STATE BUDGET:

Borrowing may be the worst option except for all the rest

Thursday, Dec. 4, 2008 | 2 a.m.

The state borrowed money in 1881, after a rash of bank closures and a faltering mining industry, state archivist Guy Rocha said. The Supreme Court weighed in after the debt was challenged. In Jacob Klein v. Gov. John Kinkead, the high court ruled the debt was legal. The opinion said the Legislature has the power to issue debt “at any time.”

Carson City — As the state considers taking the dramatic step of borrowing money to avert still more budget cuts, officials might find comfort in knowing that the maneuver would not be unprecedented.

Indeed, in the ’70s and ’80s, the state borrowed money to pay ongoing expenses and weathered the financial storm.

Of course, that was the 1870s and 1880s, and the money went to build an insane asylum, among other things.

But the point stands: Borrowing is not unprecedented. The state did not wither and die.

Though the deal is not final, there are no more meetings scheduled between the legislative leadership and Gov. Jim Gibbons, and the special session to be held Monday and Tuesday is still set.

The latest agreement to cut the budget combines stopgap financing, questionable policy and more cuts to services.

A key part of that plan is allowing the state to borrow $160 million from a pool of local government money. That would break over 100 years of precedent — of not using one-time, borrowed money to pay for ongoing expenses — but there’s bipartisan resignation to the need.

But that’s not the only financial sleight of hand being considered. Lawmakers are also considering changing a state law that requires Nevada to keep a 5 percent budget reserve. That would free up the $187 million currently in reserve.

It might be awkward to defend before a civics class, but the borrowing, lawmakers say, is better than the alternatives — closing the state’s high risk juvenile correction center, was one proposal.

“If we did not have a severe economic crisis, we would not do it,” said Assembly Speaker Barbara Buckley, D-Las Vegas. “Don’t get me wrong, this is an extreme emergency. But it’s more responsible than what other states are doing, which is issuing bonds.” (That alternative, warned Treasurer Kate Marshall, would be expensive and could affect the state’s ability to borrow money in the future.)

The state has cut $1.2 billion from the current budget cycle. But much of that was in delaying one-time funding and draining savings accounts.

Before tackling the looming problem of 34 percent cuts for the next two years, legislators have to cut about $340 million from the budget for the biennium that ends June 30.

Assemblyman Morse Arberry, D-Las Vegas, chairman of the Assembly Ways and Means Committee, says funding for public schools will not be reduced further. But the Health and Human Services and Corrections departments — two of the biggest agencies in state government — will endure more cuts.

Dan Burns, the governor’s spokesman, said the governor does not want borrowing to become a habit, but said it might be necessary.

He noted that the really tough decisions will come in February, as the governor and Legislature hammer out the state’s budget for the next two years.

Faced with a budget shortfall as large as 34 percent, Burns said, “You can’t raise taxes enough, or cut spending enough to balance the budget. It’s going to take some innovative thinking.”

Marshall said the $160 million loan would give legislators more time to come up with long-term solutions. Instead of rushing to chop the budget over a two-day special session, they could make the cuts in February.

But it seems that state legislators are under no requirement to make those cuts.

The Legislature’s top lawyer, Brenda Erdoes, said the plan to borrow $160 million appears to pass constitutional muster. She said the Nevada Constitution allows the state to borrow money, and never specifies that it can only be used for capital projects and not ongoing expenses.

“It’s like any other borrowing,” she said of the tentative agreement.

Even so, there is a legal precedent.

The state borrowed money in 1881, after a rash of bank closures and as the mining industry faltered, said Guy Rocha, the state archivist. The Supreme Court weighed in after the debt was challenged.

In Jacob Klein v. Gov. John Kinkead, the Supreme Court ruled that the debt was legal. The opinion said the Legislature has the power to issue debt “at any time.”

To pay back the loan, the state also increased taxes on property and mining, Rocha said.

So it appears Nevada’s balanced budgets have been more of a practice than a constitutional requirement.

Sun reporter Cy Ryan contributed to this story.

Discussion: 12 comments so far…

By KDR81

12/4/08 at 8:46 a.m.

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They always threaten to close something which will seek sympathy from the public...never do they go out and find duplicate spending, or unnecessary spending, or figure out ways to lower costs and do the same service or better with less.

If Wal-Mart can do it with $7 an hour employees why can't the government get creative with its $50,000 a year employees?
By davidwayneosedach

12/4/08 at 9:15 a.m.

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I think the states should be bailed out before the Big Three and AIG. The states will still be around after all else has gone bankrupt.
By jfnance32

12/4/08 at 9:19 a.m.

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I think that they should every person in the USA $50,000.
By UNLVStud

12/4/08 at 12:47 p.m.

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I agree that States, like ours that have already made the cuts and have worked to be fiscally responsible, should be bailed out.

But the bail out can only do so much. It would have to be used to finish ongoing projects. It couldn't be used to pay on going salaries of employees. Unfortunately, those employees make up most of the budget and roll up costs are just going to get worse each year.

Someone needs to propose a real solution to this situation. Reform the tax structure, encourage new businesses to relocate to Nevada, and regulate those industries that got us in this mess in the first place. Only then can we become fiscally sound again.
By LasVegas2009

12/4/08 at 1:39 p.m.

