What will replace the casinos?

Guy Louis Rocha was exasperated. He was taping a segment with a television host, telling him that the casino economy was not going to come back after the recession. The host was telling him that the “City Center” development in Las Vegas would help that city rebound to the old days.

Rocha, a historian and former state agency chief, believed he was experiencing history repeating itself. After the Comstock Lode declined and the state fell into a long depression, the state’s leaders believed that one day mining would come back. It did, for a while in the first decade of the 20th century, but then it went into a more extended decline. Still, right up until World War II, stories kept appearing in the state’s newspapers about a mining comeback. Rocha believes the state is in the grip of another such fantasy, and that it will miss the importance of this moment in Nevada’s history.

“These elections and the 2011 session [are] critical to the future of Nevada,” he said. “The 2011 legislative session, with the new governor at the helm, is charged with the responsibility of reinventing Nevada for the 21st century. The two principal rides we had initially were mining and then a service economy based on [divorce, gambling and other socially questionable activities]. Those elements, while they’ll still be revenue feeds for the state, will not be the direction the state has to go to sustain itself in the 21st century. There’s got to be a much more diversified economy, and the new governor and the 2011 legislative session has to lay the groundwork for that. I mean, that’s critical. … It has to start in 2011 because we kicked the can down the road. We should have, in my opinion, been doing this type of thing 10 years ago.”

Almost no one wants to hear that.

The casinos, which control many policymakers, certainly do not. Legislators and candidates for governor are tiptoeing around the subject.

Several things are becoming more and more difficult to ignore:

• Nevada is losing population.

• The casino industry may never come back.

• Recession in the state may last until there is new non-gambling economic activity.

• Nevada is not in shape to diversify its economy.

• The remedy for all of these may be taxes.

No one wants to hear those things, either. And politicians are in the business of telling us what we want to hear.

Nevada doesn’t know how not to grow. Few if any people living have experienced such a thing. Las Vegas grew so fast at one time that, unlike Reno and the state government, it had no retention program to convince businesses not to leave the state. Growth in the city was so fast that businesspeople and public officials could not handle the ones arriving, much less worry about keeping anyone from leaving. Nevadans were spoiled rotten, living in what former university chancellor James Rogers called a Ponzi economy—“Those coming in subsidized those already in Nevada. Over time, neither long-timers nor new residents were required to pay any substantial taxes, causing necessary services, including education, to suffer.”

Nevada doesn’t know how to have a non-casino economy. The last time it had one was the 1920s—and even then the gambling was only hidden, not missing.

State officials say they want to diversify the economy and for Nevada to become the Mecca of alternative energy. A strong education system is essential to diversifying the economy, particularly in high tech industries. Yet Nevada has spent the last couple of years dismantling its higher education system.

Here’s an example: “Lt. Gov. Brian Krolicki, state and local officials and my staff are working tirelessly to bring new businesses to Nevada to create good-paying jobs for our hardworking families. We are looking not only to expand our manufacturing base, but also to bring new green energy jobs to Nevada. In addition to building facilities to generate solar, wind and geothermal power, we are also working to establish research and development facilities for newer, better green technologies.”

That was Gov. Jim Gibbons in February. The governor was being disingenuous. Essential to attracting energy-related industry to Nevada is a world class higher education system. During the last two years, in part because of the governor’s recommendations, higher education funding in Nevada has been cut by a fourth, and he wanted it cut more.

Gibbons’ past budgets, according to economist Elliott Parker, “will cost us our most productive researchers who bring in the most outside funding, [will] scare away potential donors, and it will encourage our best students to go elsewhere.”

More recently, Parker got more specific about what is lacking.

“We don’t have the educated workforce to actually be engaged in [alternative energy] design and production,” he said. “The university has some expertise, but the size is small and the number of graduates available is even smaller. … Instead, we might have a temporary jump in construction-related jobs related to putting in the solar panels, building the transmission networks, etcetera, but these would be designed and built elsewhere. Once they are installed, the maintenance and operation would not require many people, and given the state tax structure at present, and the likelihood that the investors will be from out of state, we are also not likely to have a significant revenue stream coming from the power, either.”

Rocha believes that history has a lot to teach Nevada officials, if they only knew it. So it might be useful to look at some of that history.

