State nearing its spending limit

Nevada's budget is nearing a cap approved by the 1979 Legislature that limits the growth of expenditures to no more than inflation plus population growth.

Gov. Kenny Guinn said Friday if "supplemental appropriations" later this year exceed $85.3 million, the state would violate the cap.

That means that even though the state is looking at a revenue surplus estimated as high as $591 million by the end of this budget cycle, it would not be able to spend the bulk of that money.

Some - like university system and school district leaders - say that surplus money would go a long way toward fixing some under-funded programs in the state. But under the cap law, only $85.3 million of that money could be spent.

By law, a good chunk of it will be put in the state's emergency Rainy Day Fund. Budget Director Andrew Clinger said that will leave about $300 million in revenue the governor can't spend except on capital construction projects, roads and highways or on a rebate to Nevada taxpayers.

While the governor cannot exceed the cap in his proposed budget sent to the Legislature, the Legislature itself does not have to abide by the cap, according to a legislative analysis.

Because of high inflation rates in the late '70s and '80s combined with nearly double digit population growth, the state has never hit the statutory cap in NRS 353.213. As a result, most people - including legislators - don't know it exists.

The expenditure limit approved by the 1979 Legislature sets the 1975-1977 biennium as the base period for state spending and increases that base by the growth in population and inflation each budget cycle.

Using that formula, the spending cap for the 2005-2007 biennium is $5.93 billion - just $85.3 million more than the current general fund budget.

Guinn said the cap becomes even harder to deal with for the 2007-09 biennium and, by the budget cycle after that, "it gets ugly."

In a paper prepared for lawmakers, legislative analysts estimate the spending cap will be $6.94 billion for the coming biennium. That is just about $1 billion more than the current general fund budget, but Clinger said almost all of that will be eaten up by budgetary "roll-ups." Those are inflationary and other cost increases such as utilities and payroll commitments which, for the most part, the state has no control over.

Guinn said that could make such things as new and expanded programs or pay raises for teachers and state workers impossible.

The analysis gives a "ballpark estimate" that the state will have at least $7.08 billion in the treasury for the 2008-9 budget cycle. If that's true, revenues would exceed the cap by about $141 million.

Clinger said actual revenues could be significantly higher than that if the economic boom continues. But he said it would still be illegal for the governor to spend it.

The cap is similar to the basic idea behind the constitutional Tax and Spending Control amendment proposed by gubernatorial candidate Bob Beers. While both Beers' initiative and the statutory spending cap use the same mechanism to control government spending - population growth plus inflation - the similarities end there.

Unlike the Beers plan which would require a vote of the people to exceed the spending cap, the existing law applies only to the governor in preparing his executive budget. It doesn't apply to the Legislature.

Guinn said cost increases the state can't control could leave them in a very difficult situation. He said health care costs, which are increasing much faster than the overall inflation rate, are a good example. Also on the horizon is the prospect the federal government may change formulas for funding entitlement programs such as Medicaid.

Any such changes could leave legislators with a huge shortfall even though the state treasury may have the cash to cover it.

He said lawmakers would be forced to choose between the political fallout from changing or lifting the cap and the fallout from cutting programs.

"It could be like the 2003 session all over again," said Guinn referring to the budgetary shortfall that forced him and lawmakers to approve more than $830 million in tax increases.

• Contact reporter Geoff Dornan at gdornan@nevadaappeal.com or 687-8750.