Monster budget gap awaits

LINCOLN -- The end of this year’s legislative session didn’t bring the usual sense of closure to Nebraska lawmakers.

Not with the size of the budget monster that lies in wait when they reconvene next January.

The revenue shortfall is more than 8 percent of estimated state spending for the two-year budget period starting July 1, 2011. In raw numbers, it’s calculated at $679 million.

Put another way, the budget gap is twice as big as the one closed in a special budget-cutting session in November.

It’s more money than the state will spend on the University of Nebraska, state colleges and community colleges combined during the next school year. It’s more than the state’s share of Medicaid for a year.

Closing all state prisons would take care of only 25 percent of the problem. And state aid to K-12 schools would have to be cut by two-thirds to close the gap.

“To me, I don’t feel any relief with this session being over,” said State Sen. Greg Adams of York, the Education Committee chairman. “There’s this constant looming problem ahead of me.”

The shortfall can be traced to the national recession, which caused Nebraska tax revenue to drop for two years in a row.

To balance state ledgers during the budget period ending June 30, 2011, lawmakers relied heavily on the state’s cash reserve fund and federal stimulus dollars. They also dipped into many other cash funds.

Those measures avoided deeper spending cuts, although they did not forestall all cuts. Budgets for most state agencies and aid programs were cut 7 percent across the board, and others sustained targeted cuts.

But the stimulus dollars end in 2011, and most of the state’s cash funds have been drawn down as much as possible. The result is a “cliff effect,” created when one-time sources of revenue disappear.

The only remaining cushion is the state’s cash reserve fund, which legislators have carefully guarded. It is expected to have a balance of about $320 million heading into the new budget period.

Sen. Lavon Heidemann of Elk Creek, the Appropriations Committee chairman, estimated that about $270 million of the reserve could be used, enough to make a substantial dent in the shortfall.

To deal with the rest of the problem, he and other senators have pledged to spend the months between now and January looking at what might be done.

Heidemann said he expects that lawmakers will try to cut their way out of the budget problem. He doesn’t anticipate much appetite for raising taxes but said they will look at the gamut of ideas.

“We will look at everything, where our money goes, where our money comes in from,” he said. “Everything’s on the table.”

Lawmakers will have to negotiate their way through political and legal obstacles in making budget decisions.

Gov. Dave Heineman said last week he expects growth rates for school aid and Medicaid to force the state to make a choice. He said he would put the priority on school aid.

“The education of our children is critical to our future,” he said. “We can’t grow without education.”

But Adams and Heidemann said school aid will have to be part of the solution, given that it makes up more than 25 percent of the state budget.

The federal health care law also may limit the state’s options on Medicaid.

The law bars states from cutting eligibility for Medicaid or raising costs to patients until the new health insurance exchanges are up and running.

On the other hand, Congress is debating an extension of federal Medicaid assistance to states, which would help Nebraska’s budget situation.

A critical issue will be what happens with state tax collections in the coming months.

The $679 million shortfall was calculated using five-year historical averages for tax revenue growth. Under that method, revenue is projected to increase 7.2 percent in each year of the new budget period.

But many observers worry that those averages will prove overly optimistic for this recession.

If tax revenues increase at a slower pace, the budget monster would grow and the budget decisions become more difficult.

Contact the writer:

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

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