To hedge cuts, state ponders borrowing

By David McGrath Schwartz

Thursday, Nov. 27, 2008 | 2 a.m.

So long, balanced budget.

Hello, deficit spending.

Legislators and Gov. Jim Gibbons announced on Tuesday a tentative agreement to bridge the state’s $300 million budget shortfall by making $150 million in cuts and — to spare agencies even deeper cuts — borrowing $150 million from a local government investment account.

If the plan is approved by the Legislature during a special session set for Dec. 8, it would be the first time since at least the Great Depression that Nevada has balanced its budget by borrowing money, according to state government observers.

The move carries with it significant questions about the wisdom of borrowing to meet ongoing expenses and whether it’s even permitted. The Nevada Constitution states that the Legislature shall pass enough taxes to meet anticipated expenses for each fiscal year.

Lawyers for the Legislature and governor are analyzing whether the plan can be carried out.

“I don’t think it’s legal, but I also don’t think it’s good public policy,” said Carole Vilardo, president of the conservative Nevada Taxpayers Association. It sets a dangerous precedent and ties up future revenue.

“This does nothing to solve what needs to be done in the long term. What we’re doing is betting on the come, hoping the economy turns around.”

Vilardo added: “Personally, I’d rather see a quarter- or half-percent increase in sales tax for a year.”

The state has historically bonded for road projects and buildings — one-time capital expenditures. Borrowing for recurring expenses, such as payroll and programs such as Medicaid, would be similar to a homeowner putting a mortgage payment on a credit card. Eventually, the bill will come due and if the borrower hasn’t figured out how to make enough money to avoid putting the next month’s expenses on the credit card, the debt will continue to rise.

Still, other government observers said short-term borrowing, if handled properly, can see a government through a fiscal crisis.

Josh Barro, staff economist with the Washington, D.C.-based Tax Foundation, a conservative think tank, said it is not necessarily bad to borrow “if you’re borrowing in lean times, on a scale where it can be paid off in flush years, when the economy is strong again.”

Other states are also considering borrowing to make it through the downturn.

But Barro cited California as a cautionary tale. It, too, has a balanced budget requirement in its constitution, but has used accounting methods to essentially borrow and fund a large portion of its budget.

During recent flush years, the state didn’t pay off the debt it had accumulated in the previous downturn. Now, California is looking to borrow even more.

Guy Hobbs, a fiscal analyst, said that if Nevada does choose to borrow, the move should be accompanied by long-term fixes to the tax structure to avoid future shortfalls.

Lorne Malkiewich, director of the Legislative Counsel Bureau, said he was unaware of any time in Nevada’s history that it has borrowed to pay for ongoing expenses.

Guy Rocha, the state archivist, said the state has not borrowed for ongoing expenses since at least the Great Depression, which is as far back as budget records go.

The plan, agreed to after a detente between Gibbons and bipartisan legislative leadership, would work like this:

Treasurer Kate Marshall has control over the investment of the Local Government Investment Pool. That money, currently in certificates of deposit with government agencies and commercial paper, now earns local governments a 2.5 percent return.

Under the plan, Marshall would loan the money to the state’s general fund at 2.75 percent interest. The state would repay the debt within five years.

Neither Marshall nor any other elected official has said how the loan would be repaid, or from what source. One idea is to increase the room tax and bond against that.

Yet although the source of revenue to repay the loan is unknown, tapping the local government investment account instead of selling bonds in the credit markets is the right move, according to Steve George, the state’s chief deputy treasurer.

Tapping that fund guarantees a lower interest rate for the state — credit markets are currently charging more that 5 percent — as well as a higher rate of return to the local government fund, he said.

The $150 million would help see the state through the current fiscal year, which ends June 30.

For the next two years, Nevada faces an estimated $1.5 billion budget shortfall, a hole that’s likely too deep for the state to borrow its way out of.

“We’re banking on the economy turning around,” George said.