(Ron Knecht & Geoffrey Lawrence) – This is the final column in a series presenting findings and conclusions of Nevada’s 2016 Popular Annual Financial Report (PAFR), posted at controller.nv.gov. Here, we present policy recommendations based on our analysis of issues in the PAFR.
The PAFR shows that, economically, Nevada families and businesses have fared poorly the last decade, but the burden on them of state spending and revenues has continued to rise. Spending increases were driven by the two largest sectors, health and social services and K-12 education. But the increased spending did not improve the poor results those sectors deliver in Nevada. We also showed that state and local employee pensions constitute a major risk and burden, mainly because their board relies on unrealistic estimates of future returns on their investments.
We showed that the prospects for economic growth, and also for returns on pension and higher education endowments, are poor for the foreseeable future. The main reason is government excess in spending, taxing, regulation and other intervention, exacerbated by demographic and labor force participation trends, excess debt levels, and adverse trends in trade and growth of other economies. We also reviewed the decline in entrepreneurship in Nevada.
What to do? First, we must rein in state spending and regulation by growing government slower than the economy and the incomes of our families and businesses for the foreseeable future. This will be quite challenging with very slow economic growth and low investment returns.
Nevada foolishly embraced Obamacare, but now the federal government is reducing its Medicaid subsidies on which the state has become dependent. So, we must now reduce health-care coverage and spending, especially for able-bodied folks with incomes above poverty levels. And we must focus health-care spending on a pool of high-risk persons instead of using third-party payment for a massive mess of cross-subsidies masquerading as insurance.
We must allocate K-12 spending toward programs that have been demonstrated to improve student achievement, not toward pacifying the teacher unions and education bureaucracies. Funding should follow the students and favor wide-scope educational choice by their families. And Nevada needs to embrace much more technological innovation in all levels of education.
Nevada, like much of the country, has increased higher education’s administrative burden, and those salaries have continued to grow in real terms. We must curtail those trends and move resources into actual education. We need also to redirect some resources from the two universities to the community colleges to redress long accumulating inequities between them.
Nevada public pensions and education endowments should adopt a reasonable expected annual rate of return on their investment portfolios of five percent. The pension system needs also to revise its demographic assumptions to reflect longer working and retirement lives.
We must also revitalize the dynamism of our economy and promote genuine entrepreneurship as the path to sustained growth and economic development and end crony and corporatist special deals.
Occupational and other licensing laws that are here more onerous than in other states must be repealed. This includes especially dubious licensing schemes for occupations like interior design and music therapy that exist in only a handful of states.
Nevada’s approach to economic development has focused on providing incentives to select private firms with political influence. Substantial packages of targeted tax incentives have been awarded or offered recently to Amazon, Tesla Motors, Faraday Future and the Oakland Raiders. Such special deals must not be repeated in the future.
Likewise, we must abjure legislation crafted in recent years to authorize outright cash grants of state funds to private firms, preferential “economic development” utility rates and transferable tax credits that can be sold for cash on secondary markets. All these interventions distort natural market incentives for innovative and productive behavior.
For more than two centuries America and the West have prospered by embracing the rule of law, limited government with enumerated powers, separation of powers, personal liberty, individual rights, strong property rights and high levels of economic freedom.
This legacy provided hope, growth, opportunity and fairness to us, but our failure to rigorously uphold it means we are in danger of leaving Nevada’s children and grandchildren a grim future instead. We must turn things around to leave future generations the same legacy we inherited.
Ron Knecht is Nevada’s State Controller. Geoffrey Lawrence is Nevada’s Assistant State Controller.