March 8, 2017

The Roots of Nebraska's 'Fiscal Squeeze'

Michael D. Thomas

Assistant Professor of Economics, Creighton University
Summary

Rather than continuing with this first-come, first-served race to see who gets the resources before they run out, let’s make deliberate choices about how we want to spend our tax dollars. Focusing on the things we need the most — for example, schools and health care — before those very things wind up on the chopping block.

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The $900 million-plus gap in Nebraska’s budget is creating some serious problems for our legislators in the unicameral this year. Budget crunches are not unusual, even in a state that generally makes better fiscal decisions than most. And while Nebraskans may have to fix it, much of the blame should be directed toward Washington and structural flaws in our government, rather than toward our legislators.

The situation has deep roots, and while it is unlikely to improve in the near future, it requires attention. As the federal government shifts the financial responsibility of its own policymaking to the state level, Nebraska is left with less flexibility to meet the needs of its own residents and local governments.

In a paper released by the Mercatus Center at George Mason University, I call this phenomenon the “Fiscal Squeeze,” because it’s leaving us without the ability to truly set our own state’s priorities.

Historically Nebraska has been in a relatively good fiscal position compared to states like Illinois and New Jersey, with their crushing levels of debt and unfunded pension liabilities. We have opportunities for growth and relatively healthy state finances. But when coupled with our own priorities, the Fiscal Squeeze has simply left us with too many new and expanding policy commitments.

The state gasoline tax’s scheduled rise, passed in 2015 to increase revenue, will only cover some of these costs (not to mention road maintenance). On top of this, Nebraska’s demographics have changed. In 2015, persons over 65 years of age comprised 14.7 percent of the population, up from 13.5 percent in 2010.

With this comes an increase in medical expenses due to expanding commitments to citizens over the past decades. This portion of the budget is growing rapidly, even as Nebraska refused Medicaid expansion under the Affordable Care Act. Medicaid alone accounts for 16.7 percent of the state’s budget and is growing by nearly 2 percent a year.

The growth of school spending in Nebraska helps illustrate the dynamic. Originally, schools were a locally funded priority. In the 1960s, budget surpluses and momentum from federal Great Society programs led to a shift from local funding to state funding. This was motivated by a desire to increase funding per student, and that part was successful.

But the change in school funding led to a disconnect. While the state is now footing the bill, local communities continue to decide school policy. When decision-making and financial responsibilities are separated, programs have a tendency to expand beyond what’s financially sustainable.

To fix this disconnect, education decision-makers and the lawmakers holding the purse need to participate in one process. Parental choice, while not purely a budget issue, is a surprisingly effective way to align their incentives. Programs like Omaha’s Tax Credit Scholarship, or changes to the law that accommodate charter schools, increase the efficiency of school finance while helping parents express their own priorities for their children.

What can be done about the Fiscal Squeeze? For starters, Nebraskans need to be assertive about prioritizing the programs that are most important. Making too many promises — sometimes under federal pressure — means some tough budget choices are inevitable.

Rather than continuing with this first-come, first-served race to see who gets the resources before they run out, let’s make deliberate choices about how we want to spend our tax dollars. Focusing on the things we need the most — for example, schools and health care — before those very things wind up on the chopping block.