In July, the Nebraska Department of Revenue released a final report on General Fund tax receipts for the end of the fiscal year. Despite the Nebraska Economic Forecasting Advisory Board reducing revenue projections at its April meeting, the state still ended the fiscal year on June 30 collecting $34 Million less than predicted. In the event that revenues continue to fall under projections in coming months, the biennial budget passed in May will need to be adjusted. This may require a special legislative session this fall or adoption of adjustments in the next legislative session, depending on the magnitude of any shortfall in the next few months.
In light of these numbers, a review of the budgeting and appropriations process will help citizens of District 38 put these numbers in context. Over the next several weeks, I will address a how budget requests are developed by state agencies, the difference between the budget and actual expenses, and deficit budget adjustments made to a biennial budget after it has been adopted. While I have discussed the biennial budget and appropriations process in previous columns, I want to highlight unique aspects of the state budget from other budgets you may have experience with.
The budget of any state agency consists of appropriations from three types of funds: General, Cash, and Federal. The General Fund budget, over $4 Billion, is funded by income and sales taxes. When most taxpayers think of the “budget”, it is typically the General Fund. Cash Funds are dollars that are collected by an agency as “fees”, usually associated with a specific function. Those fees are intended to pay for the cost of delivering that service. An example would be fees collected by the Department of Agriculture for food safety inspections. Federal Funds are allocated by the federal government to the state for specific programs. Most of these dollars require some portion of state General Fund as a match. The federal portion of Medicaid and federal education dollars are examples.
Nebraska utilizes a “baseline budgeting” process. The philosophy behind baseline budgeting assumes an agency will receive its prior year’s budget in addition to any increases such as negotiated employee salary raises, increases in health insurance premiums, and other inflationary costs. In a typical budget process, the primary task of the Appropriations Committee is to accept or reject requests for new funding. No justification is required for previously appropriated dollars.
The baseline budgeting approach makes reductions to a General Fund budget challenging. Since previous spending is not evaluated for effectiveness and prioritized as part of the request, it is not readily obvious how any reduction may impact specific services. Since previous spending is expected to operate in perpetuity, it is assumed that any increases in employee costs or due to inflation will have to be covered with new appropriations and not within an existing budget.
When submitting their budget requests, state agencies also include budget “modifications”, which are items they identify and offer as potential reductions to their base budget. The Governor provides instruction to state agencies when developing their budgets whether to propose modifications at 5, 8, or 10% of their General Fund budget. Typically, Cash and Federal Funds are not suggested for reduction. In my experience as a member of the Appropriations Committee, these voluntary modifications are generally not helpful. To avoid the possibility of a reduction being adopted, agencies offer politically popular programs or funding that would require a statutory change to reduce. Thus, they are not a sincere attempt at spending prioritization or management of budget growth.
The default of the state budget process assumes the General Fund budget will continue to grow. You may recall discussion about a projected $900 Million shortfall when the legislative session began this spring. That figure assumed the General Fund budget would grow at approximately 6% annually for the two years of the biennium. That projected growth alone comprised over 75% of that figure. A flat budget would have immediately dropped that figure to $250 million without any reductions to spending or increases in taxes.