We have just issued the Controller’s Annual Report (CAR) for fiscal year 2017 (FY17). Here we provide an overview of it. Future columns will discuss individual sections.
The CAR provides Nevada citizens, officials and others a summary of key facts, data, analysis and issues about the state’s fiscal condition and challenges. The Controller has a statutory charge to recommend plans for: support of public credit; promoting frugality and economy; better management of the state’s fiscal affairs; and better understanding of them.
In FY17 and over the long term, state spending has grown faster than Nevada’s economy, thus imposing an ever larger real burden on Nevada families and businesses, whose real incomes have fallen significantly over the last decade. Rapid increases in spending on Health and Social Services (HSS) and K-12 education are driving state spending growth. HSS and education (K-12 and higher) consumed 77 percent of total state spending of $12.3 billion in FY17, while all other state spending in total declined significantly in real terms since FY06.
Non-tax revenues – grants and contributions to the state, charges for services and contract revenues – have grown very rapidly (65 percent faster than Nevada’s economy) to comprise 56 percent of total state FY17 revenues of $13.4 billion. Total tax revenues grew only slightly faster than the state economy, and they provide the other 44 percent.
Gaming and property tax revenues fell sharply in real terms while tax revenues from non-gaming businesses (including unemployment assessments) rose greatly. The burden carried directly by consumers and residents (not including the pass-through effects of business taxes) grew only half as fast as their incomes.
Large revenues from federal HSS grants cannot be redirected to other areas. HSS spending is the largest category of state spending, and it has grown fastest, driven mainly by federal mandates. Medicaid is 64.6 percent of the HSS total, and that percentage has increased recently due to Nevada’s embrace provisions of the federal Affordable Care Act of 2010 (Obamacare). Nevada Medicaid spending will increase in coming years, and federal funding that has supported it is uncertain, and it delivers poor health care results.
State funding of K-12 education has increased at more than twice the rate of incomes of Nevada families and businesses over the long term. Research has continuously demonstrated little correlation between student achievement and spending. In the absence of K-12 policy reform, it is unsurprising that the quality of Nevada education has remained low despite major funding increases.
Substantial parts of the cost of higher education have been shifted from taxpayers to students and their families in Nevada, as elsewhere. Higher education compensation in Nevada and all states is very high. All levels of public education suffer administrative bloat and operating inefficiency.
Current compensation of state employees, except those in higher education, is overall at market levels, but higher for lower-level positions and lower for top-end jobs. Nevada local government compensation is among the highest in the nation and continues to require increases in taxes that are already very high.
Public Employee Retirement System (PERS) contributions required of state employees (not including those in higher education) and from taxpayers have risen in real terms. PERS coverage of many local government employees is almost completely paid by taxpayers and is rising to unsustainable levels. PERS relies on unreasonably high estimates of future investment returns and member growth to hide a growing under-funding problem that threatens financial peril for Nevada.
We identify four long-term trends that have suppressed U.S. economic growth in the last decade, thus explaining the “new normal” of slow economic growth. The main one is the continuing growth of government that is already too big relative to the economy, reflected in excess public spending, taxes, deficits, debt, regulation of all kinds, and other government interventions. The trends create an ever greater drag on our economy and produce slow real economic growth of two percent or less annually.
For a long time to come, Nevada needs to rein in the size, scope and reach of government to get it back within optimal levels. We also need to adopt policies that help reverse the long-term adverse economic trends and move Nevada away from cronyism toward true entrepreneurship and economic dynamism.