MINUTES OF THE
JOINT meeting of the Assembly Committee on Taxation
AND THE
Senate Committee on Taxation
Seventy-Second Session
March 31, 2003
The Joint Assembly Committee on Taxation and the Senate Committee on Taxation was called to order at 5:05 p.m., on Monday, March 31, 2003. Chairman David Parks presided in Room 1214 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
Senate Committee 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 MEMBERS PRESENT:
Mr. David Parks, Chairman
Mr. David Goldwater, Vice Chairman
Mr. Bernie Anderson
Mr. Morse Arberry Jr.
Mrs. Dawn Gibbons
Mr. Tom Grady
Mr. Josh Griffin
Mr. Lynn Hettrick
Mr. John Marvel
Ms. Kathy McClain
Mr. Harry Mortenson
Ms. Peggy Pierce
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
Senator Mark E. Amodei, Capital Senatorial District
Senator Terry John Care, Clark County Senatorial District No. 7
Senator Bernice Mathews, Washoe County Senatorial District No. 1
Assemblywoman Chris Giunchigliani, Clark County Assembly District No. 9
Senator Emeritus Lawrence E. Jacobsen
STAFF MEMBERS PRESENT:
Rick Combs, Fiscal Analyst
Ted Zuend, Fiscal Analyst
Mary Garcia, Committee Secretary
June Rigsby, Committee Secretary
Mavis Scarf, Committee Manager
OTHERS PRESENT:
Perry Comeaux, Director, State of Nevada Department of Administration
Chairman McGinness:
I will call this meeting to order. This is a joint meeting with Senate Taxation and Assembly Taxation. We are here today to talk about S.B. 219 and A.B. 204, which are virtually the same bill.
Assembly Bill 204: Provides revenue in support of state budget. (BDR 32-1210)
Senate Bill 219: Provides revenue in support of state budget. (BDR 32-1209)
I just want to let you know that the second meeting for Senate Taxation will be cancelled. Mr. Parks.
Chairman Parks:
Thank you, Mr. Chair. Likewise, the Assembly Committee on Taxation to follow this one will be cancelled, too. Thank you.
Chairman McGinness:
Okay, we are here for an update from the Executive Office on The Executive Budget. Mr. Comeaux, I assume you are the guy to make that happen. Good afternoon.
Perry Comeaux, Director, Nevada Department of Administration:
[Introduced himself.] I appreciate the opportunity to go over the numbers with you one more time and to talk about the impact that current events might have on our economy and our financial situation. I provided a four-page handout that I hope you all have [Exhibit C]. It looks like this. I would like to run through these schedules with you. It is basically nothing more than the state’s Ending Fund Balance Statement with various assumptions built in. The first page, which is labeled ”Executive Budget,” is simply an update of the fund balance statement that you will find in The Executive Budget. It has been updated by changes that we are aware of up to this point. There has been one other change since we first put this schedule together last week, which improves our situation by a couple of million dollars. I will tell you about that when I get to it.
This basically assumes, for fiscal year 2003, that our revenues will come in through the balance of this fiscal year as the Economic Forum forecast they would last December. That would be revenues of $1,814,000,000. This assumes that you would follow the Governor’s recommendation and adopt his temporary tax increases that would be effective this fiscal year. This number, the $74 million, is slightly different from what is in The Executive Budget. We adjusted that for the fact that the Secretary of State has indicated that they could not make the collection of the early fee increase that the Governor had recommended. Also, we had assumed that the temporary increase in the business license tax (BLT) would also include an increase in the tax base. As the Governor proposed that, it does not, so we reduced that amount to $74 million. The estimate for reversions is as it was presented in The Executive Budget, is $39 million.
The 3 percent in other budget cuts, $57 million, is the number that is slightly different now. That is, we think, about $59 million. That has been adjusted down for some of the budget cuts that we have had to return to agencies to offset shortfalls that they simply have not been able to manage. The last number in the top section, the transfer from the Rainy Day Fund, is what has already been approved by the Legislature and signed by the Governor, the transfer of $135 million from the Rainy Day Fund. That leaves us with a little over a million dollars in that Fund.
[Perry Comeaux, continued] We would still propose that, if you approve those new tax revenues, and if everything else comes out as we have assumed here, that we would be able to restore some of the funds to the Rainy Day Fund. Here we are proposing $35 million, which would leave us, at the end of this fiscal year, with a balance in the Rainy Day Fund of a little over $36 million.
