Of Note Nevada

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.

The State of the State

Today the Governor announced he will call a special session beginning February 23 to address a projected budget shortfall of almost $900 million.  The Governor has yet to issue his official proclamation calling the session, where the agenda for the session will be spelled out.

In his speech, the Governor pointed out the continuing economic woes plaguing Nevada and blamed the Legislature for raising taxes and failing to enact stiffer budget cuts in 2009.  The Governor took potshots at Senator Harry Reid as well, noting that Nevada came in 50th in per-capita stimulus funding.  Just about all that was missing from the critique was a challenge to settle things out behind the bleachers after school.

As for specific budget solutions, neither the Governor nor the Democratic response provided exact details on how to come up with $900 million.  The Governor spoke of reducing state salaries, closing the aging Nevada State Prison, laying off hundreds of state employees, reducing health care levels, and reducing spending for both K-12 and higher education.  The Governor reiterated his vow to not raise taxes, and said he would not look to county or municipal revenue coffers.  The Democratic response from Senator Steven Horsford noted the already severe cuts in state services and disagreed in principle with the Governor's recommended budget cuts.  While Senator Horsford said there is no appetite to raise taxes in a special session, he was very straightforward that tax reform would be on the table in 2011 and that mining and big business would be expected to pay their "fair share."  Senator Horsford also said the state must do a better job of collecting unpaid taxes which seemed somewhat odd given that just recently the Department of Taxation concluded a successful tax amnesty program that brought in $40 million in unpaid taxes without costing the state anything.

What was very apparent in the speech and response was the lack of an agreement between the Legislature and the Governor on how to fix the budget shortfall.  Recent media reports claimed there had been good cooperation and communication between the Governor and the Legislature but that cooperation and communication will certainly be strained by the Governor's aggressive comments about the Legislature.  Leaving the solutions for a budget deficit unresolved also threatens to result in a lengthy and contentious special session. 

As dire as the situation appears now, it will only grow worse in the next biennium when the budget shortfall could reach 50%.  Coupled with the loss of many experienced legislators to term-limits, the 2011 session may well be one of the most challenging sessions in our state's history.  In the current biennium, the challenge for the Governor and Legislature has been to maintain the existing state government.  In the 2011 session, they will have to redefine how that same government functions in the 21st century.

The Latest Round of Fiscal Projections

The Economic Forum is set to meet in two days to provide updated state revenue forecasts for the current biennium.  In an earlier post, I suggested that the shortfall for the current biennium could approach $400 million.  Since then, state revenues have continued to decline and at this point, it would not be surprising if the forecasted shortfall ends up being well in excess of $400 million, possibly even approaching $500 million.  With a fiscal hole of that magnitude, and the apparent lack of cooperation between the executive and legislative branches, the upcoming special session threatens to be lengthy, difficult, and fraught with risky political exposure to elected officials gearing up for an election cycle.

On an interesting legal side note, Nevada law requires that the normal forecasts of the Economic Forum (which occur in the December before a regular session and again in May of a regular session) be used in setting the biennial budget.  However, the statutes are silent as to whether interim forecasts, such as the upcoming forecast, must be used in a special session to adjust an existing biennial budget.  Regardless, both branches used an interim forecast in the summer of 2008, when the Governor called a one-day special session to address budget shortfalls.

Let the Legal Standoff Begin

Today, Assembly Majority Leader John Oceguera penned a letter to the Governor. The letter is in response to a recent directive from the Governor to executive branch agencies prohibiting them from responding to legislative requests for information without the approval of the Governor's Office.  Although the letter is civil in its tone, the inclusion of numerous citations to Nevada law make it clear that the Legislative branch is willing to engage in a legal fight if the directive is pursued.

If the Governor's directive stands, legislative subpoenas will likely start being issued, leaving agency heads in a difficult position.  Presumably the Attorney General will need to weigh in on the issue at some point.

In the meantime, the rhetoric from the executive and legislative branches continue to set the stage for a contentious and lengthy special session, as relations between the branches continue to grow more strained by the day. 

Who Can Represent the Governor in a Lawsuit?

Over the last few days the Governor has threatened to file two lawsuits.  One would challenge the legality of the federal health care bill and the other would challenge the Legislative Counsel Bureau's recent decision to refrain from drafting bills on behalf of the Governor at an upcoming special session.

This brings to light an interesting legal question.  What happens if the Governor asks the Attorney General to file a lawsuit and the Attorney General refuses?

NRS 228.110(1) states that the "Attorney General and his duly appointed deputies shall be the legal advisers on all state matters arising in the Executive Department of the State Government."  NRS 228.170(1)  states that "[w]henever the Governor directs or when, in the opinion of the Attorney General, to protect and secure the interest of the State it is necessary that a suit be commenced or defended in any federal or state court, the Attorney General shall commence the action or make the defense."

 

However, a situation where the Attorney General cannot represent the Governor is contemplated in NRS 228.110(2).  That statute provides 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." 

 

Furthermore, NRS 223.085(1) provides that the "Governor may, within the limits of available money, employ such persons as he deems necessary to provide an appropriate staff for the Office of the Governor . . ."  Governors have historically utilized this provision to include within their staff a licensed Nevada attorney to act as general counsel.

 

Should the Governor pursue a lawsuit on either the health care bill or against the Legislative Counsel Bureau, and should the Attorney General be unable to represent the Governor in that lawsuit, the Governor would likely argue that his general counsel may prosecute the case under two theories.  First, because his general counsel is employed pursuant to NRS 223.085(1), it is a position specifically authorized by the Legislature and is therefore an exception to the general rule of exclusive representation by the Attorney General.   Second, because the Attorney General is unable to represent the Governor, the Attorney General is effectively disqualified under the other exception to the same general rule. 

