Lombardo Should Pursue Charter Agencies

Newly elected governor Joe Lombardo will soon step into a budget proposal that he largely inherits from outgoing Governor Steve Sisolak. At best, Lombardo’s team will have a few days to tinker around the edges between the time he is sworn in early January and when he is due to present the Executive Budget proposal (usually mid-January).

Meanwhile, the budget-making process for the 2023-2025 biennium began back in March 2022. State agencies have requested $10.79 billion in general fund spending for the new biennium to fund about 29,000 full-time positions and continue existing programs.

That amount would represent a robust 16.1 percent growth in general fund spending over the current two-year budget cycle in which the state will spend $9.29 billion from the general fund.

Spending from sources other than the general fund, such as user fees and federal grants, would remain about the same at $31.4 billion after this portion of funding roughly doubled in the current cycle following the state’s receipt of massive amounts of federal aid during the pandemic.

The Economic Forum, which provides official projections of state tax revenue, has estimated that general tax revenues will grow 2.9 percent over the upcoming budget cycle to $11.43 billion to support this level of spending.

That forecast is in spite of significant downside risks as most prominent economists are predicting a recession will begin in 2023. Since many of Nevada’s tax revenues derive from gaming and tourism, the state’s finances can become highly volatile during periods when disposable income tumbles around the world.

During the last recession, the Economic Forum’s revenue forecasts dropped almost 20 percent, going from $6.84 billion in 2007 to a forecast of $5.50 billion prior to the 2009 legislative session.

While a combination of record-setting tax hikes and organic economic growth over the past decade have led to a rapid doubling of general fund revenues, there is some reason to exercise caution and fiscal prudence heading into the next budget cycle. To his credit, Lombardo has indicated that he intends to set money aside in the state’s rainy day fund.

But Lombardo’s first Executive Budget proposal will mostly remain the work of the outgoing Sisolak administration, which has spent the better part of a year crafting the proposal. Lombardo and his team will simply not have time to propose major programmatic changes that substantially affect spending patterns.

However, one approach Lombardo could take is to ask for agency directors to gain greater autonomy over their own budgets.

The current budget process requires the legislature to approve or disapprove specific uses of money within each agency and agency directors then become bound to spend money in precisely those ways even if they don’t provide meaningful value to taxpayers or the public.

Instead, the legislature should outline broad public policy objectives the Executive Branch should be responsible for meeting and allocate funds to achieve each of those objectives.

After all, the Executive Branch employees who execute state initiatives on a daily basis are often more knowledgeable about which uses of funds provide value to the public than part-time lawmakers.

Lombardo should tap into this this institutional knowledge as well as the management expertise of his appointed agency directors. He should allow agencies to innovate and create new ways to provide value to taxpayers at lower cost. And he should pay great, innovative employees for their good ideas.

This is the charter agency model. In 2003, Democratic Governor Tom Vilsack in Iowa pioneered the charter agency approach in order to improve state services while saving money.

He asked for volunteers to try the new approach and got six state agencies to sign on. The directors of those agencies were asked to sign performance contracts outlining quantitative policy objectives they would become responsible for achieving at the risk of dismissal. They also agreed to a 10 percent reduction in funding.

In exchange, these directors gained the ability to add or eliminate positions or to purchase capital equipment directly, without going through central state purchasing and personnel divisions which can add months of delays.

Agency directors were empowered to manage as though it was a for-profit operation. The final carrot was that if the agency could achieve its goals without spending all of its money, it could retain half the savings. Those savings could be used to reward highly productive and innovative employees with annual bonuses or to purchase labor-saving capital equipment for future budget cycles.

The results were tremendous. Each agency that participated improved its performance in quantifiable ways. Employees became engaged and excited that they could apply their best ideas and get rewarded for them. Iowa taxpayers were able to weather a recession without any tax hikes.

Former state controller Ron Knecht proposed to create the same framework here in Nevada as Assembly Bill 104 in 2015. Lombardo should seize upon that legislation. Charter agencies would allow Lombardo’s team to gain some control over the execution of a budget it will otherwise mostly inherit.