Appropriations budget: Appropriations up, funding restoration slow

Appropriations budget: Appropriations up, funding restoration slow

A decade-long decline in state spending will come to an end if the Legislature’s Appropriations Committee budget is adopted.

The committee’s recommendations call for a 5.2 percent average annual increase in General Fund appropriations this biennium, but it’s important to note that appropriations only grew at a 1.1 percent average over the previous four years.

As such, the budget would be a small first step toward restoration of support in key budget areas such as education, transportation and infrastructure, and health and human services.

Spending has declined relative to the economy

The cost of providing services increases every year due to factors such as inflation, population growth and increased costs of health insurance, so state General Fund spending in actual dollars increases most years.

But when viewed as a share of the economy, state General Fund spending has decreased significantly in the past several years.[1] In the 14 year span between FY 98-99 and FY 12-13, Nebraska Personal Income grew at an average rate of 4.4 percent. General Fund appropriations have averaged 3.6 percent growth in that same period. This lag has led to a nearly 11 percent drop in state spending as a share of the economy. (Figure 1)

Impact on K-12 education

The Appropriations Committee’s proposed 5 percent average annual growth for the Tax Equity and Educational Opportunities Support Act (TEEOSA) – which the state uses to fund K-12 education — will halt a long decline in support and slightly reverse the trend.[2]

TEEOSA funding will be far from being fully restored, however, as it will remain about 9.6 percent below the FY 98-99 to FY 12-13 average, and about $78 million below the biennial funding level called for under current law. TEEOSA funding is now at its lowest level as a share of the economy since the formula was implemented in 1990.

General Fund K-12 appropriations decreased as a share of the economy by 21.4 percent from FY 98-99 to FY 12-13. As state funding has decreased, school districts have become more reliant on property taxes. Final data for FY 12-13 are not yet available, but property taxes increased from 44.8 percent of school budgets in FY 00-01 to 48.4 percent in FY 11-12.

Effect on higher education

The Appropriations Committee recommendations include a 4 percent average annual increase for higher education funding. This would not be enough to reverse the decline in General Fund higher education support as a share of the economy.

Between FY 98-99 and FY 12-13, General Fund higher education appropriations declined 20.7 percent as a share of the economy.

Transportation and infrastructure outlook

The Appropriations Committee budget shows that a sales tax diversion from the General Fund will help increase state transportation and infrastructure funding[3] by about 9.8 percent per year.

This will be a significant boost as expenditures on Nebraska’s roads and other infrastructure declined 15.8 percent as a share of the economy between FY 98-99 and FY 11-12.[4]

Implications for Health and Human Services

General Fund appropriations for the Department of Health and Human Services (HHS) would grow 6.2 percent per year in the Appropriations Committee budget, somewhat faster than the 5.7 percent average from FY 98-99 to FY 12-13.

Within HHS, Medicaid and the Children’s Health Insurance Program (CHIP) spending would grow 10 percent per year, while the rest of HHS would grow 2.5 percent per year.

It is important to note that much of HHS, particularly Medicaid and CHIP, is federally funded, so the General Fund is only part of the picture. Federal and state policies interact to determine overall spending on these programs, and oftentimes a General Fund decrease is offset by a Federal Funds increase, and vice versa. For example, Nebraska received nearly $330 million in federal stimulus funds for Medicaid, which reduced the amount of state money needed to fund the program during the recent recession.[5]

We do not have historical appropriations data from Federal Funds and Cash Funds but expenditures data show that in FY 11-12 total HHS spending from all funds as a share of the economy hit its lowest point since at least FY 98-99, declining about 3.5 percent overall during that 13-year time period.

Effect on local governments

It is unclear exactly how the Appropriations Committee budget recommendations would affect local governments such as counties and municipalities.

Local governments likely would see some additional roads funds due to the sales tax diversion mentioned above, as well as increased insurance premium tax revenue as a byproduct of federal health reform.

From FY 00-01[6] to FY 12-13, support for counties and municipalities decreased 33.6 percent and this has contributed to local governments becoming more reliant on property taxes. (Table 1[7]) Property taxes on average account for a 19.7 percent share of Nebraska county and municipality budgets as opposed to 16.7 percent in FY 00-01.

The largest shift to property taxes is at the county level where property taxes now account for an average of 36.7 percent of county budgets, up from 30.2 percent in FY 00-01. The majority of county budgets are used to fund roads, public safety and health care.

Tax code issues drain revenue

A crucial aspect of the budget picture is that the state is limited by the amount of revenue it has to spend and Nebraska’s outdated tax code has hindered the state’s ability to generate funds needed to support state priorities.

The state’s tax code, which hasn’t undergone comprehensive reform since the 1960s, was designed in a goods-based economy. This means the sales tax doesn’t apply to most services, which are a large and growing part of today’s economy.

The state also lacks the ability to collect all it is owed in internet sales tax. In total, Nebraska loses between $550 million and $650 million a year in untaxed services and internet sales.[8]

The state’s ability to support its General Fund budget priorities has been further drawn down by a recent income tax cut as well as the aforementioned roads funding diversion.

Reasons for optimism

The state’s revenue picture brightened at the recent news that Nebraska Economic Forecasting Advisory Board predicted a $53 million increase in its 2013-15 biennium revenue projections as well as a one-time $125 million windfall for the state’s Cash Reserve Fund – or “Rainy Day Fund.”

Also, the state likely will conduct a comprehensive review of its tax code this interim. This could lead to a more modern tax code that better keeps up with today’s economy.

These developments could help stabilize Nebraska’s revenue and put the state on better footing to adequately fund key budget areas like education and health care, potentially reducing reliance on property taxes. This would be a move toward better opportunities for all Nebraskans and would help fortify the foundation upon which our state and its strong economy is built.

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A note about our methodology: When measuring state budget trends as a share of the economy, Gross Domestic Product (GDP) is the most comprehensive measure and would normally be used if possible. However, we do not have official projections for Nebraska GDP growth into future years. For this report, Personal Income was used instead of GDP because official projections are available. Personal Income constitutes about 80 to 85 percent of GDP, and in Nebraska has grown slightly slower than overall GDP. We also prefer to use actual expenditures data when possible, but to directly compare the Appropriations Committee budget to previous years, it was necessary to use historical appropriations data. We only have historical appropriations data for the General Fund at this time. Therefore, in the case of Transportation and Infrastructure spending and Health and Human Services spending, which both rely heavily on Cash Funds and/or Federal Funds, it was necessary to refer to historical expenditures data to put the committee’s proposed appropriations in context, though appropriations and expenditures are not directly comparable. Ultimate expenditures tend to be slightly lower than appropriated amounts.