Other Legislation Amending TEEOSA in 1997

Without question the education bill receiving the most interest and scrutiny during the 1997 Session was LB 806, the comprehensive school finance legislation.  The Legislature did, however, devote a considerable amount of time to other education and education-connected proposals.  There were bills that seemingly had nothing to do with school finance, yet had, after further review, a collateral impact on funding for public education.  For instance, there was the controversial income tax reduction bill (LB 401), part of the Governor's political agenda, which would necessitate a revision to applicable school finance laws.  There were also bills having a distinctly education-oriented policy objective that crisscrossed through or near by the provisions of law containing the school finance formula, thereby necessitating appropriate changes to these provisions.  And there were technical "cleanup" bills.  More education-related, technical-oriented bills than usual were passed in the 1997 Session, each having an impact on the formula to one level of significance or another.

Not unlike the well-known LB 806, each of these lesser known or remembered bills has a story unto itself, and each story amounts to a building block to the overall history of the current public school finance system.  Therefore, each of these bills deserves mention, albeit briefly, in order to construct a complete historical record.

For purposes of classification, the eleven bills discussed below are divided into two segments.  The first involves those measures referred to the Education Committee for disposition, and the second involves those referred to the Revenue Committee or Government Committee.

Sources:  Legislative Bill 345, Legislative Bill 347, Legislative Bill 713, Legislative Bill 865, Legislative Bill 269, Legislative Bill 270, Legislative Bill 271, Legislative Bill 342, Legislative Bill 397, Legislative Bill 401, Legislative Bill 595 (1997). in Laws of Nebraska, Ninety-Fifth Legislature, First Session, 1997, Session Laws, comp. Patrick J. O'Donnell, Clerk of the Legislature (Lincoln, Nebr.: by authority of Scott Moore, Secretary of State), passim.

First Segment:  Legislation referred to the Education Committee

Recodification Bills

In 1996 legislation was introduced to re-codify Chapter 79 of the Nebraska Revised Statutes, which embodies the bulk of all public education-related laws.  The purpose of the recodification effort was to reorganize existing law, without making too many substantive changes, in order to provide a more logical order of various articles and sections of law.  The 1996 recodification package actually included four bills:  LB 900 (1996), LB 1014 (1996), LB 1015 (1996), and LB 1016 (1996).  The first of these bills, LB 900, contained the overall structural changes in terms of renumbering articles and sections along with some minor, technical revisions to existing law.  LB 1014, LB 1015, and LB 1016, on the other hand, embodied some of the more substantive changes to various statutes.  Only LB 900 would successfully traverse through the legislative process and pass into law in 1996.

At the start of the 1997 Session there was unfinished business as it related to the recodification process.  Accordingly, LB 345 (1997) was introduced to incorporate the original provisions of LB 1015 (1996).¹  LB 346 (1997) was introduced to incorporate most of the original provisions of LB 1016 (1996).²  And LB 347 (1997) was introduced to incorporate the original provisions of LB 1014 (1996).³ Only two of the bills, LB 345 and LB 347, would actually amend various parts of the school finance formula.

Senator Ardyce Bohlke sponsored all three pieces of legislation in her capacity as Chair of the Education Committee.  The public hearing for all three bills was held on January 27, 1997.⁴  The principal witnesses were Thomasin Barry, legal counsel for the Education Committee, and Larry Scherer, a consultant hired by the Legislative Council to perform the bulk of the recodification effort.⁵

Among other provisions, LB 345 clarified language regarding school funds, school governing bodies, and voters.  New definitions were added for school lands, permanent school fund, and temporary school fund.  School lands were defined as those lands owned or acquired by the state in trust for the support of common schools.  The permanent school fund was defined as that which holds and invests the principal from lands that are sold and other sources in perpetuity for the support of the public schools.  The temporary school fund was defined as the holding fund for interest, dividend, and other income.  The entire balance of the temporary school fund would be used for the support and maintenance of the common schools annually or at time intervals specified by the Legislature.⁶

The definition of legal voter was rewritten for the purposes of Chapter 79.  The existing definition defined legal voters as "all who are eligible to vote at an election for school district officers."  The new definition under LB 345 clarified that a legal voter would be a voter who is properly registered and domiciled in a precinct or ward that lies in whole or in part within the school district.  Those performing the recodification found numerous instances where different sections inconsistently used such terms as "elector," "qualified voter," and "registered voter."  Therefore, throughout the bill these terms referring to voters or electors were replaced with the term legal voters, including one applicable section within the school finance formula.