This scenario would also leave us with an Unappropriated Fund balance of just under $136 million on July 1, 2003. That is approximately $34 million more than the 5 percent Ending Fund Balance that is really the minimum that we shoot for. If you look down in fiscal year (FY) 2004, you will see that that $34 million is actually necessary if you approve the Governor’s proposals for FY2004. That extra $34 million is necessary to balance the budget in FY2004 and leave us with an Ending Fund Balance of right at 5 percent. Now, the numbers that are presented for FY2004 and FY2005 have been adjusted for budget adjustments that we sent over in the last two months to the money committees. This top sheet indicates the updated proposals that the Governor made to the Legislature in The Executive Budget and assumes that the estimates and assumptions that were made in putting that budget together hold true and come to pass.
If you look at the next page, which is labeled “Scenario One,” this is what all that will look like without the new tax revenues that the Governor proposed for this fiscal year. The only thing that has changed on this scenario is the new tax revenues have been eliminated and the $35 million restoration to the Rainy Day Fund in that first year has been eliminated, too. The net effect is that we would end up with an Ending Fund Balance, if everything else came true, of just under $97 million, which is about $5 million under that 5 percent target that we shoot for. You can also see that since we do not have that extra $34 million in FY2003 under this scenario, we end up, with all the other recommendations of the Governor, with a significant problem in the second year of the biennium in that we would end up with less than $80 million in an Ending Fund Balance, or about $38 million below where we should be.
The next page, which is identified as “Scenario Two,” assumes some things that might happen to us as a result of the war and the effect it could have on our economy. We cannot give you anything definitive at this point, obviously. The war has just started. Any evidence that we have of negative effect on our tourist traffic is strictly anecdotal at this point, but I am sure you have seen the same articles in the newspaper that I have about Wall Street analysts taking another look at casino stocks. There was an article in the paper this morning about the bookings for some of the casinos in Las Vegas, some signs of weakness there. The bottom line is that we are not really going to know for a [Perry Comeaux, continued] while. We will find out for sure in May how the activity that has taken place in March affected our revenues. In any case, in Scenario Two, we assumed that the war would have the same kind of effect on our economy that the events of September 11, 2001, did. Actually, we were a little conservative there.
In the 3 months that followed that event, our revenues were about 3.2 percent below where they should have been. That, basically, was in spite of the fact that our sales tax revenues were really propped up during most of that time by the zero percent financing that the car manufacturers started to offer in response to our economy hitting the deck. That really helped us then, but would not help us now. A lot of them are still offering that zero percent financing. I think the chances are good that if there were that same kind of reaction to our current events, the decrease in our revenues would probably be even more severe than they were following September 11, unless someone else came up with some scheme to help prop things up.
Based on forecasts by the Economic Forum and a 3.2 percent decrease in revenues for the last 3 months of the biennium, we estimate that would cost us directly about $29 million in revenue. It would also cost us nearly $9 million more in the local school support tax piece of the sales tax, which funds the Distributive School Account, and we basically guarantee that. If it does not show up at the local level, then we provide it out of the General Fund.
It is my understanding that LCB Fiscal Division has looked at this and their numbers are different from ours. They based theirs on a 3.2 percent decline from where we were through January, not where the Economic Forum forecast we would be. We could come up with probably 10 or 15 different scenarios. The bottom line is, I think it is reasonable to assume that this conflict is going to have some negative effect on our economy. I do not think anyone, at this point, is going to be able to tell you with any degree of certainty the extent of that impact, but I do not think there are going to be very many people that would take the Pollyanna approach and decide that there is probably not going to be a negative impact at all. I just do not think that is realistic.
Anyway, Scenario Two indicates what our Ending Fund Balances would look like if we did take that revenue hit that we estimated, a $29 million direct hit and another nearly $9 million indirect hit through the Distributive School Account. If the new tax revenues were approved, the effect generally of the decrease in revenues could be absorbed by simply not restoring the balance to the Rainy Day Fund. You can see that is the other change in this scenario. We would end up with an Ending Fund Balance of about $132 million, which would [Perry Comeaux, continued] give us an extra $30 million to carry forward into FY2004, which would come within a couple of million dollars of balancing that year.
Scenario Three, the last page, which is the scary one, includes the same assumptions as Scenario Two, except without the new tax revenues. That would produce an Ending Fund Balance in FY2003 of just slightly over $58 million. It would be about $43 million below where we should be. As you can see, that would give us an even more significant problem in FY2004, because that shortage would follow 2003.
