Worst still ahead in budgeting woes

LINCOLN — The sleepless nights in state government aren't likely to end now that Nebraska lawmakers have finished their special budget-cutting session.

Economists and state senators alike predict that budget woes in state government will continue into 2012 and possibly longer, even if the effects of the recession have bottomed out.

That means lawmakers will face more difficult and unpopular choices when they return in January for their regular session.

And there might be more to come in 2011, when they start work on a state budget without federal stimulus money to help balance the books. The current budget incorporates $490 million in stimulus funds.

“I think the worst problem might still be in front of us,” said State Sen. John Harms of Scottsbluff, vice chairman of the Legislature's Appropriations Committee. “We're in an unusual environment today all across America.”

Sen. Lavon Heidemann of Elk Creek, the committee chairman, struck a more optimistic note while acknowledging “there's still work to be done” in future years on budget problems.

“We're still a whole heck of a lot better off than a lot of other states,” he said.

But projections of Nebraska's fiscal future are grim enough to make budget watchers keep popping antacids.

Lawmakers just finished closing a $334 million gap in the 2009-11 budget, required after the state's revenue projections plummeted.

Legislative fiscal staff predict a gap between revenues and expenses in the next two-year budget period, the one ending June 30, 2013.

The gap is expected despite the assumption that state tax revenues will grow at an above-average rate of 7.4 percent annually during those years.

The revenue assumption looks overly rosy in light of a new report from the National Governors Association and National Association of State Budget Officers, based in Washington, D.C.

The report forecasts that revenue collections for the states will remain depressed throughout the current fiscal year and likely into the two fiscal years following. Even then, the report said, states will struggle to catch up with unmet needs.

“The bottom line is that states will not fully recover from this recession until late in the next decade,” said Raymond Scheppach, executive director of the governors association.

The new report parallels scenarios presented by Donald Boyd, a senior fellow with the Rockefeller Institute of Government based in Albany, N.Y.

He said state taxes typically take three years to five years to regain their prior peak following a recession. But this time around, it will be fiscal year 2012 before tax revenues rebound to fiscal year 2008 levels under his high-growth scenario — and longer under the low-growth one.

Nebraska tax collections dropped 4.4 percent from fiscal year 2008 to fiscal 2009. The state's economic forecasting board projects that revenues will fall an additional 1.3 percent in the current fiscal year, which ends June 30, 2010.

History shows that states' worst budget years are about two years after a national economic recovery, especially in states that rely on income taxes for a large portion of their revenues.

Nebraska gets about half of its state revenue from individual income taxes, with sales taxes a close second.

Three-fourths of the $334 million budget gap that lawmakers wrestled with this month stems from a sharp dropoff in individual income tax revenues since April. Job losses, wage cutbacks and people taking losses on their investments contributed to the decline.

Mark McMullen, director of government consulting at Moody's Economy.com, said Nebraska is among the states emerging from the recession now. But he predicted the state won't see employment climb back to 2007 levels until the end of 2011.

“It's really not going to feel like (a recovery),” he said. “It's going to feel like a slog.”

The prospects of continuing budget difficulties have some lawmakers even whispering the “T” word: taxes.

Sen. Jeremy Nordquist of Omaha said taxes would have to be part of the discussion if the state faces repeated rounds of budget cutting. Broadening the sales tax or restructuring the state tax system could be considered, he said.

“Eventually, you cut so deep, we're not going to be able to serve the citizens of Nebraska that well,” he said.

Sen. Greg Adams of York said tax increases are always an option, depending on what the Legislature is willing to do.

So far, lawmakers have not been willing to touch taxes.

The Legislature held the line on taxes during the 2009 regular session, while more deeply hit states enacted tax and fee changes that will raise a combined total of $23.8 billion in additional revenue.

Gov. Dave Heineman's call for the special session did not allow consideration of tax changes. Lawmakers broached the subject only to emphasize their opposition to tax increases.

Harms said lawmakers need to start preparing for worse budget times by looking deeper at state expenses.

He wants a discussion about state priorities and about eliminating programs rather than reducing them.

Speaker of the Legislature Mike Flood of Norfolk said he has no plans to convene such a discussion. He said the cuts made during the special session will help in future years.

“I think we're doing the right things now to get ready,” he said. “By and large, I think we're all very aware of what the environment is like.”

Contact the writer:

402-473-9583, martha.stoddard@owh.com

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