MINUTES OF THE JOINT meeting of the
Senate Committee on Taxation
AND THE Assembly Committee on Taxation
Seventy-second Session
February 4, 2003
The Joint Meeting of the Senate Committee on Taxation and the Assembly Committee on Taxation was called to order by Chairman Mike McGinness at 2:09 p.m., on Tuesday, February 4, 2003, in Room 1214 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
Senate Committee on Taxation MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Bob Coffin
Senator Joseph Neal
Senator Ann O'Connell
Senator Sandra Tiffany
Senator Randolph J. Townsend
Assembly Committee on Taxation MEMBERS PRESENT:
Mr. David Parks, Chairman
Mr. David Goldwater, Vice Chairman
Mr. Bernie Anderson
Mr. Morse Arberry Jr.
Ms. Dawn Gibbons
Mr. Tom Grady
Mr. Josh Griffin
Mr. Lynn Hettrick
Mr. John Marvel
Ms. Kathy McClain
Mr. Harry Mortenson
Ms. Peggy Pierce
GUEST LEGISLATORS PRESENT:
Senator Bernice Mathews, Washoe County Senatorial District No. 1
STAFF MEMBERS PRESENT:
Rick Combs, Fiscal Analyst
Russell Guindon, Deputy Fiscal Analyst
Ardyss Johns, Committee Secretary
OTHERS PRESENT:
Guy S. Hobbs, Chairman, Governor’s Task Force on Tax Policy in Nevada
Jeremy Aguero, Chairman, Technical Advisory Committee, Governor’s Task Force on Tax Policy in Nevada
Chairman McGinness:
I’m going to ask Rick Combs to take up the first item on our joint meeting agenda.
Rick Combs, Fiscal Analyst:
This is a proposal to reimburse Guy Hobbs and Jeremy Aguero for travel expenses to attend legislative meetings. If the committee wishes, they can make a blanket approval to cover expenses for airfare and parking to attend future meetings when requested by the committee during this Legislative Session.
SENATOR O’CONNELL MOVED TO REIMBURSE GUY HOBBS AND JEREMY AGUERO FOR AIRFARE AND PARKING.
ASSEMBLYMAN GRADY SECONDED THE MOTION.
THE MOTION PASSED UNANIMOUSLY.
*****
Chairman McGinness:
We will hear today from Guy Hobbs, Chairman of the Governor’s task force on tax policy and Jeremy Aguero, Chairman of the Technical Advisory Committee for the task force. First, before we get to Guy and Jeremy, Russell Guindon, Deputy Fiscal Analyst with the Legislature will give us an overview of the economic forum projections.
Russell Guindon, Deputy Fiscal Analyst:
You should have before you a Table entitled “Economic Forum’s May 1, 2001 and December 2, 2002 General Fund Revenue Forecasts” (Exhibit C), which I will be using during my presentation. I have been asked to give a brief overview of the State of Nevada Economic Forum’s forecast, produced in May 2001 for the 2001 Session, and how that forecast matched the actual activity and then the Economic Forum’s projections done here in December 2002. Most of you are aware the 1993 Legislature created the Economic Forum. The Economic Forum, by statute, is responsible for producing forecasts on or before December 1, in the even-numbered years, and on or before May 1, in the odd-numbered years. The December 1 forecast is used by the Governor in developing his Executive Budget presented to this body. The May 1 forecast is the final official General Fund revenue forecast the Legislators use to balance the General Fund appropriations against the estimated General Fund revenues available for appropriation.
Table 1 (Exhibit C) presents the Economic Forum’s May 1, 2001 forecast for fiscal year (FY) 2002, compared to the actual collections recorded for that fiscal year. The table lists the six major General Fund tax sources for which the Economic Forum produces projections, as well as the total General Fund revenue forecast. The table, under the “Dollar Difference Actual Less Forecast,” shows the actual collections for the total General Fund were approximately $68.2 million below the Economic Forum’s May 1, 2001 forecast. That is the forecast this body would have used to develop the budget for the 2001-2003 biennium. As you can see, the State’s 2 percent sales tax and gaming percentage fees, which account for approximately 68 to 69 percent of the total General Fund, actually accounted for $56.2 million of that $68.2 million total shortfall.
Table 2 presents the Economic Forum’s December 2, 2002 forecast for fiscal year 2003 compared to the forecasts they would have produced back in May 2001 for fiscal year 2003. The May 2001 forecast would have been the one used by the 2001 Session to produce the budget for the 2001-2003 biennium. Looking at the “Dollar Difference” column of Table 2, you can see the Economic Forum’s current projection for the fiscal year 2003 is approximately $87.5 million below what was forecasted in May 1, 2001. As you can see, sales tax and gaming account for approximately $70 million of the $87 million shortfall. Based on the actual shortfall we observed and recorded in fiscal year 2002, in the revised forecast for fiscal year 2003, the total General Fund revenues are estimated to be approximately $155.7 million below the amount that would have been used by the 2001 Legislature to prepare the legislatively approved budget for the current biennium.
Finally, Table 3 shows the Economic Forum’s December 2 forecast for fiscal year 2004 and fiscal year 2005. As you can see, based on what would have been the estimate the Governor used to prepare his budget, excluding any enhancements he has proposed, approximately $1.896 billion in total General Fund revenues is expected in fiscal year 2004. This implies total General Fund revenues for fiscal year 2004 were expected to grow approximately 4.6 percent, and for FY 2005, approximately 5.1 percent, producing approximately $1.992 billion. So, for the 2003-2005 biennium you will be considering this session, total General Fund revenues are expected to be approximately $3.889 billion, or about $323.5 million above the $3.565 billion estimated for the current biennium.
That concludes my presentation on the Economic Forum projections and I will answer any questions committee members may have.
Senator Neal:
What does the Economic Forum look at and have at its disposal to come up with these projections?
Mr. Guindon:
The Economic Forum relies on staff from the Fiscal Analysis Division, the Budget Division, and State Gaming Control Board, specifically with regard to the gaming taxes. They also rely on staff from the Department of Taxation with regard to the revenues collected by that department. We also have an outside contractor called Global Insight, which produces forecasts of the State 2 percent sales tax and the State gaming percentage fees. The members of the Economic Forum are in contact with members of the university, the private sector, and other analysts who prepare their outlook or analysis for the economy. If they do anything with regard to any of the specific taxes the Economic Forum has to consider, then those comments are provided. After consideration of the different forecasts, the forum produces a consensus and is presented to you here this afternoon.
Senator Neal:
Do those entities you listed provide to the Economic Forum, the estimated amount of funds generated in a particular year?
Mr. Guindon:
Yes. Take, for example, the gaming percentage fees. The Economic Forum would have available to them forecasts produced by staff in the Fiscal Analysis Division, the Budget Division, the State Gaming Control Board, as well as the outside contractor, Global Insight.
Senator Neal:
I’m trying to understand how the forum meshed all of these together to come up with a projection.
Mr. Guindon:
That is difficult for me to answer because it is the five members of the Economic Forum who, after listening to the different forecasts, discuss amongst themselves what they believe to be a reasonable consensus forecast.
