About the budget “shortfall”

Geoffrey Lawrence

The size of Nevada’s budgetary “shortfall” heading into the 2011 regular session is highly disputable. First, a budget is simply a plan to spend money and any “shortfall” is, therefore, the result of a plan to spend more money than is available. The most appropriate way of addressing any such “shortfall” is to adjust the spending plan so that funds are allocated to their most cost-effective uses.

Unfortunately, Nevada’s budget process does not offer a lot of flexibility for doing this, as I note in today’s commentary at npri.org. Over the next few days, I will outline an alternative budgeting process known as Budgeting for Outcomes and detail how that approach can be used to address the state’s fiscal position in the 2011 session. This is a “How-to Guide for Budget Reform” that will lay out the principles of rational budgeting for lawmakers.

However, lawmakers should also be aware as they head toward the 2011 session that the typical media claims of a “$3 billion shortfall” are completely counter-factual. These claims rely on the inaccurate presumption that state General Fund spending for the current budget cycle would amount to $7.9 billion. This is simply not true. This assumption is based on the idea that the “baseline” originally approved by the 2007 legislature should be carried over into the next budget cycle instead of the current baseline.

Not only is this counter to standard baseline budgeting practice, but the 2007 baseline was never actually realized. Two special sessions during that budget cycle were called in order to reduce General Fund spending. By consequence, the “$3 billion shortfall” estimate is not only based on something that does not currently exist – it is based on something that has never existed.

If lawmakers are to continue under the broken baseline budgeting process, they should at least acknowledge that the baseline has changed through the past three special sessions and one regular session. In fact, General Fund spending during fiscal year 2011 is scheduled to be about $3.1 billion. If the same level of spending were carried over into the 2011-2013 budget cycle, that would amount to $6.2 billion while revenues are likely to be in the $5.5 billion range. (No revenue estimates are official until the December meeting of the Nevada Economic Forum.) Allow me to demonstrate this mathematically:

$6.2 – $5.5 ≠ $3.0

Even if spending programs formerly existed within the General Fund that are no longer present, it is inappropriate under baseline budgeting policies to incorporate programs into the baseline which do not currently exist. That effectively amounts to the inclusion of new spending into the baseline.

Likewise, so-called “roll-up costs” that have routinely added upwards of $1 billion to the baseline in recent years are not justified under present conditions going into the 2011-2013 budget cycle. The most significant components of these “roll-up costs” are for caseload adjustments and annual employee pay raises. In many areas, caseloads in Nevada are in decline for the first time in decades. Similarly, given the current deflationary trend that has seen historic declines in private sector personal income, there is little rationale for extravagant, across-the-board, public sector pay raises – especially when a portion of those pay raises are for a purported “cost-of-living adjustment.” Instead, lawmakers should recognize that public sector employees in Nevada already are paid 28.1 percent more, on average, than their private sector counterparts in similar job classifications, and that this disparity is increasing.

The lesson to be taken out of all this is that claims of a “$3 billion shortfall” are unfounded and fallacious. However, the Silver State is capable of getting much more for the money that it does spend but this will not happen until the state adopts a more rational budget process such as Budgeting for Outcomes.

Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.