Las Vegas Sun

November 22, 2014

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STATE BUDGET:

Borrowing may be the worst option except for all the rest

A LEGAL PRECEDENT — FROM 1881

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.”

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.

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