Senator Neal:
So, it is a guess.
Mr. Guindon:
I guess forecasting is sort of a guesstimate, but I think it is not a wild guess in that we try to look at historical trends, and what is going on in the market. We talk to people who are looking at and analyzing the market, and use the information to put together projections to present to the forum for its consideration.
Senator Neal:
Does this projection include the salaries a person might receive in a given year and what might be spent in terms of a generation of sales tax?
Mr. Guindon:
With regard to the sales tax, there is use made of personal income to try to get an idea of what the level of personal income might be, either explicitly or implicitly, when we are producing forecasts of taxable sales. Note, however, that is how staff from the Fiscal Analysis Division looks at it. I do not think it would be fair for me to comment on how staff in the Budget Division or staff in the Department of Taxation or others may produce their forecasts. We do try to look at all economic and demographic information.
Assemblyman Goldwater:
Why is there so much optimism on the growth of insurance premium taxes?
Mr. Guindon:
This tax has continually outperformed our forecasts. The information we currently have available shows it is continuing to go strong. Given the demographic growth in this State, and what is happening with the inflation side of premiums, we expect the level of growth to continue throughout the next biennium.
Senator O’Connell:
Will the Department of Taxation come in and give us an update on its equipment and on the status of its auditors?
Chairman McGinness:
The Department of Taxation is scheduled for a week from Thursday and we will make sure we pass those questions along.
Senator Neal:
May I request we get a copy of the names of the gentlemen who participated on this Economic Forum and the areas they represent?
Senator McGinness:
We will. We have asked Mr. Hobbs and Mr. Aguero today to focus on how they arrived at the deficit the State is facing and on Thursday to impart to the committee how they arrived at how to fix that deficit. Unless everyone has unlimited time and no plans for the rest of the day, we will try to limit our questions to your topic for today. That is, how you arrived at the deficit, and on Thursday, I am sure there will be a flurry of questions on how you arrived at those solutions. I ask the committee’s indulgence to head us in that direction. Mr. Hobbs, we cannot thank you enough for all of your work in the interim.
Guy S. Hobbs, Chairman, Governor’s Task Force on Tax Policy in Nevada:
We will begin the process of going over the work product of the task force over the last 14 months. As we do, we will be referring to our Microsoft Power Point presentation (Exhibit D. Original is on file in the Research Library.). We will first talk about A.C.R. No. 1 of the 17th Special Session. Even though you are familiar with it, part of the importance of talking through it is it sets a blueprint for the approach the task force took through the entire process. We tried to use the construction of A.C.R. No. 1 of the 17th Special Session as a template for how we would approach the work we were going to be undertaking. We went through two phases, each having a multitude of subphases. The first one being the validation of assumptions and an overall problem assessment, which we are going to be concentrating our efforts on with you today. Second, once the problem is identified, we will work through a series of alternative methods and mitigation to address the type of problem we identified through the first phase, on which we will concentrate a bit more on Thursday.
We will use, as much as possible, A.C.R. No. 1 of the 17th Special Session in the way it was written to guide today’s presentation providing several steps we can go through. We will give you some demonstration of the analytical elements that were part of our work product to try to highlight or amplify certain points as we go through. We were talking about things during the course of the task force’s work that would be generally construed as policy types of considerations. We tried, however, to limit those to what was directed by A.C.R. No. 1 of the 17th Special Session and not get into areas that are the prerogative or the appropriate purview of this legislative body. You cannot talk about tax policy without the word “policy” creeping in, and we understand. In fact, we were asked to do that, but we tried to limit, through the assumptions we made as we went through this process, the types of policy considerations at hand in A.C.R. No. 1 of the 17th Special Session.
Mr. Hobbs:
One of the first things I noticed as I read through A.C.R. No. 1 of the 17th Special Session was a lack of analytical resources provided to do the work we were being tasked to do. We took this task very seriously, and those of us who have been working with this kind of information for many years, knew it would be a substantial analytical undertaking. I coerced a number of people into serving on something I will refer to as the technical working group. It was not something specifically spoken of in A.C.R. No. 1 of the 17th Special Session, but, as you look at the task, you know you are going to have quite a lot of numbers to crunch and you want to get the very best people you possibly can. I am sure we did. Their names are covered in the Analysis of Fiscal Policy In Nevada, the Executive Summary for the Governor’s Task Force on Tax Policy In Nevada (Exhibit E. Original is on file in the Research Library.). Members of the task force included Mr. Russ Fields, Eva Garcia-Mendoza, Brian Greenspun, Ken Lange, Dr. Luther Mack, Mike Sloan, and Nancy Wong. Those appointments were made in part by the Governor’s office, and in part by the Speaker of the Assembly and the Senate Majority Leader. The technical working group I referred to a moment ago really took it upon itself, at the direction of the task force, to crunch the numbers and bring back the analytical material and keep us moving forward through this entire process.
We were required through A.C.R. No. 1 of the 17th Special Session to identify the taxes and other methods of revenue mitigation we would be considering over the course of our study. We did not exclude anything from consideration during the early part of our meeting. We were also required to do a review of existing fees and charges the State has as part of its revenue system. We were required to do a solicitation of the executive branch business and labor organization and local governments as to their feeling about public expenditures in K through 12, kindergarten through twelfth grade, education and long-term care. That solicitation was done very early on to several hundred people from whom we got several dozen responses. All of the responses are a part of the appendix to the report we filed with the State on November 15, 2002. Many of those did not necessarily point to tax policy in the State of Nevada as much as they did specific conditions relating to certain agencies of the State or certain social types of programs, but it was a very worthwhile process.
We were also asked to look at the sales tax issue. We were required to develop one or more proposals to carry out the State’s need to provide additional revenue for State programs. Any recommendation we send forward by way of recommended legislation must include a plan to broaden the tax base so it is more reflective of the State’s overall economy. One of the other things we thought was critically important in A.C.R. No. 1 of the 17th Special Session was the assumption included within it. Obviously, in passing A.C.R. No. 1 of the 17th Special Session, there was a general feeling of an imbalance between future revenues and future expenditures in the State. That was clearly worded in A.C.R. No. 1 of the 17th Special Session, but we needed to take it a step further and validate the extent of that imbalance, the causes of the imbalance, and the future performance, on a projected basis, of any such imbalance.
Mr. Hobbs:
We wanted to go through some of these assumptions with you and offer validation for these assumptions. We did not find any of the assumptions to be inaccurate statements of the condition of the State going forward. For example, Nevada’s population is growing faster than its public revenues. I want to run through these assumptions quickly and then come back to them individually. It is becoming increasingly costly to provide needed public services in this State. A disparity between revenues from current revenue sources and public spending needed to maintain current governmental services has created what A.C.R. No. 1 of the 17th Special Session termed a “structural deficit,” or a budget gap. I think it is a fairly important one to concentrate on for a moment, as the terms “current revenue” and “current expenditures” are used. It may sound fairly simple, but it became somewhat of a sticking point for us as we tried to determine how best to assess the gap we might have in the State’s budget. A broad-based tax structure, reflective of the diversity of Nevada’s economy, would be a desirable public policy. That is an assumed policy statement in A.C.R. No. 1 of the 17th Special Session, and as you read through all of the requirements and the assumptions in A.C.R. No. 1 of the 17th Special Session, it leaves you with certain questions you know must be addressed to deal with everything A.C.R. No. 1 of the 17th Special Session has mandated.
