Nevada's economy is growing slower than projected, so people and businesses have had to cut back their planned spending. Accordingly, tax revenues are also growing slower than projected, so the state must reduce its planned spending, too.
Gov. Jim Gibbons has provided strong leadership in this challenge. He has consulted more extensively than previous governors who faced similar challenges, and he continues to listen to input. However, he has been clear that increasing taxes is not an option and it is too early to dip into the state's "rainy day" savings account.
After extensive research and consultation with many parties, at the Board of Regents' recent meeting I presented the ideas outlined below for addressing both the statewide budget problem and the part that higher education must play. By a unanimous vote, the Regents endorsed (without limitation) the general approach I outlined.
As a preface, I noted that the governor and Legislature dealt fairly with higher education in the 2007 legislative session. Also, there is no need to posture about raising taxes or making rainy-day withdrawals at this time because those actions require the governor's concurrence and he has already ruled them out. (In my view, he's exactly right on those two points, because Nevada's public sector is already big enough relative to our economy. So increased taxes would diminish human well-being and be contrary to the public interest. But that's a subject for another day).
The approach I presented is based on two fundamental principles for making budget cuts, and they apply both at the statewide level and to higher education.
First, in adjusting budgets to meet changing revenues - whether increasing or decreasing, and whether for a family, business or government - one should focus primarily on capital, one-time and similar expenses that can be deferred or accelerated. Only after adjusting those items should one make changes in operating budgets.
A prime example in Nevada's budget is $170 million of transportation projects added near the end of the legislative session because revenues were projected to exceed levels that could be spent on operating budgets under statutory budget caps. Not being priority projects, these were among the last added, and they should be among the first reduced or deferred.
Similarly, there are $194 million of other capital projects funded with general fund monies (not bonding), $119 million in special one-time appropriations, and a $36 million appropriation for this year's addition to the existing rainy day fund. These non-operating areas, totaling $519 million, should yield reductions that would meet at least half the $285 million required cuts in the two-year general-fund budget of $7.3 billion. That would leave cuts in the $6.8 billion operating budgets of less than 2 percent.
In building operating budgets, a basic principle is that the value of the last dollar of spending added in each area should be equal. If the marginal value of spending on K-12 education is higher, for example, than the marginal value of spending on human services, then we are spending too little on K-12 and too much on human services. If a budget is constructed in this logical manner, then in making cuts, the law of diminishing returns to spending dictates the second budget-cutting principle: Cuts should be spread proportionately across all operating sectors. If not, then we are cutting high value in one sector to preserve lower value in another.
Hence, the most reasonable approach to cutting operating budgets is to apply the 2 percent (or whatever the figure turns out to be) to each area. We should not exempt some special-interest areas and, necessarily as a consequence, overburden unfavored areas.
I emphasized that higher education should carry its portion of the load in total budget reductions, but not more than its share. Thus, the Regents should first make cuts in the capital, etc., projects funded by general-fund monies, just as other departments should, to help cut the $285-million reduction by more than half before turning to operating reductions. Then, if the state operating budget must be cut 2 percent, the Regents should expect to have to cut the state's higher-education operating budget 2 percent.
A corollary of this logic is that, whatever percentage cut is required in higher-education, total operating budgets should also be the percentage required for each of the system's eight institutions. We should not favor one institution over the others or burden some institutions disproportionately.
I respectfully recommend these approaches and results to Gov. Gibbons for the overall state budget cuts, and I will continue to present them to my fellow Regents to guide us in making whatever cuts are needed in the higher education budget (a mission in which none of us finds any pleasure). At both levels, the point is to do as little damage as possible to public service missions and to maintain quality and effectiveness. Given the very real possibility that further cuts beyond the $285 million current estimate (perhaps as much as $400 million) may be needed, adhering to sound principles from the start is important.
• Regent Ron Knecht of Carson City is an economist, engineer and law school graduate. He wrote this column prior to the governor's new budget announcement that included 4.5 percent across-the-board cuts.