LB 345 was passed by the Legislature on March 4, 1997 by a 44-0 vote.⁷  Governor Nelson signed the legislation into law on March 10th.⁸

The purpose of LB 347 (1997) was to eliminate obsolete sections and provisions, correct statutory references, transfer language among different sections, harmonize various provisions, and update terminology and sentence structures.  It was the lengthier of the three trailer bills but contained fewer substantive changes.  The pertinent changes to the school finance formula involved the removal of all references to the county nonresident high school tuition funds.  These funds were effectively rendered obsolete by July 1, 1993 when the affiliation process had been completed.⁹ The funds were used by Class I (elementary-only) districts to allocate funds to applicable high school districts for high school tuition paid on behalf of students residing within the Class I district.

LB 347 was passed by the Legislature on March 4, 1997 by a 44-0 vote.¹⁰  Governor Nelson signed the legislation into law on March 10th.¹¹

State Aid Certification Date

Introduced by Senator Bohlke, LB 713 (1997) had the singular mission to change the state aid certification date from July 1st each year to December 1st each year.  The certification date is the date by which the department must let school districts know what their state aid will be for the following school year.  This date had already been set and reset several times, and would change again in subsequent legislative sessions.

The principle reason for moving the date was to permit local school boards more time to establish their district budgets based upon the amount of projected revenue and state aid.  School boards also had to be cognizant of the April 15th deadline to file reduction-in-force (RIF) notices to certificated staff.  It was believed that by changing the certification date to December 1st there would be a more logical timeline of events and deadlines for boards to meet.

The Nebraska Association of School Boards (NASB) was a key supporter of changing the certification date.  John Bonaiuto, the association's executive director, testified at the public hearing for LB 713:

We have been trying to address school board members' concerns about making decisions in the dark, if you will, looking at the budget cycle, not knowing what their state aid certification and final numbers would be until mid-June when the reduction-in-force date is April 15 and so, for the longest time, not being able to come up with a better idea, we had this notion that we needed to move that reduction-in-force date to some time later or after the session.  By certifying the state aid earlier, we will address that issue.¹²

Bonaiuto said the legislation would facilitate better budget preparation and more informed decisions by local boards and school administrators.

The change in certification date would become operative beginning with the 1998-99 school year, which meant NDE would first use the new provision to certify state aid by December 1, 1997.¹³  In order to facilitate an earlier certification date, several adjustments also had to be made in the computation process.  The definitions of "general fund operating expenditures" and "transportation allowance" were amended to reflect changes necessary to provide data for the earlier certification.  Beginning in school year 1998-99, general fund operating expenditures and the transportation allowance would be calculated by using data from the school year immediately preceding the most recently available complete data year, adjusted by the average annual change in each district's general fund operating expenditures or transportation allowance for the two school years immediately preceding the most recently available complete data year.  However, for the final calculation of state aid, the general fund operating expenditures and the transportation allowance would be as reported in the annual financial reports (AFRs) from the most recently available complete data year.¹⁴

As an example, using this process for the 1998-99 calculation of state aid with a December 1, 1997 certification date would designate the data from the 1995-96 school fiscal year as the "most recently complete data year."  The two-year averaging process would then include the two school fiscal years preceding the most recently complete data year (i.e., 1993-94 and 1994-95).

The legislation also added clarification for calculation of other actual receipts, for purposes of computing district resources, to indicate the correct data source for the earlier certification.  The other actual receipts would be equal to the district's other actual receipts from the school year immediately preceding the most recently available complete data year, adjusted by the average annual change in each district's other actual receipts for the three school years immediately preceding the most recently available complete data year.  However, for the final calculation, other actual receipts would be as reported in the district AFRs for the most recently available complete data year.¹⁵

LB 713 certainly could not be classified as a technical bill given the substantive changes, but it was treated nearly the same way throughout the legislative process.  Technical bills rarely receive much debate or attention, and neither did LB 713.  The bill sailed through the first and second rounds and passed by a 42-0 vote on March 21, 1997.¹⁶  Governor Nelson signed the bill into law on March 26th.¹⁷

Special Education Funding System

LB 865 (1997) was ostensibly introduced to delay the action of previous legislation to change the mechanism by which school districts receive funding for special education services and programs.  In 1995 the Legislature passed LB 742, which, in part, proposed to eliminate the existing cost reimbursement system for special education services in favor of a new "identification and program neutral" funding system.¹⁸  LB 742 (1995) established a sunset date of August 31, 1998 for the old system, which meant implementation of the new system beginning with school year 1998-99.¹⁹ As directed by LB 742, the Special Education Accountability Commission did indeed study various proposals, including a grant-based system, and did seek public input on the matter.

