Of Note Nevada

Senate Candidate Debate

Earlier today Nevada Newsmakers hosted a raucous and informative debate with the Republican candidates for state Senate District 4.  The seat, located in a heavily Republican district, is open as the incumbent Senator Randolph Townsend is term-limited.  You can watch the debate at www.nevadanewsmakers.com.  It provides some good insights into the platforms and personalities of the various candidates.

Now What?

As all remain hopeful that the recent special session will keep the state budget in the black through the biennium, the looming problem of a budget deficit that could reach $3 billion (around 50% of the general fund ) in the next biennium inches closer.  Anjeanette Damon wrote a comprehensive overview of the situation here.

The stimulus crutch will be gone, and most of the temporary tax increases from the 2009 session are set to expire.  The fiscal problem facing the state is severe and the solutions that come out of the 2011 session will surely reverberate for years.  Going into an election year, candidates are loathe to discuss specific ways to solve the problem, as nearly all solutions will be difficult and unpopular.  Other states have enacted a variety of solutions, including tax increases and spending reductions, to solve their budget problems. 

But the sheer magnitude of the upcoming deficit in Nevada means even a combination solution will require dramatic action on both the spending and revenue fronts.  Consider that the two largest tax increases in Nevada history occurred in the past decade, each being around $1 billion.  Another tax increase of that size would only go to about 1/3rd of the budget deficit.  Consider also that the SAGE Commission recommendations are estimated to be $2 billion.  And given that much of the SAGE recommendations are long-term savings, even implementing every recommendation in the next biennium (which is impossible anyway) will not solve the budget shortfall.

With respect to existing revenues, the state is projecting general fund revenues of approximately $2.7 billion for the 2011-2013 biennium.  In terms of actual dollars, that equates to revenues received in the 1995-1997 biennium.  In terms of dollars adjusted for inflation, it's equivalent to revenues received in the 1989-1991 biennium.  (Information courtesy of the Nevada Department of Administration).

In hopes of an economic turnaround, the state has swept nearly every reserve fund possible in forestall further cuts to operating expenses.  While this action has allowed the state to keep it's budget balanced for the current biennium, it leaves a significant funding cliff for 2011-2013.  The budget decisions that seemed so contentious and difficult in 2009 and 2010 will likely seem easy compared to what is to come in 2011.

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The Bigger Question in the Health Care Debate

The vigorous debate on the health care bill has largely focused on policy.  Questions such as whether the bill will help or hurt and how expensive it will be for Americans are important and strong arguments have been made on both sides.  But there is a deeper more fundamental question on the bill that has little to do with policy and more to do with the scope of Congressional authority.

One aspect of the health care bill in particular brings this question to light.  The bill includes a mandate, effective in 2014, that Americans obtain health insurance or face monetary penalties.  This part of the bill was enacted by Congress under the authority of the Commerce Clause of the United States Constitution.   While the scope of Congressional authority under the Commerce Clause is undoubtedly broad, some legal scholars have opined that Congress has exceeded the limits of their power with the insurance mandate. 

The analysis goes like this.  The Commerce Clause has traditionally been used to regulate economic activity of an interstate nature.  For example, Congress has passed legislation limiting the amount of wheat that a farmer could grow in an attempt to avoid wheat surpluses.  That legislation was upheld under the Commerce Clause because farmers were willing participants in the wheat industry, and wheat prices had national economic impacts.    Congress has also used the Commerce Clause to pass legislation regulating the growth and possession of home-grown marijuana for personal medical use.  As with the wheat legislation, the marijuana legislation was upheld because it regulated a class of willing participants engaged in the production of a tangible good.

Critics of the health care bill point out that the difference with the insurance mandate is that instead of regulating economic activity, Congress is attempting to regulate economic inactivity.  In other words, Americans will be required to enter into private contracts with insurance companies not because they are willing participants in a particular economic industry, but because they happen to be Americans.  

Those critics point out that if there is a justification under the Commerce Clause for such legislation, there are effectively no limits on what Congress can do under the Commerce Clause.  For example, could Congress seek to stimulate the economy by passing a law that every American must buy a new car or face a monetary penalty?  It might sound far-fetched but it's a similar Commerce Clause rationale as the insurance mandate.   

At the end of the day, and despite how one feels about the policy of the health care bill, the legislation raises fundamental questions about the limits of federal power.  The answers to those questions hold significant ramifications for Americans both today and tomorrow. 

Who Can Represent the Governor in a Lawsuit, Redux

With the passage of the health care bill, the Governor has renewed his call for the Attorney General to file suit to challenge the legality of the bill.  Earlier in this blog, I wrote a post about what might happen if the Governor demanded the Attorney General file a lawsuit and the Attorney General refused.  Now that the health care bill has been signed into law and other states have already filed legal challenges and the Nevada Attorney General has refused to comply with the Governor's request that Nevada join in the litigation, that question deserves further scrutiny.

