LINCOLN — Nebraska likely faces a treacherous revenue situation due to the COVID-19 pandemic a new analysis by OpenSky Policy Institute shows, but just how choppy the state fiscal waters get will depend on the severity and the duration of the economic fallout from the virus.
The analysis examines three hypothetical revenue scenarios that are based on the most recent projections for the U.S. economy. In each of the hypothetical scenarios, the projected surplus Nebraska lawmakers were working with prior to recessing in March would disappear and in one of the scenarios, the state would face a shortfall this year that would be too large to be closed with the funds in the state’s cash reserve.
The state’s fiscal scenario could be even more precarious looking ahead to the next budget cycle (FY 22-23). If FY 22 revenues were to decline at the 5% level experienced after The Great Recession and hold steady for FY 23, state revenues could come in between $1.7 billion and $2.7 billion below projected expenditures in the next biennium depending on which of the three scenarios is considered, the analysis finds.
“It’s very possible that the fiscal impact of the virus will force Nebraska lawmakers to make cuts to services that Nebraskans need more than ever or raise new revenues in order to balance the state budget,” said Renee Fry, executive director of OpenSky Policy Institute.
The three scenarios included:
- A relatively short but deep contraction of the economy with a quick rebound, often referred to as a ‘V-shaped’ recovery, in which the Nebraska economy recovers relatively well;
- A longer recession that leaves the state with a nearly $450 million shortfall at the end of the current biennium; and
- A more dire scenario that would leave a shortfall nearing $700 million at the end of the current biennium, which is more than the pre-pandemic cash reserve balance of $510 million.
The recent news that the U.S. economy contracted 4.8% in the first quarter of 2020, its steepest decline in over a decade, along with projections from the Congressional Budget Office that indicate that the U.S. economy will not return to pre-pandemic output until at least 2022 and have sustained unemployment through 2021 of more than 10%, are troubling signs for state revenues, Fry said.
“These signs point to a more dire revenue situation for the state, which means policymakers could be faced with difficult, painful choices,” Fry said.
The analysis also highlights that making cuts to the current budget now — in the middle of the biennium — would be particularly difficult for state agencies to absorb because they have already approved and partially executed their budget.
“For example, mid-biennium cuts could mean schools having to cut non-certificated staff, defer maintenance or even borrow money to cover their obligations, as teachers are already under contract for fall classes,” the analysis notes.
Cuts would also mean significant uncertainty for the University of Nebraska system that has already begun to see effects from the pandemic and strain the already overcrowded and understaffed correctional facilities, the analysis finds.
That Nebraska has a strong cash reserve relative to other states is beneficial, Fry said, but it is still below recommended levels, which could be a liability for the state should the economic fallout from the pandemic be severe.
“If the cash reserve is unable to fill a shortfall, lawmakers will be forced to make cuts to services or find new revenues,” Fry said.
Contact Chuck Brown at 402-610-1522 or cbrown@openskypolicy.org for more information.
