The $3 billion deficit myth

Clinger and Co. are causing confusion about the severity of Nevada’s shortfall

Almost everything you've heard over the last six months about Nevada's projected budget deficit has been either wrong or seriously misconstrued — making the situation appear worse than it is.

Nearly every print, radio and TV media outlet in the state has reported that Nevada faces a projected $3 billion budget deficit in the next biennium:

• Las Vegas Review-Journal: Nevada's revenue "is predicted to be short by $3 billion or more."
• Reno Gazette-Journal: "Nevada's $3 billion projected shortfall".
• Las Vegas Sun: A "$3 billion shortfall looms in the coming $6.5 billion budget."
• KSNV Channel 3 asks Nevadans for solutions to "Nevada's $3 billion budget hole."
• Even national publications like The Nation say, "[Most] analysts believe that Nevada is facing a shortfall of about $3.4 billion for the coming two-year budget cycle — meaning it does not have the revenues to fund about 50 percent of its current obligations."

This belief is so widespread that in the recent education debate between gubernatorial candidates Rory Reid and Brian Sandoval, the very first question asserted, "Considering the state faces a 3 billion dollar shortfall ...."

Just because everyone's saying it, however, doesn't make it true. And a look behind the budget numbers reveals the inaccuracy of this "$3 billion" statistic.

For the current, 2009-11 biennium, Nevada's general-fund budget is about $6.4 billion. For the next budget cycle, both Andrew Clinger, the governor's budget director, and Russell Guindon, senior deputy fiscal analyst at the Legislative Counsel Bureau (which is cited in Rory Reid's budget plan), have confirmed to the Nevada Policy Research Institute that they project Nevada will collect more than $5 billion in taxes — and this assumes that the 2009 legislative session's temporary tax hikes will expire.

In the real world, $5 billion minus $6.4 billion equals a deficit of $1.4 billion. But government accounting is not quite in the real world.

Instead, government accounting works like this: $5 billion minus ($6.4 billion budget plus a $1.5 billion spending increase) equals a $2.9 billion deficit.

What? You didn't know Nevada's projected "$3 billion shortfall" is based on an assumed $1.5 billion — or 23 percent — spending increase over the current biennium? Well, you're not alone. Few do. And those who do, excluding NPRI, rarely say so publicly.

Largely responsible for the confusion is Clinger, who was the source of an April 2010 Las Vegas Sun article reporting the budget deficit at "$2.5 billion to $3 billion." Then at an Aug. 5, 2010 meeting, Clinger said, "You could eliminate everything, and have nothing but K-12 and higher ed, and you would have a balanced budget. So the magnitude of the problem that we face, or the challenge that we face going into the next biennium, is huge."

The next week, on the Aug. 9, 2010 episode of Nevada Newsmakers (starting at the 3:40 mark), Clinger stated that, "We face almost a 50 percent shortfall when you look at state revenues and state expenditures."

Clinger's August statements exaggerate the severity of the deficit, even if you assume an $8 billion budget. Clinger confirmed he's doing just that in an e-mail to NPRI, in which he wrote: "The $3 billion [projected budget deficit] is based on estimated revenue of approximatly [sic] $5 billion and appropriations of $8 billion." A $3 billion deficit out of an $8 billion budget is significantly less than 50 percent.

But Clinger's assumptions, like most, also conceal the $1.5 billion spending increase. He has alluded to the spending increase by noting that the budget he's talking about assumes that furloughs and pay freezes will end, but, for individuals and reporters who aren't as intimately familiar with the budget as he is (read: everyone), that's easy to miss.

The end result has been that reporters, politicians and citizens are assuming and stating as fact that Nevada faces a $3 billion, 50 percent budget deficit out of its current, $6.4 billion budget. This is inaccurate. Neither Clinger nor the LCB is predicting that will be the case, but the "50 percent deficit" and "$3 billion budget deficit" falsehoods have spread throughout Nevada.

State government can claim that spending must be increased by more than 23 percent only because that assumption is built into the state's fundamentally flawed "baseline" budgeting system. In baseline budgeting, you simply take all of the previous year's spending and increase it by a certain amount, based on the estimates you choose to make of salary increases, caseload adjustments and other factors. These virtually automatic "roll-up" costs in the upcoming budget cycle are expected to total more than $1 billion.

This budgeting system gives big-government advocates incredible public-relations leverage (see the examples above). Since most people would rather have a colonoscopy than try to understand state budget numbers, this system allows tax consumers and leftists to publicly bemoan "cuts" — even if what's being proposed are actually spending increases that are merely below the numbers that the "baseline" approach would entail. Today in Nevada, this charade takes necessary spending reductions and greatly exaggerates them.

In real-world terms, to bring expenditures in line with projected revenues, Nevada only needs to decrease spending by about 20 percent from its current levels (or take more revenue from local governments).

Nevada can cut 20 percent from its budget. Many families and businesses in Nevada have already taken similar action with their own finances in the face of rising gas prices, lower wages, unexpected bills and higher taxes.

If Nevada needs help cutting 20 percent from its budget, the state should follow the example (but not the rhetoric) provided by the liberal Progressive Leadership Alliance of Nevada. From PLAN's 2009 newsletter:

PLAN was hit hard by the economic downturn. But we developed a plan to ensure we move forward with our core mission intact. We cut our budget by 20 percent through a combination of staff layoffs, reduction in hours, and voluntary pay cuts.

In the real world, families, businesses and even liberal organizations like PLAN have to face reality and budget accordingly. In the world of government, however, distorted budget numbers help big-government politicians generate a collective "reality" that exists only on paper and which they then use to justify increasing both taxes and spending.

Now the only question is: Will Nevadans take the blue pill, and believe the popular narrative? Or will they take the red pill — and see how deep the government rabbit-hole of misconceptions goes?

Victor Joecks is the deputy communications director at the Nevada Policy Research Institute. For more information visit http://npri.org.

Tags: Fiscal, Budget, Taxes