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During the last legislative session I was clear with my concerns about spending levels in our state budget. In the face of lagging revenue receipts and decreased revenue forecasts, the Appropriations Committee and Nebraska Legislature balanced the state budget by transferring $173 million from the state Cash Reserve and sweeping almost $194 million from various Cash Funds to pay for ongoing expenses.
I did not vote for those transfers or to advance that budget from committee, nor did I vote for the budget on the floor. As I stated repeatedly, the next budget cycle would require $367 million in revenue growth just to cover ongoing expenses paid for with one time transfers. That is a pretty deep hole to “grow” out of in the midst of a struggling agricultural economy. At the conclusion of the legislative session in May, a group of my fellow senators and I continued to publicly state our concerns, predicting that a sluggish farm economy and its financial impact on our communities would continue to weigh down state tax receipts.
On October 27, the Nebraska Economic Forecasting Advisory Board (NEFAB) met to update the revenue forecast for the current fiscal year and the 2018-2019 fiscal year. Tax receipts, specifically personal income and sales taxes, have not met the forecast levels in any month since the board last met in April and lowered the revenue projections. Thus, it was no surprise that the NEFAB again reduced the projection for tax receipts to the state General Fund, this time by a total of $224 million over the current budget biennium.
A deeper examination of the details behind the declining numbers presents greater concern. For the current fiscal year, FY18, the NEFAB reduced revenue by $100.4 Million. In the second year of the budget cycle, FY19, the revenue level was reduced by $123.5 million. The revenue declines in sales and income taxes are greater in the second year than the first. The economic models used by the NEFAB to project revenue indicated the need for a steeper reduction with the passage of time. There is no objective evidence to support the claim we will “grow” out of the spending hole the Legislature has created any time soon. On a positive note, corporate income tax receipts were revised upward by $50 million over the biennium.
Here is the scorecard: the budget passed last session plugs a $367 million hole with one time money. If spending restraint is not exercised to accommodate the $224 million revenue downgrade, it will need to be covered by the transfer of more one time money, primarily the Cash Reserve. The next budget cycle would begin with a $591 million gap to fund ongoing expenses.
If the entire $224 million from the current revenue decrease is taken from the Cash Reserve rather than in spending reductions, it would leave $155 million in the state’s “rainy day” fund. Current revenue models have a greater negative impact with time, and the potential exists for an ongoing revenue deficit almost 4 times the size of the Cash Reserve.
The very fact that personal income tax revenues continue to come in below economic projections indicates Nebraska families and small businesses are not earning as much as expected. Lagging sales tax revenues reflect the decreased spending by Nebraska consumers that accompanies those reduced incomes. Any strategy that increases state revenue by taking it from already strapped Nebraska taxpayers, rather than reducing state spending, is illogical.
I believe in the resilience of Nebraskans. Inherent in that belief is the faith that we can strategically set priorities and responsibly address funding needs using evidence and cost/benefit analysis. A quick recovery of Nebraska’s fiscal health depends on it.