NTF Issue Paper: Legwatch30.doc.  12-04. 
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
THE NEBRASKA STATE BUDGET CRISIS: FY 2004-05. 

BACKGROUND.  The state treasury will finish FY 2004-05 at $154 million below the minimum 3% reserve funding traditionally maintained.  In the FY 06-07 biennium, the projected ending balance is -$118.1 million, $295 million below the minimum 3% reserve.  This horrendous shortfall stems from the $160 million court judgment against Nebraska in the radioactive waste lawsuit and senators spending more than incoming revenues.1  Cash flow will be a major concern in FY 2004-05, as the state attempts to reach the minimum 3% general fund reserve.2  The beginning balance for FY 06-07 will be -$164,962,172, showing a shortfall of $294,747,476.  General Fund appropriations for FY 05-06 will reach $3,086,518,406 and $3,088,762,419 in FY 06-07.  The cash reserve fund status in FY 03-04 was $89,372,790 and will shrink to $66,520,212 in FY 06-07.3  Revenue growth in FY 02-03 comprised 2 of the 3 lowest years in the past 22 years, 11.5% below the historic average, causing FY 03 revenues to fall $310 million less than the average rate.  FY 02-03 final actual revenue receipts were $61 million below forecasts.  The minimum reserve fell from $8.5 million to -$1.3 million.  In fall of 2003, minimum reserves dropped to -$211 million. The NE Forecasting Advisory Board calculates a 4.1% revenue growth in FY 2004-05, below the 22-year average of 5.1%. Senators tried to balance the budget by musical chairs financing, with a cash reserve transfer of $6 million, extending the state sales, income, and cigarette tax hikes of 2002, expanding the sales tax to construction and repair labor, and hiking the liquor tax.4  Nevertheless, projected FY 04 ending balance will set at -$157 million, total shortfall increased to -$315 million.5   

IT’S THE SPENDING!  Spending totaled 3.9% above FY 03-04, or $102.9 million more.  Aid to individuals increased by $196 million over 2 years, an average 10.1% hike.6  Proposed budget hikes for FY 04-05 include 8% more for public assistance, 10% more for Medicaid, 6% more for inmate costs, and 10% more for health insurance, totaling an 8.8% overall hike in spending.7  Small across the board cuts ranged only up to 1%.  74% of all general fund appropriations were exempt from this trimming, such as retirement benefits, state aid to education and individuals, the court system, and legislative council.  Higher ed agencies saw only a .5% trim.8   

STATE AID TO SCHOOLS.  State aid to public schools increased $10.87 million.9  20.4% increased state aid to public schools in FY 06 and 7.6% in FY 07.10 22.4% of the total state budget. State litigation costs to fight the school finance lawsuit filed by the Omaha, Grand Island, and South Sioux City school districts will reach $1.6 million through FY 2005. The att.-gen. office hired outside legal assistance and added 1 staff attorney to fight this frivolous lawsuit.11   Omaha Public Schools state retirement annuities will cost $522,168; other school retirement $599,069.12  Special education funding rose from $7.3 million in FY 03-04 to $15 million in FY 04-05, 5.8% of the total budget, up 104% in 2 years. General funding for the state Dept. of Education administration rose from $803,958,938 to $804,922,495.13 

HIGHER EDUCATION.  University and college funding totaled 15.7% of the FY 04-05 budget.14  NU administration general fund spending zoomed from $393,119,402 in FY 03-04 to $398,617,105 in FY 04-05.15  

WELFARE.  Public assistance rose from $41.1 million in FY 03-04 to $54 million in FY 04-05, 6.9% of the total budget, up 31% in 2 yrs. Medicaid from $16.5 million to $70.1 million, 17.1% of the total budget, up 325% in 2 yrs., and developmental disability aid from $1.75 million to $3.5 million.  The total Health & Human Services budget rose 7.2%.1  General funding for the HHS administration rose from $46,285,945 in FY 03-04 to $47,094,263 in FY 04-05.2  The Dept. of Economic Development used up to $2 million to establish additional group neighborhood homes for seriously mentally ill adults.3  Total HHS mental health housing will cost $1 million, public advocacy travel costs $18,000.4 LB 1089 also provided $6 million to expand community-based services. About 28.5% of all general fund appropriations constitute state aid to individuals.  It is the largest growth area of the budget, with a net increase of 8.9% in FY 03-04 and 11.4% in FY 04-05.  Over the current biennial budget, this expense accounts for ALL the budget growth.5  Childrens’ Health Insurance rose from $9,575,456 in FY 03-04 to $12,510,455 in FY 04-05, a 31% hike in general fund spending!6  Child welfare general fund costs rose from $72,835,826 to $84,456,120 in this 2 yr. period, a 16% jump.  ADC general fund costs rose from $17,330,633 to $29,004,507 in these 2 years, a 67% hike.7  All general fund medical assistance during this period rose from $379,411,081 to $470,355,382, a 24% spiral.8   