However, one year after the passage of LB 742, the Legislature embarked on a mission to resolve the property tax issue and imposed levy limitations and strict spending limitations on political subdivisions, including school districts.  The levy and spending lid bills of 1996 (LBs 1114 and 299) necessitated a rethinking on plans to add another layer of change on schools concerning special education funding.  There was a concern that the timing would not be right, particularly since the full impact of the new limitations had yet to be realized.²⁰

Accordingly, the Education Committee introduced LB 865 in 1997 in part to delay the implementation of a new funding system until the beginning of the 1999-2000 school year.  The old system would win a one-year reprieve and then automatically sunset on August 31, 1999.²¹  In fact, the old system would win a permanent reprieve during the 1998 Special Session, when it was decided to leave the cost reimbursement system in place.²²

By extending the life of the old special education funding system for another year, LB 865 also extended the existence of one of the more bitterly won compromises with regard to special education issues.  Once again the vessel of controversy was LB 742, the year 1995.  The Legislature was heavily divided between those who wished to dramatically limit state appropriations for special education services and those who pleaded, quite literally, for compassion to those affected by spending reductions.  Ultimately, the body decided upon a compromise whereby a 2.5% spending lid on state appropriations for special education would be imposed for 1996-97, and a 3% spending lid on appropriations for 1997-98 and thereafter.²³  The underlying caveat to this arrangement, however, was that LB 742 also proposed to sunset the existing funding system on August 31, 1998.  This meant the sunset date applied as much to the lid on appropriations as it did to the existence of the funding system itself since the two issues were intertwined.  Under LB 865, the 3% growth factor for state appropriations to special education would continue through the 1998-99 school year.²⁴

While delaying the change in funding systems may have been the primary objective under LB 865, it certainly was not the only objective.  LB 865 implemented changes to the state's special education provisions that resulted from meetings and discussions conducted by the various special education entities, including the Nebraska Association for Special Educators and the Special Education Accountability Commission.  Many of the changes were among the discussion items of an interim study conducted during the fall of 1996.²⁵

One of the themes for the changes under LB 865 had to do with the perception among some lawmakers that school districts may have over-identified students with special education needs.  This theme was particularly present in 1995 during the debate on LB 742 and had carried through to the 1997 Session.  Accordingly, a good portion of LB 865 attempted to address this issue.  The legislation required NDE to adopt guidelines, prior to August 1, 1998, in order to assist schools, ESUs, and cooperatives with the assessment, identification, and verification of the need for related services.²⁶  The term of art, "related services," included developmental, corrective, and other supportive services, including speech pathology and audiology, psychological services, physical and occupational therapy, recreation, and medical and counseling services.²⁷ The idea was that any changes in verification criteria suggested in the guidelines might result in a decrease in expenditures for school districts and, ultimately, the state.

And while LB 865 appeared to promote savings to government at one end, it seemed to promote expenditures on the other end.  The legislation established a new category of services that would be eligible for reimbursement as a special education allowable reimbursable cost.  Beginning with the 1997-98 school year, public schools, ESUs and cooperatives may provide "support services," which means preventive services for students not identified or verified as having a disability but who demonstrate a need for specially designed assistance in order to benefit from the school's general education curriculum.²⁸ The State Board of Education was given authority to determine a percentage of the cost of such support services that would be reimbursable to education entities providing the services, so long as it did not exceed 10%.  This was not exactly a major commitment on the part of the state, and the bulk of the cost would fall upon the general education budgets of the districts and ESUs wishing to participate - the same entities beset by budget cutbacks due to severe spending lids and pending levy lids.

