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November 24, 2014

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MEMO FROM CARSON CITY:

Why $2.2 billion a better estimate of state’s deficit

Andrew Clinger

Andrew Clinger

Sheila Leslie

Sheila Leslie

Instead of providing clarity, the Economic Forum’s ruling on how much money the state can spend over the next two years set off an even more heated debate on the actual size of the budget deficit.

On one side, there’s Gov.-elect Brian Sandoval and conservatives who say the state has a deficit of $1.2 billion.

On the other side, Democrats and advocates for maintaining current government services say the deficit is $3 billion.

The real number is somewhere in between, about $2.2 billion, according to a Sun analysis.

The budget office, which is supposed to be an impartial authority in such matters, said in October that the deficit will actually be $3 billion. That figure reflected the cost of maintaining government service levels and ending the state worker furloughs initiated in 2009, set to expire in 2011.

Both sides have accused the other of using fuzzy math to further their ends.

“This is clearly the spin coming from the governor’s office to minimize the budget hole, so he can maintain his no-new-tax pledge and convince the public that the problem isn’t as big,” state Sen. Sheila Leslie, D-Reno, said.

Heidi Gansert, Sandoval’s future chief of staff, said it’s wrong to assume that government services will automatically go up in cost.

“The numbers are the numbers,” she said.

But numbers inevitably take on political tinges. They can be manipulated in multiple ways to make a point.

So how big is the state’s money problem?

It’s likely somewhere between the two figures being tossed about — probably about $2.2 billion. In an ideal world people would have the facts before forming opinions, so here’s the math both sides use to bolster their positions, plus why the actual number is likely somewhere in the middle.

$1.2 billion

Sandoval’s team, including state Budget Director Andrew Clinger, on Thursday issued the latest on the state’s financial position. Including some leftovers from the current budget, Clinger said the state will have $5.46 billion to spend.

On the spending side, Sandoval’s staff made some assumptions, including:

• Ten percent cuts in all state agency budgets, which the budget office requested in October. That’s worth $820 million.

• A cut in the Nevada System of Higher Education of $175 million.

• A savings of $480 million by extending furloughs and pay freezes for state workers and teachers.

The problem with that number? The 10 percent cut in state agencies is no slam dunk.

In fact, Sandoval has ruled out some cuts proposed by agencies to protect “the most vulnerable people,” Gansert said. For example, personal care attendants for the elderly and disabled, which cost the state $55 million, would not be cut, she said.

But for every “ugly” cut that Sandoval objects to, his team will have to find a cut someplace else. The university system will protest a $175 million cut, which would likely mean higher tuition and the elimination of more programs.

$3 billion

The Economic Forum projected the state will collect $5.3 billion in taxes over the next two years, assuming that the tax increases passed in 2009 expire. Meanwhile, state agencies said in October they need $8.3 billion to preserve services, according to the budget office.

That figure assumes a loss of $600 million in federal stimulus funding; declines in sales and property taxes will cost school districts $551 million; and furloughs and pay freezes for state workers and teachers end.

The problem with that number? The governor and lawmakers will likely extend the furloughs or some other salary savings. That translates into an easy $480 million cut.

Plus, Clinger said the state budget outlook has improved in some respects — such as people applying for Medicaid or unemployment.

Why the truth’s in the middle

The $480 million savings from furloughs and pay freezes is virtually assured to be extended. So we can subtract that from the $3 billion.

The state has made new projections improving the budget outlook, further reducing the number. Still, the 10 percent ($820 million) cuts Sandoval is including seem a generous assumption — especially considering such a proposal will have to make it through the Legislature.

Same goes with the $175 million cut in higher ed. Students, faculty and school boosters won’t let that happen without a fight.

So add back that combined $1 billion in proposed cuts to Sandoval’s number. That leaves a $2.2 billion deficit — and tough decisions for legislators and the governor to make.

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  1. Thank you for the analysis of the real scope of the problem.

  2. Stop looking at the general fund. If you want the big picture look at total state spending.

  3. 1. Does the $2.2 Billion estimate include unfunded and underfunded Pension Benefits? I suspect that is a very big number.

    2. Is the $2.2 Billion estimate of the deficit only in the general fund? What would the deficit be if all state spending were included?

  4. For over a year I been trying to figure out why Mr. Sandoval would not release his plan to balance the state budget. He kept saying he would cut $500,000 out of the budget but would not tell us how.

    I finally figured out why he would not tell us what he is really going to do. He is going to cut many services out of the state budget and make the counties/cities responsible for those services but he won't fund them from the state any longer.

    If he had disclosed that I have a feeling he would not have been elected. I hope I am wrong but it is starting to look like that is the real plan he had all along. Please Mr. Sandoval, prove me wrong next month.

  5. All very interesting, but what many people are not mentioning that could wreck the state budget in Nevada and states across the country is off balance sheet liability due to the underfunding of public pension plans. This is due, among other things, to the use of discount rates that are too high which results in liabilites that are unrealistically low. Research by Associate Professor Joshua Rauh of Northwestern University and Assistant Professor Robert Novy-Marx of the University of Rochester, reported in the New York Times today, indicates liabilities of all the state pensions of approximately 5 trillion (using more realistic and lower treasury rates to discount the pension obligations) with only approximately 2 trillion of assets on hand. Last month a huge sell off in muncipal bonds. Hedge funds currently looking for ways to bet against (sell short) the riskiest state pension funds. Knowledgable individuals such as Felix Rohatyn, formerly of Lazard Freres investment bank and credited with helping New York City navigate its way out of its financial crisis in the 1970's, and others believe a failure in one of these state systems could have a cascading effect, which would significantly raise the cost of state borrowing. Should that happen and no one knows exacty when it will happen, it could have a huge negative impact on state and municipal budgets nationwide. Moody's and other ratings agencies have recently changed the way they rate state governments based on their belief that the Federal government will backstop any state that is teetering on the financial abyss. Given the ratings agencies performance prior to the sub-prime crisis, I'm not that confident that will be the case.

  6. Patrick R. Gibbons continues to blog on this site without identifying himself as part of NPRI, a right-wing group, and stating that he is getting paid to share his opinions.

    His fiscal conclusions are based on NPRI's conservative, anti-government ideology, and not on an either bi-partisan or non-partisan examination of the numbers.

    Thank you to the Sun for providing a true, even-handed look at our fiscal situation.

  7. Mr. Hilton,

    First, you don't pay attention... at all. Emails, posts, go ignored.

    Second, who are you?

  8. PS,

    My fiscal conclusions are based off the same numbers the Las Vegas Sun has... and are also supported, now, by Clinger and others... and if you paid any attention, you'd know I'm 4 for 4 on budget predictions now.

  9. Btw, the Las Vegas Sun's numbers actually come in line with Governor Gibbons' own numbers.

  10. Patrick,
    It's pretty obvious that WilliamHill is William Hilton. Maybe pick up a Nevada phone book and give him a call?

    William is however correct when he states, "Patrick R. Gibbons continues to blog on this site without identifying himself as part of NPRI, a right-wing group, and stating that he is getting paid to share his opinions.

    His fiscal conclusions are based on NPRI's conservative, anti-government ideology, and not on an either bi-partisan or non-partisan examination of the numbers."

    Unfortunately, NPRI ignores any numbers it doesn't see as benefiting it's ideological approach to statistical analysis. (A very valid reason for why NPRI's policy proposals get completely dismissed in committees.)