Legislators feeling budget crunch

J. Patrick Coolican and Cy Ryan

Sunday, March 18, 2007 | 7:23 a.m.

CARSON CITY - A sense of gloom has settled on Carson City, as tax receipts have come in $40 million to $50 million less than expected. It's a small sum in a $7 billion budget, but with many legislators clamoring for new programs, such as an expansion of all-day kindergarten, negotiations will be that much tougher in the coming weeks.

Yet as difficult as those circumstances seem, contrasted with what lies ahead, it's just a little water coming into the basement. In the next decade, the house could get washed away.

Here's the real story about the state's budget outlook:

At some point in the next six to 10 years, the state will almost certainly face the type of fiscal crisis it did before the 2003 tax increase, legislators and budget experts say.

"Growth has never paid for itself," former Republican Gov. Kenny Guinn said. "I've said that as a businessman, a school superintendent, a governor."

What Guinn means is that while the state's population and tax receipts are exploding, the cost of building government institutions - such as schools, roads and prisons - to meet the state's needs, will slowly but surely outstrip the growth of tax revenues.

In other words, sometime in the next decade, the state will face spending cuts or a tax increase.

Few people are even talking about this scenario, let alone planning for it.

Assemblyman Morse Arberry, D-Las Vegas and chairman of the budget-writing Ways and Means Committee, said he doesn't have the staff to do that kind of long-range thinking. They struggle just trying to plan the next two years, he said.

So the Assembly has no real idea what the state's fiscal outlook will be in six to 10 years.

Arberry said it was a frustration: "You have to plan. We tell our kids to plan. We tell them to plan for their future. And then we come here and do it all willy-nilly."

Mike Dayton, Gov. Jim Gibbons' chief of staff, said the governor put significant money in the state's rainy-day fund to prepare for the future. The governor's budget director expects there to be $300 million in the fund in 2009.

Dayton also said the governor is exploring public-private partnerships and other creative revenue sources for the future. And, he said the governor and Legislature might consider looking at revenue flowing to local governments:

"If local governments have surpluses year after year, that's something that should be looked at. If we can't meet expectations at the state level, then that needs to be reexamined. I think legislators share that view that that should be looked at."

Although he reiterated Gibbons' opposition to a tax increase, he acknowledged that in recent decades, the state has gone through major tax increases about every 10 years.

The last one was 2003.

These cycles are related to the costs of growth, Arberry and Guinn said. There are massive upfront costs, such as the price of land for schools and roads. In addition, the price of educating children, treating the sick and imprisoning the delinquents is outpacing the growth of the overall economy and tax revenues.

Moreover, Nevada lags behind the rest of the country in most indexes of social and educational health, which means the public may eventually want to spend more on government programs to move the state forward.

These costs can be difficult, if not impossible, to contain, Guinn said. For instance, Nevada has little control over prescription drug costs for its impoverished and imprisoned.

Sen. Bob Beers, R-Las Vegas and a champion of the state's libertarian Republicans, calls Guinn's entire premise fiction.

Growth does pay for growth, he said.

The 2003 tax increase, he said, was "a deliberate, massive expansion of government." He said there's no reason the cost of education should ever outstrip tax revenues, or that the state's social services can't be reined in to levels closer to other Western state governments (excluding California.)

"On the aggregate, people's incomes run close to (inflation). Should we raise taxes and continually erode their buying power and the quality of their life?"

Arberry's response: "You can only cut so much. You've got a state to run, and it's not going to run itself."

Arberry said another fundamental tax reform, one that makes the state less dependent on gaming and sales taxes, should be considered in the future.

Even if Beers' assertions are true, the state has other long-term liabilities, including an urgent need for more roads: $3.8 billion by 2015; as well as $6 billion owed to state government retirees, and another $4 billion for state government worker health care.

For the short term, Arberry said he has instructed the governor's staff to find $40 million to cut from the budget.

One reason is that construction is down, so sales tax revenue derived from construction raw materials is off, as is money from the real estate transfer tax.

Also, as Senate Majority Leader Bill Raggio, R-Reno, said, if the sales tax slowdown continues, "It will mean a big hit on the DSA," referring to the distributive school fund. Under that fund, a portion of the sales tax goes to the school districts. If that amount falls short, the state must make it up from its revenues. And part of the state's revenue also comes from the sales tax.

So there's a double hit.

Raggio said the distributive school fund shortfall could be $30 million to $40 million. If that's true, then the overall deficit could be closer to $70 million to $90 million.

On the other side of the ledger, Raggio said bills have been introduced for programs beyond what the governor has proposed. He estimates those total "near $1 billion."

Examples, he said, include popular programs such as all-day kindergarten and bonuses for military veterans.

"It's a staggering amount," he said.