Pew Testifies on Bill to Provide Long-Term Fiscal Accountability
Nebraska would benefit from budget forecasting and stress testing
Adam Levin, principal associate with The Pew Charitable Trusts’ state fiscal health project, testified Feb. 28 before the Nebraska Executive Board Committee on Legislative Bill 713, which builds on existing fiscal management practices in the state. The legislation would require conducting a budget stress test, which would alternate years with the regular revenue volatility study the state already administers. It also would require creation of a long-term budget every four years.
Levin presented Pew’s research findings, which indicate that the proposed bill aligns with fiscal best practices. He said states that require the study and forecasting of key trends driving state budgets are more equipped to manage revenue and expenditure fluctuations. Levin said that L.B. 713 could support more proactive budget decisions and help to advance Nebraska’s fiscal health.
The full text of the testimony is below.
Pew Testimony for L.B. 713
Provide for long-term accountability from the Legislative Fiscal Analyst
Executive Board Committee
February 28, 2019
Principal Associate, State Fiscal Health Project, The Pew Charitable Trusts
Thank you Chairman Hilgers and members of the Executive Board Committee for your consideration of Legislative Bill 713 and for the invitation to testify.
My name is Adam Levin and I am with the state fiscal health project at the Pew Charitable Trusts. Pew is a public charity that engages in research and technical assistance at the local, state, and federal levels.
L.B. 713 builds on the fiscal management practices Nebraska already has in place. In 2015, Nebraska passed L.B. 33 and joined 10 other states that require regular studies of the state’s revenue volatility. This bill – L.B. 713 – requires the Legislative Fiscal Analyst to alternate the state’s revenue volatility study (in even-numbered years) with a budget stress test (in odd-numbered years). The bill also requires a long-term budget every four years. Producing these regular examinations of the state’s budget represent a positive step toward ensuring Nebraska’s long-term fiscal health.
We are currently in the middle of the country’s second longest economic expansion. If current conditions persist until June 2019, it will be the longest expansion in history. Although anticipating the exact timing, severity, or duration of any recession is difficult, the cycle of expansion and contraction is inevitable. The regular stress test and long-term budget required by L.B. 713 represent a positive step toward ensuring Nebraska’s long-term fiscal health and crafting structurally balanced budgets over the long-term.
A budget stress test helps policymakers better understand how state finances may react to economic shifts and plan for those events. Stress testing budgets includes modeling the likely effects of varying economic scenarios on revenue and expenditures. This approach yields concrete estimates of both revenue shortfalls and spending pressures policymakers can expect depending on the severity of an economic event.
In recent years, organizations including Moody’s Analytics and S&P Global published stress tests of all 50 state budgets. A growing group of states are now conducting their own stress tests to identify potential budget shortfalls. Pew is working with one of these states, Utah, on developing budget stress testing best practices.
Another best practice is to connecting potential deficits that may be revealed in the stress test to the tools available to address them, such as reserve funds. This process allows officials to both anticipate budget gaps and plan ahead to address shortfalls.
Long-term budgets also help policymakers plan for the future. By examining both revenue and expenditure forecasts, states have a more complete picture of their finances. Like budget stress testing, this process allows policymakers to see where potential shortfalls might exist, now and in the future. By identifying structural budget issues before they manifest, officials have the necessary information to make changes that can impact the long-term fiscal health of their state.
Pew’s research on long-term budgeting included a 50-state examination of long-term budgeting practices and legislation. We classified states as participating in long-term budgeting if they project both revenue and expenditures ahead three to five years and require the practice in statute.
A forecast of three to five years allows states to see upcoming budget positions while keeping projections reasonably accurate. Including this practice in statute ensures these analyses are produced regularly and signals a commitment to examining the state’s budget beyond the current budget cycle. L.B. 713 would move Nebraska into the group of 19 states meeting these criteria
Most states conducting long-term budgets do so annually or every other year. This schedule can help identify unexpected challenges. In Maryland, where the long-term budget is produced every year, the document crystallized for state lawmakers that the growing price of teacher pensions was becoming a major expense for the state, which covered the entire cost. This helped spur legislators to negotiate a cost-sharing arrangement with cities and counties, which were the governing bodies deciding teacher salaries and benefits. Although these were long-term costs, a more infrequent long-term budget may not have given policymakers enough preparation time to address the issue.
Nebraska may want to consider tradeoffs associated with producing a long-term budget on a more frequent schedule. Updating these analyses more frequently would allow the state to examine their revenue and expenditures more often and identify any structural budget issues sooner.
Nebraska currently identifies ending balances for the general fund for the current and upcoming biennium in its normal budgeting process. Continuing to do so, and doing so for at least three subsequent years will only bolster policymakers’ efforts to plan for Nebraska’s future.
An economic and demographic analysis in a long term-budget that assesses population trends, inflation, health care costs, and other developments also lends insight into how expenditures like Medicaid will grow in coming years and allows policymakers to evaluate out-year spending pressures against revenue forecasts. Performing scenario analyses and connecting findings to fiscal policy tools also equips state leaders with critical information to stabilize state budgets.
While the ups and downs of the business cycle will continue to pose challenges for state policymakers, there are many fiscal management tools leaders can use to plan for and manage these events. Careful study of the budget and a forward-looking approach to fiscal management—including long-term budgeting and stress testing—can provide the information policymakers need to manage state resources effectively.
Overall, based on Pew’s research, Nebraska’s budget stress testing and long-term budgeting proposals include policies that will help to strengthen Nebraska’s long-term fiscal health.
Thank you, and I am happy to take questions.