How a Court Ruling Ended Nevada Budget Fight

Governing, politicians often like to say, is harder than campaigning. For Brian Sandoval, Nevada's new governor, that lesson arrived more abruptly than it does for most newcomers to the executive office.

Sandoval is one of 11 new Republican governors (and one Democrat) who won office last November on a campaign pledge not to raise taxes. Tapping into voter concerns about soaring government deficits, the tough-talking class of 2010 stressed that the problem facing their states was unnecessary spending, not revenues. Sandoval was emphatic about this.

For him, however, the no-tax pledge was riskier than for many of his peers. As a percentage of spending, Nevada had one of the biggest budget shortfalls in the nation at the start of this year, 45 percent of annual state expenses. Years of meager tax collections in the gaming and tourism industries had already forced deep spending cuts in previous legislative sessions.

Despite the tough fiscal circumstances — and a Democratic-led Legislature hoping to prevent more deep cuts to education and human services — Sandoval seemed poised to keep his campaign promises. In January, he pleased his conservative Republican base by proposing a state budget that sharply cut spending without raising taxes, though it relied heavily on using local government funds for state purposes.

Democrats argued for an expansion of the sales tax to include more services, as well as new taxes on businesses, but Sandoval rejected the idea. In addition, Democrats wanted to extend earlier sales and business tax increases that were due to expire at the end of June, but met another firm rejection from the governor's office. 

"The governor had pushed the Legislature to the wall," says Eric Herzik, chair of the political science department at the University of Nevada at Reno. "I think the Legislature was ready to cave."

That's when the Nevada Supreme Court stepped in.

On May 26, with less than two weeks left in the legislative session, the court ruled unanimously that a little-noticed, $62 million state raid on local government funds approved by an earlier Legislature was unconstitutional. That meant that as much as $656 million of Sandoval's own budget proposal might be unconstitutional, given that the local fund transfers that Sandoval had relied on in place of spending cuts and tax increases might no longer meet court approval.

Few choices

The ruling opened up a political minefield for Sandoval. A former attorney general and judge, he would have trouble arguing that the unanimous ruling was politically motivated, especially since the Nevada Supreme Court is not known as being particularly liberal.

The budget itself presented even trickier terrain. Sandoval could continue pushing a no-tax proposal that might be ruled unconstitutional in a matter of months, potentially forcing a costly special legislative session. He could double down on spending cuts to close the new 10 percent hole that had been ripped into his budget, likely pleasing his conservative backers but undoubtedly intensifying the resistance of Democrats and some Republicans in the Legislature. Or he could agree to meet the Legislature halfway, approving the tax extensions that they were seeking without imposing any new tax increases. Sandoval chose the latter option.

"As a former federal judge, I am cognizant of the legal issues," Sandoval said in a statement after the court's ruling. "As governor, I am forced to deal with their ramifications and I am responding by reworking the state budget."

With Democrats standing behind him, Sandoval announced a budget agreement on June 1. The $6.2 billion, two-year plan holds the line on new taxes and makes sweeping, Sandoval-backed changes to the education system, while extending about $620 million in taxes that were scheduled to expire. But the decision is already costing Sandoval among fiscal conservatives who see it as a broken promise.

"Raising the sunsetting taxes is a clear violation of his no-tax policy," says Victor Joecks of the Nevada Policy Research Institute, a conservative think tank that was firmly behind Sandoval when the governor took office in January. "To support (a no-tax budget) so strongly for 100 days, it makes the about-face a little more painful."

Long-term implications

Some conservatives may feel cheated by Sandoval, but he is not likely to walk away from his first legislative session in deep political trouble. That's in part because the governor brokered a bipartisan compromise that had lawmakers on both sides of the aisle claiming successes and likely will appeal to the political middle.

Meanwhile, Carson City insiders say the real legacy of Nevada's session will be the Supreme Court's decision, which could do away with a long-standing budget trick: the appropriation of local money for state purposes.

Nevada lawmakers have been tapping funds from school districts, counties and municipalities for decades. Herzik says the practice is so common, and so dreaded among local officials who stand to lose from it, that some counties spend money they might otherwise save. "Better we spend it than to have the state take it from us," Herzik says of local officials' thinking.

In the case handed down last week, the state Supreme Court ruled that Nevada could not take $62 million from the Clean Water Coalition, a regional water management entity in Clark County, because the Nevada Constitution prevents the taking of money from one particular region to benefit the whole state.

In the decision, Sandoval and his lawyers saw huge warning signs for similar transfers to the state they had proposed just months earlier, including $247 million from school districts and $121 million in local property taxes, both taken from the Las Vegas and Reno areas.

Lawmakers, lobbyists and others agree that the decision was a shock of the highest order. "I don't think anyone remembers a game-changer like this," says Jeffrey Fontaine, executive director of the Nevada Association of Counties, whose members stand to benefit significantly from the ruling. Lawyers for local government entities are already reviewing their options for lawsuits to recoup money taken by the state in the past.

Sandoval himself went out of his way to underscore the potential magnitude of the decision, which, he said, "has far-reaching implications for how governors and legislatures will do business from this date forward."