The $200 Million Dollar Question

(Geoffrey Lawrence/NPRI) – The Nevada Supreme Court dealt a blow to Gov. Brian Sandoval’s budget proposal on May 26, leading him to abandon his opposition to tax hikes and support higher state payroll and sales taxes for the next two years.

And the Court may not be done yet.

With less than two weeks to go before adjournment of the 2011 Legislative Session, the Court delivered an opinion in Clean Water Coalition v. The M Resort that declared the state had violated constitutional principles when, in a 2010 special session, it seized $62 million in sewer connection fees to plug a hole in the state budget. The opinion pointed to a clause in the Nevada Constitution that says “all laws should be general and operate uniformly throughout the state” and told lawmakers that they could not use taxes levied against narrow and specific populations for broad state purposes.

While the Court opinion directly invalidated the $62 million taken from the Clean Water Coalition in Clark County, it further implied that Sandoval’s proposed use of school district bonds reserve funds and property tax diversions from Clark and Washoe counties would be found unconstitutional. In fact, the governor issued a de facto admission that these proposed revenues would violate constitutional provisions when he struck them from his budget proposal following the Court opinion.

However, state seizures of Clark and Washoe county property taxes began in 2007 and, thus, have been ongoing for several years. Sandoval’s de facto admission that these tax diversions would be unconstitutional in the future further implies that they were unconstitutional when initially enacted — giving county commissioners a large window to sue the state for past damages.

The prospect has already enlivened some county commissioners. When asked last month about whether Clark County should sue the state to recoup $180 million taken in the 2009-11 budget cycle, Commissioner Steve Sisolak responded, “I’m definitely going to pursue this.”

And the county has. Just last week, Clark County legal counsel Mary-Anne Miller sent the Nevada State Board of Examiners a letter demanding the state refund the county $102.5 million.

Meanwhile, the Washoe County Commission voted unanimously on June 28 to “demand” that State Treasurer Kate Marshall return to the county $21.5 million in property tax diversions begun in 2007. Commission Chairman John Breternitz has sent a letter to Marshall in which he says:

…the Washoe County Board of Commissioners voted unanimously to authorize me to make this demand for the return of the unconstitutionally diverted Washoe County tax revenues. The County Commission also directed that this letter inform you that Washoe County will withhold payment to the state of any such revenues the County may still hold.

The aggressive language used by the Clark and Washoe commissioners forebodes potential legal action should state authorities refuse to comply with their requests for a refunding of county monies. Further, the opinion delivered by the Court in Clean Water Coalition sets a timely and important precedent which could virtually guarantee the counties’ success if commissioners elect to sue the state.

Many observers object to the refunding of the monies taken by the state, because of the commissioners’ prolonged lack of fiscal discipline and demonstrated eagerness to reward — with overly generous contracts — the public-employee unions that help them get elected. Commissioners clearly over-committed when revenue growth was at record highs and over-extended county finances.

Incumbents on the Clark County Commission have admitted as much. When constructing the county’s last annual budget, financial constraints compelled commissioners to fight back against the generous union contracts they had agreed to in better times, leading Commissioner Lawrence Weekly to bluntly observe, “We’re paying a lot for what’s been done in the past.”

As such, apprehension understandably arises that county commissioners will abandon their newfound fiscal prudence if tens of millions in revenue are returned to them. Nevertheless, the Supreme Court has established a clear-cut constitutional standard that, by itself, appears to open the door for the counties to reclaim funds taken by the state.

Either a court ruling or settlement could require lawmakers to once again return to Carson City to rework the state budget in special session. Once there, the ugly debate about more taxes could re-emerge, since majority lawmakers have demonstrated repeatedly an unwillingness to take advantage of billions in potential state savings identified by the SAGE Commission and the Nevada Policy Research Institute.

Alternatively, legislators could respond by pushing services down to the county level to offset the state’s revenue loss — an action that could ensure continued fiscal discipline at the county level.

Either way, it is far too early to proclaim that the 2011 budget debate is finished.