Of Note Nevada

High Noon for the IFC

Throughout the past few years, tensions between the executive and legislative branches have been on the increase.  The constitutionality of the Interim Finance Committee (IFC) has been questioned by the Governor.  The IFC has been fiercely defended by the Legislature.  Those rooting for a legal showdown earlier in the year were disappointed as the constitutional conflict took a back seat to a special session and the primary election.

But now, the conflict is boiling up again and the dynamics between the executive and legislative branches have changed dramatically from just a few months ago.  A Governor with nothing to lose is squaring off with a Legislature disinclined to pay much heed to the final six months of the Governor's term.  In the crossfire are the Department of Business and Industry and the Department of Public Safety, who have been directed to disregard IFC requests for information.

The Legislature is now threatening the issuance of subpoenas, and hinting that fines and even imprisonment could be in store for those who fail to comply.  If the executive branch stands its ground, the legislature will either need to follow through or blink and back down.  And if the matter does proceed to a legal standoff, there will be a host of legal issues rekindling another long-standing conflict in state government between the Governor and the Attorney General.

The Attorney General has already declined to undertake litigation against federal health care reform as requested by the Governor.  As a result, the Governor retained outside volunteer counsel to represent the state.  It seems a safe bet that the Attorney General would similarly decline any gubernatorial directive to challenge the constitutionality of the IFC.  There is always the possibility that the Governor could seek outside counsel again to bring suit.  But there might be another way.  If state agencies are sued for failure to comply with a subpoena, and those state agencies are typically represented by the Attorney General, what happens then?   The Attorney General is required by NRS 41.0339 to defend state employees sued in a civil action from actions arising out of the course and scope of their official duties, and the contempt of court statute is a civil statute.  Could the Attorney General be required by law to challenge the legality of the subpoenas in the process of defending the state agencies?  Could the Attorney General defend against the subpoenas without implicating the fundamental authority of the IFC?  Might the Attorney General refuse to defend the state employees at all?

One way or another, we should know soon whether the conflict is heading to the courts or whether the situation will be defused in some fashion.  One thing is for sure, the Governor has not made things easy on the Office of the Attorney General.

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.

The Internet Tax

The Governor's callfor the recent special session asked that the Legislature consider extending the use tax to online vendors.  The Legislature did not take action on this issue. 

Currently, online vendors without a nexus in Nevada are not required to remit sales or use taxes to Nevada and consequently the purchasers of goods from those vendors do not pay the tax either.

The use tax in Nevada is commonly misunderstood in its application.  The use tax is a compliment to the sales tax.  The sales tax is due when tangible goods are sold in Nevada and is paid by the customer to the retailer who in turn pays the state.  However, when tangible goods are sold from outside of Nevada (and in some other circumstances), such as in an online transaction, the retailer has no legal obligation to pay the state and therefore does not require payment from the customer.  But that does not mean the tax is not owed.  In those situations, the customer directly owes the state the use tax on those goods.  However, because the use tax in this situation is only collected if self-reported by customers, and because enforcement is effectively impossible, many use taxes go unreported and uncollected.  Moreover, many Nevadans are simply unaware that they even owe the state a tax in these situations.

Under the interstate commerce clause of the United States Constitution, states have generally been prohibited from taxing out of state vendors without a nexus in the state.  However, with the recent budget shortfalls across the country states have been more aggressive about trying find ways around that prohibition and to impose use taxes on out of state vendors.  In several states, rather than litigate against such rules, online vendors have simply terminated relationships with in-state affiliates, which has the negative effect of shutting down business for those affiliates.  The vendors thereby eliminate any potential nexus with the state and are able to avoid taxation under the interstate commerce clause.   

