Study cites challenges of Nevada’s financial problems

By Cara McCoy

Wednesday, Nov. 11, 2009 | 1:10 p.m.

The financial woes of states like Nevada and California are no secret, but a report released today indicates the states’ fiscal problems could be a harbinger of bad times to come for the entire nation.

Nevada, along with neighboring states California, Arizona and Oregon, are among the 10 most troubled states to watch, according to a Pew Center on the States analysis, "Beyond California: States in Fiscal Peril."

The other states on the list are: Florida, Illinois, Michigan, New Jersey, Rhode Island and Wisconsin.

Pew researchers said the 10 states on the list account for more than one-third of the country’s population and its economic output. What state governments do to balance budgets can have an effect on the rest of the country and could slow down its recovery, researchers said.

In their analysis, researchers determined factors that contributed to California's problems and then analyzed the degree to which other states have experienced those problems.

The factors they looked at were loss of state revenues, relative size of budget gaps, increasing joblessness, high foreclosures rates, legal obstacles to balanced budgets and poor money management practices.

According to the report, the last time Nevada’s economy was in this bad of shape was the year it opted to legalize gambling – a move intended to pump revenue into a sparsely populated state struggling to recover from the Great Depression.

This time, gambling is the cause of its problems: tourism is down and those who do visit are spending less, the report says.

Researchers said Nevada's gaming-based economy is "in jeopardy." They said 60 percent of Nevada's budget revenue comes from gambling and sales tax, and that year-over-year, revenue has fallen a record two years in a row.

That lack of revenue has been disastrous for the state budget, they said. Because there is no personal or corporate tax, the budget for state services will continue to suffer as long as gaming and sales revenue remains low.

Researchers cited the challenges inherent in changing Nevada's tax system because, unlike in most other states, some tax laws are part of Nevada's constitution.

"Increasing the sales tax or adding an income tax, for example, would be nearly impossible because it requires voters to amend the constitution," researchers pointed out.

The group also noted fractures in state government, as Gov. Jim Gibbons’ support from the Republican Party has waned and he’s had battles with the Democratic-controlled Legislature, using his veto stamp on a record 41 bills.

The research group scored all 50 states based on data available July 31.

At the time Pew analyzed the numbers, the unemployment and foreclosure rates in Nevada were the second highest in the nation. The median home valuation has dropped more than in any other state and new construction has “virtually stopped,” researchers said.

Ten years ago, Nevada led the nation in the percentage of jobs created; in contrast, only Michigan now has a higher percentage of unemployed.

It’s not just Nevada that’s in trouble.

"The 10 states are hardly the only ones at risk in this time of record-setting revenue drops, high unemployment and far-flung fallout from the housing bust and credit crisis. Virtually all states have been stressed by the downturn," said Susan Urahn, managing director of the Pew Center on the States, in a statement.

"We expect that when state lawmakers next spring turn to crafting their new budgets for 2011, many will confront an even tougher set of challenges. States already have made significant cuts, revenues continue to drop, and stimulus funds will be running out."

The study cited the unbalanced economies of Nevada, Florida, Michigan and Oregon, which have struggled partly because their economies have been dependent on a particular industry.

Researchers noted that their report isn’t a comprehensive diagnosis of states’ fiscal health; rather, it’s a means to understand why the recession has impacted some states more severely than others.