Audit shows ‘sloppy’ work

CARSON CITY -- State auditors said Monday that Lt. Gov. Brian Krolicki broke state law by not depositing $6 million in state-earned fees into the state treasury during his two terms as state treasurer.

The audit will be turned over to the attorney general's office for a follow-up investigation, said Assemblywoman Sheila Leslie, D-Reno, chairwoman of the Legislature's audit subcommittee. She declined to say whether she believed criminal charges should be filed against Krolicki. Twice during the audit presentation hearing she said Krolicki's office was guilty of "sloppy" accounting practices.

"It is so amazing to me," Leslie said. "I can't fathom how this happened."

Auditors told the subcommittee that Krolicki allowed Strong Investments and Upromise Investments -- two of the four national mutual funds running the state's $3.3 billion College Savings Trust Fund -- to retain $2.8 million in fees that should have been given to the state.

In addition, a Georgia consulting firm, G.I.F. Services, had been allowed to retain $3.2 million in its account funds that should have been given to the state, according to the audit.

Letting the $6 million remain in private companies' control effectively cost the state $38,000 in interest that it would have otherwise earned on that money, the auditors said.

The money the companies held was from fees the state had earned by sponsoring the college investment program.

None of the money that parents invested for their children's education is missing or ended up in an improper account, according to the audit. In fact, the investments are flourishing, and parents should be pleased at the money they are earning, Leslie said.

Leslie noted, however, that the state advanced $4 million to the treasurer's office to start the savings program in the 2001 session.

"A little more than $3 million is still owed," she said. "We need the money. We might have had it paid off already if we knew $6 million was there."

Krolicki attended the audit presentation and defended his actions.

"We followed legal and professional accounting advice every step of the way," he said. "I was following the advice I received. All the monies have been accounted for to the penny."

But, he added, he takes "full responsibility" for what happened. "I know where the buck stops," Krolicki said.

The College Savings Trust Fund program was established to allow parents to invest money in nationally recognized mutual funds to build up college funds for their children.

More than 300,000 U.S. parents have invested in the program, including 4,623 in Nevada.

During Monday's presentation, auditors noted that the state controller's office, then run by Kathy Augustine, decided in 2002 against providing accounting oversight over the college savings trust fund program. Under her direction, the program was moved out of the state accounting system.

Augustine died in July 2006 under suspicious circumstances. Her husband, Chaz Higgs, is charged with murder in her death and his trial is slated to begin June 18.

New state Treasurer Kate Marshall contacted the state Legislature in March after she could not account for the state college trust fund fees. She said she will implement the audit recommendations designed to ensure state control of all fees.

Audit subcommittee member Sen. Bob Coffin, D-Las Vegas, praised Marshall, a Democrat, for coming to the Legislature with her concerns about the fees.

Krolicki is a Republican, and the subcommittee has two Republican members, Sen. Dean Rhoads of Tuscarora and Assemblyman John Marvel of Battle Mountain. Rhoads made no comment about Krolicki's actions. Marvel mentioned three times that the audit found no money was missing.

Marshall said she has been in contact with the mutual fund managers, lawyers, consultants and others and intends to seek return of any money that should have been given to the state.

While the $6 million has been found and Krolicki controlled how the money was spent by the private companies, auditors found the Reno-based Rose-Glenn Advertising spent $1.33 million more on advertising than allowed by state contracts in the three fiscal years ending June 30, 2006.

In the 2005-2006 fiscal year when Krolicki announced his candidacy for lieutenant governor, advertising expenses exceeded the contract limits by $878,705.

Television ads that ran at the time showed Krolicki surrounded by children as he touted the benefits of the college fund savings program. Krolicki's primary opponent, Barbara Lee Woollen criticized Krolicki for appearing in the state-sponsored ads during an election. He secured an Ethics Commission opinion that cleared him of any wrongdoing.

After the audit presentation, Krolicki contended that Upromise was obligated by contract to spend $500,000 a year of its own funds on advertising the Nevada college saving program. He said the company may have mistakenly used state funds and hired Rose-Glenn to provide that advertising.

When questioned about the ads, Krolicki said most state treasurers appear in college savings program ads and he did nothing wrong. He added that most of the ads appeared late in 2005 and early 2006, not close to the November election.

Critics also blasted Krolicki last year, alleging he interceded to throw business to his mentor, former state treasurer Bob Seale in 2003 when Seale was a consultant to G.I.F. Services. Krolicki began his career in state government as deputy treasurer under Seale in 1990. Krolicki became lieutenant governor in January.

G.I.F. received $300,000 in state-earned college investment trust fees in 2005 and 2006, although the state was not contractually obliged to make those payments to the company, according to the audit.

Auditors also noted Monday that the Orrick, Herrington & Sutcliffe law firm of Sacramento was paid $985,000 for legal services for the tuition savings program over a four-year period.

In the 2001-02 fiscal year, the company billed the state $428 per hour for services, although the contract specified a $225-per-hour limit, according to auditors.

Auditors also noted one of the consultants for the college program billed the treasurer's office for $80,000 in consulting fees and $32,041 in travel and meal expenses, but the consultant provided no documentation for those expenditures.