As the legislature begins Select File debate on the package of bills that become the biennial budget, there remain a lot of hotly debated ideas and plenty of unknowns. When the Legislature began its work in January, they were facing a $432 million budget deficit, setting up an arduous process of seeking to close the gap while maintaining essential services and raising questions about whether there would be any room for appropriations for new or expanded programs. Significant efforts have been made to narrow the shortfall over the last 76 legislative days, but economic headwinds identified by the Nebraska Economic Forecasting Advisory Board sent the Appropriations Committee back to the drawing board. Here’s where we are and what might happen next.

What they are definitely doing

The Revenue Committee identified a significant need to find additional funding sources and heard hours upon hours of testimony on various ideas. They assembled two priority packages, one of which, LB 650 has already been passed and signed into law. This bill rolled back various tax break programs passed in recent years and is expected to contribute $52 million to closing the gap. The Nebraska Retirement Systems Committee made adjustments to the teachers’ retirement fund that is expected to generate an additional $84 million with LB 645. The Banking, Commerce and Insurance Committee shepherded LB 527 across the finish line as well, which, upon approval from the Centers for Medicare and Medicaid Services, will draw down additional federal funding for health care.

For the third time in the last 12 months, the body implemented significant cash fund sweeps, meaning they will redirect funds earmarked for a specific purpose to fill the gap in the General Fund. These transfers include $8 million from cash funds that support workforce housing development in rural and urban communities (Rural Workforce Housing Fund and Middle Income Workforce Housing Investment Fund) as well as transferring $3 million from a cash fund that helps municipalities and tribal governments to promote economic opportunity and a higher quality of life (Civic and Community Center Facility Financing Act). They also gave first round approval to a $142 million withdrawal from the state’s rainy day fund to balance the budget, which could prove regrettable as the state faces economic uncertainty and as significant federal spending shifts to Nebraska are being debated by Congress.

The Appropriations Committee has also proposed low spending growth – 0.4% over the biennium, compared to an annual 3.2% average over the past 20 years – and several program cuts, including $8 million for public health and no increase for the State Patrol. It remains to be seen whether these often discussed areas will feature prominently as the budget is debated.

Another certainty is that by the time the series of budget bills pass on final reading, the budget will be balanced, as mandated by the Nebraska State Constitution.

What they might do

The Legislature has several options to explore revenue generation to close the shortfall by adjusting various types of taxation. Income tax cuts passed in 2022 were set to be fully implemented in the upcoming biennium, but a proposal, LB 171, would reduce them slightly once more, then hold them at that level, giving the body time to reassess and better understand the impact of various global, national and state economic factors. This would raise nearly $400 million over the coming biennium. Sales and excise taxes are getting a look in LBs 169, 170 and 712, which would remove exemptions on various goods and services as well as raising excise taxes on vape products to generate additional General Fund revenue. Speculation exists that some in the body may be eyeing these funds for additional property tax relief, a stated priority of Governor Jim Pillen in January.

What they likely won’t do

Based on the tone and tenor of floor debate, there seems to be strong opposition to reallocation of any of the $630 million of funding dedicated to the Perkins County Canal that some say is critical to maintaining water availability for agricultural producers in the state. It also seems unlikely that a proposal to allow sports betting in Nebraska will succeed, after being passed over on General File, leaving it likely stranded for the year.

It also seems as if the Legislature will maintain current property tax relief funding levels, rather than reallocate those funds to assume more of the share of K-12 public education, which makes up the largest portion of many property tax bills. There also seems to be little interest in a proposal to freeze property tax relief funds at their current levels rather than allowing them to grow as designed.

To sum up, the strategy to balance the budget appears to be a continuation of low agency spending growth, funds transfers that obscure spending, sweeping cash funds into the General Fund and drawing down the rainy day fund, approaches frequently used to balance the budget since 2022, all while reducing revenues. On their own, each of these budgetary tactics can have merit, but taken together, they pose risks to the state’s long term fiscal sustainability.