Gibbons plan could have hidden costs, experts say

That’s what financial experts told the Las Vegas Convention and Visitors Authority board of directors on Friday during a talk about a plan by Gov. Jim Gibbons to shift $424 million in room tax revenue from tourism and convention promotion to road construction.

The hidden costs would come in the form of reduced borrowing power and higher interest rates for Nevada public projects if Wall Street lenders think state officials are likely to divert revenue that agencies use to secure billions of dollars in bonds.

Shifting room tax revenue that’s already securing about $234 million in existing bonds could undermine the credibility of future efforts to use projected government revenue to secure borrowed money, said Guy Hobbs, managing director of Hobbs, Ong & Associates.

“There would be a signal to the credit markets that the governing body of this state is inclined to do such a thing,” said Hobbs, whose firm advises the authority. “It is a lousy signal to send to the credit markets.”

Currently, the authority receives 47 percent of the 9 percent tax on hotel rooms in Clark County. This year, the authority will keep $200 million of the $426 million in projected room tax revenue. The rest goes to everything from schools to roads, statewide tourism promotion and payments to local governments.

In its latest budget, the authority also included $28 million to help pay for an $890 million expansion to the Las Vegas Convention Center. By 2010, the authority will need to make $72 million in debt service payments annually, an increase of $47 million it now uses to pay debts.

The proposal by Gibbons would raise $424 million for roads in the next eight years by diverting 32 percent of the authority’s room tax revenue. That, and other diversions of sales and entertainment taxes, would secure $2.5 billion in bonds for roads. The selling point of Gibbons’ plan is that it doesn’t call for any tax increases.

“The state has a wonderful deal,” said Bill Weidner, president of Las Vegas Sands Corp. “Most of our income comes from people who are outside the state.”

Weidner, who supports Gibbons’ proposal and is a longtime critic of the authority, said diverting the room tax is relatively painless because the authority could make up the revenue by raising convention rates or increasing operating efficiency.

“They don’t have a clue how to run a business,” Weidner recently said of the authority. “If I ruled the world, I’d privatize it.”

But Hobbs said moving money that is already pledged to secure bonds could be costly. And John Swendseid, the authority’s bond counsel, said it would be illegal. He said bonds are a contract between borrowers and lenders, and the state and federal constitutions prohibit diverting revenue that’s already securing bonds without replacing the money from another source.

Perhaps more costly, however, could be doubts on Wall Street about Nevada’s promises. If bondholders think the state government is willing to shift revenue after it’s been pledged to secure bonds, they may want more money from borrowers to compensate for the risk.

Although the cost of borrowing money isn’t what taxpayers typically think of when they evaluate the worthiness of a new road or pipeline, under current rates it could be 40 percent or more of the bottom line for a project, Hobbs said.

A swing of just one-tenth of 1 percent in interest could add $6 million to the cost of an $800 million project, he said.

“When we are talking about credit ratings, it is very much akin to an individual’s credit score,” Hobbs said. “The lower their credit number, the more it costs to borrow.”