Open Sky Legislative Update

Four things to know about the budget as we move into debate
1. Low spending growth
Projected General Fund spending for the coming biennium in the budget proposal stands at 1.5%, well below the previous 20-year average of 3.2%. Keep in mind this spending does not take into account $133 million in additional spending cuts agreed upon by the Appropriations Committee and advanced to the floor for debate.

2. Cash fund sweeps
The budget relies on $150 million of additional cash fund transfers into the General Fund. Cash funds have historically only been used during economic downturns to help balance the state budget. The Legislature has tapped into these funds as recently as the 2024 regular and 2024 special legislative sessions, when the state was not facing a shortfall. Reliance on these revenues long-term to balance the budget is not sustainable and not in line with the specific purpose for which cash funds were created. 

3. Rainy day fund withdrawal
Reporting from last week indicates the Appropriations Committee will recommend drawing from the state’s rainy day fund to balance the budget. If the reserve is tapped to the extent reported – $132 million over the biennium – the fund balance will decrease to about 12.5% of projected expenditures at the end of the coming biennium. The rainy day fund is vital to protecting state spending when economic shifts alter what tax revenue comes in.

4. Not out of the woods yet
The following biennium (fiscal years 2028 and 2029) is also projecting a shortfall, in addition to the coming two-year budget. Since the Legislature is considering using spending cuts and cash fund transfers to close this biennium’s budget shortfall, it is limiting its options to protect the state’s finances during an actual economic recession. 

 What’s been done so far
The budget shortfall for the upcoming biennium budget was back in the spotlight last week after less-than-rosy revenue projections from the Nebraska Economic Forecasting Advisory Board on April 25. In total, the revenue forecast for the coming two year biennial budget decreased by $190 million. 

To begin closing the shortfall, Senators pushed two bills across the finish line last week. LBs 645 and 650 contribute about $136 million to closing the $396 million shortfall, leaving just over $260 million yet to backfill. LB 645, introduced by Senator Beau Ballard, at the request of Governor Jim Pillen, made changes to teachers’ retirement plans, lowering state, school district and teacher contributions. It saves the state $84 million over the coming two-year budget. LB 650, introduced by Senator R. Brad Von Gillern, also at the request of Governor Pillen, rolls back recent legislative initiatives and tax incentive programs, closing the budget gap by $52 million. 

Additional ideas have surfaced, including a reduction of funds for the Perkins County Canal and state penitentiary appropriated in recent years, as well as a temporary pause of income tax rate reductions, generating additional revenue by allowing sports betting, and repealing certain sales tax exemptions, but reportedly face an uphill battle in the body. 

Legislators begin debate on the budget today, starting with the biennial budget bill for fiscal years 2026 and 2027. Stay tuned for more OpenSky analysis as the budget progresses through floor debate and onto final passage with a deadline of May 15, or Day 80. 
 

LB 468
Also last week, Senators gave first round approval to a bill slashing the state’s inheritance tax. Nebraska’s inheritance tax generated $94 million in fiscal year 2024, of which all proceeds went to county governments, helping decrease their reliance on property taxes. 

The bill, LB 468, reduces inheritance tax rates for class two and three beneficiaries, who include relatives like nieces and nephews and nonrelatives, respectively. The bill also increases the amount exempt from the tax for all three beneficiary classes. Information handed out during floor debate showed a $34 million reduction to county revenues as a result of the changes. 

Senator Robert Clements, introducer of the measure, sought to offset that county revenue loss through a variety of means, which were amended onto the bill before advancement from first round debate. The myriad offsets include reallocations of current state General Funds to counties through sources like the Insurance Premium Tax and Securities Act Cash Fund, an increase in several fees including marriage licenses and repeal of an ImagiNE Nebraska Act tier and sales tax exemption for data centers. 

The amended version of the bill advanced to Select File still takes $3 million annually out of the state’s General Fund, according to information distributed during General File debate. While Senator Clements indicated that he would work to reduce the bill’s cost to the state, it is unclear whether the bill will be debated again before the end of the legislative session, given the state’s current fiscal challenges.