State's lease-purchase plan carries flaws

On Jan. 23, the Nevada Appeal enthusiastically endorsed Nevada State Treasurer Brian Krolicki's lease-purchase plan. This plan allows the state of Nevada to enter into long-term agreements to purchase the buildings that it occupies rather that leasing them from private owners.

I have some concerns about this plan, but before I go further, I must disclose a bias. I do have ties to the development community. On the other hand, as a taxpayer, I have an interest in the efficient and economical administration of government.

It is seductive to think that the state could save substantial amounts of money by owning the buildings that it occupies rather than paying rent to the evil landlord and it is true that the state pays large amounts of rent to private property owners. On the surface, Krolicki's plan to eventually build as many as 25 state-owned buildings in Carson City appears to be a good idea. However, like many things in life, it is a little more complicated.

Firstly, there are the constitutional and accounting issues. The Nevada State Constitution provides at article 9, section 3, that the total Nevada State indebtedness shall not exceed 2 percent of the aggregate of the assessed valuation of the state of that year. In order to comply with the indebtedness provision, the state requires a non-appropriation clause in all of its long-term leases. The non-appropriation clause provides that in the event future sessions of the Legislature do not appropriate money to pay for obligation created by the agreement, the lease is null and void. In other words, no long-term liability is created in the event that state revenues are decreased.

In order to circumvent the indebtedness clause, the Legislature passed NRS 353.500 to 353.510 effective in 2001, creating a convoluted statutory scheme to allow the state to enter into lease-purchase agreements. This scheme has not been tested in the courts to ascertain whether or not it passes constitutional muster.

However, a reading of the statute does not clearly answer the ultimate constitutional question. What happens in the event the Legislature does not appropriate the money required for the payments on the lease-purchase agreement? It appears that the statute as implemented by state officials creates an off-balance sheet Enron style of accounting there by subverting the intent of the constitution.

Constitutional question aside, in 1994 a ballot question to endorse lease-purchase agreements was placed before the voters of the state of Nevada. The voters gave this proposal a two-thirds thumbs down. The Krolicki plan clearly flies in the face of the will of the voters.

Secondly, we must ask does this plan actually save taxpayer dollars? The state is required by federal law to pay prevailing wages (union scale). This can increase construction costs by as much a one-third. The more the building costs, the longer it takes to pay it off, the older the building is when the state owns it free and clear.

Does the Krolicki plan save taxpayer dollars? According to news sources, the state would pay $73 million to the holders of certificates of participation over the next 27 years. This means that the net rent will be $1.85 per square foot per month. In addition, the state will have to pay for the building expenses such as utilities, maintenance, and janitorial, which typically add 35 percent to the net rent for a total gross rent of $2.50 per square foot per month.

The agency that will occupy this new building presently pays a gross rent of $1.25 per square foot. It is difficult to understand how the taxpayer benefits from paying double rent for 27 years in order to own a building that may well be outdated and a maintenance menace by the time it is paid off.

The Kincaid building is the perfect example of what can happen when the government becomes a developer and owner. I was a management analyst for the state and I had the privilege of being one of the first occupants of the Kincaid building. I had a new office with a window, which was exciting after working in the basement of an outdated state- owned building that was subsequently demolished. Shortly after we moved in, it became apparent that the Kincaid building was riddled with design and construction problems. The state has spent millions of dollars to keep the Kincaid building in service. They had to; their investment was too great.

Thirdly, this plan has a negative tax impact for Carson City. The state is by far the largest office user in Carson City and as they move out of privately owned buildings the vacancy rate will increase. At this point, there are no potential private tenants who will backfill the enormous amounts of space that were built specifically to house state offices.

A vacant building is not worth as much as an occupied building and therefore real estate property values on commercial office space will decline and this will result in a lower overall ad valorum tax base. The state does not pay real property taxes so there will be no off-setting revenues from the new state building being constructed. Likewise, there will be no reduction in the demand for city services such as fire and police

This is a complicated issue from a legal, financial, and accounting point of view so it is difficult for the press and the public to properly scrutinize it. However, given the enormous implications for the state of Nevada, for Nevada taxpayers, and for Carson City, it bears close scrutiny. We must be diligent in our analysis and not just accept a simple, sound-bite solution to a complex issue.

Linda Johnson is a 29-year resident of Carson City, a wife, mother and a retired construction law and real estate attorney.