The Legislature is conducting first-round debate on the Appropriations Committee mid-biennium budget proposal today. The budget proposal maintains funding for K-12 education and a healthy cash reserve while increasing salaries for state employees and reimbursement rates for some Department of Health and Human Services (DHHS) and corrections service providers. Some have raised concerns that the budget doesn’t do enough to support underserved communities in the state.

The proposal also allocates a considerable amount of funding for new legislation. How policymakers choose to use those funds could have major fiscal ramifications for our state in the future. Below we take a closer look at the committee’s proposal.

Surplus likely caused by one-time factors 

A combination of factors – including revenues continuing to come in above projections – led to a $775 million increase in funds available for the current biennium. The Appropriations Committee budget proposal, however, uses $349 million of that to fund:

  • Salary increases for state employees, including 20% raises for high-demand positions, 30% raises for some health care professionals and 2% increases for other state employees;
  • Increased provider rates for some DHHS and Corrections services providers; and
  • The STARWARS lake proposal.

The committee’s budget proposal leaves $454 million in this fiscal year for lawmakers to pass new legislation, including new tax and spending measures.

The committee proposal notes on page 2 that the factors leading to a surplus are likely short-term occurrences. The budget notes the massive influx of federal relief dollars – roughly $24 billion – that has flown into the state since the pandemic started, and acknowledges that this influx has played a key role in robust tax collections. The rise in revenues sparked by the federal funds “is also likely to be temporary leading to low growth or a decline in revenues over the next 2-3 years,” the report noted.

Budget leaves a healthy cash reserve balance

The budget calls for about $513 million to be withdrawn from the cash reserve this year, which is comparable to the $530 million in cash reserve fund expenditures called for in the governor’s budget proposal. The committee and governor both call for $175 million in cash reserve funds to go toward the construction of a new prison. A major difference between the two proposals relates to the Perkins County Canal Fund. The governor’s proposal calls for $400 million in cash reserve dollars to go towards the project while the committee proposal would only put $53.5 million toward it. The committee proposal also would transfer cash reserve dollars to several other funds, projects and initiatives that did not receive cash reserve funds in the governor’s proposal including efforts to increase middle-income housing, rural workforce housing and internships in Nebraska.

The budget would leave the cash reserve balance at about $1.3 billion – which is about 22.8% of general fund receipts. This is above the recommended level of 16% of general fund receipts but the committee chair has expressed a desire to have a strong cash reserve given future uncertainty around state revenues.

K-12 funding growth unlikely to keep up with inflation

While the budget does fully fund K-12 education – the largest item in the state budget – in accordance with the state’s school finance formula, K-12 funding in the committee proposal actually decreased in FY 2021-22 compared to the prior year. The budget proposal also shows that K-12 funding growth is projected to grow slowly in the next two fiscal years, 2.3% in FY 2022-23 and 1.3% in FY 2023-24. This low funding growth is being caused in part by rising property valuations, which, under the K-12 formula, reduces the amount of aid schools receive. This level of growth is unlikely to keep up with inflation – which was 7.9% in February – and could leave schools faced with having to cut services or raise property taxes just to keep up with costs that rise due to inflation. Funding schools at this low level also means the state can direct state dollars to different initiatives including several tax-cut proposals before the Legislature.

Future impact of current bills could create significant budget issues

It’s certainly welcome news that the committee was able to allocate a considerable amount of funding to enact new legislation this year – particularly as many current lawmakers have endured several lean budget years over their tenures.

How lawmakers choose to use these dollars will, however, have major fiscal implications for the state moving forward. The Legislature’s current General Fund Financial Status projects that the state will have a $490 million budget surplus in the next biennium. It also shows, however, the state would instead be faced with a $288 million shortfall instead of a surplus if the bills currently on first- or second-round debate – which includes several major tax-cut proposals – are enacted.

Given that the current surplus is likely based on one-time factors like a massive influx of federal relief dollars, it will be important to exercise prudence in the use of the surplus. If allocated wisely, these dollars will help the state make key investments that promote the good life for all Nebraskans while simultaneously preventing future Legislatures from having to cut services or raise taxes and fees to balance the books.

The budget debate is being streamed live by Nebraska Public Media.