You can see a copy of the primary legal challenge to the health care bill here.  Thirteen states joined in this lawsuit, and you can see that the plaintiffs are each respective state "by and through" their Attorney General.  The case was filed in a Florida federal court.  Another case is pending in Virginia.

NRS 228.110(2) says that ""[n]o officer, commissioner or appointee of the Executive Department of the Government of the State of Nevada shall employ any attorney at law or counselor at law to represent the State of Nevada within the State, or to be compensated by state funds, directly or indirectly, as an attorney acting within the State for the State of Nevada or any agency in the Executive Department thereof unless the Attorney General and his deputies are disqualified to act in such matter or unless an act of the Legislature specifically authorizes the employment of other attorneys or counselors at law."   (emphasis added).

Because the litigation in which the Governor wants to join is pending outside of Nevada, the general prohibition on hiring outside counsel in the statute may be inapplicable.  In that case, the Governor could be within his legal authority to utilize outside counsel to join in the pending litigation over the health care bill, so long as that litigation is conducted outside of Nevada.  On the other side of that argument however, NRS 228.110(1) says that the Attorney General is the legal adviser on "all state matters arising in the Executive Department," which could be interpreted to mean that only the Attorney General can represent the state outside of Nevada.  The issue is uncharted legal territory in Nevada, and it will be fascinating to see how this one unfolds.

On the political side of the issue, the Georgia Attorney General is facing talk of impeachment after he refused a similar order to file suit from the Georgia Governor.  You can read about it here.  Governor Perdue has since talked about hiring outside counsel to represent the state.  The Nevada Attorney General will likely catch similar political heat over her decision in the months to come.

Another Special Session?

One instance of action and one of inaction at the recent special session may be grounds for another special session in 2010.  At the session, the Governor and Legislature approved the transfer to the general fund of approximately $62 million from a fund designed to build a wastewater pipeline in Clark County in order to help with the budget crisis.  Now, multiple groups who have either paid into that fund or oversee that fund have filed lawsuits against the state to prevent the transfer of those funds.  Jon Ralston has copies of the lawsuits here.  If those lawsuits are successful, it would create a $62 million dollar hole in an already tenuous patchwork of budget solutions.

Inaction by the Legislature may also result in a further special session.  The Governor asked that the Legislature consider a clarification of water law in response to a recent water decision from the Nevada Supreme Court that could jeopardize long-existing water applications.  The Legislature focused its energies on the budget solution and did not address the water case.  However, numerous water rights advocates, including former state engineers, testified yesterday in favor of another special session to address the issue.  You can read Cy Ryan's account of yesterday's hearing here.  Further hearings will likely be held and ultimately a formal recommendation from the state engineer will be presented to the Governor.

The odds of a special session happening anytime soon, however, are likely remote.  Because of the prohibition on fund-raising before, during and after a special session, and because of the many heated primary races, there will likely be little appetite to go back into special session until after the June primaries at the earliest.

The Fiscal Crystal Ball

Yesterday I attended the annual Nevada Taxpayers Association luncheon in Las Vegas.  The keynote speaker was renowned economic forecaster Dr. John Silva of Wells Fargo.  Other panelists included Jeremy Aguerro from Applied Analysis, Bill Anderson from the Nevada Department of Employment, Training and Rehabilitation, Kevin McCarthy of the Arizona Taxpayers Association, David Kline of the California Taxpayers Association and Dale Craymer of the Texas Taxpayers and Research Association.

Dr. Silva pained a fairly optimistic economic picture for Nevada, opining that while Nevada remains in a recession and will likely be in one for at least another year, signs of recovery are present and Nevada could come out of the recession in a good position "as long as it doesn't do something stupid."  Dr. Silva noted that both California and Oregon have become increasingly unfriendly to businesses, leading many of those businesses to look more for more friendly tax climates.  Nevada, with no personal or business income taxes, is primed to capture many of those fleeing businesses. 

Mr. Aguero noted that Nevada's heavy reliance on sales and gaming taxes is increasingly difficult for budget planning purposes as per capita revenues from each tax continue to decline year after year.  Mr. Aguero also noted, however, that there is "great danger" in changing a tax structure at the bottom of an economic recession.  Mr. Aguero also discussed how uncertainty over water rights applications in Nevada (as the result of a recent court decision) can have detrimental economic impacts as investors worry about the existence and availability of water for Las Vegas in the future.

Mr. Anderson noted the looming problem of repaying federal loans taken in Nevada (and many other states) in order to pay unanticipated and expensive unemployment insurance claims.  Nevada had a healthy reserve fund for such claims, but once unemployment reached 13% the level of claims outgrew the reserve.