Some legislators in Colorado are trying a new tactic.  Instead of requiring online vendors to collect and pay the tax, the proposed legislation would require online vendors to turn over a list of customers and purchases to the state taxing authority, and to provide those customers with a tax invoice showing what they owe on their purchases.  Presumably, the taxing authority would then proceed to collect directly from those customers or alternatively, the online vendor would instead collect and pay the tax as a matter of convenience to its customers.  If that legislation proceeds, it could become a model used by other states looking to shore up declining sales and use tax revenues.  But, the streamlined sales and use tax act under consideration by Congress could accomplish the same result, and in a much cleaner and more uniform manner.  It will be interesting to see if the Colorado legislation gains any steam as Colorado's legislative session goes on. 

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 Battle Over the IFC

Today the Governor vetoed Senate Bill 3 from the special session.  SB 3 addressed employee furloughs and related subjects.  One section of the bill required exemptions to the furlough program to be approved by the Interim Finance Committee (IFC).  The veto message specifically cited to that section as part of the rationale for the veto, noting that the Legislature was giving "itself authority to administer and execute the law in violation of the separation of powers provision in the Nevada Constitution."

This is not the first constitutional clash between the executive and legislative branches over the authority of the IFC.  In the summer of 2009, the Governor and the IFC had a very public disagreementover who had the authority to administer stimulus funds.  The Governor threatened to file suit over the constitutionality of the IFC itself on the grounds that it violated the separation of powers clause by exercising legislative authority outside the bounds of a legislative session.  At the end, the IFC backed down and agreed to the proposals set forth by the executive branch, avoiding a legal battle.

Legislators probably should have expected that any legislative attempts to bestow further authority on the IFC would be met with hostility from the administration.  With no chance to override the veto until the next legislative session, legislators will have to wait a while before deciding whether to push the bounds of their authority.

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

One Minute to Midnight

As I've discussed in earlier posts, there is a long-running legal dispute between executive and legislative lawyers about whether the Governor has the authority to set an end time for a special session.  The issue has never come to a head in Nevada, although there is an Attorney General's opinion to the Guinn administration opining that the Governor can in fact declare a time by which the Legislature must adjourn.  But the issue has not been tested in court. 

Today, the Governor released an amended proclamation on the special session, adding several agenda items for consideration, and also setting the end of the special session at 11:59 p.m. on Sunday.  For history buffs, this provides a nice reference to the doomsday clock, which was used to track how close the world came to nuclear armageddon during the cold war.  With midnight representing all out nuclear war, the closest the clock ever got was 11:58 p.m. in the 1950's.

It's a fitting analogy as the pieces are now in place for the executive and legislative branches to engage in a legal showdown that could forever change how special sessions are conducted in Nevada if an agreement cannot be reached by Sunday night, which could result in either the erosion or solidification of the power of the executive branch.

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.

Some Observations on the Call for the Special Session

Earlier today Governor Gibbons issued a proclamation calling the Legislature into a special session beginning at 9:00 a.m. on February 23, 2010.  Without rehashing everything contained therein, I did note some interesting aspects of the proclamation.

1.  No specific ending time and date is set for the session.  In the two special sessions in 2008, a specific ending time and date was established in the proclamation itself. 

2.  There is no express prohibition on the consideration of new or increased taxes.  Of course, both the Governor and legislative leaders have said that taxes are off the table.   

3.  Some major issues were not included, such as the change to Nevada law needed to apply for Race to the Top funds, and a change to Nevada law to address the recent water law decision in Great Basin Water Network v. State Engineer.

4.  Although the proclamation lists 12 specific issues for consideration, it also concludes by stating that the Legislature "shall consider solutions to reduce state government spending."  In other words, the Legislature is not necessarily limited to considering just those 12 specific issues.  Perhaps the Legislature will take the opportunity to review more of the SAGE Commission recommendations that did not receive much attention in 2009.  (Note: a few of the agenda items are SAGE recommendations). 

5.  The Governor reserves the right to amend the agenda as the session progresses.  An amendment at some point seems a given, and the Governor has significant authority to dictate the course of the session with his ability to set and limit the agenda.