What is the extent of the disparity between revenues and expenditures? We want to accurately scientifically measure that gap and have some basis for measuring it. There are many different ways one can go about measuring such a thing. Are we measuring it from a standpoint of an ideal level of public service, a minimal level of public service or, an optimal level of public service? All of those are somewhat difficult to describe. We used more of a current benchmark. In other words, what are we spending today and will we be able to afford those same programs in the future? I made a statement earlier about not wanting to infer additional policy into the process. Had we done otherwise, we would have been making value judgments about programs, i.e., that they should be increased or diminished beyond what is being provided today. We did not feel that was the prerogative of a task force on tax policy. This would offer, hopefully, a measure of gap less debatable because we are not using a level of expenditures differing from those we provide today. Consequently, we felt that to be the best benchmark. In looking at any sort of gap like that, is it a short-term quirk or is it something more systemic or structural? That was something we clearly needed to understand. There had been a lot of discussion about economic cycles creating these problems and there is no question in my mind, having gone through this, economic cycles are something with which we live. They are something that can certainly aggravate or actually bring forward more quickly the existence of any kind of structural or systemic problem, which is what we believe to be the case here.
Mr. Hobbs:
What are the underlying factors contributing to the problem and how might they be mitigated? It sounds like a very simple statement to make, but I think you have to understand the problems inside and out to best fashion a solution to match up to the characteristics of the problem. Our approach was to review the State’s economy and develop a set of baseline assumptions. This is the beginning of the modeling process as well. Step 2 was to review the State’s fiscal system including historical revenue and expenditure trends. You have to do this in order to have any sort of time series for purposes of projections. Each of these steps I am mentioning at this particular point in time conform to the eight chapters of our report. We are trying to follow a logical structure and one similar to the one we followed in putting together the report. Step 3 was to define the framework of the State’s fiscal problem. Step 4 was to make it more specific to the State’s General Fund in measuring the problem, which was specifically focused on by A.C.R. No. 1 of the 17th Special Session. Step 5 was to conduct a thorough state-to-state evaluation. In chapter 5 of the report, we compare both revenue ratios and amounts on a per capita-per-thousand-dollars-of-income basis and do a similar kind of measurement on the revenue side.
That led us to the next step, comparing revenue alternatives, against a set of criteria we established about midway through the task force’s deliberations. We wanted to look at all existing and potential revenue sources from the standpoint of how they stacked up under certain tests of stability, sufficiency, equity, ease of administration, and a dozen or so criteria we used to create a matrix for all of the revenues viewed during this particular process. It was a rather time-consuming, pivotal part of the work process. Step 7 was to develop recommendations and test all of the scenarios. This involved the use of the model we had created for fiscal projections inserting various mixes of different revenue sources until we could come up with one we felt best achieved our overall objectives. Step 8 then, was to identify additional supplemental issues and considerations. There was a litany of those, and since the time we filed the report, a number of others have come up that are additive to and supportive of several of the more specific recommendations we made throughout the report.
Here are some of the key findings. The first step we went through was an economic overview. Population and employment growth are slowing. They are increasing at a decreasing rate as time goes on. Nevada’s economy is diversifying but nonetheless, remains comparatively narrow when you look at other states across the country. Nevada’s economy is not, in fact, recession-proof and our revenue structure exposes us to the problems created when we go through national economic cycles.
Mr. Hobbs:
Another observation from the first section of the report is persons over the age of 65 and those we would consider to be school-age children have grown to represent increasing shares of our overall population. Those are two segments of our overall society requiring different mixes of services. School-age children require education and all the programs that go along with supporting educational processes, which is a dominant part of your State budget. There are certain services demanded by some of the folks in the 65-and-over range not necessarily required by younger members of our society. That is certainly a critical element and we have come to find it is, in fact, the case.
In defining the problem, “structural deficit” was a term we wrestled with. It is a term coined in some other academic work previously done, but whether you hear that term or “budgetary imbalance” or “revenue expenditure imbalance,” they are all aimed toward the same thing. Over time, if your revenues are growing at a lesser rate than your expenditures, you will experience an imbalance, all other things held constant. Revenue stability and sufficiency, both within the State of Nevada, are clearly issues with which we have to contend. There are certain contributing factors causing these situations to develop and obviously changing demographics, economic diversification and relative tax burden for example. Also, construction activity has become less of an overall part of our economy. There are revenue sources we have with the State’s revenue mix that do not adjust with inflation or what we refer to as fixed unitary taxes, and over time, actually devalue as inflation occurs. There are other things as well, such as Internet penetration into the retail sales and use tax base, creating a bit of an erosion or dilution of tax revenue.
Regarding the State’s fiscal system, there are certain kinds of constraints somewhat unique to the State, whether in the constitution, or other types of policy constraints rendering our system comparatively less flexible than we would like it to be. The State’s revenue side is dependent upon certain revenues and good performance within those revenue areas. We have a historical high-use of earmarking. Earmarking reduces flexibility over time, and we are still rather heavily characterized by a fair amount of earmarking in this State. Inflation-adjusted per capita revenues have been declining, and we have a similar trend with regard to revenues and percentage of personal income. We would rather see per capita inflation-adjusted revenue staying somewhat constant over time rather than declining if, in fact, we are to provide the same level of services over time. We projected revenue growth over a 10-year period, at around 4 percent with projected expenditure growth, assuming current service levels only, at approximately 6 percent. You can see the disparate growth rates between the two. Our projections go back to this past late November and have not changed dramatically in our model. Every time we got a key piece of information on certain types of revenue production, we would go into the model and rerun it. It stayed rather constant at an amount similar to the $705 million. Looking ahead to fiscal 2009 to 2011, we would expect that figure to approximately double to just under $1.4 billion.
Mr. Hobbs:
Our report is between 1100 and 1200 pages long and includes a lot more information than we are trying to provide for you on a summary basis, but we wanted to hit some of the salient points. Nevada ranks thirtieth nationally in State taxes generated per capita and thirty-second in State taxes generated as a percentage of income. Per capita figures used for this State, for this type of purpose, are sometimes a little bit misleading because we do not necessarily bring into this the effect of tourism. Tourism would add a couple hundred thousand or more people to the population base if we were to count them on a daily equivalent basis. We would then drop further than thirtieth if tourism were taken into consideration. We are also starting to hear a number of different accounts about how you translate a certain amount of tax dollars to individual tax burden. This is not reflective of what an individual tax burden might be because it does not consider the impact of business-to-business kinds of transactions, or business-related taxes. Neither does it consider the effect of tourism on a per capita computation basis, so it can be a little misleading.
Senator O’Connell:
You say we rank thirtieth. Could you tell us the percentage between the top and our number?
Mr. Hobbs:
We would be very happy to make those tables available to you.
Assemblyman Mortenson: If you are talking about the revenue generated per capita, do you mean taxes collected from individuals, per capita? Are you not including the input of casino revenue?