LB 865 also authorized the awarding of grants from the Education Innovation Fund (from state lottery proceeds) for programs for students with disabilities receiving special education services and students needing support services.  Eligible programs must demonstrate improved outcomes for students through emphasis on prevention and collaborative planning.  The bill also provided that any grants received from the fund would not be included when determining the actual special education receipts for purposes of calculating school district formula resources.  The intent to exclude these amounts necessitated a change in the school finance formula concerning other actual receipts.²⁹

The special education bill of 1997 was substantially less controversial than LB 742 in 1995.  LB 865 progressed through the legislative process without much fanfare and passed on June 4, 1997 by a 48-0 vote.³⁰  The Governor signed the bill into law on June 10th.³¹

Second Segment:  Legislation referred to the Revenue Committee

Property Tax Relief Package Revisions

LB 269 was introduced by and referred to the Revenue Committee, which was lead by Senator Jerome Warner.  The importance of LB 269 was dramatized by the special status conferred upon it by Speaker Withem in the 1997 Session.  The Speaker designated the legislation a "major proposal" or what is commonly known as a "super" priority bill.³² The measure had previously been designated an individual priority bill by Senator Warner - sadly, the last such priority designation the senator would make prior to his death on April 20, 1997.

The intent of the legislation was to make some necessary revisions to the 1996 property tax relief package, including LB 299 (spending lids), LB 1114 (levy lids), LB 1085 (levy setting procedures), and LB 1177 (Municipal Equalization Fund).  Some of the changes were of a substantive nature, but most fell into the category of technical cleanup.  Noteworthy were changes in the property tax levy limit for community colleges and changes to the Municipal Equalization Fund's eligibility and distribution formula.

LB 269 amended the Nebraska Budget Act to provide that budget documents filed with the State Auditor by September 20th need to contain an amount of property taxes to be levied, rather than just the rate itself.  The levy setting deadline was changed to October 31st.  It also struck a provision prohibiting the setting of a levy which would generate more money than the budget requires, and replaces it with a requirement that the levy generate no more than 1% greater or lesser than the property tax requirement.³³

On the issue of levy setting itself, LB 269 amended existing law to delay the final levy setting date for the county board of equalization from October 15th to November 1st and required the board to set levies certified by other political subdivisions only if the levy is within the limit of the law.³⁴  The bill also provided that the levy setting requirements do not apply to bond levies, and that the clerk of the county where the office of the political subdivision is located is responsible for the preliminary levy, rather than all the counties jointly.³⁵

Some of the major substantive provisions of LB 269 related to community colleges.  The bill changed the levy limits for community colleges from 8¢ per $100 of taxable property beginning in 1998-99 and 4¢ beginning in 2001-02, as per LB 1114 (1996) to 8¢ for 1998-99 and 1999-2000 and 7¢ thereafter.³⁶  The bill also enacted a new aid program for community colleges.  The program would supply state funds for any shortfall between the revenue raised by community colleges levying the maximum levy and 40% of their operating costs.  The costs were to be calculated by using 1997-98 as a base and increasing it by an amount equal to full-time equivalent student growth plus 2% annually.  Community colleges were also to receive aid necessary to make up any shortfall between the categorical aid provided by the current program and 40% of operating costs measured if the college is levying the minimum levy.³⁷

For school districts, LB 269 attempted to resolve one of the major uncertainties created upon the passage of LB 1114.  The 1996 legislation was designed to impose property tax levy limits and also to enumerate and describe the possible exclusions to the levy limitations.  One of the exclusions related to special building funds and sinking funds established for projects commenced prior to April 1, 1996, for construction, expansion, or alteration of school district buildings.³⁸  The problem encountered by school officials was attempting to discern what the term "commenced" really meant.  How far along in a building project must a school board have been in order to legally fall within the intent of LB 1114 and thereby qualify for the levy exclusion?  LB 269 provided a response to the question in that the district would qualify for the levy exclusion if "any action of the school board on the record" prior to April 1, 1996 "commits the district to expend district funds in planning, constructing, or carrying out the project."³⁹  However, as a matter of accountability, LB 269 also required school districts to report the amount of their building fund levies that is exempt as per the levy exclusion to the Department of Education.⁴⁰

The changes under LB 269 to the school finance formula were of an editorial nature.  The bill changed two separate sections clarify the exact section and subsection of law, section 13-508(1), in which can be found the deadlines for school districts to certify budget statements together with the amount of the tax required to fund the adopted budget.  For Class I districts, the deadline was August 1st and for all other districts, September 20th.⁴¹

LB 269 was passed by the Legislature on May 30, 1997 with the emergency clause attached by a 42-1 vote.⁴²  Governor Nelson signed the bill into law on June 5th.⁴³  In fact, in a somewhat unusual yet touching move, the Governor submitted a letter of acknowledgment to the Legislature of his action to approve the legislation.  But the letter was much less about the legislation he signed into law as the man who spearheaded its introduction, and spearheaded so many other legislative efforts before it.  The letter represented the Governor's feelings about the recent death of Senator Jerome Warner on April 20, 1997.  Nelson wrote:

This bill is only one of many initiatives authored by Senator Warner during his 35 years as a member of the Nebraska Legislature.  He was a genuine leader for all Nebraskans, a legislative problem-solver and a man whose fairness, wisdom, honesty and integrity helped to shape the State to which he dedicated his life.