 

However, this is an issue of first impression in Nevada and if such a lawsuit were filed, it would be interesting to see if the defendant would seek to disqualify the Governor's general counsel by arguing that the exceptions to NRS 228.110(2) do not apply.

 

The Coal Case and the Impact on the Budget

In a post on December 30, 2009 I noted that the budget deficit could increase due to some pending tax refund cases, one of which deals with the taxability of coal burned in power plants in Nevada.  This particular case began in 2002 when Southern California Edison (Edison) requested a refund for use taxes paid on coal burned in its Southern Nevada power plant.  Edison argued that because coal could be subject to Nevada's net proceeds of minerals tax it would be unconstitutional to also subject it to Nevada's use tax.  The coal at issue was mined in Arizona, mixed with water to form a coal slurry, and piped into Nevada where the water was removed and the pulverized coal powder was burned in Edison's power plant.

The Nevada Department of Taxation denied the refund claim and a hearing officer upheld the denial.  The case was appealed to the Nevada Tax Commission.  The Commission reversed the decision of the hearing officer and ordered a refund.  Thereafter, the Nevada Attorney General filed an open meeting law complaint, alleging that the Commission reached its decision in violation of Nevada's open meeting law.  That complaint went up to the Nevada Supreme Court, who agreed with the Attorney General and voided the Commission's decision to grant a refund.  

The case was remanded to the Commission for further deliberation in compliance with the open meeting law.  On February 27, 2009, the Commission changed course and voted to deny the refund.  The Commission held that because coal is not mined in Nevada and because Edison was therefore not subject to Nevada's net proceeds of minerals tax on the coal, it was appropriate to subject Edison to the use tax.  The Commission also held that Edison's refund request was time-barred and that Edison was not entitled to any offset for taxes paid in Arizona.  Edison appealed the Commission's decision to the courts, where the case is currently pending. 

The refund case caught the attention of the Nevada Legislature, who created a supplemental account in the state's rainy day fund with over $30 million in the event a refund was ordered.  However, that supplemental account was drained (along with the rest of the rainy day fund) in a 2008 special session to plug holes in the state budget, leaving no contingency plan for a refund should Edison prevail in the courts. 

The financial impact of a potential refund would be significant as interest on refunds accrues at 6% per year, and would run for over 10 years as the initial refund period claimed by Edison began in early 1998.  Moreover, Edison is not the only power company to import and burn coal in Nevada, and other power producers are surely watching this case closely to determine whether further refunds may be justified.

Baptism by Fire

The Associated Press ran a story yesterday called "Rookies will be  big factor in 2011 Legislature."  The article notes that newcomers will hold at least 17 of the 42 spots in the Assembly, and at least 8 of the 21 spots in the Senate (with some allowances for legislators who avoid term limits and remain in the Legislature by swapping houses).  The story notes that the 2011 Legislature will be confronted with at least two enormous challenges:  the growing gap between government expenses and revenues; and reapportionment of Nevada's legislative districts. 

The challenges in tackling those issues will be exacerbated by several factors.  The last year saw the retirement of the two most senior fiscal analysts at the Legislative Counsel Bureau (although their replacements are experienced veterans in their own right).  The amount Nevada spends on Medicaid continues to climb as unemployment remains high.  The unemployment insurance trust fund is depleted and the state is borrowing money from the federal government to cover unemployment benefits.  On top of that, there are some major tax refund cases pending dealing with complimentary casino meals and the taxability of coal, both of which could further upset the already tenuous budget outlook.  Furthermore, the largest counties in the state are beginning to experience significant downturns in revenue as property tax assessments decline in response to foreclosures and falling home values, which could trigger additional state expenses in order to hold education harmless by maintaining basic school support levels.

These challenges may leave many of the rookie legislators wondering just what they got themselves into come February 2011 when the Legislature convenes for its 120 day biennial session.  Of course, while the challenges will be daunting, there will also be plentiful opportunities for positive and imaginative reform. 

Setting the Agenda

With the possibility of a special session of the Nevada Legislature comes the speculation about what will be and what won't be on the agenda.  Article 5, Section 9 of the Nevada Constitution provides that the Governor "shall state to both houses when organized, the purpose for which they have been convened, and the Legislature shall transact no legislative business, except that for which they were specially convened, or such other legislative business as the Governor may call to the attention of the Legislature while in Session."

There has been a long-running, if subdued, dispute between the Executive and Legislative branches over exactly how far the Governor's power extends to control the agenda of a special session.  The issue has the potential to come to a head if the Governor and Legislature cannot agree in advance how to best resolve the growing budget deficit in Nevada.  The Governor, who is firmly anti-tax, will likely include language in his proclamation prohibiting the Legislature from considering new taxes, raising existing taxes, or otherwise impacting existing tax exemptions.  Legislative lawyers will likely take the position that while the Governor can call a special session to address a budget deficit, to tell the Legislature how they can or cannot address that deficit is tantamount to lawmaking and therefore beyond the scope of the Governor's executive authority.  Similar arguments were raised recently in New Mexico when Governor Richardson included a similar prohibition in his call for a special session.

Of course, heading into an election year the Legislature as a whole may avoid delving into the intricacies of a constitutional debate, making the issue moot by deciding not to consider tax increases in any event.  In that case, we may have to wait until another day to see just how far the Governor's authority extends under Article 5, Section 9.