Mr. Hobbs:
Basically, the computation is State own-source revenue only, so it would include revenue from all casino taxes.
Assemblyman Mortenson:
I have seen figures where we rate somewhere around tenth in the nation in terms of expenditures per capita by the State government. That is not consistent with what you have presented.
Mr. Hobbs:
I know you will hear a tremendous amount of these kinds of statistics over the course of this discussion about specific areas of expenditure per capita compared to other states. One of the reasons for focusing on per capita was to demonstrate the fact that the value we are deriving on a revenue basis per person in the State is declining. This is a problem from a standpoint of being able to support a constant level of services over time. Some of these other comparisons are a bit more problematic. We did not spend as much time on the expenditure side of the equation. It was not something with which we were tasked, and we did not have specific authority to get into the expenditure side.
Assemblyman Mortenson:
The fact we are forced to spend no more than we collect really makes those figures almost identical.
Mr. Hobbs:
A variety of accounting reasons could apply. There may be transfers not counted as revenue, or federal funds considered in the spending mix and not counted as own-source revenue, but are spent on the other side of the equation. Oftentimes the two will not necessarily track each other because of elements of inclusion and exclusion. Our per capita revenues are not keeping pace with per capita demand for expenditures on a constant basis.
One of the other findings in this particular section was sales and receipt taxes within the State’s budget account for about 86 percent of all State taxes. That is roughly double the national average of reliance on those types of taxes. That is very notable. Nevada ranked fiftieth out of the 50 states in state and local revenues received from the federal government on a per capita basis. This could be explained by the fact that Nevada had what we would argue as a severe underestimation of our overall population in the 1990 census. Additionally, we grew faster than any other state. By the latter part of the decade, we were about as far away from a rational counting of our population as one could statistically get. Because many of the federal funds are distributed on a population basis, it caused us great harm. Nonetheless, we were concerned with our standing as far as federal revenue, or federal funds per capita, being provided back to the State budget.
When we made our recommendations we had a multitude of simultaneous objectives. We were trying to broaden the tax base, providing increased overall equity and stability to our overall system of revenue within the State. We wanted to concentrate on those with comparatively low costs of compliance and administration. We also wanted to have a realistic viewpoint toward cash flow. Some longer-term types of things, possibly fitting the other categories, might not provide any near-term cash flow benefit because of the number of months, or in some cases, years needed to implement them. Consequently, with that in mind, we knew we had to balance cash flow considerations with long-term structural changes. We also had to deal with some of the problems we had identified over time, particularly with the erosion on unitary taxes, caused by inflation.
Mr. Hobbs:
Expenditure accountability is unquestionably a very important thing. We know there is a need for ongoing assurance that every current dollar we have be spent in the wisest possible fashion with the highest and best use, and with the greatest amount of accountability. The same is true of any additional revenues necessary to sustain the service levels. Should any or all of our recommendations be implemented, you might consider having an additional task force to monitor the implementation of those revenue measures. That body would provide additional input back to you as to the accountability side of the equation, and on which we also would place a very high premium.
The Department of Taxation is very heavily challenged and we strongly believe it would be a very wise investment on the part of the State to provide for information technology upgrades. With the addition of any new revenue sources beyond the challenges they already have today, that point only becomes more amplified. We definitely believe investments will be necessary, both to maximize the revenue due the State at this point, as well as to deal with any new programs the State may wish to undertake.
Nevada’s tax base is very narrow by its design. We apply the sales tax to the retail sale of tangible personal property. Therefore, if it is not a retail sale and tangible personal property, it is implicitly exempt by the way it is defined in the State of Nevada. We then go a step further. Because we have dozens of explicit exemptions of certain types of tangible property from taxation, our tax base has become even narrower over time. When you add the encroachment on the sales tax base by catalog and Internet sales, which are becoming an increasing share of the overall retail activity, our base narrows even more. This is of great concern because, unquestionably, sales and use tax will continue to be a part of State and local government funding.
Increasing the State’s proportional allocation of federal funds should be a priority. One of our recommendations was to centralize the approach of the various State and local agencies in securing grants from the federal government. Having one centralized grant-writing office, where there could also be some seed money from matching funds, seemed to make sense. The expense could be shared by the State and local governments, and coordinated on each unit’s behalf. Anecdotally, we ran into situations where certain units were not able to apply for certain kinds of federal funding because they either lacked the staff to do it because they could not justify it on an ongoing basis, or did not feel they could support it from an appropriations standpoint. Substantial consideration and attention was given to the impact on economic development and economic diversification in the State. It is and should be an ongoing process. Now that we have collected the data and have the model capability we have, it is going to be exceptionally important to maintain the database and the model as time goes on.
Senator Tiffany:
Having been on the budget committee for a number of years, I have seen exponential growth. I have not seen a growth in the budget based on the Consumer Price Index (CPI). I have seen us spend extra revenue because we have had the surpluses. Expenditures in the last year of the biennium grew by 18 percent and we only cut back 3 percent. We then refunded the 3 percent, and are now growing 25 percent. That would not be considered CPI, so did you take any of that into consideration when you talk about the revenues needed?
Mr. Hobbs:
That is a very good question and it is one around which we had a substantial amount of dialog. You can just simply do a CPI, or regression type of projection, or you can do one more associated with demographic forecasts of caseloads, which is the one we felt would be a more appropriate measure. We went through a very complex and comprehensive process in order to leave with you today, at least an understanding of the $705 million value we projected over the next biennium. We want you to be very clear about how we arrived at that figure, so you can use it as a benchmark for making other kinds of judgments.
Senator Tiffany:
You based it on some caseload growth from population?
Mr. Hobbs:
It came from population and other demographic assumptions. For example forecasting the K through 12 education caseload over a 10-year period, we needed to make some kind of assumption about the dispersion of age groups over time. It was there we came up with some of those earlier findings, such as recognizing we had a higher growth rate in the age group of 5 to 17. We found we were, demographically, growing faster to an older population on the other end as well, sort of on a parabolic basis.
Senator Tiffany:
I have seen the population growth of the age 65 and older, and the population growth in the ages 5 to 17 groups. We have 17 counties in this State. Are you just talking about Clark County, because if you look at all the counties, that is not true.
Mr. Hobbs:
We are talking about the State as a whole.
Senator Tiffany:
So you aggregated the demographics.
Mr. Hobbs:
Yes. Everything was aggregated. In trying to identify potential solutions to address the gap, several alternatives were evaluated. Nearly every existing revenue we have was compared to all potential revenues we could consider. All forms of revenue we could think of during this particular process were tested the same way. At the end, we felt our recommendations should provide sufficient revenue to sustain current service levels through fiscal 2011. By our recommendation and our forecasts, they, in fact, do meet that particular test. Near-term cash flow issues and longer-term structural issues need to be balanced. In other words, there may be things we recommended or you all would like to do, and it may take some of them some time to be implemented.
Senator Neal:
When you say “sufficient revenue to sustain current service levels through 2011,” would you tell me how you define the service level?
