To recover, Nevada must adjust its model

Nancy B. Rapoport

Sunday, Nov. 16, 2008 | 2 a.m.

I’m a bankruptcy lawyer by training, and I teach bankruptcy law. I know what it’s like to have pressing needs and not enough money to be able to pay for all of them, and I know that Nevada is in a difficult situation — far too many needs, and far too little money in the coffers. I’ve also been following, with interest, some of the proposals for dealing with the state’s severe budget shortfall.

The proposal of a salary cut for state employees — to avoid the pain associated with layoffs — creates more problems than it could solve. I can’t speak for all state employees, but I know I sign a new employment contract each year.

Were I to leave mid-year for other employment that paid more, the state would be entitled to seek compensation for my breach of the agreement (including the cost of finding a replacement to teach any courses that I was already slated to teach). Under certain circumstances, a failure on my part (or the state’s part) to perform might be excused under contract law — which means that the nonperforming party would not have to pay damages.

But does Nevada want to have to litigate whether the state’s nonperformance of its obligation to pay the contracted-for salaries constitutes a breach or was excused by unforeseen and unforeseeable circumstances? Moreover, I doubt that a cut would come close to solving the current shortfall problem.

Long-term, though, the real issue isn’t about any stopgap measures. The real issue is what Nevada will look like after it climbs out of any budget crisis. Do we want to base our future economy on industries that are cyclical?

Tourism is, by its nature, cyclical — when times are very bad, discretionary spending is the first to go. People take fewer vacations, and when they do take vacations, they take budget-conscious ones. Businesses cut back on travel for meetings.

If our economy is based on people coming to the state to spend discretionary income, it’s like that old rhyme about the little girl with a curl in the middle of her forehead: When our economy is good, it’s very, very good; but when it’s bad, it’s horrid.

For Nevada to survive, we need to figure out how to sustain sectors that are counter-cyclical — ones that sustain themselves even in failing economies. We need to invest in brainpower. A well-educated populace can adapt to changing circumstances and to bring in ideas and businesses that make Nevada more prosperous.

Nevada is at a crossroads right now: there are many reasons to live here, but there’s a real risk people will leave if they don’t have a solid baseline of infrastructure. We need decent roads, decent medical care, decent protection (police and fire) and decent education. Each of these needs requires a certain baseline level of funding.

Nevada’s history as a low-tax, low-social-services state might be fine for an old-world economy, but in this new global economy, where outsourcing to other nations is becoming more commonplace, Nevada needs to think about how it can remain competitive as a place for businesses and for people to thrive.

To be competitive, we need a good educational system. Not an OK one, not a bare-bones one, but a good one.

In bankruptcy reorganizations, debtor companies have to look to a combination of ideas to survive. They need to trim costs, and they need to figure out where to invest to make the business healthy again.

Debtor companies don’t simply cut to the bone. They can’t, if they want to reorganize, because cutting to the bone deprives them of the necessary building blocks to return to financial health.

Instead, they figure out what went wrong with their old business plans, and they figure out what they can do differently — or they don’t make it through the reorganization process at all. As we’ve all heard, insanity is doing the same thing over and over again but expecting different results.

Our current national financial crisis came about, in part, from the wrongheaded assumption that economies can only go “up”: that housing prices would never plummet, that people would be able to keep paying on adjustable-rate mortgages that adjusted to more than they could afford, and that the securities based on these risky mortgages would pay handsomely for investors.

Human behavior lies at the heart of why those wrongheaded assumptions failed. People can make bad choices — greedy choices, selfish choices and stupid choices. It’s time to make some smart choices.

Nancy B. Rapoport is a professor at the William S. Boyd School of Law at UNLV.