This seems like a good time to indicate why that 5 percent Ending Fund Balance is important. You may look at this and say, “Hey, we would still have $58 million left at the end of the year. That is a lot of money.” It is a lot of money, but it is not enough. The way our finances work, the timing of our commitments and the timing of our revenue collections are not coordinated. For example, we make disbursements to two of our three biggest customers, the Distributive School Account and the University system, at the beginning of the month. The statute basically requires us to make distributions to the Distributive School Account on a quarterly basis in advance, if we have the money to do it. If we do not, we can do it on a monthly basis. That is what we have been doing for quite some time now, but we still distribute that revenue to them at the first of the month, in advance. A lot of our revenues become due and we collect them toward the end of the month.
Basically, we need to have this kind of a balance on hand to prevent cash flow problems. Even with a 5 percent Ending Fund Balance, we still, from time to time, technically go into the red on the books. At a $58 million level, I can tell you we would be scheduling bills for payment. We would not be able to pay things in the normal course of business. We would be prioritizing. That is just the way it would work; that is what we would have to do.
In this last scenario, let me point out to you that there are only a couple of numbers on this page that are firm. The transfer from the Rainy Day Fund is firm because you have already done that. Just about everything else on this page is an estimate. In the revenue section up at the top, the estimated reversions, $39 million, is on top of the next line down, which is the 3 percent in other budget cuts of about $57 million. The $39 million and about $16 million of that $57 million in budget cuts are estimates. We will know about part of it in June. We will not know about the reversions until August.
That $39 million figure represents reversions of about 2 percent, which, in a normal year, would be a very conservative of reversions. Normally agencies simply cannot manage their budgets tight enough to keep from reverting around 2 percent. We have already hit the agencies very hard with budget cuts, and we really are not sure if all of that 2 percent is going to show up. We went back and looked at the closest to this situation that we have been recently, which was in 1991 when we had that reversion. In the tough year there, our reversions came in at about 1.25 percent. If that happens here, that would make a $15 million or $16 million difference in reversions.
If I could get one point across, it would be the uncertainty that we are dealing with. If you want to look at The Executive Budget scenario and say, “That does not look bad. We do not have to do anything,” that, in my opinion, is a mistake, because you are counting on us being very lucky. I sure hope we are, but I have always been told that you hope for the best and plan for the worst. The one point I would like to try to drive home is the uncertainty. In all of these numbers here, there are one or two of them that are firm. All the rest of them are estimates. They are still up in the air and still subject to outside influences. I just ask that you keep that in mind. That is all I had, Mr. Chairman. I will try to answer any questions you might have.
Assemblyman Goldwater:
I was looking at the law that requires the 5 percent. You, as the chief, may exceed the limit to the extent necessary to meet situations in which there is a threat to life or property. So, you can manage the 5 percent limit on your authority if you find that there is a threat to life or property, which you could probably do. Does that, combined with the Rainy Day Fund, which was liquidity, combined with the ability to manage cash, not give you a little bit of comfort in being able to make it through this fiscal year?
Perry Comeaux:
If I thought it was just this fiscal year that I needed to worry about, and that on July 1, everything magically would be okay and revenues were going to come in, then I would not be concerned. However, if we spend this Fund balance down to the $60 million level that one of these scenarios provides, for example, we have got to get back up to a 5 percent level some way, somehow, sometime. How are we going to do that? If we miss the opportunity that we have now for early enactment of some of the Governor’s proposals, it is gone.
Assemblyman Goldwater:
Are there statutory changes we can make regarding budgetary [matters], for example, spending down the budgetary accounts, or postponing some payments on capital projects that the state has authorized, just to manage cash?
Perry Comeaux:
I do not know that there is anything you can do that would really help.
Assemblyman Goldwater:
My only question here, and I guess it is all speculation, is do you, yourself, have the authority to exceed 5 percent?
Perry Comeaux:
Do you mean to draw the Fund balance down below that? [Mr. Goldwater indicated that was the case.] That is correct.
Assemblyman Goldwater:
That currently exists in law. Thank you.
Perry Comeaux:
It is not that we would have to stop paying bills when we got to that 5 percent. That is the problem. We would keep on paying them and draw that reserve way down.
Assemblyman Mortenson:
You said that you came up with the 3.2 percent decrease. That was in the quarter following September 11, is that correct? Would it not be more appropriate to look at the quarter following [Operation] Desert Storm? What kind of decrease was there in the quarter following that? Did you look at that? It seems like it would be more appropriate.