Mr. Hobbs:
We projected what we thought the existing services provided in the State would cost us in each succeeding year. It was a mathematical exercise because we had to make a litany of assumptions about how much we expected certain components to grow over time. We considered components like the cost of providing for education, long-term care, State prisons, or administrative functions. Obviously, they were not all the same rates of growth, so we tried to use what we hoped to be the least debatable benchmark. What we are currently doing today, as opposed to trying to make any value judgments about what anyone feels we should be doing, whether less or more in any particular program area, is to reflect the cost of what we are doing today and go forward by each of the several years in the projection period. It was important that our recommendations reflected the diversity of the State’s economy. We were dealing with what we refer to as a blended solution made up of several different components. We aimed at achieving all of the different objectives, including the near-term cash flow objective as well as the longer-term structural objectives. It was not our goal for any one segment of the tax-paying public, business community, tourists, or any other group, to carry the full burden. We thought it best, from a diversity standpoint, to spread it out over several different areas of burden, thus making it more equitable and diverse, over time.
We also include within our recommendations measures to increase system efficiency, stability, and equity. We reviewed and made recommendations within areas of certain unitary taxes. For example, the business license tax, which is charged per employee as a unitary tax, and was fixed, roughly 10 years ago, at a $100 value. That $100, 10 years ago, is not worth $100 today, even though the number of employees has risen. The value you are getting per employee has declined largely due to inflation. Because of the narrowness of our particular tax base, an admissions and amusement tax would offer additional stability to the bottom line. It was very targeted toward the particular systemic deficiency we identified with the sales tax base.
We would like to provide you with more evidence as to the reasonableness of the assumptions made in A.C.R. No. 1 of the 17th Special Session, and then take it a little further with our projections. The notion here is if there is not an acceptance of the existence of a problem, there cannot be serious dialog about forming solutions. The first assumption is Nevada is the fastest growing state in the country. There is some pretty strong evidence. Referring to the chart shown on slide 23 (page 12 of Exhibit D), the left side shows the percentage of growth of the population over the last decade. Nevada is clearly outpacing all of the other states by quite a wide margin. The dotted line you see down around the 14 percent level is the mean growth rate over that same period. You can see the assumption is true. Another assumption was the biggest gains are being made in populations of school-age children and senior citizens. The chart at the bottom of the same page shows that, in fact, is correct as well. In 1990, we had 17.2 school-age children per 100 residents in the State of Nevada. More recently we are moving up to 18. The senior population, those 65 and older, is up from 10.5 per 100 residents in 1990, to 11.1, for a gain of 6.3 percent over the same period of time.
The next major assumption indicates the rate of growth of Nevada’s population is much faster than the rate of growth of its public revenue, which is another fact. The chart on slide 26 (page 13 of Exhibit D), shows inflation-adjusted State revenue per capita in 1992 was $2110 on an equivalent basis, and has dropped to $2010. The 1992 level of $820 dropped to a 2001 equivalent value of $790. Though it does not seem like a lot, this kind of trending is what is bothersome to us, and we expect it to continue into the future.
Mr. Hobbs:
The next assumption is that Nevada is falling behind in revenue collections needed for funding K through 12 education, for meeting long-term care needs of the growing senior population, and for keeping pace with soaring energy demands. When there is a disparity between the growth and revenues from current revenue sources and the growth in public spending needed to maintain current governmental service, a structural deficit arises. We expect to see a $705 million gap between the current service levels and current revenues forecast for the next biennium. To get into the problem-assessment phase, we needed to project General Fund revenue sources, which we did separately from expenditures. This was the first step. In step 2, we needed to model the General Fund expenditures by category, and we did this not only by category, but also by subcategory. The logical thing in step 3 was to compare the two, and see what kind of gap we had over time. Having done this kind of work for as long as I have, doing them separately, and apart, to gain the kind of focus on both the revenue and expenditure side, is a tremendously important exercise. What were some of the assumptions we made in putting together these projections? We wanted a longer-term look at these projections because we were not doing a projection just for the next biennium or the one after that. We wanted to develop a model allowing us to project forward at least 4 to 5 bienniums. Any projections degrade a bit the further out they get, but are still a useful tool in showing trending and tendencies in your system. Therefore, we developed a model reaching backward, historically, for 10 years and, in some cases longer, to develop time series and support for projections. We also went forward 10 years to offer the kind of trending analysis we want to see. Thus, our projection period is the period 2001-2002 through fiscal 2010-2011.
The $705 million gap only maintains current service levels. It does not offer any enhancement to existing services, nor does it assume the demise of any existing services. We used only the existing revenue mix we have today, and forecast each one of those revenue sources forward, separately, to compare the two. We did not attempt to project or reflect the uncertainty of any world events. Clearly, we know those kinds of things can have a tremendous impact. We were dealing with such a situation from September 11, 2001. The projections would have been more restrained on the revenue side had we not chosen to go back a greater period of time to somewhat diminish the more recent trending impacts a situation like September 11, 2001 would have on those projections. At this point, Jeremy Aguero, the chairman of the task force’s technical working group, will take you through some of the additional details about how we projected certain kinds of revenues and expenditures. Hopefully, you will gain a bit more confidence in some of the projections by the end of today.
Jeremy Aguero, Chairman, Technical Advisory Committee, Governor’s Task Force on Tax Policy In Nevada:
As Guy discussed, the first step in the process was to forecast forward revenues. The reason we started with revenues was because we had more information on them. Collecting information on expenditures, caseloads, offsets, and those types of things took much more time. We focused on primary revenue sources first, such as retail sales and use tax, gaming fees, insurance premiums, casino entertainment, excise taxes, business licenses, mining taxes, and car rental fees. We also did projections of each one of the secondary sources, including licenses, fees, fines, use of property, and other. Each of these individual revenue sources was forecast independently of one another.
For all the primary revenue sources, we took a two-phased approach. In the first phase, we looked at the upcoming biennium and tried to reflect existing trends we were seeing in the market. The overall forecast used by the task force was long run in nature. The cash-flow issues were one of the primary concerns of the task force. We attempted to look at those over the short run period. If I can direct your attention to the chart indicating taxable retail sales (page 17 of Exhibit D), you can see the lulls in the early 1990s, when we had a recession, and a leveling off area in the early 1980s, but overall, we see steady growth in retail sales. The curve is sharp. The red line is the growth over the previous year. It is always 12 months’ worth of sales. We tend to look at it this way in order to not get any of the variations. If we had something occurring in January that did not occur last year, you would get a lot of variation. If we look at the full 12 months, things like the Super Bowl or the Chinese New Year, which certainly would bring in more tourists, we capture those over the 12-month period.
Looking at the next slide (page 18 of Exhibit D), this is the exact same data, but we have adjusted it for inflation, and divided by the number of employees. We would have divided it by the population, but we do not have population statistics month over month, every single month. Certainly you see the variability here, and the difference in the growth. The yellow bars indicate the inflation-adjusted taxable sales per employee year over year. The red line reflects the growth rates. Today we are at the lowest per-employee revenue generation over the entire period shown on the chart, due to all the things Mr. Hobbs mentioned earlier. There are any number of reasons why the retail sales and use tax is eroding with time.
