When then-Treasurer Brian Krolicki didn't get as much money from the state Legislature as he thought he should to market a state college savings program, he decided to get the funding through other means: routing program fees through "off-line budgets."
That is what a former deputy treasurer, Janice Wright, told the grand jury that earlier this month indicted Krolicki, the state's lieutenant governor, on charges of misappropriation of state funds.
Wright said she repeatedly expressed misgivings to Krolicki and his chief of staff, Kathy Besser, about the way the money was being handled, but they told her it was fine. Besser was indicted with Krolicki on felony charges of misappropriation of state funds.
"I didn't think it was illegal because I had been assured by Kathy Besser that the treasurer had authority to do this," Wright said, according to a transcript of the grand jury proceeding made public Thursday. But, she added, state law "didn't seem to authorize the kind of actions that I was being directed to take so I (was) uncomfortable with that."
The case presented to the grand jury closely resembles the conclusions of a 2007 legislative audit that found that Krolicki broke the law in administering the Nevada College Savings Program.
The audit did not find that Krolicki pocketed any money himself. But the advertising for the college program prominently featured Krolicki at a time when he was running for office and was seen by his critics as state-funded campaign commercials.
Krolicki and Besser are scheduled for arraignment Dec. 30 on the charges. Krolicki's lawyer, Kent Robison, said Thursday that after the evidence is presented in court, it will be clear Krolicki did nothing wrong. A grand jury is a one-sided proceeding wherein the prosecution's case is presented without challenge.
Robison said he plans to show that Wright, a longtime state employee who is now retired, is no whistle-blower. Given that she was the one directing that funds be deposited in accounts outside the state budget, he said, she appears to be blaming others for her own possible misconduct.
Besser has declined comment on the indictment.
In 2001, Krolicki, a Republican, proposed the college program, which allows families to open tax-free investment accounts to save for children's higher education expenses, and it was approved by the Legislature. By 2006, when Krolicki left the elected office of treasurer after two four-year terms, the program had assets of $3.3 billion.
Account holders paid small fees to keep their money in the program. According to the statute that established the program, the fees were supposed to go into a state budget account where the Legislature could access them and direct their use.
Instead, according to testimony heard by the grand jury, Krolicki redirected the funds to other uses, including hundreds of thousands of dollars for marketing and unauthorized legal fees. The funds were held in accounts outside the state budget so there was no transparency or oversight, according to testimony.
Of $11.3 million that should have been deposited in a state account, auditors said, only $5.2 million made it there.
Wright said money began to be funneled away from state accounts after the 2003 legislative session, in which Krolicki had asked the Legislature for $370,000 for marketing of the college program.
That was how much another, more limited education savings program, the Prepaid Tuition Program, was getting. But the Legislature cut the allotment for the Prepaid Tuition Program marketing to $102,500 and directed $82,500 to market the College Savings Program.
When that happened, Wright said, Besser was "upset."
"She said that that was simply not enough ... that she needed more money to be able to market the program and that the treasurer had the authority to do that," Wright testified.
"And I was surprised by that comment. ... I explained that the Legislature provides the authority in the budget that they approve finally and whatever that authority is is what your limitation will be for the upcoming biennium."
In subsequent conversations, Wright testified, Besser told her that Krolicki wanted her to use "off-line budgets."
Despite her misgivings, Wright did as she was told, telling the investment companies that contracted with the state to hold back certain funds, to send money directly to marketing firms without going through the state account or to put money into a separate non-state account.
In one case, Wright said, one of the investment companies that was generating fees for the state wrote a check made out to the State of Nevada, but Krolicki sent it back and asked that the payee be changed to an escrow account with a credit union in Georgia.
"Do you know why Mr. Krolicki wanted that money deposited in that particular escrow account?" Chief Deputy Attorney General Conrad Hafen asked Wright, according to the transcript.
"Because it kept it outside of the state budget system."
"And how do you know that that's what he thought?"
"Because Brian told me that."
Wright said she expressed her qualms to another superior, then-Chief Deputy Treasurer John Adkins.
"I went to him on several occasions and told him I was uncomfortable with this," she said. "I wasn't familiar with how there was authority legally to do this. ... I don't know how you have the authority to have the treasurer spend money that is not going through the budget state system, and he and I would make comments that this was going to get Brian in trouble."
In November 2006, as Krolicki prepared to leave the treasurer's office and turn it over to Democrat Kate Marshall, he asked the board in charge of the college program to change the rules so that all fee money had to be deposited with the state, a rule that, according to auditors and prosecutors, already existed but that Krolicki was ignoring.
"Why was there a specific proposal to do something that was already required?" Hafen asked.
"Because the treasurer did not want to have the new incoming treasurer to have the same opportunity to have off-line funds available for marketing," Wright responded.
"And how do you know that?"
"Because Brian and I talked about it."
When Marshall took over, Wright told the new treasurer about what had been going on, which she thought was improper but not illegal.
Marshall "said, because she was an attorney, this is wrong, this is not legal and you can't do that," Wright said.
"(Marshall said ) it's definitely wrong and we need to go immediately to the attorney general's office."
Interviewed by state investigators, Krolicki said the problem lay with Upromise, one of the companies that managed the college fund.
The state had been "hoodwinked" by Upromise, Krolicki told Detective Leslie Peeler, who testified before the grand jury and recounted his conversations with Krolicki.
Upromise originally agreed to spend $700,000 on marketing in the first year and $500,000 each subsequent year for the college program, Krolicki said. But in 2005, Upromise's contract with the state changed, and the company gave Nevada $300,000 to do its own marketing.
Krolicki told Peeler he was unaware of the change to the contract. Based on the change, state fees were redirected to pay marketing costs without first going through the proper state account, Peeler said.
Despite his denial that he knew about the change, Krolicki signed off on the contract amendment, Peeler told the grand jury.
County Commissioner Chris Giunchigliani also testified before the grand jury. Giunchigliani, a former state assemblywoman who was vice chair of the Ways and Means Committee, heard Krolicki pitch the original idea for the college savings plan.
At the time, Krolicki told lawmakers that the college savings program would gain enough money to help fund another program and the Prepaid Tuition Program and provide money to the general fund, Giunchigliani testified.
She said that all of the money from the college savings programs was to be sent to the treasury and that its use would be determined by the state, not by Krolicki.
"Just because a particular agency may have raised that money doesn't mean it goes back to them," Giunchigliani told the grand jury. "We have a check and balance system. The Budget Act is very controlling. It's to protect the taxpayers' money."
Contact reporter Molly Ball at mball @reviewjournal.com or 702-387-2919, or reporter David Kihara at dkihara@review journal.com or 702-380-1039.