In search of fiscal solutions

By David McGrath Schwartz

Sunday, Feb. 21, 2010 | 2 a.m.

Nevada faces what may be the most severe economic crisis in its history.

With the economy mired in the Great Recession, state tax revenue is projected to be $887 million short between now and June 2011.

Gov. Jim Gibbons has called a special session of the Legislature, beginning Tuesday, to deal with the deficit.

The Las Vegas Sun gathered four of the state’s leading voices in business and education to discuss the state’s predicament. While discussing it, they couldn’t help but look beyond the current crisis to what the state eventually wants to be, how it will attract the next generation of innovators and where it will get the money to pay for it all.

The group: Lynn Warne, president of the Nevada State Education Association, the state teachers union; Mike Wixom, an elected member of the Board of Regents, which governs the Nevada System of Higher Education and a Republican; Steve Hill, past chairman of the Las Vegas Chamber of Commerce; and Paul Enos, CEO of the Nevada Motor Transport Association, which represents trucking companies, and a conservative voice in the legislative lobbying corps.

We launched the conversation by asking for their thoughts on Gibbons’ plan to fill the deficit with a mix of revenue increases; cuts in education, and in health care and services to the poor and disabled; and reduced public employee pay. Their comments have been edited for length and clarity.

Warne, Nevada State Education Association: The governor’s plan is going to cripple the public education system — I hope not beyond repair. We have been working under a strained system for so many years with funding already very limited to our schools. We’re nearly last in the country in per-pupil expenditure. To ask the schools and children to further shoulder a burden is going to be extremely difficult.

I think the alternative is to have a conversation about revenue. We’ve had a very lopsided conversation up to this point. All we’re going to do is cut, cut, cut. How is it we fund vital services for our citizens in the state of Nevada?

Enos, Nevada Motor Transport Association: When we talk about “revenue,” a lot of people won’t say tax increase, and that’s what we need to call it.

The reality is, when you look at all the states across the country that have myriad taxes — from income taxes, to property taxes to corporate income taxes, to gross receipts taxes — only two states over the last two years are doing well, and that’s Wyoming and North Dakota, and it’s because they have oil and gas taxes there.

Wixom, Board of Regents: You’ve got to address the issue from a broader perspective.

Last year, Forbes printed an article about business-friendly environments. Nevada ranked 31st and it has very low taxes. Virginia, which has much higher taxes, ranked first. We’ve operated under the assumption that our tax base is automatically going to guarantee us prosperity. That’s not true. If we want to create a business-friendly environment, we need to take a look at how we address K-12 education and how we address higher education. We’ve never done that and it bothers me because I see much of what we’ve worked for over the past 10, 15 to 20 years being dismantled. I’m not sure we understand the repercussions of what we’re doing. We need to start talking about what we want to be, what we want to look like.

Hill, Las Vegas Chamber of Commerce: I do agree that we need to look at things differently as we move forward. But realistically, for the special session, none of our legislators or the governor has proposed taxes to avoid cuts to education.

Three years ago, governments in Nevada in total — state government and local — spent about $20 billion. We’ve divided that up; we’ve said “OK, the state is going to get $3 1/2 or $4 billion a year and you’re going to have some of the most important services and those revenue streams are going to provide for those services.”

If you take a little broader look at government spending, it’s predominately a local government issue. But because we can’t cross that political boundary between state and local government, we can’t look at solving those problems, where the problems actually potentially lie.

Enos: Three years ago, the question of revenue being stable wasn’t a problem. Nevada was doing great, the economy was doing great. We’re here today because we are in a nationwide recession, and the private sector is hurting and that means the public sector is hurting because the private sector pays for the public sector. The reality today is that the private sector can’t afford it.

Warne: You’re talking about the private sector funding the public sector — well the private sector has never adequately funded the public sector.

Yes, we have a very business-friendly environment for taxes, but we rank near the bottom for education. Go to the Nevada Development Authority’s site. It brags about no franchise tax, no gift tax, no business income tax. What has that gotten us? That’s gotten us the highest foreclosure rate in the country, the highest unemployment rate in this country, dead last in the country in per-pupil expenditure and an education system so businesses won’t come to this state. The way to build a strong and diversified economy is to invest in your education system.

Wixom: I think it’s a fundamental mistake to say that everything was fine three years ago. The whole notion that we were just fine because a bunch of revenue comes in doesn’t necessarily address the issue. We were never diversified as an economy, and that’s the problem.