Senator Neal:
How do the layoffs and unemployment relate to this particular chart?
Mr. Aguero:
Layoffs would have a tendency to offset themselves. For example, if you had a layoff, you would have fewer employees, but you would also have fewer taxable sales per capita, so they would tend to offset one another.
Senator Neal:
Are we talking wages?
Mr. Aguero:
We are talking taxable retail sales. The total volume of sales divided by the total number of employees.
Senator Neal:
Why would you use the total number of employees rather than a dollar figure?
Mr. Aguero:
We are using both. It is a ratio between the two. The idea is, in order for the State to maintain itself, we have to have the same amount of revenue for every person here. It will not cost less to educate a child tomorrow than it did yesterday nor will it cost less to provide Medicare tomorrow than it did yesterday. So, what this chart looks at is how much revenue we are generating for every person who is here. If there is a disconnect between those two, it goes down. If we start generating more revenue for every person, the chart goes up.
Senator Neal:
You are speaking in terms of costs?
Mr. Aguero:
No, I am speaking in terms of revenues. This is merely a chart to look at revenues generated at the State level for every person who lives here.
The question becomes then: Why are we seeing this erosion in the tax base, and why are we collecting fewer tax dollars for every person who lives here? There are a number of reasons. The number one reason is because there is less construction activity. We have a consumption-based fiscal system and a consumption-based economy. As we mature as a society, we are going to construct fewer homes. The taxes generated by those homes, including retail sales and use tax, are going to erode with time. We have a slower economy, both domestically and abroad, which is certainly impacting how consumer behavior is reacting. It impacts the way each of us, as a family, spends our money within the State, as well as how businesses are reacting and spending money. Increasing market penetration by Internet retailers is becoming an increasing problem. Every year, the Internet catalog sales are capturing a higher share of the total amount of sales going on in the State, causing us to lose money.
The economy is diversifying away from tourism, which is becoming increasingly problematic. Historically, tourism has welcomed about 24 visitors for every person who lives here, and those visitors come here and spend money. They generate tax revenue. To the extent there are fewer of those visitors, there are fewer dollars generated for every person who resides in Nevada permanently. This also puts a downward pressure on the amount of money we are able to generate. Finally, we will look at increased spending on services. In general, societies are becoming more apt to spend money on personal and professional services, and as such, the tax base tends to erode with time.
The next slide (page 19 of Exhibit D) shows an illustrative example of how this might impact our tax system. In our example, household 1 earns $100,000 per year. Household 2 earns $110,000 per year, or $10,000 more than household 1. Taxable spending per household is $10,000 with Internet spending at $1000 for household 1 and $1500 for household 2. The total taxable sales per household is less for household 2 by $37 in this example. Now extrapolate that out to every person living in the State of Nevada, or every household, and you start seeing how the problem can compound over time. This is because we are becoming more like household 2 as opposed to household 1.
The next slide (page 19 of Exhibit D) is a chart indicating gross gaming wins. Here is another chart showing relatively tremendous growth until you get to the very end. You see strong upward trends in the total amount of revenue, but since mid-2001, those started dropping off. You see we have grown, year in and year out, but at smaller paces. The yellow area represents the total volume of gross gaming revenue for every year. It does not reflect inflation or the amount of people living here, but simply says in December of 1980, we were generating $2 billion per year in gross gaming revenue and today we are generating just under $10 billion.
Mr. Aguero:
In our next slide (page 20 of Exhibit D), the downward curve is quite obvious. The amount of revenue generated in thousands of dollars, on a per-employee basis, has declined, almost consistently, year after year. What I find interesting is we are coming out of the longest period of economic expansion in the United States’ history since World War II, and yet we have had these kinds of declines in overall revenue. What are the factors influencing this? The next slide (page 21 of Exhibit D) indicates in 1980, hotel gaming and recreation represented about 33 percent of our State’s total employment. Today, they represent about 23 to 24 percent. They are growing to represent a smaller share of our overall economy and, over time, will inevitably generate fewer dollars for every person who lives here. The next chart (page 21 of Exhibit D) shows the same thing, only in terms of wages. In 1980, the hotel, gaming, and recreation sector of our economy generated about 28 percent of the total wages paid in the State. Today the number is about 23 percent. They also represent a smaller share of the personal income within the State as a whole.
In the next slide (page 21 of Exhibit D), you see the total number of visitors per capita between 1990 and 2002. In 1990 the total number of people who came into Nevada, for every person who lived here, was just over 24. In 2002, that number was about 21½. This not only has to do with the number of tourists, but how they are spending their money. In the next slide (page 22 of Exhibit D), the yellow bars represent the amount visitors spend on gaming. The rest of the bars represent spending on rooms, food, beverage, retail sales, and other expenditures. In 1990, gaming represented 61.3 percent of all the spending. By 2001, that number was only 51.4 percent. I want to be very careful to say this does not mean to suggest our gaming industry is not performing. As a matter of fact, some of these figures have a tendency to suggest Nevada’s gaming industry is eroding over time, which is not the fact at all. It is an impossible scenario, to ask an industry to continue to attract 24 people for every new person moving here and then to grow at 6 percent per year. Even though we have done it somewhat, to expect it to occur over the long haul is highly unlikely.
Senator Neal:
How do you account for the constancy of your lines for rooms, food, and beverages, and yet you show a somewhat steeper decline for gaming. Are you saying those people came to stay in a hotel and did not eat? Or they stayed in a hotel and ate, but did not play the games?
Mr. Aguero:
I think that is exactly what we are saying. I think people come here with a budget. Let’s say that budget is $500 for every person who comes here. Fewer of those dollars are being spent on gaming and more of them are being spent on other types of things.
Senator Neal:
When I look at your “other” category, I assume that money was spent in the hotels’ shops. The line indicating “other” and the one indicating “beverage,” does not seem to be as steep as the one involving gaming. Are you suggesting that people come here, go to your shops and then to the bar, but did not gamble?
Mr. Aguero:
No. I am just saying they did it less. They partook in alternative forms of amusement as opposed to just participating in gaming. I believe Nevada, as a whole, has evolved to become a multifaceted entertainment destination and I think these numbers reflect that.
Senator Neal:
Microsoft Corporation National Broadcasting Company (MSNBC) did a report 2 months ago in which they made a very profound statement. They said Las Vegas turns over $12 billion per month. Even if you just looked at a conservative figure and say the person who is actually playing those games, got a return of 90 percent, the gamers would make around $3 billion, which is still a lot of money. I do not know where MSNBC got its information, but no one to date has challenged it. What you are saying suggests a loss of money.
Mr. Hobbs:
One of the things we are trying to do through this section is to look at each one of the main areas of the State’s General Fund from a revenue standpoint. We have talked about sales tax and now we are talking about gaming because, basically, two thirds of your budget, perhaps more, is vested in those two revenue sources. We are addressing the robustness of those revenues over time. Much the same as we were talking about with sales tax, where we have Internet encroachment and additional exemptions over time, those kinds of things are creating threats to the future sufficiency of the revenue flow coming from the sales tax. In this particular case, the hotel casinos are offering alternatives for people to spend money whether on rooms, food, beverage, entertainment, or gaming, there has been a substantial shifting going on in the last 10 years. Since Nevada has an investment in taxing the gross gaming revenues, we are seeing less revenue being dedicated to those areas by the visitors, and more of it going to other areas that are not taxed in the same manner. The reason for showing this particular slide is to help explain the reduction in per capita gaming revenue. It is similar to the reduction in sales tax revenue per capita we were trying to demonstrate earlier, to try to point to the weaknesses within the existing structure at existing rates.
