Analysis: Nevada economy faces extended losing streak

SAN FRANCISCO Tue Sep 7, 2010 4:16pm EDT

SAN FRANCISCO (Reuters) - To borrow from its gambling parlance, Nevada is likely to extend its economic and fiscal losing streak well into the future.

Once one of the fastest-growing states, Nevada now faces the prospect that recovery from its deep economic slump will lag -- perhaps substantially -- a national rebound.

Nevadans are resigned to that dour outlook. A recent Mason-Dixon Polling & Research Inc poll found 42 percent of residents expect the state's economy to stay the same over the next year and 29 percent anticipate it to worsen.

They have good reason to be glum. Credit counseling agency CredAbility ranks Nevada as the most financially distressed state.

"It's the only state at a crisis level," said John McCosh, a spokesman for the Atlanta-based credit counseling agency.

Nevada, a state of 2.64 million, has come to symbolize the extremes of the U.S. economy's boom and bust and now holds the country's records in jobless and foreclosure rates.

The slumping state economy has also worked its way into national politics, as leading Democrat and Senate Majority Leader Harry Reid of Nevada fights for votes from a depressed electorate.

Nevada's unemployment rate was at 14.3 percent in July, compared with 9.6 percent nationally in August, and nonfarm payrolls in the Las Vegas region, the state's main economic engine, shrank by a worrisome 2.3 percent in July from a year earlier.

The Las Vegas area's median home price was off 58.4 percent in July from its November 2006 peak and home sales in the region dropped 22.2 percent in July from June and 18.8 percent from a year earlier, according to real estate information service MDA DataQuick.

Foreclosures continue to weigh on the region's housing market. It had the highest foreclosure rate among U.S. metro areas with populations of 200,000 or more in July, with one in every 71 housing units having received a foreclosure filing, or more than five times the national average, according to online foreclosure marketplace RealtyTrac. Nevada in July held onto the highest state-level foreclosure rate for the 43rd consecutive month, RealtyTrac added.

Meanwhile, in Carson City, the state capital, revenue is so weak that state leaders expect a shortfall of up to $3 billion in the two-year state budget cycle beginning next July if they hold spending at current levels.

At $3 billion, Nevada's deficit would be about 46 percent of its roughly current $6.5 billion budget, said economist John Restrepo, a principal at Restrepo Consulting Group LLC and member of the Nevada Economic Forum, which projects general tax revenue for the state government.

"The options are relatively limited," Restrepo said. He noted that a new governor will be elected in November and lawmakers will have to accept more spending cuts along with tax increases of some kind to balance the state government's books.

LEANER GOVERNMENT

Nevada's government faces a historic fiscal reckoning, said Jeremy Aguero of the economic and fiscal research firm Applied Analysis, in Las Vegas.

"The hard choices that we didn't make before are going to be very apparent," he said.

Republican Assemblyman Pete Goicoechea expects Nevada's coffers to be so thin for so long that he has raised the idea of taxing food sales, since imposing a personal income tax is widely opposed.

"It's a broad-based tax, easy to collect and completely controlled by the voters," he said. "I don't know if that particular tax would be worse than the cuts to the programs we're looking at."

Goicoechea added: "There will be cuts to essential services. We will start getting into public safety, health and human services and education. That's when it starts getting sticky."

Local governments are also cutting spending because retail sales tax revenue has plunged as unemployment has spiked, said Kevin Knutson, director of management and budget for Reno. The city may see its credit rating lowered because of unpaid rent on a city lot used for parking next to a casino.

"As consumer spending goes, so go our revenues," Knutson said. "We've assumed it's going to continue to drop."

Local officials in and around Reno have responded by reining in spending and by consolidating more than 60 services in recent years. Knutson said another 50 services could be merged amid further spending cuts.

Government in Nevada will grow leaner and leaner until revenue revives. But that requires tourism to rebound and enough foreclosures to be cleared from inventory for home building to resume, each largely dependent on outside forces, said Rick Shelton of the Greater Las Vegas Association of Realtors. "Our neighbors' circumstances are paramount to our circumstances."

(Reporting by Jim Christie; Editing by Dan Grebler)

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