His legacy is one of action, not only in the area of taxation policies, but also in the establishment of a program for state aid to schools; in the growth of educational opportunities in Nebraska's university system; in the development our state's highway planning and construction process; and in providing property tax relief to Nebraskans while maintaining local control.

In building this record, Senator Warner used few words to make his point.  Instead, he relied on listening to others, studying the issues, debating the merits and avoiding political games.  It is a measure of the greatness of this quiet, simple farmer that both those who called him friend and those that did not know him well thought him a decent, fine man.

It is with honor and pride that I take this opportunity to sign the final priority bill authored during the distinguished career of our friend and fellow Nebraskan, Jerome Warner.  In Senator Warner's own words, "I guess we're done now."⁴⁴

Property Taxes, Generally

LB 270 (1997) cannot be classified as a mere revenue-related, technical cleanup bill.  It did contain many, seemingly technical changes to laws concerning property taxes, but the background of the legislation would require it to be examined in a different light.

The bill was introduced on behalf of the Nebraska Department of Revenue, but more specifically, on behalf of the department's newly created Property Tax Division.  The new division was created under LB 490 in 1995, along with the creation of a gubernatorial appointed Property Tax Administrator.  The first designee for the position was Catherine Lang-Morrissey, who had been appointed by Governor Nelson but not yet confirmed by the Legislature at the time of the public hearing for LB 270.  True to her reputation and diligence, she had already begun a comprehensive review of all state laws relating to property taxation.  And the comprehensive review was literally conducted at a grassroots level with the participation of county assessors, along with staff from the Property Tax Division.  Their mission was to examine every pertinent statute and compare actual practice to express provisions of law.  The result was LB 270.

Technical bills are usually uncontested at the public hearing stage, but again, LB 270 was not wholly a technical-oriented bill.  During the public hearing, LB 270 received opposition testimony by several groups, including the Nebraska Catholic Conference.  Their concern was largely focused on any possible changes to the exempt status of property owned by religious organizations.  Many of their concerns were addressed in the committee amendments to the legislation as it emerged from the Revenue Committee.

The only set of changes under LB 270 that directly affected the school finance formula were provisions to eliminate a notice requirement, then incumbent upon the Department of Revenue, and a provision to clarify the process to request a nonappealable correction of adjusted valuation.  Both changes occurred within the same section of the school finance formula relating to the process by which adjusted valuations are computed and certified to NDE and to individual school districts.⁴⁵

The first change concerned a publication requirement created under LB 1290 in 1994.⁴⁶ The provisions required the Department of Revenue, later changed to the Property Tax Administrator, to publish adjusted valuations of each school district in a newspaper of general circulation within the county at the same time adjusted valuations were certified to the Department of Education.  The idea was to make the public aware of their respective school's adjusted valuation for the coming school fiscal year and generally to be open about the process involved.  This was part of a broader goal outlined in LB 1290 (1994) to ensure a level playing field in the area of assessment of taxable property.

It must be remembered that the intent of LB 1059 (1990) was to use adjusted valuation for purposes of calculating state aid to schools, but there were difficulties encountered by the Department of Revenue in making the transition.  In fact, LB 1290 (1994) was originally introduced to impose another one-year delay in order to give the Department of Revenue more time (and more funding).  By the time LB 1290 passed, however, the delay was removed, more funding was granted to hire staff, and adjusted valuation would be used for the first time beginning with the 1994-95 school year.

Therefore, the publication requirement was added to LB 1290 in order to further the goal, perhaps even overreach the goal, to conduct an open and public process of assessing taxable property and adjusting it for purposes of state aid computation.  This was, after all, a new process, and lawmakers believed the public had to be made aware.  By 1997, however, it was clear to the newly appointed Property Tax Administrator Lang-Morrissey that this particular publication requirement may be over doing it.  "We believe that that requirement should be removed," Lang-Morrissey said during the public hearing.⁴⁷  "[T]he only people who can protest or the only entities that can protest adjusted valuations are school districts and they are required by law and are getting specific notice as to their adjusted valuations," she added.⁴⁸ In addition, she noted, the notice did not list all districts and their respective adjusted valuations, and the overall value of the notice had to be questioned.  The only way to enhance the value of the notice would be to include more information, but the cost would be greatly increased.