During the 1880s, there was continued yearning for a revival of mining booms. But in the 1890s, some Nevadans started looking at a different kind of economic activity—desert reclamation, converting the desert into agricultural land. In 1902, Congress enacted legislation to provide for reclamation projects, and Nevada was given one of the first five projects.

As it happened, desert reclamation was built on a foundation of politics and bad science. More water was required than expected to produce fewer farms than planned. Though a couple of communities were built up for the purpose, the idea never paid off. When new mining booms came along, desert reclamation faded.

In 1978, casino gambling was made legal in Atlantic City. New Jersey Gov. Brendan Byrne cut the ribbon on May 26, 1978, when the old Chalfonte-Haddon Hall Hotel in Atlantic City reopened as Resorts International, the first full fledged casino in the east. “I’ve been going to Las Vegas since 1949,” said customer Tony Brunette. “Now I don’t have to go anywhere.”

Nevada leaders and officials were patronizing in their comments (Gov. Mike O’Callaghan: “one hotel and a slum area”), warning that New Jersey might not be up to the job of regulation. (New Jersey regulation turned out to be better than Nevada’s, and the first person indicted for a gambling violation in New Jersey was a Nevadan.) Most, such as Las Vegas Sun publisher Hank Greenspun, said more gambling simply creates more gamblers.

However blasé they tried to be, there was no ignoring the huge profits being turned in Atlantic City and the rush of Nevada casino corporations to Jersey. Nevada Gaming Commission chair Harry Reid threatened to “put the brakes” on the migration by using a law giving Nevada regulators authority to veto “foreign” licenses by Nevada companies.

But their anxiety still did not induce state officials to get more serious about economic diversification. A state “futures commission” was established that had few results.

In 1981, a crippling recession hit Nevada that evaporated the state’s previous belief that its casino economy was recession-proof. A new governor, Richard Bryan, convinced the legislature to create a new program to diversify the state’s economy beyond gambling.

There was just one thing wrong with the Bryan program. It didn’t work. Some businesses were attracted to Nevada, but the casino industry kept growing, too, so the gambling sector of the state’s economy stayed more or less the same, which meant the state stayed just as dependent on it. Moreover, the non-casino businesses drawn to Nevada were not exactly the cream of the crop, particularly in the early years. They tended to be companies that had low wages and few benefits and had fled states where they had to do better. Nevada was a refuge from corporate responsibility. Worse, those firms were the ones most likely to fold or have layoffs when hard times came.

Plainly, the state needed to beef up and accelerate its economic development program. But it didn’t.

The state later dabbled in trying to attract high-tech industry. The lawmakers authorized creation of a second engineering school and other attractions and incentives. But the effort was half-hearted. As state after state lined up to try to get in on the high-tech boom, many pointed out that there is a reason the Silicon Valley is located near Stanford: Santa Clara University, Carnegie Mellon Silicon Valley, San José State University, important federal facilities like NASA Ames Research Center, and so on. Nevada, with its uncertain state budget commitment to education, was in no position to compete or to attract the engineers and venture capitalists California enjoyed.

“Yes, Nevada tends to see the university as a social service, not as an investment in the future,” said Parker. “Many would be happy if the universities became more like community colleges, or like the University of Phoenix [which has branches in Nevada].”

“And when you’re going for those high quality jobs, generally they’re looking for strong higher [education] and K-12 system,” said Chuck Alvey, head of the private Economic Development of Western Nevada, which tries to bring new businesses to the state. “And so it’s hard to recruit out-of-state companies if you don’t have a strong higher ed system.”

Eventually, Nevada turned to alternative energy, the latest economic development fad among the states.

Last year, building on some earlier measures, the Nevada Legislature approved bills to

• require NV Energy to plan for transmission lines to carry energy from areas in the state where renewable energy facilities are likely to be located;

• create a renewable energy fund as well as energy efficiency and energy conservation loans. (The money is expected to come from federal stimulus legislation.);

• add two small county members to the state Economic Development Commission in recognition of the small counties locations renewable projects are expected to have;

• create abatements of portions of sales and property taxes for wholesale power producers using renewable sources;

• create a new Renewable Energy and Energy Efficiency Authority and a post of Nevada energy commissioner.

Attention should be paid to the fact that these required a minimal state investment, and that at the same time that these measures were being passed, the state higher education system was being decimated. The state was starting late, acting in desperation, and sending conflicting messages.

Of course, other small Western states got started late, too. But the task is not as urgent for them. States like Utah and Arizona already have diversified economies. Nevada is dependent on a single industry that is in rapid decline. And some states are better positioned than Nevada. Utah has a dozen institutions of higher learning and a couple of them are major players.

Again, Nevada’s effort was half-hearted and poorly planned. It relied heavily on large projects.

“I think we made some progress,” said Las Vegas energy consultant Rose McKinney James. “I think we made more progress on large scale power projects and less progress on small-scale, site-based applications.”

Things like installation of renewable applications on individual homes create a need for a whole trail of other businesses, creating jobs all along the way.

“With these projects, you have to install, you have to be trained for the installation, the components have to be distributed—you end up with a lot of businesses doing different things,” McKinney James said. She faulted the legislature for cherry picking and going after the “low hanging fruit.”

Economists agree with her. While large corporations may seem to be the most stable companies, economist Glen Atkinson points to small businesses that install air conditioners and heating units, which are never in short supply and stay in business year after year. The alternative energy equivalent of that would be a source of continued economic activity. “That goes to construction, obviously, but it’s a lot of small businesses that are reasonably stable,” he said. “I mean, if you had construction firms that were coupling with them installing solar at the time of construction, it would be like replacing the old mechanical stuff.”

Energy consultant Cynthia Mitchell, a former staffer in the Nevada consumer advocate’s office, talked about another factor: “This is one of those really interesting socioeconomic policy questions where you see a conflict or a mismatch between public interest and private interest, right? Private interest, for the utilities, is not in renewables. Large-scale renewables, maybe yes, because they can capitalize those. But you start bringing renewables on, and that starts to unravel the utilities’ monopoly control of generation over time because it goes from centralized down to smaller and smaller scale.”

But the legislators gave support mostly to bigness.

The failure to act toward an alternative energy future is seen most clearly in the issue of a transmission line between the northern and southern grids. Without it, the state will never seriously be in the business of developing alternative energy for in-state use. It is also essential to export power to California and other states. State leaders have known of this shortcoming for decades and, Rocha said, should have been more aggressive and had it accomplished with federal help 10 years ago. Finally, in January, Sen. Harry Reid provided a federal solution, announcing a project to use federal recession stimulus money to help build a line from White Pine County to Las Vegas in a partnership between Sierra Pacific Resources and New York-based LS Power.

Reid seems to believe he can go ahead with alternative energy development in Nevada in the face of minimal cooperation from state government.

“Infrastructure development, for every billion dollars we spend, we create 47,500 high paying jobs,” Reid said. “A new area that we’re looking into, and Nevada’s going to benefit as we already have, is renewable energy. We have thousands of jobs right here in Nevada as a result of that. We have a long ways to go, but we’ve made progress.”

Does Reid think it can be done, given the small contribution from the state?

“Yes, I really do believe, because the work we do with renewable energy is more important than just taking care of Nevada. We hope within three years when we’re energy independent—we will be, because we’re the first leg of the grid—we’ll be able to start selling electricity to California. We’ve never done that before.”

The state program does have its defenders, of course. When he heard the criticisms, Lt. Gov. Brian Krolicki, who chairs the state economic development commission created by Bryan, said, “I actually really, really disagree. The meeting I just had was with a 350 megawatt solar producer. … These kinds of conversations happen every day. I mean, you know, I’ve got 400 leads … that are active and are being worked and half of them, roughly half of them, are related to renewable energy.”

He concedes certain advantages enjoyed by New Mexico, Arizona and California over Nevada, but said Nevada has advantages over them.

“Today we are the number one producer per capita of geothermal and solar energy,” he said. “You know, today we have probably 400—four to five hundred megawatts of geothermal energy. In the next decade that’ll probably be 2,500 megawatts—a five-fold increase. California today is probably about 2,400 [to] 2,500 megawatts of geothermal production. In the next 10 years they’ll probably double.”

He also said some legislators were inclined to want a quick fix for the economy from renewable energy, and that complicates the state’s task.

But even Krolicki is having to argue (“Volatile budget,” RN&R, July 15) that Nevada will be able to do more if only the state can land some big fish. “Yes, it is a very troubling time when you cannot, you know, just bulk up the academic and higher ed systems in the state, but that doesn’t mean we can’t have successes,” he said. “And I think if we have the private sector successes, the education components will come.” Most energy consultants we spoke with said the state needs to show its credentials first.

But Krolicki is working with the tools he was given by the legislature. He and the commission may be making the most of them, but they are still limited. More to the point, the state’s ability to compete gets high marks mostly from those inside state government.

Though there are some pockets of resistance to Nevada’s push into alternative energy, they are few and far between. The state stands to gain from anything that can be accomplished. Tim Hay, former state consumer advocate (the consumer advocate represents the public in rate hike proceedings), recently wrote that it’s a little like the nation’s energy independence efforts.

“Because Nevada has no coal or natural gas of its own, NV Energy sent over a billion dollars of ratepayer money out-of-state in 2008 alone just to keep the lights on,” Hay wrote. “That is a huge outflow of cash that won’t go away. Adding more homegrown renewable energy sources to our fuel mix will keep some of those dollars at home, create jobs, and shield us from volatile fossil energy prices in the future.”

In resources, the state is in as good a position as most small Western states, and better than some. In geothermal, it’s particularly well set—the second highest (after California) geothermal potential in the lower 48.

The small resistance that exists seems more cultural than political or economic, as in the case of a conservative Las Vegas editor who disses alternative energy from time to time. Such figures seem to have a visceral reaction to the notion, perhaps as a manifestation of the environmentalism that came out of the 1960s.

Even if everything enlightened administrators hope for comes to pass, there is still a huge question about whether a new alternative energy industry will take up the slack for the fading casino industry. There are many who say it will not, certainly not in employment figures.

Last week, state legislators touted a solar facility in North Las Vegas. It will produce up to 300 jobs—welcome, but a drop in the bucket of the state with the highest joblessness rate.

Glen Atkinson: “I don’t think anybody will employ as many people as the casino industry in this state. That’s unlikely.”

Elliott Parker: “I don’t think there is any way that this new industry could replace the jobs we have lost, and will continue to lose, in gaming and tourism, or in housing construction.”

That, then, leads back to the matter that so exasperated Rocha—whether state officials are prepared to recognize the decline of the casinos. An alternative energy industry will help, but it is not enough, unless the state wants to permanently reduce its population and have a smaller economy (and there are some benefits to that). Even with such an industry, the state needs to diversify more, and soon. There is a small group, Rocha among them, who believe Nevada is facing a genuinely dire future unless it acts fast, and part of that process is realizing the casino industry can no longer be counted on to fuel the state’s economic engine, because continuing under that illusion means time lost.

Today, many state leaders are being heard pointing out that Nevada and the casinos recovered after the 1981 recession—and that is true. After which, more than 30 states made gambling legal. Then, tribal casinos came along. The Nevada casino industry is not likely to make a 1981-style recovery after this recession. California tribal casinos have seriously undercut the Northern Nevada casinos, which get much of their customer base from that state. Las Vegas’ mantra is “We have the infrastructure,” meaning no one else matches its mega-resorts. But as soon as the first tribal mega-resort opens in southern California, that advantage will begin to drain away, too. In the meantime, business in Las Vegas is moribund.

The casinos have traditionally resisted diversification of Nevada’s economy. In June 1964, when Gov. Grant Sawyer’s administration was trying to lure other industries to the state, the industry growled like a dog in the manger.

When Bryan convinced the legislature to set up the economic development commission, casino figures grumbled again.

These days, no one in the industry is actually objecting, probably because it seems a bit disloyal to the state in such hard times, but it’s unlikely they’re happy about it.

Atkinson calls the casinos a “mature industry.” That’s an economic term for an industry that is at its peak—and has nowhere to go but down.

“I think the growth in the casino industry is not likely to be positive for some time, though,” he said tactfully.

Now if only he, Rocha, and the small band of scolds can convince the state’s political leaders of that.