Moody’s blues

January 2011 should be quite a month.

A new governor will take office and will need to put together state budget recommendations reflecting his priorities to submit to the Nevada Legislature. Crafting those recommendations normally takes about a year. He’ll have three weeks.

And the legislators will arrive in Carson City to begin hearings on that budget knowing they are starting out $3 billion in the hole, a number which may grow by then.

But both of them were supposed to have one thing going for them—a new, thoroughgoing, up to date study of the Nevada fiscal structure would be awaiting them, a clear, useful analysis to make their work easier.

Last week, Moody’s Analytics was handed a notice of default for failing to do the study competently.

“All I got today was just a notice that they have given a notice of default,” said Senate Republican floor leader William Raggio, a member of the Senate Finance Committee. “I’m just amazed that with their credentials and the program they presented that they’re not performing.”

Lorne Malkiewich, director of the staff arm of the legislature, said negotiations have been going on to salvage something from Moody’s. But talks on an extension of time led nowhere.

Moody’s Analytics, a Pennsylvania firm, was commissioned in October to do the report for $253,000. (At that time, the shortfall expected for the 2011 legislature was $2.4 billion.) It was to have been the first all-encompassing report on Nevada revenues and expenditures since 1988, when Price Waterhouse and the Urban Institute jointly analyzed the state’s fiscal system in a 720-page report.

Moody’s Analytics is a research arm of Moody’s Corporation, holding company for Moody’s Investors Service. That interrelationship was a source of concern when the Nevada contract was awarded because the investor arm’s reputation had been badly battered. It was being investigated by the Securities and Exchange Commission, New York attorney general, and congressional committees, and the National Association of Insurance Commissioners was considering a plan to reduce Moody’s rating role (“Moody’s has detractors,” RN&R, Nov. 19).

The investor service had been accused of giving top ratings to some firms handling collateralized debt obligations, ratings that turned out to be wildly wrong. In addition, just before the Nevada contract was awarded, McClatchy Newspapers reported a Moody’s corporate culture in which the investor service punished its executives who questioned ratings, removed analysts who offered warnings, and rewarded executives who were involved in activities that fostered the housing meltdown.

Nevertheless, the Nevada contract was awarded with few hitches. The trouble started in May when Moody’s presented a draft report that was described by fiscal experts as inadequate and was rejected by a panel of community leaders set up to work on the study. Among other things, it contained no recommendations. As a result, a notice of default was sent to Moody’s giving the company 10 days to present the actual report.

“We were expecting to get a report by July 1,” Raggio said. “That was to be some kind of a plan or at least a design on which we could start building a budget and expenditures and a revenue budget.”

The July deadline would also have permitted time for the study’s findings to have been discussed in the year’s political campaigns so the public would have a say. That was a problem with the Price Water-house/Urban Institute study. The two firms requested, and were granted, a delay in the deadline until after the 1988 election.

Raggio said the kind of study commissioned from Moody’s is not to be confused with a number of other studies.

“They’ve had a lot of them over the years, and they keep saying, ‘We’ve studied this to death.’ ” But Raggio said most studies floating around have been done by private groups with their own agendas.

“That’s why I felt a study of this kind, funded by the state, as the one was in the [’80s], Price Waterhouse, that this was important enough. … It needed to have full credibility so that the public would understand any change in our state tax structure.” He said he expected the report to examine “whether we were allocating taxes properly, what our needs are,” not just whether revenue was adequate.

The kind of study expected from Moody’s has been done only three times in the past half-century, if Moody’s is counted.

The most important was the “Zubrow Report,” as it was known, named for the lead author, Reuben Zubrow. Commissioned by the legislature in 1959 and delivered in 1960, it recommended against ever letting the sales tax get too high and against depending on tourist taxes. That set a pattern for the state until Gov. Robert List and the 1981 legislature broke away from the recommendations with a near doubling of the sales tax. Ever since, Nevada has experienced chronic budget crises.

The second report was the Price Waterhouse/Urban Institute study done 22 years ago. That report found that Nevada’s fiscal system was in reasonably good condition, but that new pressures were rising, and the state would need to enact some changes in the 1990s. The fact that no immediate changes were called for and turnover in the legislature meant that the lawmakers never returned to the report when needed.

Every legislature makes changes, large or small, in the state’s tax system, so it becomes difficult to keep track of the state of taxation at any given moment—whether the system is stable, whether it is predictable, whether it is fair. The passage of 22 years since the last such study handicaps the governor and legislature in planning for long term policy. Delivery of the study would have provided needed clarity.

“It would have been extremely useful,” said Raggio of the Moody’s report, referring to its value to both the new governor and the lawmakers.

Malkiewich would not speculate on the legislative dynamics of legislators trying to deal with the fiscal crisis without the Moody’s tool in hand. He also did not sound encouraged about the negotiations with Moody’s producing the report.

“After trying to negotiate extensions, there’s just so long you can go with that before you say, ‘Look, we need to do something that’s more forceful here,’ ” he said, explaining why the notice of default was issued.

Gov. Jim Gibbons vetoed funding for the study last year, claiming it was intended “to study further tax increases,” though Raggio had insisted that the enabling legislation contain no such language. In fact, the Gibbons veto also prevented study of tax cuts.

“We don’t need an expensive study to tell us that government revenues will decline during a recession,” Gibbons wrote in the veto message. “We don’t need an expensive study to justify maintaining unsustainable levels of spending by increasing taxes while our citizens struggle to get by. What we do need is responsible government that puts the needs of its citizens above its own wants.”

The veto further frayed the governor’s relationship with legislators, who funded the study out of a legislative account.