ALAMEDA, Calif. — Conflict looms when Nevada lawmakers convene Monday to map out a budget for their recession-battered state.

Newly elected Republican Gov. Brian Sandoval has laid out a no-tax-hike budget that will deliver deep cuts to programs throughout the state government.

Sandoval also wants to use $425 million in bond-financed school debt service reserves to help plug a gaping hole in the operating budget.

He faces a Legislature narrowly controlled by Democrats who want to limit some of Sandoval's proposed cuts, particularly to education programs, though they lack the two-thirds supermajorities that would be needed to pass tax hikes.

There's no question the state's budget is in terrible shape. Nevada has been hammered by the recession, and its 14.5% unemployment rate is the highest in the nation by far, according to federal statistics released in January. California is next highest at 12.5%.

Sandoval's executive budget proposal projects $5.3 billion in general fund revenue in the two-year budget period beginning July 1.

That's down from $6.2 billion in general fund revenue Nevada recorded in the 2005-2007 biennium, evidence of the sustained decline in the state economy.

That means substantial cuts to popular K-12 and higher education programs, as well as across-the-board pay cuts for state employees, if Sandoval's budget is enacted as proposed.

Even with those cuts, the governor's budget calls for $5.8 billion in general fund spending.

That gap would be closed by tapping local school districts' bond funds, and by deficit borrowing.

Over two years, the Sandoval administration plans to take $450 million from the bond funds, in what the governor describes as something of a minor accounting maneuver.

"We propose to change the level of reserves required for debt service in all those counties with bond funds," Sandoval said in his state of the state address last month.

"Simply put, these tax dollars were unnecessarily locked away in one of those separate buckets," he said.

Most of the impact would fall on the Clark County School District, which enrolls more than 70% of Nevada's students.

Neither the Sandoval administration nor Clark County school officials responded to requests for comment, but the district put together an online presentation listing some of what it sees as drawbacks of the governor's proposal.

Notably, the use of bond proceeds for the purposes Sandoval proposes would require the debt to be refinanced as taxable working capital loans, according to the district.

"Such an issuance of taxable bonds would require a non-economic refunding of the district's outstanding bonds and, including additional interest and penalties due the IRS, could easily double the district's financing costs," the presentation said.

It would also violate the implicit deal the school district made with voters in 1998 when they approved its bond program, according to the district.

"Using borrowed funds to finance daily operations would likely be viewed very negatively by bond rating agencies and could significantly impair the district's ability to issue future capital bonds," according to the online presentation.

The Sandoval budget also calls for $190 million in deficit borrowing, which his administration describes as a securitization of the state's insurance premium tax.

The budget calls for the borrowing to be repaid over five years. No further details were available.

Senate Majority Leader Steven Horsford told the Associated Press that he's not a fan of the borrowing plan.

"It's like taking out a second [mortgage] on my house to pay my bills," he said. "And I think a lot of families that have done that — we have seen the consequences of that approach and it has put people in bankruptcy."

While Democrats like Horsford have also signaled that they want to provide more funding for education and social programs, minority Republicans are trying to draw a line in the sand to say GOP members won't provide the necessary votes needed to pass a tax increase.

"They owe it to every Nevadan to begin providing specific details of not just their plan, but also how they propose to fund it," Senate Minority Leader Mike McGinness and Assembly Minority Leader Pete Goicoechea wrote this week in a widely publicized open letter.

Despite its economic and budget woes, Nevada has general obligation bond ratings of AA-plus from Fitch Ratings and Standard & Poor's, and Aa1 from Moody's Investors Service.

"The rating reflects a very conservative debt position and a history of taking action to keep the state budget in balance," said Fitch analyst Karen Krop.

Those conservative debt practices mean there won't be much new Nevada general obligation paper coming to market in the forseeable future. Nevada GOs are backed by a dedicated statewide property tax, and those collections have gone into the dump along with property values in the foreclosure-ridden state.

According to the Debt Affordability Report published recently by state Treasurer Kate Marshall's office, the statewide assessed valuation, $148.2 billion on June 30, 2008, dropped by more than a third in two years, to $95 billion in 2010.

What that means, according to Marshall's report, is that Nevada only has the capacity to issue $29 million in new-money GO bonds over the next two years.

Barring an unexpected uptick in property values, after that Nevada won't have the capacity for any more new GO debt until 2021, the report said.

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