As we look at the looming state budget cuts, is this a libertarian exercise in dismantling government? Or is this a process where we understand the role that government should play in our society? What troubles me is there’s this whole underlying notion that government is bad and we should do away with government. We should dismantle government and be free. I hear that again and again.

Hill: One of the things that I hope conversations like this can do is get rid of the idea that government is bad, but also get rid of the idea that business is bad. There’s bomb-throwing on both sides.

I don’t disagree with what you’re saying. But the business community has come to the table over the last four legislative sessions, three of which we’ve seen taxes increase pretty significantly. We want great education, we need great education. We need to figure out what delivers great education and other services and where we are making mistakes with the dollars we are currently using.

Gibbons has pointed to public employee pay as a place to cut. He has also talked about suspending collective bargaining, which would allow teachers’ and local government workers’ pay to be cut. Should that happen? And is the perception that the public sector has been spared the suffering of the private sector accurate?

Hill: We pay local government workers 30 percent more for the same job than we pay state government workers. There’s a billion dollars a year in that difference. Yet we’re in a situation now where we’re going to cut state workers’ pay even more while we’re having arguments about how high the pay raises should be for local government workers. Education gets stuck in the middle of all of that.

Also, when you’re talking about public employee salaries, from teachers to firefighters is a pretty broad spectrum. We could cut firefighters’ pay right now by 10 percent, and they would still be the second-highest paid group of firefighters in the country. We pay about 20 percent more than the national average. The total dollar difference between what we pay firemen in Nevada and what the national average is $100 million a year.

We pay 206 percent of the national average for parks and recreation payroll right now. I don’t want to disparage parks-and-rec workers; it’s an important service. But is it more important than education right now? We think that’s another place we ought to be looking.

Collective bargaining needs significant reform, and ultimately what needs to happen is that local government officials need to be responsible for what they pay the people who work for them. Right now, unresolved contract negotiations go to binding arbitration. That potentially takes away responsibility from those who are elected to make those decisions.

Warne: I think the public sector is suffering every bit as much as the private sector. We have folks losing homes and folks laid off and out of business. We did begin the year with quite a few layoffs. Through negotiations we have been able to settle about half of the contracts so far this year, rehiring some workers.

We can understand that we’re going to probably need to get back to the table and have that conversation with representatives from the school district through the collective bargaining process. It’s a process that I do believe works, and I believe the public has a voice.

For the special session you have mining talking about prepaying some taxes and/or seeing lower tax deductions. You have gaming talking about paying some fees. The long-standing criticism is that businesses beyond gaming have not stepped up.

Hill: That is not the case. The modified business tax — the tax on payrolls — is now clearly the third leg of the state’s revenue stool. It was projected to generate nearly a billion dollars during this biennium. Business has clearly stepped up.

Everyone is feeling this pain right now. Businesses really are either barely making it or just hoping that something turns around because they are losing money at a rate that they can see it is going to put them out of business. Mining is an exception right now.

Warne: Limiting the tax deductions on the mining industry is a conversation that is long overdue. Is that going to help us fill our shortfall right now? No. But it’s a start of a conversation that we need to have. The governor has opened the door to a conversation about revenue during a special session with these proposals.

Enos: When gold was $270 an ounce, mining could produce an ounce of gold for $230 per ounce. Today, the price of gold is significantly more and it costs more to produce. The ore they’re mining today is much lower in quality than it was 10 years ago. There are many communities that were going to be great communities that are now ghost towns.

Warne: There are some real scare tax tactics in rural communities by saying they’re going to dry up and blow away like a tumbleweed. If you look at the tax rate the mining industry has in other countries, they’re in the double digits. We have a 3.9 percent tax rate on mining.

Enos: It’s also cheaper to produce an ounce of gold in those countries.

Warne: We’re not talking about saddling the entire tax solution on one industry, mining, or large corporations. It needs to be fair and balanced.

Hill: It needs to be well-mannered and it’s very difficult to do in a special session.

Lawmakers are looking at $4.2 billion in the capital fund accounts of Southern Nevada’s local governments as a possible solution to the state budget shortfall during the special session. Should they tap those accounts?

Wixom: I think it’s something we need to explore fully. The question I have, though, gets back to the fundamental issue: If we’re using those funds simply to fill a hole, when the funds are gone, we still have the hole. In other words, is there a fundamental shift in the way our economy works? Are we looking at a long-term downturn?