STATE SALARIES.  Salary and health insurance costs rose from $24 million in FY 03-04 to $49.6 million in FY 04-05.  61 state employees earn over $100,000 annually.  Of the 15 highest paid, 12 are psychiatrists and 3 are medical directors, all earning between $151,000-$190,000. 13 of these employees work for the Health & Human Services Dept.  The Clerk of the Legislature and the Commissioner of Education, both at $127,000, earn more than NE Supreme Court judges earning $119,000.  Assistant attorneys-general earn $107,000, more than the $75,000 paid the Attorney-General.  The director of the Dept. of Natural Resources makes $114,000 salary, 2 HHS directors over $100,000.  The director of the Investment Council earns $138,000, up $5,000 this year, and the director of the Public Advocacy Comm. over $102,000, neither appointed by the governor, their salaries set by boards or commissions.  The head of the state college system takes home $158,000+, his salary and those of the clerk of the legislature and commissioner of education set by boards.9  Salaries for state personnel have risen 49% between 1993 and 2003.  Annual salaries for state workers in 2003 averaged $33,877, compared to $29,448 in the private sector in 2002. 10  NE Dept. of Economic Development statistics from 10-2004 peg NE per capita personal income at $30,331 in 2003.  The average annual rate of growth in per capita personal income was 5.1% from 2002 to 2003.  In contrast, forecasted state revenues for 2003 stood at 5.6%.  State government income has grown faster than personal income. 

BONUS PAY.  Employee bonus pay rose from $900 to $25,200 in the Dept. of Roads between FY 92-93 and FY 02-03, from $150 to $8,088 in the HHS Dept., and from $0 to $8,050 in the Equal Opportunity Commission.11 

FRINGE BENEFITS. Retirement funding for public school teachers and judges rose from $580,000 in FY 03-04 to $1.7 million in FY 04-05.12 Low returns on defined benefit retirement plans will create a spike in unfunded liabilities and require additional state contributions to the system, an additional $13 million per year.13  Public employee retirement costs from the general fund rose from $15,927,474 in FY 03-04 to $17,048,711 in FY 04-05, a 7% jump.14  State spending for fringe benefits stood at 43% compared to salary, up 3% from FY 03-04.  Sick leave benefits rose almost $1 million, retirement benefits almost $4 million, health insurance over $5 million, and employee assistance programs over $26,000.15  Highest average sick days used were 13.6 at the Electrical Board, 13.4 in the Governor’s Office, and 12.8 at the Public Service Commission.  Highest sick leave expenditures accrued to the HHS Dept., $6+ million, Dept. of Roads, $3.2 million, Dept. of Corrections, $2.5 million, and Dept. of Administrative Services, $1+ million.16  Examining employee assistance expenditures, they have doubled for HHS between FY 96-97 and FY 02-03, tripled for the Supreme Court between FY 92-93 and FY 02-03, doubled for the Dept. of Corrections between FY 92-93 and FY 02-03, and risen from $25,580 to $30,207 for the Dept. of Roads between FY 92-93 and FY 02-03.17  Health insurance costs for employees and state both have more than doubled from 1992-93 to FY 04, particularly for HHS, rose from $7.6 million to $12.9 million in the Dept. of Roads, and spiraled from $4.5 million to $10.6 million at the Dept. of Corrections, from FY 96-97 to FY 02-03.1 The state contribution is 79%; the employee contribution is only 21%.2 

WORKERS COMPENSATION.  Workers compensation expenditures rose from $1.5 million in FY 96-97 to $2.5 million in FY 02-03 for HHS, from $474,367 in FY 92-93 to $1.9 million in FY 02-03 for the Dept. of Roads, and from $266,188 in FY 92-93 to $913,644 in FY 02-03 for the Dept. of Corrections.3 

