With boom days gone, Nevada’s future offers some tough choices

Welcome to the beginning of a new era.

With those celebratory words, the head of the Strip’s newest chandelier-strewn hotel-casino, The Cosmopolitan of Las Vegas, opened its doors in December to great fanfare.

While Cosmopolitan Chief Executive John Unwin’s declaration signaled the resort’s fresh take on gaming glamour, its launch marked not the beginning, but the end of two decades of record growth in a Nevada boom now gone bust.

New era, indeed.

"We’re never going back to the pre-2007 era when the state bird was the construction crane," said Guy Rocha, former state archivist and renowned Nevada historian. "There’s going to be a new normal, and we have to figure out what that is. Nevada’s not only at a turning point, it’s at a critical threshold that will determine what the state’s going to be in the 21st century."

Eighty years after Nevada legalized gambling, the state finds itself at a crossroads where implications are profound.

Will gaming still rule? Will taxes rise? Will schools, colleges and universities be reformed? And how can the state balance its budget when costs continue to outpace incoming cash?

In one dismal prediction, state demographer Jeff Hardcastle said Nevada may recover slowly from the loss of nearly 200,000 jobs since May 2007.

After a recent exodus of 100,000 people, Nevada’s population may slide for a few more years, then tick back up, adding a paltry 14,000 residents to the current 2.7 million count by 2030, he predicted.

In contrast, Hardcastle also put out a separate, sunny, high job-growth prediction that would have Nevada draw 1.2 million new residents, pushing the state population to 3.9 million by 2030.

"Migration has always been the main driver of our growth," said Hardcastle, who didn’t know which scenario to bet on. "We’re in this situation where we can be too pessimistic or too optimistic."

During the growth spurt, two people moved to Clark County for every one who left, a frantic churning of citizenry as construction workers came and went with each new project.

"The big question for Nevada is how quickly will jobs be generated both nationally and locally," he said, noting that nobody believes tens of thousands of construction jobs will ever return.

In 2011, incoming Gov. Brian Sandoval, a Republican, and the Democrat-led Nevada Legislature will take initial steps toward setting the direction of the state for years to come.

A longtime Nevadan, Sandoval said he is betting on a steady economic upswing and has a briefcase full of the names of businesses he is trying to woo to the Silver State from high-tax California and Oregon.

"If Nevada was a stock, I’d buy now because we are going up," Sandoval said last week. "I think there are great opportunities here to turn this state around."

Sandoval, whose inauguration is Monday, takes office with Nevada at the bottom, leading the nation in un­employment, at 14.3 percent, as well as home foreclosures and bankruptcies.

Sandoval’s proposed spending plan, to be revealed Jan. 24, and the legislative session that starts Feb. 7 come cloaked in mind-numbing budget figures and the dry language of bill drafts. But state leaders will set vital economic, educational and political policies and priorities that will affect every Nevadan, young and old, jobless and working, longtime residents and newcomers.

The upcoming budget battle will pit forces that want to shrink state government and shift services to cities and counties against those who think public programs have been cut too much.

It will pit tax reformers who want to broaden Nevada’s revenue base against Sandoval and others who oppose new taxes, saying now is not the time to pay more for government.

And it will pit unions that have protected public employees and teachers from big layoffs and deep pay cuts against those who believe local officials need greater legal power to set performance standards and negotiate salaries and schedules, just as businesses do with workers.

"The next six months are going to set the tone for the next 10 years," said Jeremy Aguero, an economist for Applied Analysis who has produced several reports on Nevada’s economic and education systems, including for the Las Vegas Chamber of Commerce.

"The magnitude of the crisis is creating a newfound motivation to think about how we fund things, to think about what are essential services," Aguero said. "I see the governor-elect’s commentary as more than just no new taxes. He’s talked a lot about reform, rethinking the way we do government services. It’s a tough conversation to have, but I’m encouraged by these discussions."

Here’s a closer look at some of the issues as Nevada sets its future course:


The anticipated state general fund shortfall has been much discussed. But Sandoval is considering a bold move to balance his budget: $20 billion in annual revenue from all sources, including taxes and fees collected by cities and counties. Declaring open season on that big money pot involves a major shift in thinking.

"It’s people’s money," said Dale Erquiaga, Sandoval’s deputy transition director. "People don’t care if it is spent in a county, municipal or state general fund, so why should we?"

Breaking it down, the general fund is expected to get more than $5.3 billion in revenue during the 2011-13 budget period that begins July 1, about half from gaming and sales taxes. With current spending at $6.4 billion, that means the state must find $1.1 billion if it is to maintain current services. Agencies have requested general fund spending at $8.3 billion, but Sandoval has ordered cuts of at least 10 percent.

The general fund is the main battleground. Once that operating budget is balanced, the 120-day legislative session can end. To do that without raising taxes, the governor and lawmakers could divert money into the general fund from the total state budget of $16.7 billion, which includes accounts dedicated to everything from highways to Medicaid, said Aguero of Applied Analysis.

Beyond that, the general fund can scoop up money from cities and counties, which when added to all state accounts would total about $40 billion over two years.

The state has used money shuffling tactics before to balance its budget.

In 2009, the state redirected some property tax collections into the general fund — 4 cents per $100 in assessed value — from Washoe and Clark counties, generating about $70 million. Sandoval is considering doing the same thing at 4 to 5 cents, according to budget discussions.

During a special session last February, lawmakers swept money from various funds, including $62 million from the Clean Water Coalition, $25 million in capital improvement funds from the Clark County School District and $25 million from a Clark County highway construction bond issue.

A Clark County district judge in December ruled the state had the right to take the water money, calling it "cannibalism" but noting local governments are mere instruments of the state.

Steve Hill, who works with the Las Vegas Chamber of Commerce and is among Sandoval’s advisers, said to get control of budgeting leaders must figure out what the state, cities and counties should be responsible for and distribute the duties and the money accordingly.

"We need to think about how we would prioritize things if we had to start from scratch," Hill said.

Under Sandoval’s vision, state government would become smaller and more efficient, cutting spending to balance Nevada’s checkbook until economic recovery kicks in.


If state government shrinks, local government would grow, increasing the need for home rule.

Now, cities and counties are state directed, not fully in charge of their own fate. As a result, the state has the power to siphon off some funding and must approve local tax increases.

Sandoval wants to grant limited home rule while turning over more responsibilities. Local leaders want more power to directly raise taxes and fees.

"We want functional home rule," said Clark County Commissioner Chris Giunchigliani. "If you’re going to give us an unfunded mandate, give us the authority to tax and raise fees."

Giunchigliani also is a fan of consolidating local governments to save money, because Las Vegas, North Las Vegas and Henderson city services overlap with those of Clark County.

At least two proposals to hand state duties to Clark and Washoe counties are being discussed. To save the state millions of dollars, the counties would take over adult parole and probation investigations and all child welfare duties, including foster care, adoptions and counseling.

Clark County already handles child protective services and investigations, and could get a state block grant to take on child welfare operations. Now, the state reimburses county child welfare costs instead of distributing blocks of money to limit costs.

Virginia Valentine, the outgoing Clark County manager, said local governments also have budget problems and simply shifting services isn’t the answer.

"If that is the solution, they’re going to compound the problems of local governments," she said. "I think the governor and Legislature have to consider that when transferring things to the county, it’s possible the labor costs can be higher and it ends up costing more money."


Shifting responsibilities and funds won’t save money unless both state and local governments get a grip on payrolls.

Nevada’s city and county workers generally are paid more than their counter­parts in state government and in the private sector. Hill, of the Las Vegas Chamber, said one study showed local government workers in Nevada, overall, are paid at least $1.2 billion more than state employees doing the same work.

Forcing cities and counties into a showdown with public employee unions over salaries and benefits might be part of Sandoval’s cost-cutting strategy.

Nevada’s collective bargaining law applies only to local governments, leaving cities and counties little room to maneuver.

"We’ve kind of tied their hands behind their backs," Hill said.

Sandoval aides and others who have met with the new governor said local leaders are demanding changes in the Chapter 288 collective bargaining law so they can cut payrolls, shift workers and get rid of unneeded or bad workers without facing grievances.

Unions, along with Democratic lawmakers who get their support, have long resisted major changes in the law.

Rusty McAllister, a Las Vegas Fire Department captain and lobbyist for the Professional Firefighters of Nevada, said he is prepared for battle again this year. He expects critics to point to six-figure salaries of some veteran firefighters as examples of overpaid workers, but he said the high paychecks are mostly due to overtime and payouts to retirees taking disability.

"They can say we’re spending too much on firefighters, but I’m going to Costco, buying groceries at Albertsons and buying cars just like everybody else," McAllister said, noting that firefighters are putting money into the economy instead of standing in the unemployment line.

McAllister defended the collective bargaining system, saying unions have agreed to pay concessions to help local governments avoid layoffs and balance budgets.

At the state level, Sandoval wants to reform the Public Employees Retirement System, which has unfunded obligations of $10 billion. He wants to shift it from a defined benefits plan to a defined contribution system like private-sector 401(k) plans. PERS backers say the switch would cost too much at first, but lawmakers may consider the long-term savings worth it.


Sandoval has pledged not to raise taxes but the discussion isn’t over. Legislative Democrats and a few Republicans say new revenue is needed to balance the budget. Experts also say Nevada must broaden its tax base beyond reliance on gaming and sales taxes on goods.

Democratic leaders of the Legislature say everything should be on the table, including a broad-based business tax. Any corporate tax proposal appears dead on arrival, however, with the economy still in the tank and the state looking to lure new industry.

But the business community is coalescing around the idea of a new sales tax on services such as accounting, legal work, manicures and massages. In exchange, Nevada’s high sales tax on everyday goods, such as clothing, furniture and cars, could be cut. Proponents say the shift could spur consumer spending and reinvigorate the economy. Medical services would likely remain tax exempt.

Now, the state sales tax rate on goods is 6.85 percent, one of the highest in the country. Counting local taxes, some counties have rates topping 8 percent.

Hill, of the Las Vegas Chamber, outlined the case for a sales tax on services, which could raise $1 billion over two years at a rate of 2.5 percent. Two decades ago sale of goods dominated, but now services account for about 60 percent of all sales in the state, at more than $100 billion a year. Hill estimates that at least 20 percent of services could be taxed with few objections.

"If you raise the tax on services high enough, you could lower the tax on goods," Hill said. "There’s some concern now that our sales tax rate is getting so high that we’re uncompetitive."

People who live in Mesquite, for example, sometimes go to St. George, Utah, for major purchases such as washers and dryers, he noted.

Even some fiscal conservatives are open to a service sales tax that is revenue neutral, meaning there will be a corresponding tax decrease.

Mary Lau, a lobbyist for the Retail Association of Nevada, said it makes sense to target a portion of the economy that isn’t taxed now, but "the devil is in the details." She said retailers wouldn’t necessarily be opposed as long as the tax is listed on consumers’ bills.

"If it’s not passed on to consumers, it’s just another tax on business, and we would be opposed," Lau said. "A services tax should be put on the receipt. If the government wants to pick your pocket, they should be honest about it."


Sandoval argues that raising taxes court hurt efforts to attract new business.

It took a recession in the early 1980s to make Nevada focus on diversifying its economy, said then-Gov. Richard Bryan, who launched the state’s economic development and tourism offices.

Today’s deep recession, the worst since the Great Depression, has done the same.

State leaders sometimes must go out of their way to lure companies to Nevada, Bryan said. He had to call a special session in 1980, for example, to change the bank law so that Citibank could locate a new center at "The Lakes" to avoid listing a Las Vegas address.

"What you’re seeing now is a recognition that there needs to be structural change in our economy," Bryan said. "We need new industries that bring in good salaries and good jobs."

Nevada will always be a mecca for gaming, conventions and tourism, but with gambling legal in 40 states, its monopoly is long gone, said Sandoval, a former Nevada Gaming Commission chairman.

And the $3.9 billion Cosmopolitan, which hired 5,000 workers after a German bank swooped in to save it, is the last new resort expected for years. The hotel-casino’s opening follows a 20-year period that saw at least 15 properties rise on or around the Strip.

"Right now, we are at a crossroads," Sandoval said. "I’m going to be a governor who is focused and out there, and making those personal phone calls in terms of being an ambassador for the state of Nevada, and playing as much of a part as I can in terms of diversifying our economy and bringing these new businesses to the state."

Lt. Gov. Brian Krolicki, who is leading economic development efforts, envisions Nevada as a center for renewable energy, including solar in the South and geothermal in the North. He said the state also is a gateway for Asian gamblers, tourists and executives intent on investing here.

"We are cranking on all cylinders. We just can’t do it quickly enough," said Krolicki, who said the Nevada Commission on Economic Development generated 20,000 jobs in the past two years. "The growth we had for the past two decades was just unsustainable, and we finally hit the wall.

"The silver lining is our economic crisis means we’re all sitting together at the table, trying to create jobs. We need to do it. And now."

Bryan, a Democrat leading a team of unpaid lobbyists for higher education at the upcoming session, argued the state must raise more revenue to boost education and lure new business.

But Sandoval and Krolicki contend education improvement can be done on a tight budget.


Change, if not fresh cash, is coming to education.

Sandoval ran for governor on a platform promoting more competition and choice in public schools, and the timing seems right. The Clark County School District, one of the largest in the country, just hired a new superintendent known for launching major reform in Colorado.

Now, Nevada sits at or near the bottom of most performance measures, with about half of high schoolers graduating. But the new governor argues that more money is not the answer. Instead, he wants to let parents decide where to send their children, including to private and charter schools that set higher academic standards while using government vouchers to pay their bills.

School districts, meanwhile, want to change collective bargaining laws so they can deal with under-performing teachers now protected by unions and tenure.

Set for a showdown, Sandoval promised his plan "is going to be very aggressive with regard to choice in education, merit pay for teachers, holding schools and teachers and principals accountable."

Higher education also is preparing for changes, including how money is distributed, as the state considers more autonomy for universities and more work force training at community colleges.

Now, the universities collect fees for in-state students and higher tuition from others, and it all goes into one pot for state redistribution. Instead, the government may provide block grants and let campuses set higher fees and tuition for specific programs.

Daniel Klaich, chancellor of the Nevada System of Higher Education, said he and Sandoval have discussed "giving the higher education system more control over tuition and fees" to make up budget shortfalls. But Klaich said he fears higher education could be short-changed.

"I like the idea of more autonomy in the abstract, but it’s like somebody giving you a brand new car. If you don’t have enough money in your budget to buy gas, having a new car doesn’t do you any good," Klaich said.

"It’s not good enough to say we need to improve education and then not support education."

Sandoval said he, too, sees education as key to Nevada’s economic future, but he wants schools, colleges and universities to focus limited funds on teaching and training a new work force.

"We need to prepare our students to meet the needs of those companies that are coming here," he said.

Contact Laura Myers at lmyers@reviewjournal.com or 702-387-2919.

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