming and prevent them.
That’s not the only financial flap Mohlenkamp’s office is working through with the Public Works Board. Treasurer Kate Marshall Thursday issued a letter to Public Works Manager Gus Nunez questioning why he reverted $8.2 million in unspent bond money from 2008, “without notice to my staff.” Staff analysts caught the deposit two weeks later but Marshall charged that if Public Works had reported the unspent money before the end of the Legislature, lawmakers could have reauthorized it for some badly needed maintenance projects in the state.
She pointed out in the letter that the Board of Finance recently issued $29 million in bonds for maintenance work, to which that $8.2 million could have been added.
Nunez, however, said public works reverts money to the treasurer’s office every year and has never reported it to the treasurer’s staff.
“There is no process set up for us to report on this in the past,” he said. “We close projects each year and revert any money.”
Nunez also pointed out that the $8.2 million amounts to less than 2 percent of the more than $500 million in bonding committed to projects in the 2005 and 2007 budget cycles.
“It looks like a lot of money now when we only have a $30 million budget but what it means is we mis-estimated projects by 2 percent,” he said. “I don’t know how accurate you can be.”
He said it’s a much tinier percentage when you consider that the state’s total CIP for 2005 and 2007 came to $1.2 billion.
Nunez said his office can report to the treasurer when it reverts money and why in the future
Wallin said part of the problem is that Public Works is supposed to spend bond, federal and other money first, using General Fund money last on any project. She said public works hasn’t been monitoring that.
Nunez said that’s in part because his computer system doesn’t say what pot of money is being used to pay bills on a given project. He said that problem needs to be fixed.
Marshall and Wallin said their issue is that the money could have helped create more construction and maintenance jobs either in state service or private industry.
“They should have known certainly in May before the end of the fiscal year that they had $8 million in unspent bond revenues that could have been reauthorized,” said Marshall. “That money is jobs.”
But only the Legislature can reauthorize it to a different use.