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The past week the Revenue Department released the certified report for state revenue during July, the first month of the 2017 fiscal year. Tax collections were $7.6 million below the level projected in April by the Nebraska Economic Forecasting Advisory Board. This is the third consecutive month in which revenues did not meet projections since the Board lowered revenue expectations in April. This trend raises the possibility of modifications to the budget enacted during the past session that became effective on July 1st. Concluding my discussion over the past few weeks of the budget process, this week I will address how the budget can be modified after its adoption as law.
The state budget covers a two-year funding period, known as a biennial budget. Developed during 90-day legislative sessions held during odd numbered years, the budget covers two fiscal years that begin July 1 of each year. Although state dollars are appropriated to a specific fiscal year, it is general practice that funds not spent in the first fiscal year, known as reappropriations, roll over into the second fiscal year of the biennium. Adopting a balanced budget and meeting the statutory minimum reserve levels are required at the end of the two-year period, not at the beginning of the budget cycle, at the end of each fiscal year, or each month throughout.
The General Fund portion of the state budget is built to meet the revenue the state is predicted to collect by the Nebraska Economic Forecast Advisory Board. The revenue forecast is based upon analysis of economic models that attempt to predict consumer behavior, earnings of Nebraskans, and economic conditions both locally and nationally. If revenues do need meet forecast, spending must be reduced or money must be taken from other sources, like the rainy day fund, to make up the difference. Revenues in excess of forecast are automatically transferred to the Cash Reserve.
Although a budget is developed and adopted on a biennial basis, the “off year” involves the development and adoption of a “deficit budget”. This does not mean that the budget is allowing spending by the state in a deficit balance, but rather that modifications are being made to a previously adopted budget. Special sessions can also be called to modify an existing budget.
In theory, off year adjustments to the budget would only address unforeseen expenses, differences from the revenue projections, and statutory changes. However, in recent years the deficit budget process has expanded to include new spending and additions to the base appropriations of some agencies. The expansion of this practice is more political than pragmatic. Deficit requests made to a previously adopted budget can obscure the total increase in spending an agency may request by breaking it up into two smaller requests, one at the beginning and one the second year of the biennium.
As was seen with LB 22 at the beginning of the last session, a deficit budget bill can be a vehicle to decrease spending to meet lower revenues. With the exception of state aid to K-12 public schools, agencies receive their appropriation in equal installments from the Department of Administrative Services at the beginning of each quarter of the of the fiscal year. If the distribution has already been made for the quarter, any reductions will be taken from the remaining distributions. For example, if a deficit bill passed in the next session were to reduce an agency’s appropriation by 4%, it would all be taken from the remaining quarter of the fiscal year, meaning the agency would receive only 21% of its original appropriation on April 1st, rather than 25%. In contrast, if the same 4% reduction were taken in a special session in October, a smaller reduced distribution would take place over the last two quarters of the year, with each being 23% of the original appropriation.
Since the state budget is a plan for spending, the plan changes as state revenues and government program needs change. This flexibility is needed, but should not be abused for political gain. The dynamic nature of the appropriations process requires careful attention by lawmakers and taxpayers alike.