1995-1996: Review

Governor Ben Nelson launched a variety of initiatives in the 1995 Session, but for those involved in public education two bills would stand out above the rest.  LB 613 (1995) would reduce existing spending lids for local governments by 1%.  The measure eliminated the sunset clause on the zero percent lid provision, which required an initial 75% affirmative vote in order to access the normal spending lid provisions.  Changed the base spending lid from 4% to 3% and lowered the growth range from 4-6.5% to 3-5.5%.  LB 742 (1995) capped appropriations for special education services.  Between the two bills, only LB 613 would directly modify the school finance formula, in terms of amending the TEEOSA itself.  But both bills would directly impact the public school finance system on the whole, and both bills would lead to further changes in years to come.

Also in 1995, the Legislature passed LB 490 (1995) to create the Tax Equalization and Review Commission, a body comprised of three appointed members (a fourth member would be added in 2002).  The commission would have the power and duty to hear and determine appeals of decisions of county boards of equalization concerning the equalization of real property, the granting or denying of tax exempt status for real or personal property, and other decisions of local boards.  LB 490 would also empower the commission to hear and determine appeals of various decisions of the Property Tax Administrator, a newly created position.  The companion piece to LB 490 was LR 3CA, a constitutional amendment to eliminate the Board of Equalization and replace it with the TERC.

LB 542 was passed in 1995 related to federal impact aid.  The measure required back payment of state aid to those districts that were denied certain amounts of aid for the 1990-91 school year.  The back payments were contingent upon the passage of corresponding federal legislation by October 1, 1995.  A provision was added under LB 542 to ensure that the Department of Education would actually make the back payments to applicable districts once the legislative and legal entanglements surround the impact aid issue were resolved.

LB 840, passed in 1995, represented a significant policy change in that, for the first time, financial incentives for reorganization would be built into the school finance formula.  The measure provided a phased-in formula to distribute state aid to reorganized school districts.  In the base year of reorganization, state aid would be calculated so the reorganized district receives the greater of 100% of the state aid the districts involved in the reorganization would have received in the prior year or the amount the reorganized district would be entitled to receive.  The guaranteed percentage decreases to 66% in the second year and 33% in the third year.  The total amount of aid distributed to reorganized districts under the incentive program was limited to the amount of hold-harmless aid distributed in 1994-95.  This limited the additional aid to reorganized districts under the bill to $2.9 million.

The 1996 Session produced some of the most important legislation in the history of the State of Nebraska, its local governments, and its taxpayers.  By the end of the session, school districts, educational service units, and all other political subdivisions, would be faced with statutory property tax levy limitations, and taxpayers would be given the impression that their property tax bills would be reduced.

LB 1114 (1996) imposed levy limitations for school districts such that, for FY1998-99 through FY2000-01, school districts and multiple-district school systems would be limited to a maximum $1.10 general and special combined levy authority.  For FY2001-02 and all future fiscal years, the school levy limit is $1.00.  ESUs were reduced to a 1.5¢ levy authority effective FY1998-99 and beyond.  Levy exclusions were provided to school districts for:  (1) amounts levied to pay for sums agreed to be paid by a district to certificated employees in exchange for voluntary termination of employment (early retirement); (2) amounts levied to pay for special building funds and sinking funds established for projects commenced prior to April 1, 1996 for construction, expansion, or alteration of school district buildings; (3) amounts levied for judgments against a district to the extent such judgment will not be paid by liability insurance; (4) amounts levied for preexisting lease-purchase contracts approved prior to July 1, 1998; and (5) amounts levied for bonded indebtedness.

LB 299 (1996) imposed stringent spending limitations on school districts in order to prepare them for the reduced revenue sources upon the implementation of the levy limits.  The measure imposed a 2% lid, plus growth in student population, for FY1996-97, and a 0% lid, plus student growth, for FY1997-98.  Lid exclusions to the temporary spending limits included:  (1) Expenditures for special education; (2) budgeted expenditures for capital improvements financed by the proceeds from a bond issue, appropriations from a sinking fund, or any other means; (3) expenditures to all retire bonded indebtedness; (4) expenditures in support of a service which becomes the subject of an interlocal cooperation agreement or a modification of an existing agreement whether operated by one of the parties to the agreement or an independent joint entity for two fiscal years beginning with the first budget adopted after the agreement or modification is signed; (5) expenditures to pay for repairs to infrastructure damaged by a natural disaster which is declared a disaster emergency under the Emergency Management Act; (6) expenditures to pay for judgments, except orders from the CIR, obtained against a school district which require or obligate a school district to pay such judgment, to the extent such judgment is not paid by district liability insurance; and (7) expenditures to pay for sums agreed to be paid by a school district to certificated employees in exchange for a voluntary termination of employment.

In 1996, the Legislature passed LB 1050 (1996), the most comprehensive and substantively important pieces of legislation concerning the school finance formula since the implementation of the Tax Equity and Educational Opportunities Support Act in 1990.  It would mark some major policy changes in relation to the original formula, and would become a precursor to more significant changes a year later.  It would cause divisions among rural and urban interests, and heavily equalized schools versus non-equalized schools.  It would also represent one of the more contested legislative battles of the 1996 Session.

LB 1050 capped the income tax rebate at the 1992-93 appropriation level and proposed to determine the allocation of rebate funds to individual districts based on a statewide allocation percentage applied to the income tax liability of each district.  The income tax rebate would be capped at $102,289,817 (less $16.9 million for option aid) in 1996-97 and thereafter.

LB 1050 reduced the effect of the minimum effort provisions on districts with very low valuations.  The old minimum effort provisions prohibited districts from receiving equalization aid in amounts that would reduce their levy to less than 60% of the local effort rate.  Because the previous year's cost data was used, the interaction between minimum effort and extremely low valuations caused some districts to lose aid, making it difficult to elevate spending and educational opportunities to the level of other districts in their tiers.  Under LB 1050, qualified districts would be allowed to retain additional aid according to the following calculation:  (60% of the local effort rate) x (40% of the average adjusted valuation per formula student - the adjusted valuation per formula student) x (the district's formula students).  To qualify, districts would need to have an adjusted valuation per student of less than 40% of the average statewide adjusted valuation per student.  If the general fund tax request were not equal to at least 90% of the yield from the local effort rate or the districts general fund operating expenditures were over 15% above the target budget level, the district would not qualify the next year.

Under LB 1050, the option hold harmless provisions were eliminated and replaced with a net option system.  The measure also provided for reorganization incentives for school district reorganizations that move students into lower cost tiers.  LB 1050 changed the method used to adjust valuation.  Under LB 1050, the source year for LB 1050 moved the adjusted valuation back one year, so adjusted valuation used to calculate aid is for the property tax year ending during the school year immediately preceding the school year in which aid is to be paid.

At the 1996 General Election, Nebraska voters rejected two initiative measures proposed by the Nebraska State Education Association and the Nebraska Farm Bureau.  Initiative 411 proposed to make "quality education" a fundamental constitutional right of each person, make "thorough and efficient education" of all persons between the ages of 5 and 21 in the common schools the "paramount duty" of the state, and directed the Legislature to establish a school finance system that provides for "thorough education" in "efficiently operated public schools."  Initiative 412 proposed to create constitutional property tax levy limits for various governmental subdivisions, including school districts, which could be exceeded by a majority vote of the voters.

Both Initiative 411 (education provisions) and Initiative 412 (revenue provisions) were defeated at the November 5, 1996 General Election by 3-1 margins.