Senator O’Connell:
Did you profile any other industry? I understand why you picked this one, with all the variables that would be impacted by the tourists and the revenue, but did you do any profile of, for instance, the car industry, or the construction industry.
Mr. Aguero:
These charts are not industry-specific. The employment figures we are using represent the economy as a whole.
Mr. Hobbs:
The reason we chose the example we did is because a third of your revenue mix comes from sales tax and a third from gaming revenue. I wanted to demonstrate to you why we have some of the weaknesses that have led to the imbalances between revenues and expenditures.
Senator O’Connell:
I know about 20 percent of our sales tax is generated through either construction or support industry to construction, and you mentioned construction was going down. Then you have the car industry, which has kept us afloat with its extraordinary deals and things they have done as far as the financing goes. I think it might help us get a fuller picture of the taxing income.
Mr. Hobbs:
That would actually be fairly easy for us to do because we have the monthly reports from the Department of Taxation reported by area of trade within taxable sales. It might be interesting to look at it on an annual basis for a period of time, but on a monthly basis within the last couple of years. That is where you would see, particularly in the months following 9/11, the biggest supported impact from the car industry. That is when they were offering some of the great deals to help bolster the overall base. We can produce something like that for you and provide it separate and apart from our presentation materials today.
Assemblywoman Gibbons:
The 10 percent decrease from 1990 to 2001, does that have anything to do with the way our tourist economy is marketing to more family-type entertainment?
Mr. Hobbs:
This may be a bit of conjecture on my part, but I think it is probably a combination of, over a period of time, somewhat of a change in visitor profile.
Assemblywoman Gibbons:
Has it changed how much visitors spend per night?
Mr. Aguero:
The visitor expenditures have generally been increasing over time. They are generating more dollars per visitor, but we did not do any kind of exhaustive analysis with that in mind. To add to what Guy answered to your previous question, I think in order to attract more people to the State of Nevada you have to offer them different things. We offer them things other than gaming in order to come here. Therefore, they are spending their money on those other offerings, as opposed to merely gaming as an attraction.
Assemblyman Grady:
If people are spending less on actual gambling, and more on “other,” which I would assume includes shopping, why are we seeing a decline in sales tax?
Mr. Aguero:
It is only one portion of the overall sales. You will notice, on the previous chart, there are fewer aggregate visitors for every person here. So, even if those visitors are spending the same amount, if you have fewer of them, you are going to generate less retail sales and use tax.
Mr. Hobbs:
In addition, visitation actually could go up and spending on the gaming portion of the overall dollar they bring, could decline. They do not necessarily have to work in concert with one another.
Assemblyman Mortenson:
This is a very interesting chart. It is leading up to a point I think you are going to make later on, but I think it is confusing to some of the Legislators because it looks like gaming is going down. The yellow part does not show gaming is going down. It just shows, as a percent of the total spending, it is going down. If you were using absolute values on the chart, gaming would be going up. The fact is, the non-gaming is going up faster than gaming, and so the charts would show all upward trends. Gaming is not going downward as the chart seems to indicate, because it is a percentage chart.
Mr. Aguero:
The next chart (page 22 of Exhibit D) is an illustrative example similar to the one we had before. The number of visitors in year 1 is 10 million, and in year 2 the number is 10.1 million. The population in year 1 is 1 million, and in year 2 it is 1.1 million. Population and visitation both increase by 100,000 people. The number of visitors per capita goes from 10 to 9.2. Tax generated per visitor is the same in both of the 2 years. However, in this illustrative example, the total tax collections it would generate per capita, declined by $9. Therefore, the factors impacting gaming tax, shown in the next slide (page 23 of Exhibit D), are visitor spending patterns, which we discussed already, versus non-gaming and other expenditures. Large operators have spent hundreds of millions of dollars to build large convention centers to attract different types of visitors to the State. Gaming proliferation into California and Arizona will be a greater issue into the future. California Governor Gray Davis’ comments with regard to gaming in California, and the probability it will proliferate at a relatively rapid rate, may exacerbate this trend going forward.
Economics tends to be a dismal science, but not everything in the revenue picture is bad. Revenues such as taxable insurance premiums have been going up at an extremely rapid pace. The next chart (page 23 of Exhibit D), shows inflation-adjusted taxable insurance premiums per capita have been increasing, so the amount we are generating from these is increasing. We are insured more than we were previously, and the cost of medical care has been increasing rapidly. As a result, the State has been able to generate more revenue.
Business license tax collections, shown on the next chart (page 24 of Exhibit D), shows an example of what inflation does to different tax revenues. This looks at 1992 through 2011 and shows the total amount of business license tax each year. In the next chart (page 25 of Exhibit D), the yellow bars represent the business license tax collections per capita in nominal terms and the red bars show them in adjusted terms. What we collected per capita in 1992 has gone down significantly compared to today, and we expect it to continue. The tax is roughly $100 per full-time-equivalent employee per year, the same as in 1992. The costs to run government and public or private sector have gone up at a rate of just under 3 percent every year. With this tax generating the same amount of revenue per capita every single year, you get a sense of where those problems lie. Similar inflation and erosion problems are tied to other unitary taxes as well, such as liquor and cigarette taxes. They simply do not adjust with time, and begin to generate less money the year after they are set.
Mr. Aguero:
The key revenue findings are shown on the next chart (page 25 of Exhibit D). Revenue growth was projected to be 3.9 percent and inflation-adjusted growth per capita, minus 1 percent, so it is likely, with every new person moving here, we will have less revenue. On the bright side, the largest gains remaining, insurance premium taxes and casino entertainment taxes, are capturing a greater share of the expenditures going on in the gaming industry. From a qualitative standpoint, Nevada’s revenue system is eroding. There is little doubt we generate fewer dollars each year. Unless our economy changes or unless we start on a new path, our revenue system will continue to erode. Progressive elements help offset with regressive design. It is often stated, Nevada’s tax system is regressive in nature, which in some ways, is probably true, but you have look at the tax structure as a whole. Folks in the lowest quartile may pay a greater share of their aggregate income than people in the higher quartile, but exempting things like groceries and medical care has done a lot to offset that aggregate. Consequently, because of relatively low tax burdens on a per individual basis in the State of Nevada, residents pay a remarkably lower tax burden than any other state. Nevada exports more of its aggregate tax burden to folks outside of the State than just about anywhere else in the union. These are erosion issues. They will exist regardless of the level of spending. They are purely revenue-oriented and have no impact on levels of spending.
