CARSON CITY — The Legislature’s top lawyer gave her blessing Tuesday to a plan that would allow state government to take the unprecedented step of borrowing money from Nevada cities, counties and schools to cover its debts.
Legislative Counsel Brenda Erdoes determined it is legal for state government to secure a $160 million line of credit from Nevada’s Local Government Investment Pool to cover ongoing expenses.
The unusual borrowing plan will be the centerpiece of the special legislative session Monday and Tuesday when legislators and Gov. Jim Gibbons must find ways to handle a $331 million shortfall in the current fiscal year budget. The state constitution requires a balanced state budget.
Traditionally, the state has borrowed only to cover construction costs for roads and buildings, not ongoing state government expenses.
Treasurer Kate Marshall proposed two weeks ago that Gibbons and legislators obtain funds from the investment pool, which consists of money governments and schools have given to the treasurer for low-risk, short-term investments.
The line of credit proposal, however, does not specify how the funds would be paid back. As a result, the plan has detractors.
“We don’t have a way of paying this back unless we create a tax,” said Senate Taxation Chairman Bob Coffin, D-Las Vegas. “Let’s not put off what we need to do. Let’s not go down the same slippery slope as the federal government.”
Coffin favors raising sales taxes. Gibbons has vowed to veto tax hikes not backed by the public and affected industry.
Marshall said some $160 million for loan has been agreed to by the pool participants. The pool has $770 million.
Legislative leaders have agreed to pay back the money over a four-year period at 2.25 percent interest, a slightly higher rate than the pool members receive, Marshall said.
Marshall said lawyers for her agency are drawing up a bill to allow the state to tap into the funds. Her staff has found local government leaders in agreement to the proposal to lend money to the state.
Before the state can secure the pool funds, Erdoes said, existing law must be amended so lines of credit would be considered a state debt obligation.
Legislators and Gibbons also are expected to cut expenditures of some state agencies by 1.5 percent. Education, health and human services, corrections and public safety would not be affected.
In addition, Gibbons said last week that the state will drain any unappropriated money remaining in state budget accounts.
With the local government funds and cuts, he expects the number of state employees laid off to be fewer than 100.
On Monday, the Economic Forum projected the budget shortfall for the fiscal year ending June 30 to be $331 million and projected tax revenues over the next two-year budget period at $5.65 billion, $1.2 billion less than the current two-year budget.
Borrowing to cover state debts is nothing new, at least to people with long memories.
Archivist Guy Rocha found that between 1881 and 1905 state government regularly loaned itself money from two state school funds to cover government expenses. At the time, the state was going through a 20-year recession brought on by the demise of mining and a falling population.
The difference between then and now, Rocha said, is the 19th century legislation specified that property taxes would be assessed to cover the loan payments.
Marshall insists a line of credit is not a loan, instead calling it “an investment” for local governments.
Unlike a loan, the state would take only the money it needs under a line of credit, not the entire $160 million.
Gibbons initially came to her and asked her views on issuing $300 million in bonds to cover the deficit. Marshall said she told him that would be a “foolish move,” although California issues bonds to cover debts.
Bonds would have a much higher rate of interest than using the investment pool. Then Marshall approached the governor with the idea of using investment pool funds.
Contact Capital Bureau Chief Ed Vogel at firstname.lastname@example.org or 775-687-3901.