Fiscal reality 2011: Part 2

Need + debt + federal mandates + budget hole =  a lot more than $3 billion

Government bookkeeping doesn’t lend itself to simple addition. But tougher math suggests that  Nevadans  face a total liability much larger than the state budget deficit, a figure frequently cited as $3 billion. The liability is not just larger, it’s growing, and its shadow is so long that state government must change, drastically, and probably permanently, to offset it.  That’s the thinking inside the Nevada governor’s office, and it reflects a national trend described earlier this year in Governing Magazine.

“You can’t really add it together.” says the governor’s Deputy Chief of Staff, Lynn Hettrick, of the various pieces that make up the whole liability.  “If you want to add it together, it’s 5 or 6 billion dollars. But you can’t, really, because it’s different pots of money.  Some is federal money that we have to give back, some is general fund money. The point is, everything we have is raising expenditures at a time when revenues are going down.”

Beneath the tidy state budget pie chart lies a trail of red ink. It splashes across empty accounts, and underscores things the state is required to provide. It points up weak sales tax activity, a key component of Nevada revenue, and it calls attention to the mounting needs of the unemployed.

Outside the chart – or hidden somewhere in its lower layers — are additional expenses. By the end of 2011, Nevada could owe a billion or more to the feds for borrowed unemployment funds, as reported here last week. And, the governor’s office estimates $600 million over the next five years for expenses related to the new federal health care reform. Meanwhile, Medicaid enrollment swells, driven by unemployment, and the state’s portion of the bill is about to go up.

The lion’s share of the burden will be absorbed by Nevada businesses, Hettrick said in an interview. By the nature of the state’s tax structure, individuals won’t see major increases. Nevada has no state income tax, there’s a cap on property taxes, and sales taxes are underperforming because of high unemployment and household spending restraint.

“Business will get a re-up on sunsetting taxes,” he said, referring to a 2009 package of tax increases calculated at the time to produce nearly a billion dollars. The taxes each carried a sunset date of June 30, 2011.

“They’re gonna have to get an unemployment insurance premium increase,” Hettrick continued. “No way around it, it’s mandated in the law.

“And we’re going to have to raise taxes one way or another to pay for Medicaid. How are we going to take on another $600 million in (health care reform) expenses without a tax increase? All of those things fall back on business.”

Stimulus leaves new expenses in its wake

The national press has put a spotlight  this week on financial liabilities in the states.  State administrators had their eyes on Washington all spring, waiting for an “extender” bill that has stalled — perhaps permanently — in the U.S. Senate.  The bill would have extended federal  support to unemployment and Medicaid programs.

The halted funding prompts contemplation of the relationship between the state’s balance sheet, and the larger taxpayer balance sheet. Continued federal funding takes the pressure off the department providing the service. But it also distorts true taxpayer liability.

State Medicaid programs, for instance.  A provision in the  federal stimulus package allowed states to take advantage of a new split between state and federal contributions, said Health and Human Services Director Mike Willden. The matching rate changed temporarily to 64-36 from 50-50.

But the new split came with rules. Accepting the money meant states were not allowed to change eligibility requirements.  In Nevada, the caseload more than doubled as the economy worsened. Medicaid rolls surged from 2,000 recipients per month, which was the level anticipated in the budget.

“The growth has been about four to five thousand recipients per month,” said Willden.

In December, the federal matching rate will drop back to 50-50, but the new caseload will have to be maintained, leaving the state with higher expenses.

“By the end of the biennium, we will be in the hole by $82 million. And that considers us getting an 88 million dollar extension from the feds,” Willden said in an interview several weeks back, when there was still a possibility of a federal extension. Willden said the shortfall would be $170 million if the federal extension was not granted.

The matching fund solution

The Medicaid match illustrates one of the reasons Nevada is very cautious about matching funds, according to Hettrick. Proponents of various programs often complain that Nevada leaves money on the table, failing to grab available federal dollars that could be claimed if the state were willing to provide matching funds.

“Many times, when you take that matching money you also obligate yourself to ongoing expenditure,” said Hettrick. “You have to do it in perpetuity.”

This maintenance of effort is a principle also applied to matching funds for education.

“As soon as you spend a federal dollar in education, they say to you, oh by the way you can never cut that spending,” said Hettrick.  “That spending has to be there no matter what. So you’re stuck between a rock and a hard place.  You take the money and they mandate that you spend it forever, and if your budget goes down how do you spend the money?”

State government is headed for a major remodel.

Carson City’s primary focus, by necessity, is a balanced budget. This forces the  conversation back repeatedly to the $3 billion hole to be addressed by the 2011 legislature.

The hole is too big to fill with taxes. To do so, says Hettrick, would require the largest increase in Nevada history– 40-60 percent over whatever is in place now. The hole is also too big to remove surgically with spending cuts.

“We’re going to have to change the way we do business, and I think this is kind of a mantra going through all the states right now.  There are at least 40 states who are going through very much the same thing we are. What they are saying, and what we are saying is, ‘we ‘re not ever going back to business as usual.’”

Next installment – the new approach.

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