As worldwide economic recession loomed in early 2009, a newly inaugurated American president and his party's friendly congressional majorities enacted a $787 billion "stimulus" bill.
From this amount, policymakers in Washington, D.C., dangled roughly $200 billion before state lawmakers who did not want to anger favored political constituents by reining in state spending.
This "free" federal money offered state lawmakers by Congress came with conditions, however. "Maintenance of effort" requirements would prohibit states from reducing spending on big-ticket items such as K-12 education and Medicaid spending for years into the future — regardless of the fact that states would not have the financial wherewithal to meet these new obligations.
Shortsighted policymakers in Nevada and elsewhere, fearing reprisal from influential public employee unions, quickly accepted these stimulus funds to plug deficits that years of unsustainable spending increases had created. As Jonathan Williams of the American Legislative Exchange Council has pointed out, prior to Washington's bail-out of the states, total state spending had increased 124 percent between 1998 and 2008, while state debt increased 95 percent over the same period.
In Nevada, General Fund spending over this time period increased 129 percent, even as the rate of population growth plus inflation totaled only 63 percent. State lawmakers, failing to plan for the inevitability of future recession, spent themselves into a structural deficit.
What the Great Recession should have allowed, then, was a necessary restructuring of state government finances across the country. States should have evaluated which policy goals were of highest priority and whether current spending programs were tailored to efficiently achieve those goals. Further, states should have had to confront the fact that the growth in public-sector employee compensation was unsustainable and that control of labor costs should be a high priority.
This cleansing process was prevented by a Congress that, like a street pusher of narcotics, fed state lawmakers' dangerous spending addiction with a taste of temporary federal funds. As a result, states are finding that, because of the failure to begin adjusting to the new economic realities of 2009 and 2010, they now face potentially even-more-painful withdrawals from the spending addiction fueled by the pusher in Washington.
South Carolina Gov. Mark Sanford attempted to "just say no." If the states were to be provided "stimulus," he proposed, allow them the freedom to use that money to pay down state debt in lieu of funding ongoing programs. This would have placed his state, which currently diverts 11 percent of annual tax revenues to paying down debt, on more stable financial footing going forward.
This also would have been appropriate for Nevada, where the state debt currently amounts to 36 percent of state GDP, once the $33.5 billion unfunded liability from the Public Employees' Retirement System is considered.
Instead, Sanford's request provoked attack ads, and policymakers in Nevada never followed suit. The Nevada Legislature committed one-time stimulus funding to finance ongoing operations.
The folly of this error has been revealed with the state budget director's recent release of the new "baseline" spending projection for the 2011-13 biennium. Because Nevada's flawed baseline budgeting process requires the budget director to calculate the cost of continuing all state programs, the new arbitrary spending target produced by this process carries over nearly $600 million in spending that had been financed with temporary stimulus funds. This amount has now been rolled into the General Fund — leading to claims of a $3 billion budget shortfall.
Washington's harmful stimulants worsened — rather than ameliorated — Nevada's fiscal position. Lawmakers should have known better than to depend on a temporary cash infusion to finance ongoing operations. Instead, compulsively, they opted for the quick fix.
Nevertheless, spending addicts in the Nevada Legislature will use these bogus claims of a $3 billion shortfall as political leverage to rally for a massive tax increase in 2011. The addicts, prodded along by their self-interested campaign donors in the public employee unions, have thus far demonstrated a disturbing readiness to feed their habit by stealing more tax loot from private families — rather than undergoing the sober restructuring process that economic conditions require.
Now more than ever, Nevada needs the methadone of fiscal restraint.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. For more information visit http://npri.org/.