Perry Comeaux:
We did not look at that. We thought about looking at it, but we were convinced that the situation is so different now from what it was in the early 1990s due to the threat of another September 11-type event in retaliation for the war that it seemed to indicate we were probably looking at something a lot closer to September 11 than otherwise.
Assemblyman Mortenson:
I think I agree with you. Thank you.
Chairman Parks:
Mr. Comeaux, in your Scenario Three, you referenced the estimated revenue loss of $29 million. Do you have a breakdown as to where you would see those likely reductions in revenue?
Perry Comeaux:
I do not have that. We looked at it just in totals and applied it against our total revenues, but where that showed up after September 11 was mainly in gaming revenues. Our sales tax revenues were down somewhat, although not as drastically as they would have been if it had not been for the zero percent financing. We also took a hit, if I remember correctly, in the excise taxes that are tourist-related. Tourism is the simple answer.
Senator Neal:
I keep hearing “September 11” coming up and I wonder if that is just a phantom argument that we are putting forth here. I heard you mention gaming. Would gaming stock be a good indicator of how the casinos in this state were doing from September 11 forward?
Perry Comeaux:
You would think so.
Senator Neal:
It had a little dip, you know, during the month of September. After that it had a precipitous rise, and the stock has stayed high. All of the major casinos have stayed high ever since then, going into 2003. So, I am wondering about this. If the stock takes a dip in the month of September, then it rises and stays up through the year 2003, I am wondering if there is a good argument that we are losing anything. People on Wall Street seem to get the impression that the casinos are doing pretty good, but you seem to say that we lost money.
Perry Comeaux:
The Wall Street analysts do not collect the gaming tax, and we do. I can tell you what has happened to the gaming tax. We had a problem with it.
Senator Neal:
Is that because we have so much of an honor system as far as casinos are concerned?
Perry Comeaux:
I do not know that we have that much of an honor system. My impression is that the Gaming Control Board does a pretty decent job. I can tell you, though, that gaming taxes through January are coming in higher than the Economic Forum forecast. Not a lot higher, but higher. The question is, what is going to happen to them now. We did take a beating in our gaming tax revenues after September 11. There are no ifs, ands, buts, or maybes about that. That is a fact; we did. Now, how you reconcile that with gaming stocks doing fairly well, I do not know.
Senator Neal:
I happen to think that something is a bit wrong with the picture if the health of these casinos is being measured by Wall Street and their stocks have a precipitous rise after September 11. I do know that, over the years, when we have bad times in the country, Nevada seems to do well with its casinos. That is a given. Over the period of years that I have been watching the casinos, and for the last 31 years that I have been here in the Legislature, whenever we had bad times, we always did well here with the casinos. People have a tendency to try to improve their chances of winning money. They come here and they try to do that.
Perry Comeaux:
Senator Neal may have seen this, but I would point out that in yesterday’s Las Vegas Review-Journal, there was an article, “Inside Gaming: Analysts Growing Grim On Gaming,” was the headline. In just the first sentence, it says, “Wall Street is taking a jaundiced look at the gaming industry,” and then it goes on to indicate that they are reevaluating their earnings projections in light of the wartime distractions.
Assemblyman Goldwater:
To the honorable Senator Neal, having worked quite a bit with Wall Street analysts and looking at gaming stocks for a good portion of my private career, I will tell you that it is not necessarily the health of the economy, but rather how the market values cash flow, and what multiple they put on cash flow, and how that is reflected in stock prices. When the economy does badly and most businesses in the market do poorly, gaming has the ability to maintain a certain level of cash flow, so over time, their ability to maintain that level of cash flow in tough times deserves a higher multiple relative to their stock price. That is why gaming does pretty well. They did not do great, but they value that ability to produce cash flow.
Senator Neal:
Since Assemblyman Goldwater wanted to wade in here and give his explanation to this argument, maybe he would like to answer this question. How do you account for the high salary increases that these hotels have given themselves over the years, including 2002 and 2001?
Assemblyman Goldwater:
I would have to speak to the boards of those companies that set those salaries.
Chairman McGinness:
Thank you. Are there any other questions? Mr. Goldwater, we appreciate your update for this Joint Committee. As I mentioned at the beginning of the meeting, both separate meetings for Senate Taxation and Assembly Taxation have been cancelled. We are adjourned [at 5:39 p.m.].
RESPECTFULLY SUBMITTED:
Mary Garcia
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE:
Assemblyman David Parks, Chairman
DATE: