By Ron Knecht and James Smack
On June 30 Nevada ended its 2017 fiscal year, and we observed yet again one of the more annoying problems in state government: the annual last-minute spending frenzy.
In Nevada, any fiscal-year budgeted monies not spent by a state agency by June 30 are fully reverted back to the general fund. So, we see a substantial uptick in spending in the last week of a fiscal year. Why? Because many of the folks running the agencies, instead of considering the value of saving taxpayer dollars, realize that if they don’t spend remaining funds before the end of the fiscal year, they’ll be gone from them forever.
This prompts some remarkable purchases at the end of the fiscal year. It never ceases to amaze us how many painting projects get ordered in June, new carpeting for agencies, or massive supply orders, or whatever. All in the name of spending every dime before it reverts to the general fund.
It’s a poor way to run an enterprise, and it should be frustrating to all Nevadans, especially those who know how things work in business and for the families paying taxes to support state spending. In the private sector, saving money against budget is often rewarded with bonuses and raises. There is no such reward in the public sector, only the perceived punishment of losing the remaining budgeted funds.
Families don’t budget on fiscal years. Instead, any money they save at any time means there’s that much more for their needs and wants in the future. It’s the ideal incentive to balance present and future spending.
This problem doesn’t arise in every state agency. For example, the Controller’s Office takes pride in saving money against its budget every year. In our first full fiscal year we cut spending by 13 percent from the amount allocated to us by the legislature and governor based on the request of the previous controller. To date, we’ve returned over $1-milllion to taxpayers from our small agency. And there are other examples of such restraint.
How can we fix this? We need to change the rules.
In the next legislative session, we will propose a bill to change this feeding frenzy mentality. It will change the rules from 100 percent reversion of unspent monies to the general fund to a formula in which a certain percentage of those funds will be retained by the agency in an account for it.
The money placed into this budget account for the agency would be like a savings account: a state agency rainy day fund, if you will. Responsible agency leadership can make good strategic use of these monies, and the system would reward good leaders for saving. What a novel concept!
In the long run, efficiently run agencies could use these funds for initiatives to modernize systems, for emergency funds, or for whatever reasonable needs that may arise. This system would give agencies more flexibility in long term planning by wiping out the use-it-or-lose-it mentality that exists today.
A percentage of the monies saved would still be returned to the general fund, and we would also designate a small portion of those saved monies to the state’s general rainy day fund to prepare for the next economic downturn. We are considering a formula of 50 percent back to the agency, 40 percent back to the general fund, and 10 percent to the rainy day fund.
Nevada’s economy has experienced moderate growth the past few years and state spending and revenues have risen significantly faster than the growth of our economy. But the current pathetic national economic expansion is quite long in the tooth and another recession is possible. We don’t expect another Great Recession, but even a modest national economic downturn can be amplified in our tourist based economy. That can cut state revenues rather sharply.
Over the long term, sending more money to the state’s general rainy day fund and giving frugal agencies continuing funds of their own can go a long way toward state services not being reduced or eliminated in times of economic turmoil.
Incentivizing savings can also go a long way toward state government efficiency. And we’ll continue to explore other savings ideas going forward.
Ron Knecht is Nevada Controller. James Smack is Deputy Controller.
Ron Knecht, Economist & Nevada Controller, www.RonKnecht.net
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By Ron Knecht and Geoffrey Lawrence
For now, this is the last regular column that will carry the Ron and Geoff byline. Geoff is leaving the Assistant Controller’s job July 1 for a new one.
James Smack, the Deputy Controller, will join Ron in the weekly column beginning next week. Geoff will make guest appearances now and then, we anticipate.
Ron and James know Geoff has done an outstanding job as Assistant Controller and as a co-columnist, and he’s been a joy to work with. He’s a fine human being with a great wife and two priceless children. He’s a top-flight analyst with a superb intellect, a fine manager and leader, a gifted writer and ideal colleague.
The Controller’s office, the State of Nevada, and the voters and taxpayers are suffering a great loss in his leaving.
He was forced out of his job by the malicious and vindictive actions of Governor Brian Sandoval and the statists in both parties in the legislature because his work and Ron’s for the public interest had too long been too big a problem for them. It was pure retribution against Geoff and Ron.
When Ira Hansen was Assembly Speaker designate in November 2014, he hired Geoff as the majority caucus’s chief policy and economic consultant. It was an inspired choice. Geoff had already compiled a long, legendary record as the top policy and economic analyst at the Nevada Policy Research Institute and elsewhere. As a former Assemblyman, Ron knows the caucus has not seen Geoff’s like before or since.
But Sandoval and his political thugs organized the ouster of Hansen because, as a staunch limited-government conservative, he threatened their tax-hiking agenda. During a mugging to try to convince Hansen to go, one of Sandoval’s complaints was that Hansen had hired Geoff. During Geoff's time with NPRI, he had publicly criticized the systematic cronyism within Sandoval's office, and Sandoval had not forgotten.
When John Hambrick and Paul Anderson got control of the caucus after the coup, they did the bidding of the statists in the Republican Establishment and cashiered Geoff. What they didn’t know was Geoff and Ron had expected this and already agreed Geoff would take Assistant Controller’s job.
With the help of some principled and courageous Republicans in the legislature, plus some outstanding professionals and other citizens, Geoff and Ron crafted an alternative budget that would have avoided the unnecessary tax increases the Establishment forces in both parties wanted to pass. After legislative counsel blessed the alternate budget as legally sound, it passed a legislative hearing without a scratch. So, Sandoval and the Establishment ignored it for the rest of the session because they had already promised the predatory special interests they serve the biggest tax and spending increases in Nevada history.
Ron and Geoff then worked with the folks who had helped with the alternate budget and others to craft the Commerce Tax referendum in 2015. The referendum survived a furious assault by the governor's allies at the trial court. On appeal, the Supreme Court found a political rationale to kill the effort: They said the description of effect, written originally by the legislative general counsel, was defective for not telling voters that rescinding the tax would mean the state would have slightly less to spend in the future. The condescension of such progressives, holding that mere voters would not understand just that intended result, is stunning.
So the governor used his budget this year to cut Geoff’s position with the pretext of an assumed reorganization of some state administrative functions. Sandoval's statist allies in the legislature nixed that proposed reorganization, but they all studiously ignored that fact and agreed to cut Geoff’s position anyway.
By aggressively representing the public interest, Geoff and Ron had been too much a thorn in their sides. So, they had to pay with the loss of Geoff’s position.
Geoff was offered a better job in another state agency, but had an even better option as Chief Financial Officer with a publicly traded private firm. Geoff says he won't miss the small-mindedness and vindictiveness of the political world.
Ron kept Geoff in the byline for this last column because he was a full partner throughout their collaboration. Thanks and Godspeed, Geoff.
Ron Knecht is Nevada Controller. Geoffrey Lawrence is Assistant Controller at this writing.
Economist & Nevada Controller
775-882-2935 | 775-684-5777
By Ron Knecht and Geoffrey Lawrence – 24Jan17
This is the third column in a series presenting the findings and conclusions of Nevada’s 2016 Popular Annual Financial Report (PAFR), posted at controller.nv.gov. Here, we address health and social services.
The figures reported in the PAFR and discussed here come from the actual numbers in the state’s official financial reports. They are not estimates, future projections or budgeted or requested amounts. Just the actual revenue numbers from state books and records.
Health and social services (HSS) was the largest category of state spending in 2016, at $5.1 billion. It accounted for 47 percent of all state spending, and it has been the fastest-growing category of spending over the last decade. In 2006, HSS spending totaled $2.2 billion; so, it has grown 132 percent in a decade. Although population growth and inflation drove demand for these services upward, spending has grown 66 percent faster than these factors combined.
The incomes of Nevada families and businesses grew 27 percent over the same period, while the state’s gross domestic product rose just 17 percent. Hence, drastically faster growth of state spending for HSS has consumed a rising share of our output and increased the burden on Nevada families and businesses by 83 percent. This figure dwarfed the growth in taxpayer burden of spending for K-12 and higher education. All other spending categories combined experienced a reduction in taxpayer burden of 32 percent.
HSS spending is driven by a combination of state choices and federal requirements. Participation in federal support programs such as Medicaid is technically optional for states, but large federal grants are available only to states that participate in those programs. Accepting federal dollars requires states to adhere to federal rules regarding minimum benefits levels, participant eligibility and other parameters, thus often increasing state general fund spending.
For food stamps, cash welfare benefits and many other support programs, federal grants reimburse the state for all spending on benefits, although state resources may be required to cover certain administrative costs. Other programs, including Medicaid, require various levels of matching funding from the state’s general fund.
This requirement is significant because Medicaid accounted for 63 percent of all Nevada HSS spending in 2016, with a total of $3.2 billion. Medicaid spending exceeded state funds for K-12 education by more than $1 billion, and it is by far the state’s largest single line item.
Federal support for Medicaid fluctuates each year according to a formula that is based on the per capita income in each state. States with lower incomes are entitled to have a larger proportion of Medicaid costs reimbursed, but in no case does the federal reimbursement rate fall below 50 percent of eligible costs. For 2016, the reimbursement rate to Nevada was 65 percent. That’s up from 54 percent in 2016 due to a decline in the state’s ranking of per-capita income.
Any recovery for Nevada’s income ranking will once again obligate the state to cover a larger share of Medicaid costs, and the program’s burden on state revenues will rise even faster. Also, Nevada taxpayers pay Medicaid’s total cost because they pay federal taxes to support the federal reimbursements.
The federal Affordable Care Act of 2010 encouraged states to expand Medicaid eligibility rules beyond the legacy populations that included the elderly, disabled and children in poverty. States that agreed to extend Medicaid coverage to all individuals with incomes up to 138 percent of the federal poverty level – including single, childless, working-age adults with no disabilities – initially received full reimbursement of eligible expenditures for this expansion population. These federal reimbursements begin to decline in 2017, reaching 90 percent by 2020, with great uncertainty beyond then.
Gov. Brian Sandoval and Nevada lawmakers chose to expand Medicaid along these guidelines at the first available date. Since that time, Nevada’s Medicaid enrollment has nearly doubled, growing from 350,234 at the beginning of 2014 to 650,213 at the close of 2016. As a result, Medicaid is now the largest provider of health care in Nevada.
The PAFR (which we wrote) provides additional insight into these matters and their long-term implications. It also examines the economics of the health-care market generally and Medicaid’s poor track record in insuring access to care and improving health outcomes.
Ron Knecht is Nevada Controller. Geoffrey Lawrence is Assistant Controller.
Economist & Nevada Controller
775-882-2935 | 775-684-5777