LOS ANGELES — Nevada Gov. Brian Sandoval believes he has found a way around the state's lack of general obligation bond capacity.

The state has significant infrastructure needs and no debt capacity anticipated until 2020 under the state's current general obligation bond structure.

In his $6.55 billion budget for the 2013-15 biennium, Sandoval proposed issuing $58 million in GO bonds that would be repaid using revenue from the state's liquor tax, rather than the state's traditional method of repaying the bonds from a dedicated ad valorem levy on property taxes currently set at $0.17 per $100 assessed valuation.

"A portion of the property tax has been the typical mechanism as the primary source of repayment of [GO] bonds," said Jeff Mohlenkamp, director of the Nevada Department of Administration. "Nevada's real estate market has been one of the hardest hit and there is no capacity in property tax to do bonding."

The state will not have new capacity to issue general obligation bonds backed by property taxes until 2020, based on the state's current and forecast assessed valuation, according to the state's GO Debt Capacity and Affordability Report for 2013-15 prepared by Treasurer Kate Marshall.

"We determined we needed to find an additional source of revenue for the bonds, so we researched what other states had done," Mohlenkamp said.

Liquor tax revenues held up through the recession, said Maud Naroll, chief planner in the budget division at the Nevada Department of Administration.

Although the proposed new money bonds would have a different dedicated source of revenue, they would still be secured by the general fund of the state, Mohlenkamp said.

"We are not sure exactly how it would be structured," Naroll said. "The GO bonds might first be secured by the property tax and then by the revenue stream [from the liquor taxes] in the general fund and then by the revenue stream for the entire general fund."

The governor has budgeted $85 million for capital improvement projects in the budget; the amount beyond the $58 million in the bond proposal would come from other funds including federal grants and money allocated for state agency budgets, Naroll said.

The bonds are not for large infrastructure projects, but rather to fund maintenance projects that have been deferred, Mohlenkamp said.

"We do not have a lot of new big capital programs," Mohlenkamp said.

The list of projects includes such things as replacing the boilers in a prison, and heat, ventilation and air conditioning system replacements in a number of buildings, he said. The bonds would fund maintenance projects that have a shelf life of 20 years or more.

If the legislature approves the use of this funding mechanism, the governor might use the same mechanism to fund other capital projects in the 2015-2017 biennium as well. Mohlenkamp wouldn't project beyond that because he's not convinced that there will not be capacity for property tax-supported bonds after that.

Nevada saw the nation's worst declines in property values, and as a result has a lot of room for growth in assessed values over the next seven years, he said.

Public finance attorney Scott Shaver, who heads Stradling Yocca Carlson & Rauth's new Reno, Nev. office, said he's not familiar with the proposal, but given the dearth of new money issuance by the state over the past several years, the bonds would likely be favorably received in the market.

"There has been a lot of interest in the market for the state's traditional GO bonds, because they are conservatively managed by the state," he said.

Nevada GOs are rated AA-plus by Fitch Ratings, AA by Standard & Poor's, and Aa2 by Moody's Investors Service.

Analysts with Moody's said if Nevada issues such new bonds their rating would ultimately be determined after a review of their structure.

"If the bonds are backed by only a certain tax, then they would be rated using a different methodology," said Julius Vizner, a Moody's analyst.

In evaluating special tax bonds, Moody's analysts look at the special tax revenues pledged to the bond and the coverage those revenues provide, said Emily Raimes, a Moody's analyst.

They would also look at the legal structure of the bonds, if there are any limitations on the ability to issue additional bonds, or if reserves are in place, Raimes said.

"If they are backed by a full credit pledge from the state — then we would look less to the special revenues and straight to the GO pledge," Raimes said.

The proposal is consistent with what other states have done to get around debt caps or limits, Raimes said.

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