And to show that Nevada is not alone in the current recession, representatives from California, Arizona and Texas all spoke to the budget challenges facing those states.  California's representative noted California is 6 billion (with a b) short on its budget just since June of 2009.  Arizona's general fund revenues have declined a staggering 35% since 2007.  And Texas faces similar problems and budget gimmickry to make ends meet.  A common theme emerged from all representatives - their government has continued to put off difficult decisions in hopes that the recession will end soon and the economic climate will improve, while using stimulus funds as a crutch to minimize impacts to operational expenses.

The Dust Settles on the Special Session

Early this morning the Legislature concluded its 26th special session.  In a showing of bi-partisanship and cooperation between the executive and legislative branches, elected officials enacted a series of fixes (many of which are temporary) in an attempt to shore up the general fund budget deficit for the current biennium.

The major components of the plan, including spending reductions, have been comprehensively covered in the mainstream media.  Here are a few of the other aspects of the plan, including what ended up in the plan and what was proposed but didn't make it.

IN

Increased mining fees

Increased gaming application fees

Tax Amnesty (penalty and interest waiver on certain tax payments)

Increased bank foreclosure fees

Removal of a sales tax increase sunset provision in Clark County with the money going to road construction

Increased business filing fees

Removal of prohibitions on certain generic drugs in Medicaid

A desk audit of the Insurance Division and the fees and taxes collected

Increased license fees for unarmed combat

A change to the use of student test scores for teacher evaluations in order to apply for Race to the Top funds from the US Department of Education

OUT

A change to water law in response to a recent Nevada Supreme Court decision

Sales taxes on internet sales

Changes to the collective bargaining process

Poll Shows Angry and Frustrated Voters

A new poll from renowned national pollster Glen Bolger shows that Nevada voters are generally dissatisfied with their government and are looking for change. 

37% of those involved in the poll described themselves as Republican, 42% as Democrat, and 18% as independent or tending to lean towards one of the parties.  Interestingly however, when asked if they would vote for the Republican or Democrat running in their legislative district, 34% picked the Republican and only 28% picked the Democrat (with the rest generally undecided).

80% said that the situation in Nevada "has pretty seriously gotten off on the wrong track."

Perhaps unsurprisingly, the primary issue of concern to voters is "jobs and the economy" at 66%, while a subject that has dominated the national headlines of late, health care, came in at just 13%.  Taxes were even lower at 12%.

64% believe the worst is still to come in this recession.  And as we begin the third special session on the budget shortfall in Nevada, 79% believe the budget shortfall is "very serious," compared to 62% who believed so in May of 2009.

On the issue of taxes, more people (47%) believed it was prudent to raise taxes to resolve the budget shortfall than to reduce spending (38%).  However, 58% felt that the tax burden in Nevada was "about right" and 60% felt that tax increases would increase unemployment, and only 26% felt that spending cuts would "hurt important programs." 

On Jon Ralston's "Face to Face" earlier this evening, Glen Bolger rightfully described the poll as voters sending "mixed messages."  The unpredictable nature of voter's responses, combined wtith the clear seriousness of the budget situation, threatens to leave many elected officials in a very tough spot, with unforgiving voters demanding straightforward and effective solutions to exceedingly difficult problems while disliking any of the most likely outcomes. 

Ratcheting Up the Risk Factor

When it comes to fixing budget deficits, there are three primary methods:  reducing ongoing operational expenses;  digging into contingency savings;  and increasing revenue.  In 2008, the State swept many contingency accounts to react to the budget shortfall (including the largest, the rainy day fund), and those accounts were not replenished in 2009.  The proclamation for the special session to begin on Tuesday lists further sweeps of contingency accounts.  While the Governor and Legislature continue to seek funding sources to solve the immediate short-term budget problem, doing so exposes the State to significant financial risks.  Some of those risks include:

Wildfire:  Nevada had a relatively light wildland fire season in 2009, but a bad season in 2010 could lead to millions in unplanned for and unbudgeted state expenses. 

Torts:  The tort claim fund is used to pay settlements and judgments primarily resulting from negligence by state employees.  Reductions in the tort claims fund could lead to a higher possibility of a large judgment against the State in a case that could have been settled if funds had been available.

Insurance Insolvency & Taxpayer Bonds:  These funds were set up to protect against insolvency by insurers, and to protect the state from default by businesses with tax debts.  In a distressed economy, the risks of insolvency and default increases, which could place further pressure on these funds.

It should be noted that these funds will not necessarily be drained to zero, but if what is left in these funds is exhausted, the state government will need to go back to the general fund in order to make up the difference, further straining a fund that is already under severe pressure.