A paramount task for the Nebraska Legislature in the current session is to pass a balanced budget, a blueprint for spending in the upcoming biennium that matches up with the money expected to be available.
Senators are working within a unique fiscal outlook this year. The unprecedented Cash Reserve Fund balance was built in part on federal pandemic relief that won’t be there two years down the road.
As a result, long-term commitments made by this year’s Legislature potentially could set the stage for shortfalls in future budget cycles, when a new group of senators will be tasked with the balancing act. Phasing in proposed tax cuts could put future senators in a tough spot by restricting the state’s ability to raise the revenue necessary to support services that Nebraska residents rely on daily.
As budget plans emerge and with decisions on tax cuts pending, here’s a look at some of the aspects of the budget process.
Maintaining a healthy reserve
The state’s minimum reserve is a statutorily-required buffer within the General Fund, amounting to 3% of spending for the biennium. The goal is to set aside cash to accommodate fluctuations in revenue and spending, ensuring that the state has the cash flow to pay its bills from month to month.
Beyond the minimum reserve, the Cash Reserve Fund is often compared to savings accounts and is intended to help the state weather economic downturns. A strong cash reserve, or “rainy day fund,” positions the state to manage future economic uncertainty.
The cash reserve grows when more tax revenue comes in than was projected, or when the Legislature votes to transfer money in. But lawmakers can also agree to draw money out, usually for a one-time investment or to balance the budget in years of a shortfall.
The Legislative Fiscal Office suggests that a Cash Reserve Fund balance of 16% of net General Fund tax receipts is the minimum necessary to provide cushion for economic downturns. An even larger cushion will soften the blow when inevitable shortfalls come about.
The cash reserve is extraordinarily important to the healthy operation of state government, protecting important services for when economic shifts alter what tax revenues come in.
But when tax cuts are passed in one year and phased in at a later time, you’re essentially making promises that you don’t know that you can keep. While this year’s financial situation is rosy, history tells us to beware of thorns known as structural deficits. Out of eight budget cycles from 2004 to 2018, the Legislature faced a budget shortfall in the following biennium six times.
Forecasting Board meets Wednesday
An important milestone in the state’s budget process takes place Wednesday, as the Nebraska Economic Forecasting Advisory Board meets to review revenue projections for the next couple of years, which will help decide how much the Legislature has available to spend in this legislative session.
For the current fiscal year, net receipts reported by the state stand $93 million short of forecast. The trend in tax receipts, coming at a time of high inflation and workforce challenges, indicates that Nebraska’s economy may be cooling off.
Prudent revenue and spending decisions that protect the cash reserve and don’t shift responsibility to future senators are critical to keeping Nebraska on sound financial footing in the future.
Join next week’s budget webinar
Join OpenSky Policy Institute and its partners for a budget webinar at noon on Monday, May 1. Two members of the Appropriations Committee – District 27 Sen. Anna Wishart and District 30 Sen. Myron Dorn – will provide an overview of the state’s budget bills.