Warne: There’s a false dichotomy that people put out there — you’re going to have to lay off teachers, or you’re going to have to cut salaries. Districts have funds that are set aside for the repaving of parking lots and athletic fields. I think if you talk to parents and children and asked, “Would you rather see your students’ class size grow or see a new parking lot paving project?” They’re going to want to see the quality of education remain rather than see those critical services eroded.

I understand some of the money is voter-approved — it’s a promise made, a promise kept for the construction of schools — but there’s other money that’s not voter-approved. A school facility is important, but what if you can’t fill that facility because you don’t have the funding to hire that educator to fill that building? The desk, chairs and all those things, what’s the point?

Enos: We need to make sure that we have enough students for the buildings we’re planning. We had a huge building craze here, and there’s been a decrease in population in Nevada. It’s probably time to do a new student count.

Hill: We need to look at the money there, but we need to keep it in perspective. It’s really imperative that we maintain our bond rating. The funds are a buffer where commitments have been made over time. We have revenues coming in, but those revenues are down as well. So you can get somewhat of a false picture. There may be some money there — it’s not $4 billion.

For higher education, the governor is proposing about $75 million in cuts, over 10 percent of operating costs. What would be the impact of that?

Wixom: When you aggregate the cuts that higher education took in 2009 with the cuts we’re facing in the special session, you’re looking at well over 30 percent — conceivably 35 percent cuts.

Enos: Those kind of cuts are substantial. But I think they are the types of cuts the private sector has been feeling for the last two years. When I talk to my guys and ask them how they’re doing, it’s been consistent: “We’re down 40 percent in revenue.”

Wixom: I’m not immune to that, my law firm clients face this all the time. We face it in our firm.

But the cuts to higher education are happening so quickly, that I’m not sure if the public fully appreciates the ramifications. These are more than substantial cuts. We’re fundamentally changing the way we do business. We’re talking about doing away with programs, conceivably talking about closing campuses, and what we’re doing is cutting off our ability to diversify our economy.

That’s where you have to be careful about direct comparisons between the private sector and the public sector. The public sector has an entirely different purpose than the private sector. One purpose we have in higher education is to allow diversification of our economy.

Enos: Part of that poor ranking is because of our results in education. In 2003, we did have a big tax increase and a lot of that money went to education.

Warne: Paul, did we get to the national average for per-pupil funding with that increase?

Enos: No, Lynn. But we talk about national averages. You look at schools in Washington, D.C., where they spend over $14,000 per student and their school system is no better than ours. I don’t think we need to look at money. I think we need to look at some reforms.

On the university side, we need to look at how some of these contracts are negotiated. So if you want to lay somebody off it doesn’t take you a year or 20 months to lay somebody off. We need to look at some different ways to deliver education in a more positive way. We need to look at vocational, trade and technical schools. We need to look at charter schools. We need to look at Internet- or Web-based schools. There are some reforms we can look at.

Wixom: I need to stop you there, especially with respect to Internet education. It costs us more per student to provide an Internet course than it does to provide a brick-and-mortar course. They’re very expensive.

Hill: We can have those discussions in 2011, talk about how the university system is funded and aligning that with economic development. Let’s figure out a way to fund the university system that really ties in economic development. But you can’t do it in a special session.

To bring it back to the special session, we’re facing a lot of cuts right now and the governor has a plan on the table. Is that the best plan for the long term?

Warne: Absolutely not. If you go to his education reform, removing earmarks for class-size reduction, cutting full-day kindergarten, asking districts to cut 10 percent. It has already crippled our education system and we’re going to cripple it even further. If we truly want to invest in the quality of life in this state, if we want Nevada to be at the level where industries want to move to this state, were going to need to invest in our education system.

Enos: There are some things in the governor’s plan that I have some issues with. I don’t think it’s wise to base your tax base on the mining industry, which is traded on the global market. It has been up and down. When the price of gold went to $270 an ounce, the people from Elko went to places like Ghana, Indonesia and Peru, where they could produce the gold for cheaper and that is a definite possibility if we do some things. The better those rural mining counties do, the less money Clark County and Washoe County are exporting to support them.

Do I think the governor’s plan can be worked on? Absolutely. Do I appreciate him looking at cutting some things like the private sector did? Yes.

Hill: In fairness to the governor and the Legislature, three months ago we thought we had a $60 million deficit. That skyrocketed when the Economic Forum projected a much different revenue stream. The decisions that can be made within a special session, when you have that big of a deficit, are bad. We can criticize any of them. But before we do that, we need to come up with our own solution and it will probably be equally bad.

This conversation was transcribed by the Sun’s Nadine Guy.