Auditors say $6 million spent without state permission

Legislative auditors charged Monday that former treasurer Brian Krolicki spent more than $6 million in state money without the legal authority to do so.

The money consisted of fees the state was supposed to get from the Nevada College Savings Program over the past six years.

"Although participant money in the Nevada College Savings Program was properly handled and accounted for, money earned by the state was not."

According to Paul Townsend, head of the audit division, the program earned the state more than $11.2 million in program fees since it started in 2001. But only $5.2 million was ever deposited in the state treasury.

The remaining $6 million was spent by the program's primary contract manager, Upromise, at the direction of Krolicki and his staff, according to the audit.

They emphasized that none of the money is missing. All of it was spent on program expenses, including $1.6 million for marketing and advertising, just under $1 million for legal expenses and $3.4 million paid to the plan advisor.

But the total amount authorized by the Legislature and governor in the budget over those six years was just $1.2 million while total spending was $7.2 million.

Subcommittee member Sen. Bob Coffin, D-Las Vegas, said the audit indicates violations of three separate state laws.

Because of those violations, the audit subcommittee will refer the report to the attorney general for investigation.

Those laws, including the State Budget Act, require all expenditures of state money to be either appropriated or authorized by the Legislature and governor and to be accounted for in a state budget account.

Instead, the money was collected by Upromise, the contractor, held outside the state accounting system and spent at the direction of Krolicki's office.

Subcommittee Chairwoman Sheila Leslie, D-Reno, emphasized that none of the money invested in the plan has been misappropriated and all of it will be there when the parents who entered the college savings plan need it.

The fund has grown to more than $3.3 billion with some 300,000 accounts nationwide, seventh largest in the nation.

"I'm still amazed the state treasurer's office, where you would expect a very high level of accounting to be in place, would do this," Leslie said.

"What are we looking at here? Is sloppy the word?"

Auditor Rick Neil described that as a fair characterization.

A substantial amount of the money used on marketing and advertising was used in 2006 when Krolicki was running for lieutenant governor. He has repeatedly denied his appearances in those commercials were designed to further his political career - a charge made by other candidates in the race. And he was cleared of those allegations by the Nevada Commission on Ethics.

Krolicki said he believed the money was not state funds but money the administrator of the college fund, Upromise, was supposed to contribute to marketing efforts to build the plan.

Krolicki said the responsibility is his: "I know where the buck stops. I'll take that responsibility."

But he said he relied on advice from the attorney general's office, the controller's office and others in setting up the program.

"Every step of the way, the college board and I followed all the legal, accounting and professional advice we received," he said.

Auditors also said there were instances where terms of the different contracts were violated - almost universally to the state's detriment. For example, a review of legal fees paid showed a contract hourly rate of $250. But the actual payment rate averaged $428 during one contract period. And the billings sent by the law firm were sporadic with little explanation or backup - in two cases billing for a period of 21 months instead of monthly as the contract required.

Auditors made a series of 13 recommendations designed to ensure that all money in the future is properly reported, accounted for and spent according to legislative authorization.

Krolicki's replacement, Treasurer Kate Marshall, accepted all of the recommendations saying she has already begun implementing them. It was Marshall and her staff who discovered the illegal spending in the first place.

• Contact reporter Geoff Dornan at gdornan@nevadaappeal.com or 687-8750.