Now we will look at the expenditure side of projections (page 26 of Exhibit D). This was a two-step process. Expenditures began with a baseline development. I think there were about 3000 line items in the legislative Appropriations Report of 2001 for the General Fund. Every one of those was put into a series of spreadsheets and projected forward, based on expected population growth and inflation. The individual categories of expenditures were then projected separately, based on caseload issues, revenue issues, transfers of funds, and things such as federal funding. Those individual categories included K through 12 education, University and Community College System of Nevada (UCCSN), Medicaid, prisons, as well as other similar expenditure categories.
The next chart (page 27 of (Exhibit D), is an overview of the different agencies projected. Constitutional agencies, education, finance and administration, special purpose agencies, human services, commerce and industry, and public safety, were each projected individually. The subcategories you see on this chart were the ones pulled out specifically for special consideration. It was a very long process and I would like to share an example. I pulled some information from K through 12 education (page 27 of Exhibit D) and will show you how the process worked. This was done for each one of the subcategories. The yellow bars on this chart show enrollment growth. Of course, spending always starts with caseloads. It starts with demographics and what we are expecting as far as growth in persons aged 5 to 17. The red line shows weighted enrollment as a percentage of school-age population. There was a disconnect between the information produced by the Office of the State Demographer and the information we received from the education folks, so we went back in to modify that. That happened on a number of occasions, so it is not just specific to this category. We always tried to make sure we were not growing something exponentially, where the number of kids we were placing in schools was more than the number of kids we had in the State, so it was always cross-checked.
The next chart (page 28 of Exhibit D) shows spending estimates by category. The Distributive School Account (DSA), for example, has all kinds of different revenue associated with it and all types of expenditures. There are 300 or 400 line items in the DSA. Each one of those was projected separately. We picked out two of them, electricity and textbook spending per pupil. The yellow bars represent per pupil expenditures on electricity, which has increased in the last couple of years, and the red line shows the textbook spending per pupil. Obviously, it has been declining over time. We started with the caseloads and knew how many people we were trying to educate in this example. We then looked at spending by category so we knew what the costs were. We now come to funding offsets, by category (page 28 of Exhibit D). This one shows the 50 cent portion of the property tax provided to offset costs within the DSA as well as the government services tax. Both of those taxes have been growing over time. These were then projected forward. Similar ones included revenue offsets like federal funding for different categories, and this was done for each individual services category, independent.
Senator Neal:
What was the source of your information?
Mr. Aguero:
All the sources are documented in the report. The enrollment figures are sourced from the Department of Education. Then going forward, we generated the enrollment projections based on information provided by both the Department of Education and the Office of the State Demographer. Electricity and textbook spending per pupil for the last 10 years was provided by the Department of Education. Property tax data was provided by both the Department of Education and the Department of Taxation, including property tax, revenue estimates, and government services tax. We finally brought all of those together to get total spending estimates. We took the caseloads and the costs and then subtracted out the money not impacting the General Fund, thus giving us the expenditures we can expect over the next several years.
In the next slide (page 29 of Exhibit D), the yellow bars show how much the DSA has brought back into the State’s General Fund over the last 10 years. The two red bars on the end are the shortfalls occurring in education over the last 2 years and will, theoretically, have to be offset by the State’s General Fund. Next, we have the key expenditure findings (page 30 of Exhibit D). Demographic changes are making it increasingly costly to maintain service levels. We have more kids per household and we are aging as a population. Those two things are going to cost the State more money. Structural considerations are placing an increased burden on the State’s General Fund. Things such as DSA, where heavy things like property tax make funding from the General Fund somewhat less, are not occurring anymore. To the extent those revenues come in, the dependence on the General Fund is going to increase. Certain operating and personnel costs are increasing at rates faster than inflation. Power and medical costs are going up faster than the rate of inflation. Neither the public sector nor the private sector can avoid these types of things.
The anticipated inflation rate to maintain current service levels is roughly 6.1 percent. The General Fund revenues and expenditures chart (page 31 of Exhibit D) shows the disparity we are likely to see. The yellow bar represents revenue in each year and the red bar expresses expenses in each year. It indicates the $705 million deficit in the first year of the biennium and the last 2 years, combined, represent the $1.4 billion deficit in the final year of the projection. The next slide looks at the same thing, in per capita terms (page 32 of Exhibit D). This chart starts at 1990, so we get a sense of what the revenue trend has looked like through the lens of the General Fund. Revenues have been declining over the last 10 years. The ability to maintain current levels is predicated on having enough revenue.
In closing, the last slide (page 32 of Exhibit D) summarizes the revenue and expenditure gap. These were the conclusions upon which the tax force’s estimates where predicated and lays the foundation for the later work.
Senator Tiffany:
When you started this tax force committee, I believe our original number was looking at $350 million. How did we get from $350 million to $1.4 billion?
Mr. Hobbs:
This was a very long and arduous process. The part we have presented for you today in the last, approximately 2 hours and 15 minutes, was about 6 months of the effort we put in. To give you an order of magnitude of what we were dealing with, the first set we produced were more aggregated projections using mathematical forecasting techniques. We then defaulted to caseload because, in looking at the initial projections, we could clearly see they were not mindful of increases in caseloads within K through 12 education, long-term care, and other significant areas of State spending. We used two different techniques and we have far more confidence in the caseload-driven projections than we do in the simple regression-driven or projection technique-driven projections we were initially reviewing.
Senator Neal:
I appeared before your task force and raised a question regarding the tourist population’s cost to the State. Tourists come here by the millions each year and become temporary residents. They use health facilities, police protection, roads, medical service, et cetera. Why were those types of costs not figured in arriving at the structural deficit?
Mr. Hobbs:
They are included because our current service levels include providing services to a visitor population. On a full-time-equivalent basis, the visitor population is about 18 percent of the total service-demanding group we have in the State. That said, the mixture of services demanded by tourists are somewhat different than those demanded by full-time residents.
Senator Neal:
One of your fundamental assumptions was Nevada’s population is growing faster than the public service. Were you using the base population of residents coming here and making this State their home, and not including the tourist population in that particular count?
Mr. Hobbs:
That assumption was given to us by A.C.R. No. 1 of the 17th Special Session. One of the reasons we went back in and did some of the per capita analyses we hn have gone over with you today was to try to explore that particular assumption. I doubt there are any tourists who use the education system to any great extent, although they do use roadways and certain mixes of public safety types of functions. They probably use less administrative and general governmental functions than they do some other things they impact. However, we were not tasked with reviewing the expenditure side or the differential types of expenditure impacts tourism may have on the State’s budget versus full-time residents. We did take them into account in doing the projections of service costs. We also made assumptions about future revenue impacts created by the growth of tourism over time.
Chairman McGinness:
On Thursday, we will look at the task force’s
recommendations on how to fill this deficit. On Tuesday, we are hearing from
the Governor’s office and for any
interested parties, the time for testimony will be when the bill is introduced
and we see some particulars.
Senator Neal:
Could we get a copy of the hotel executives’ salary increases? I do not believe the hotels would be paying these people large salary increases if they had dips in revenue. Because they are stock companies, we could probably get that information from the U. S. Securities and Exchange Commission.
Chairman McGinness:
We will have research check into it. Meeting adjourned at 4:33 p.m.
RESPECTFULLY SUBMITTED:
Ardyss Johns,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: