by Meredith Levine
Nevada’s Economic Forum: Background
The Economic Forum is a state-mandated panel that convenes periodically to submit revenue projections for the General Fund—Nevada’s major operating fund—to the Governor and the Legislature. It is a five-member committee drawn from the private sector, with three members selected by the Governor and one nominated by each the Assembly and Senate.
The Economic Forum meets in December of even-numbered years to provide forecasts for the unrestricted revenue portion of the General Fund. That forecast is binding on the Governor’s Recommended Budget for the upcoming biennium. The Forum also typically convenes about a month before the official forecast to hear testimony on the economic outlook and preliminary General Fund estimates. In 2020, an October meeting was added to the schedule to gather comprehensive information on economic indicators in the context of the COVID-19 pandemic.
Here, we summarize highlights from the October 2020 meeting of the Economic Forum.
Federal Coronavirus Aid Provided and Its Use to Mitigate the Impact of Covid-19 on the Residents, Businesses, and the State Budget
Nevada received $20.8 billion in COVID-19 funding across four pieces of federal legislation. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 accounted for the largest share of federal COVID-19 funds in Nevada ($17.1 billion, or about 82 percent). Under CARES, Nevada received $1.25 billion through the Coronavirus Relief Fund (CRF) to assist the State and local government in COVID-19 response.
The money was appropriated to the City of Las Vegas, Clark County, the State, and other local governments outside of Clark County. Per U.S. Treasury guidelines, the CRF could not be used for revenue replacement. Throughout Nevada, CRF money was distributed to assist individuals and small businesses and to support public health initiatives. As of October 1, 2020, just $842,771 in CARES Act money remains unexpended.
The CRF supported $20 million in commercial rental assistance for Nevada’s small businesses and nonprofits. In addition, Nevada provided $30 million in CRF money to the Nevada Housing Division for residential rental assistance; $20 million is being held in reserve for Clark County once its own rental assistance money has been dispensed.
Nevada Residential and Nonresidential Construction Outlook
In southern Nevada, the residential housing market has not been affected by COVID-19 in the same way as other economic indicators. It is moving in a “counterintuitive direction,” with prices remaining high despite 15.5 percent unemployment in the State. The new construction market remains stable: about 10,000 new homes were completed in 2019, and the pace is expected to remain the same throughout 2020. However, mortgage defaults in Nevada have begun to spike, and the concern is that the longer the pandemic grips the State, the greater the likelihood that the real estate market will weaken. Additionally, some major construction projections are coming to an end (e.g., Allegiant Stadium, new resorts, etc.), and without significant new construction in the pipeline, that could affect sales tax collections. New projects and approved construction activity in the northern Nevada pipeline suggest that that market remains resilient. Median home prices continue to increase, which is a pattern that is expected to continue until more supply comes online.
New and Expanding Business Development in Nevada
There is resilience and diversification in Nevada’s industry base, though there is regional differentiation. Tourism, gaming, and entertainment is the dominant sector in southern Nevada, while other sectors, such as manufacturing, are gaining in northern Nevada. For the balance of the State, mining continues to be a growth sector.
There was a loss of 287,300 jobs in Nevada as of April 2020, but as of August, 52 percent – 150,800 jobs – had recovered. Service industries have been most at-risk during the economic downturn. Of lost jobs in Nevada, 84 percent were in Clark County.
Given public health and economic uncertainty, which include vaccine availability and questions surrounding federal financial assistance, scenario projections for specific statewide economic indicators for March 2021 are as follows:
- Unemployment Rate: Best Case (9.2 percent), Most Likely (14.0 percent), and Worst Case (23.9 percent)
- Job Growth: Best Case (-6.5 percent), Most Likely (-11.7 percent), and Worst Case (-18.8 percent)
- Visitor Volume Growth: Best Case (-13.7 percent), Most Likely (-28.4 percent), and Worst Case (-50.2 percent)
- Taxable Sales Growth: Best Case (-9.1 percent), Most Likely (-18.0 percent), and Worst Case (-27.6 percent)
Looking forward, Las Vegas is expecting growth in the manufacturing and logistics sectors. But total capital investment is expected to decrease in 2020 as large construction projects come to a close. The expectation is for recovery in 2021, but it could be slow, with many industries focused on lowering business costs. Workforce investment will be key to recovery, and given the state of layoffs, it is necessary to retrain/reskill Nevada’s available workforce for higher wage jobs, observed Jared Smith, Chief Operating Officer, Las Vegas Global Economic Alliance (LVGEA).
Compared to southern Nevada, the downturn has not been as pronounced in northern Nevada. This can be attributed to a relatively lower dependence on tourism and hospitality in that region. But northern Nevada has not been entirely insulated from the economic shock, and upskilling the workforce is expected to be important to recovery and sustained growth.
Current Status and Outlook for the Tourist and Convention/Trade Show Market in Nevada
The dependence on tourism in southern Nevada is high – it is the economic engine of the region and is not yet experiencing a full recovery, much less growth. Drive traffic has recovered to pre-COVID levels, but air travel has declined significantly. Employment in the industry is down approximately 25 percent from that prior to the virus. Visitation in 2020 has decreased by 57 percent over 2019. Gross gaming revenue has declined, though there has been some recovery from the locals market. Visitation recovery factors are contingent on the following, which are variable and uncertain: health crisis/vaccine rollout, uneven recovery throughout the country, consumer travel behavior changes, varying recovery/travel restrictions internationally, virtual versus in-person meetings/conventions, and additional government stimulus and assistance programs.
In northern Nevada, cash occupied room nights, average room rate, and taxable room revenues are below 2019 numbers but are beginning to recover. Vacation rentals have remained strong. In fact, vacation rental taxable room revenue in 2020 increased nine percent over 2019. In addition, there are prospects for air travel increases with demand for new routes at the Reno–Tahoe International Airport. As in southern Nevada, the convention market has weakened, and group travel is not expected to rebound fully for 24 months.
Nevada Insurance Markets
It is not yet known how changes in health care coverage arising from the pandemic may affect insurance premium tax revenue, though it may be lower in the next two fiscal years than it has been in recent years. From a tax perspective, not all health plans sold in Nevada are required to pay premium taxes. The fully insured plans in the individual and group markets pay premium tax, along with managed care organizations in the Medicaid market. The plans offered in the self-funded group market, Medicare market, and Tricare/VA markets are not subject to premium taxes.
With increased unemployment from COVID-19 and the loss of health care coverage for employees, the Nevada Division of Insurance expects a shift in how Nevadans are covered. Given the deep impact of COVID-19 in the gaming industry that produced employment losses in the sector, some of the coverages losses likely will occur in the self-funded group market and the large group fully insured market, accompanied by projected increases in Medicaid as a share of Nevada’s population. Self-funded groups do not pay premium taxes, so this shift could result in an increase in taxable premiums and may offset decreases in taxable premiums in other segments.
State Fiscal Year (FY) 2020 Actual Revenue Collections in Comparative Context
Forecasting is especially challenging in the current economic climate and attendant pandemic-related uncertainty. A comparison of actual revenues with the Economic Forum May 1, 2019, Forecast (adjusted for legislative actions approved during the 2019 Legislative Session) that was binding on the legislatively approved budget and the June 29, 2020, Consensus Estimate (Governor’s Office of Finance Budget Division and Legislative Counsel Bureau Fiscal Analysis Division) that was used to project available revenue for FY 2021 during the 31st (2020) Special Session reveals these complications.
For example, the Consensus Estimate projected a decrease in cigarette tax revenue over the May 1, 2019, forecast on the basis of reduced visitation numbers and constrained personal budgets. But the actuals came in $12.4 million higher than what was projected in the Consensus Estimate and differed by only $44,000 over the forecast that was approved in May 2019. Thus, for that revenue source, the initial forecast was more accurate than the updated numbers. As Russell Guindon, Principal Deputy Fiscal Analyst, Legislative Counsel Bureau, Fiscal Analysis Division, stated, “Hey, it’s pretty tough to figure out what goes on with tax collections in a pandemic.”
That does not necessarily hold true for all revenue sources but merely points to the uncertainties associated with a fluid situation that hinges on the approval of a vaccine for mass distribution, full restoration of convention travel, and the availability (or lack thereof) of federal stimulus money, amongst others.
Personal Income and Wages in Relation to Population, Employment, and Inflation on a National Level and the State of Nevada
Data on Nevada total nonfarm employment shows a loss of 229,200 jobs between the first and second quarters of 2020, for a decrease of 16.1 percent over the two periods. The single-year losses exceed the Great Recession loss of 179,000 jobs between the first quarter of 2007 and the fourth quarter of 2010 (-13.8 percent). While construction was the major industry affected during the Great Recession, pandemic-related unemployment has been concentrated in leisure and hospitality.
Inflation, as measured by the Consumer Price Index (CPI), is at 0.4 percent, which is below the 1.8 percent inflation rate in the second quarter of 2019. Reduction in CPI has been driven by the energy component.
Between the first and second quarters of 2020, Nevada wages/salaries as a share of total personal income decreased from 48.9 percent to 38.6 percent, below the U.S. shares of 50.2 percent to 43.3 percent, respectively. This indicates that the Nevada wage/salary share of total personal income was slightly below the national average prior to the pandemic but is now nearly five percentage points below the U.S. share (which itself declined). Stimulus checks and unemployment compensation, which are transfer payments, have had an offsetting effect nationally and in Nevada. Specifically, Nevada total personal income increased by 11.9 percent between the first and second quarters of 2020, but total wages and salaries decreased 11.7 percent over the same period.
The October 2020 meeting of the Economic Forum provide a comprehensive assessment of Nevada’s economy from a variety of different perspectives. COVID-19 is a public health crisis that has produced a significant economic shock. Unemployment continues to remain high, and visitation has not returned to pre-COVID levels, which presents a challenge in a tourism-dependent economy. Nevada has been affected differentially by the crisis in that the effects have been more pronounced in southern Nevada than in northern Nevada.
Whether or not it is a difference of a degree than kind is not clear. All areas of Nevada are witnessing signs of recovery, particularly with respect to leisure travel. But southern Nevada is highly dependent on large conventions and events as drivers of midweek revenue. Depressed discretionary business and personal income elsewhere in the country, coupled with apprehension about COVID-19 transmissibility on airplanes and lack of confidence in health and safety protocols across all aspects of the travel experience, makes full restoration in the short term highly unlikely. A lingering recession is not outside the realm of possibility.
Expert testimony seemed to suggest something of a consensus in two respects: (1) a full rebound likely is contingent on a vaccine that is approved for mass distribution to ensure confidence in a “return to normal”; and (2) while Nevada was badly hit by the pandemic, the federal stimulus package and enhanced unemployment benefits have kept many people afloat, though others are still hurting quite badly. This money helped soften blow for many of Nevada’s families, and while State revenue was affected deeply, it could have been far worse. However, in the absence of additional federal support, the economic pain could persist or even worsen.
Uncertainty was a recurring theme of the October 2020 Economic Forum. It is doubtful that these uncertainties will become known quantities by the time official forecasts are approved at the December 2020 meeting of the Economic Forum, but the estimates will account for uncertainty and ever-evolving economic conditions.