TRAVEL COSTS.  Travel expenditures by HHS employees rose from $1.8 million in FY 96-97 to $2.3 million in FY 02-03, for the Dept. of Education from $783,648 in FY 92-93 to $1.1 million in FY 02-03, and for the Dept. of Roads from $526,236 in FY 92-93 to $928,760 in FY 02-03.4 

THE BUREAUCRACY.  In the FY 04-05 budget, 36.9% of all general fund appropriations funded all 54 state agencies, whose operations showed an $18.2 million increase.  Salary and health insurance costs here rose 107% in 1 fiscal year, retirement costs for judges rose 300%!5  The Dept. of Property Assessment & Taxation gained $351,500 more in its budget.6  The Equal Opportunity Commission enforcement arm saw its general fund appropriation rise from $1,044,781 in FY 03-04 to $1,207,639 in FY 04-05, a 16% jump.7  Cash fund appropriations for the NE Investment Council Administration rose from $698,224 to $714,245, a 4% jump.8  The Dry Bean Commission salary limit rose from $6,115 in FY 03-04 to $24,950 in FY 04-05, about a 300% hike!9  General funding for thelegislative services-legislative council rose from $6,125,044 to $6,472,874, a 6% jump.10  General funding for the governor’s office rose from $814,294 to $848,252, a 4% hike.11 

HELPING LOCALS.  State aid to local government subdivisions comprised 34% of all general fund expenditures.12  Assistance to local transit authorities rose from $1 million in FY 03-04 to $1,524,088 in cash funding, a 52% spiral.13 

WASTE SITE PENALTY.  A federal court ruled that Nebraska must pay $151 million in damages to the regional waste site compact in 4 installments, plus interest, since Sept. 2002, costs now reaching $160 million.14  The state has appealed this decision to the U.S. Supreme Court, but legal experts expect a losing appeal. 

STATE PERSONNEL.  Examining constitutional offices from 1994 to 2003, employees in the State Supreme Court rose in number by 11% (890-990) and the office of State Treasurer by 300+% (13-48).  Examining state agencies, employees in the Dept. of Administrative Services increased by 13% (447-507), HHS Regulation & Licensure by 23% (271-332), the Dept. of Environmental Quality by 20% (168-202), State Retirement Systems by 55% (29-45), Foster Care Review Board by 68%, (19-32), State Electrical Board by 36% (14-19), and Mexican-American Commission by 100% (2-4).15 

CONCLUSION.  The NE state budget crisis is a train wreck waiting to happen.  The legislature refuses to attack the problem of increased expenditures outpacing incoming revenues, especially in programs, some of them having automatic increases, mentioned in sections above.  Senators will face annual fiscal crises with a growing deficit gap every session, unless they drastically change their spending habits.  Programs accustomed to huge increases in state funding will have to cut their appetites.  We must change our expectations about what we reasonably should expect from state government.  This government will be unable to solve as many problems or meet as many demands as in the past.  Wish lists must shrink.  We must set priorities and adopt a new fiscal attitude.  Give the state auditor independent authority to audit employee health insurance claims and Medicaid spending on major medical expenses and prescription drug usage and to investigate waste and overbilling in welfare services.  The Legislature must set broad limitations on taxing and spending to restrain government growth.  26 states now have tax and expenditure limitations (TELs).  Limit the growth of state government spending to a baseline of inflation plus population growth, with a mandate that Lincoln immediately refund surplus revenues above such limit to taxpayers.  Or, limit growth in spending and taxes to state personal income growth.  However, income grows faster over the years than population plus inflation.  Tax rebate provisions would make it more difficult for state government to spend the excess.  Legislators more simply could cut taxes than handle rebate mechanisms.   

WHAT TO DO.  To learn how to lobby and monitor your state senator, email NTF or write P.O. Box 6452, Omaha, NE. 68106.  Ask for the following issue papers: Legislative Watch, The Nebraska Tax Misery Index, The Nebraska Spending Misery Index, and Prime Cut: Suggested State Budget Cuts. 

Research and analysis for this issue paper done by Doug Kagan and Lee Mimms.  This material copyrighted and notarized by Nebraska Taxpayers for Freedom, with express prior permission granted for its use by Taxwatchers, Inc., Citizens for Local Control, Cherry County Taxpayers, Dawes County Taxpayers, and other groups in the Tax Freedom Network.  12-04.  C