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Top officials and all state employees should incur a 5%-10% cut in all benefits and pay. Problem solved back to budget surplus its that easy. The commercial sector has taken up to 50% hit in pay. All businesses have and are taking a hit but not the state employees they are still drawing the same salary they had during the boom and some even more with annual pay raises. They do not have to produce more to earn more just continue to do the same job they did before. I also think a huge reduction in retirement benefits is in order.
By poker_jim

12/4/08 at 6:13 p.m.

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The state legislators bought the fallacious beliefs of endless home price appreciation and exponential growth in the general state economy. And why not--politicians love to give away money.

Time to deal with reality, as businesses are currently doing. Liquidate the state workers and their benefits to a sensible level
By truthfromreason

12/5/08 at 1:31 p.m.

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"They always threaten to close something which will seek sympathy from the public...never do they go out and find duplicate spending, or unnecessary spending, or figure out ways to lower costs and do the same service or better with less.

If Wal-Mart can do it with $7 an hour employees why can't the government get creative with its $50,000 a year employees?"

KDR - Your posts are always entertaining, to say the least. First of all, that wacky "duplicate" spending and phantom "unnecessary" spending you point out was eliminated during the first of three rounds of cuts. Now they are just cutting vital services, and soon, plenty of jobs.

Second, I don't know about you, but the last time I went into wally world I wasn't all too impressed with those $7 per hour employees. You really want those clowns running your state? You want some high school dropouts and drug addicts planning parks and road projects, teaching your children, guarding prisoners, policing your neighborhoods, designing your power grid, studying and implementing health and budgetary policy, etc.

Good idea, that will make our situation much better. While we're at it, we should hire Taco Bell employees to work in all of the state mental health facilities - it will give them a chance to share their drugs with people who need them.

Think before you post, people.
By truthfromreason

12/5/08 at 1:37 p.m.

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"Top officials and all state employees should incur a 5%-10% cut in all benefits and pay. Problem solved back to budget surplus its that easy. The commercial sector has taken up to 50% hit in pay. All businesses have and are taking a hit but not the state employees they are still drawing the same salary they had during the boom and some even more with annual pay raises. They do not have to produce more to earn more just continue to do the same job they did before. I also think a huge reduction in retirement benefits is in order"

Seriously, Lasvegas2009 - Every time someone starts their sentence with "Problem Solved" or "The problem is" I stop listening - except for your post because I knew it would be as entertaining as KDRs. The world really is not that simple - and neither is a massive state budget shortfall. It takes multiple solutions and cooperation on many levels. Even the resoundingly stubbor LV C of C came out today and said that we need to look at solutions that include new revenue.

I don't mean to be like the jfnance post police or anything, but I thought you folks were smarter than the RJ readers.
By redferret

12/5/08 at 1:56 p.m.

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For some reason truth KDR honestly believes that Walmart has sharp and innovative employees. Everytime I go there, the people are listless, evasive, and borderline obstinant. Trust me the $7/hour folks aren't reinventing the corporate paradigm for Walmart.
In any case, Walmart's such a crooked company it does border on funny. They incidentally run afoul of labor laws, wage laws, and environmental laws. Great corporation that would rather have its workers on welfare than to give them some kind of healthcare.
By truthfromreason

12/5/08 at 2:12 p.m.

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Great point, redferret.

See, these are the kind of details that KDR and his "world is black and white" brethren need to examine.
By pbud33

12/5/08 at 9:19 p.m.

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If there is no money, then they should have been more responsible in the past, and should continue to downsize. We do not need more taxes. Our businesses do not need more taxes or more fees or more licenses. We need less government...

You cannot rely on taxes that do not exist yet. There is nothing so vital that they cannot cut more. There is so much waste in our "vital" services. not to mention the waste in the government contracts for infrastructure and etc.

Our courts, police officials, and politicians all practice third party spending, because it is not their money. It is time that they focus on what is important and truly vital. Let's e the state to set an example for what can be done, instead of looking for the easy way out...taking more money from the citizens and businesses.

Fire, paramedic, and vital police services are all that is necessary. Police services should be monitored and downsized, not increased. We need more effective law enforcement, not more law enforcement. It is time that they leveraged our information and technology advancements. We need more effective politicians, not more politicians. We need to privatize DMV so that it will be run more efficiently.

We need to do away with federal protection of the post office, and truly privatize it...force them to run it like a business, if they don't serve their customers, they will lose and be taken over by UPS/DHL/any other of the many better run delivery companys.

It is time citizens force the goverment to spend our taxes more wisely, and more business-like, than to give in to their threats of closures. So close the state offices, close the dmv, close the courts, close them all. Close the state buildings, and start downsizing.

It's not anti-government, its anti-wasteful government spending of our hard earned tax dollars. Less government is always better for the people...
By pbud33

12/5/08 at 9:23 p.m.

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"Second, I don't know about you, but the last time I went into wally world I wasn't all too impressed with those $7 per hour employees. You really want those clowns running your state? You want some high school dropouts and drug addicts planning parks and road projects, teaching your children, guarding prisoners, policing your neighborhoods, designing your power grid, studying and implementing health and budgetary policy, etc."

I agree with your point, but, have you been into our state offices over the past few years? DMV, courts..?? You answered your own question...except we pay them more than $7.00 an hour, but have the same low quality of employee...