Ratcheting Up the Risk Factor

When it comes to fixing budget deficits, there are three primary methods:  reducing ongoing operational expenses;  digging into contingency savings;  and increasing revenue.  In 2008, the State swept many contingency accounts to react to the budget shortfall (including the largest, the rainy day fund), and those accounts were not replenished in 2009.  The proclamation for the special session to begin on Tuesday lists further sweeps of contingency accounts.  While the Governor and Legislature continue to seek funding sources to solve the immediate short-term budget problem, doing so exposes the State to significant financial risks.  Some of those risks include:

Wildfire:  Nevada had a relatively light wildland fire season in 2009, but a bad season in 2010 could lead to millions in unplanned for and unbudgeted state expenses.

Torts:  The tort claim fund is used to pay settlements and judgments primarily resulting from negligence by state employees.  Reductions in the tort claims fund could lead to a higher possibility of a large judgment against the State in a case that could have been settled if funds had been available.

Insurance Insolvency & Taxpayer Bonds:  These funds were set up to protect against insolvency by insurers, and to protect the state from default by businesses with tax debts.  In a distressed economy, the risks of insolvency and default increases, which could place further pressure on these funds.

It should be noted that these funds will not necessarily be drained to zero, but if what is left in these funds is exhausted, the state government will need to go back to the general fund in order to make up the difference, further straining a fund that is already under severe pressure.

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