Lean Times Ahead

The state budget is awash in red. Will we learn from our mistakes?

Perhaps you’ve heard: Nevada has a budget crisis on its hands. On the state’s biennial budget sheet, revenues are going to come up woefully short of expenses. If the state budget was your household checking account, you’d be well advised to start eating a lot of ramen, forget about Christmas presents and get overdraft protection.

The exact size of the gap is a point of contention, because revenue projections are really just an educated guess, and expenses are defined by the people setting them. What’s normal spending and what’s excessive? Most reports put the gap between revenues and expenses at $3 billion, while some analysts say it could be half that—still not a pleasant prospect.

So who’s dealing with this problem? At the moment, no one. But that’s by design. It may make for good political theater to accuse your opponent of dodging fiscal reality, but it’s up to elected officials to decide how to balance the budget when the Legislature convenes Feb. 7, and the officials haven’t all been elected yet.

In the meantime, the state is busy crunching numbers. Andrew Clinger, the state’s budget director, required many department heads to turn in budget requests that are 10 percent less than the current fiscal year. Clinger doesn’t have the authority to steer the ship, but he is the one who scans the horizon for icebergs. It’s pretty clear he doesn’t like what he sees.

“You could eliminate everything, and have nothing but K-12 and higher ed, and you would have a balanced budget,” he was quoted as saying by the Nevada News Bureau on Aug. 6. “So the magnitude of the problem that we face, or the challenge that we face going into the next biennium, is huge.”

Virtually everyone who studies the budget seriously—who doesn’t have their name on the November ballot, that is—agrees that there is really only one way out of this mess.

“At the end of the day, the most pragmatic thing is a blend of additional budget cuts and new revenue sources,” says Guy Hobbs, managing partner of Las Vegas financial consultants Hobbs, Ong & Associates. “A lot of people that I talk to in my neighborhood, they are the kind who think you can walk in and lay people off to solve problems. Nothing could be further from the truth. It isn’t that we are bloated with bodies in the public sector.”

So what goes when an already lean state operation has to shed more weight? Indeed, in 2007, Nevada ranked 46th in the number of state employees per 10,000 residents, and 48th in state and local employee compensation as a percentage of gross state product. A lot of Nevadans realize that gutting state departments is not a cost-free solution, Hobbs says. “Most things that you do, there are social consequences that can be measured. If you decide not to educate kids, for example, you can guess that there will be costs down the road.”

So look for a lot of cuts in a lot of places, he says. State employees could see the furloughs and merit pay freezes instituted in 2009 continue, though they are scheduled to sunset in July. The lines at the Department of Motor Vehicles won’t be getting shorter, he says. Education eats up 55 percent of the general fund budget, so it won’t come through unscathed. Class size will come under scrutiny, he says, and extracurricular activities such as sports, music and drama could become pay-to-play. Transportation—school buses—are a likely target. The state’s Millennium Scholarship program, established in 1999 to help high school graduates pay for college, will likely come under scrutiny. Look for possible hikes in tuition for higher education, especially in popular programs.

Mental health services might also see cuts, but that’s an area in which paying Paul robs Peter, Hobbs says. “That’s one of those short-term costs versus long-term costs deals when [people who need mental health services] end up in emergency rooms.”

Perhaps the best guide to what cuts to expect in state services came from Gov. Jim Gibbons’ Spending and Government Efficiency Commission, or SAGE, which issued its final report in January. The SAGE Commission found dozens of ways to trim the budget, and scolded the state for the way it does business in general. “It’s not much of an exaggeration to say that the way the government is organized dates to the horse-and-buggy era,” the commission concluded.

The commission recommended eliminating duplication of state services, doing a better job of managing state real estate holdings, going after federal grant money more aggressively, closing the Nevada State Prison in Carson City, bringing state employee health care plans into parity with those offered in the private sector and privatizing medical care for prison inmates, among other things.

On the other side of the ledger, expect tax increases of a sort. Stephen Brown, director of the Center for Business and Economic Research at UNLV, says legislators would do well to create a tax structure that reflects the state’s economy as a whole. “Nevada taxes a very narrow set of businesses,” Brown says, “primarily hospitality and leisure. As a consequence, our tax base is more volatile than our economy.”

Brown is referring to the “too much reliance on sales taxes” argument, which goes like this: Why do we tax businesses that primarily sell goods, and not businesses that provide services such as consultants or a barber, when 60 percent of our economy is made up of businesses that provide services? Sales, gaming, liquor, lodging and other taxes on discretionary consumer spending make up 67 percent of Nevada’s general fund budget.

A few politicians—state Sen. Steven Horsford, D-Las Vegas, and Assembly Minority Leader Pete Goicoechea, R-Eureka, are two—have dared raise the topic of broadening the tax base. And polls show the public is more realistic about the financial quagmire than gubernatorial candidates Rory Reid and Brian Sandoval, who both still believe it’s possible to cut spending enough to balance the budget.

But Hobbs, for one, sees this as a teachable moment when it comes to how we run our state government. “If we haven’t learned the lesson of select taxation,” he says, “then we are never going to learn it.”

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