New Nebraska Law Puts Focus on Future State Budgets

Stress testing and long-term planning can help ensure strong fiscal footing

New Nebraska Law Puts Focus on Future State Budgets

Nebraska Governor Pete Ricketts (R) signed legislation this spring that strengthens the state’s fiscal health and budgetary foresight. The measure mandates that officials produce regular analyses to inform policymakers about how future economic scenarios could affect Nebraska’s finances as well as the state’s ability to balance its budgets down the road.  

Signed April 24, L.B. 713 requires Nebraska’s legislative fiscal analyst to conduct budget stress tests in odd-numbered years and publish a long-term budget every four years. The state already requires the analyst to examine revenue volatility in even-numbered years. The law thus creates a four-year cycle of proactive fiscal assessments that will give legislators and other officials greater ability to achieve structural budget balance—the consistent matching of ongoing revenue and expenditures over the long term.

Budget stress tests analyze state tax collections and spending under a range of economic and fiscal conditions, both optimistic and pessimistic. The exercises help policymakers better understand whether they will have the necessary assets to pay for critical programs should unforeseen events occur and how they might want to prepare for various scenarios.

“We needed some more tools in our toolbox,” said Senator Tony Vargas (I), sponsor of the legislation. Although the state has incorporated elements of sound budget management practices, stress testing will provide a clearer idea of how much officials should put aside for the future.

“We would have been less likely to have to cut hundreds of millions of dollars in services in these last years, or take from other types of funds, to keep government running if we had a more robust cash reserve,” Vargas added.

The long-term spending plan will further arm Nebraska lawmakers, who produce a budget every other year, with a data-driven understanding of how state finances may fare in coming years. These studies extend revenue and expenditure projections beyond the one- or two-year window under which they are typically done—generally looking three to five years ahead. All states produce revenue projections, but Nebraska, like many others, did not previously do multiyear expenditure forecasts.

Long-term budgets can help illustrate where a state may have structural budget challenges, in part because their extended term makes it more difficult to build in the one-time maneuvers sometimes used to achieve budget balance in a given year.

For Vargas, getting a better picture of potential changes to the state’s finances is a priority. “Our demographics are changing so much,” he said, adding that the state needs to prepare for how these shifts could affect budget items such as K-12 spending, Medicaid, and correctional costs. “Let’s actually start to budget in four years instead of only thinking about the biennium.”

Using the stress testing and the long-term budget in concert with the state’s volatility studies—which provides analysis of tax revenue fluctuations and how they contribute to budget unpredictability—will make Nebraska a leader in ascertaining the impact of economic forces on state finances.

Mary Murphy is a director, Steve Bailey is a manager, and Adam Levin is a principal associate with The Pew Charitable Trusts’ project on state fiscal health.

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