The other change to the school finance formula concerned the same statute that contained the publication notice discussed above.  The existing statute at the time stated that a school district or county official could file a written request for a "nonappealable" correction of an adjusted valuation due to clerical error.  The request must be filed with the Property Tax Administrator (PTA) by a specified date each year, but the decision of the PTA may not be appealed.  LB 270 changed this subsection to state that both clerical errors and changes in assessed value by reason of qualifying or disqualifying for greenbelt status may be appealed.

LB 270 passed with the emergency clause attached on June 3, 1997 by a 42-0 vote.⁴⁹  Governor Nelson signed the bill into law on June 9th.⁵⁰

Motor Vehicle Fee System

LB 271 (1997) was the subject of considerable debate and controversy during the 1997 Session and culminated in a less than united vote on Final Reading.  The bill proposed to eliminate the existing motor vehicle personal property tax system and replace it with age-based tax and fee schedules.  The idea was certainly nothing new.  Similar legislation had been introduced in previous sessions, but the proposals never made it out of committee.  Legislators and lobbyists alike referred to the proposal as the "clunker tax" because it usually involved increased taxes on older vehicles and reduced taxes for newer and more expensive models.  But in 1997 circumstances had changed and the time was ripe for the so-called clunker tax to move forward.

LB 271 was a very important bill for public schools and, in fact, most political subdivisions because a good portion of their local revenue derived from motor vehicle taxes.  In 1996, the motor vehicle property tax produced $152 million in revenue to political subdivisions, and school districts received a substantial amount of the total proceeds.⁵¹

The system in existence prior to 1997 placed a value on motor vehicles and then the applicable real property tax rate for each political subdivision would be applied to that value to determine proportionate shares of revenue.  However, the existing system also had its share of critics, including individual taxpayers, who claimed the system did not take into account actual value, and therefore was not fair.  And at least one major Nebraska organization agreed with the critics.  Loy Todd, Executive Vice President and Legal Counsel for the Nebraska New Car and Truck Dealers Association, testified at the public hearing for LB 271, and stated:

[T]he actual fair market value of your motor vehicle, in this state, has almost nothing to do with how it is taxed.  You can't have a property tax system that is based on virtually nothing.  What we have now is a schedule that is thought up by somebody in a back room, the Department of Revenue, that is based on some manufacturer's suggested retail prices set by my industry.  Then, it is arbitrarily assigned some depreciation.  A schedule is supposed to be published, I have never seen it, and sent out to the counties, and then what we do is we tax, based upon it.⁵²

Todd said the state had been lucky up to that point to avoid a lawsuit challenging the existing system.  "But you have got a system that doesn't work," Todd said, adding, "We have suggested many years now that you replace it with an age-rated system."⁵³

The newly appointed Property Tax Administrator, Cathy Lang-Morrissey, had essentially the same message to offer the Revenue Committee.  Lang-Morrissey offered supporting testimony and said the responsibility falls upon her office to determine values for motor vehicles under the existing system.  And this was a responsibility she did not particularly care to have.  "It is my firm belief, both from a legal perspective and a policy perspective, that the Legislature must specify the policy for the valuation of motor vehicles," she testified.⁵⁴ The existing law, Lang-Morrissey said, offered no direction for her office in terms of guidelines to perform the task.

However, the fairness issue was but one of the major policy issues that gave rise to LB 271.  Testifying on behalf of the Revenue Committee, the majority of which sponsored the bill, George Kilpatrick, committee legal counsel, outlined three main issues that lead to the introduction of LB 271.  The first related to the fairness problem addressed by Loy Todd and Cathy Lang-Morrissey.  The second related to the recent enactment of levy limitations under LB 1114 a year earlier.  Kilpatrick testified that, "[B]y adopting a uniform schedule of taxation ... it will remove essentially motor vehicles from the property tax equation in the sense that whatever relief is provided by 1114, whatever shortfall is caused by 1114, will have no impact on motor vehicle owners."⁵⁵ But there may, instead, be an impact on the real property owner since political subdivisions may be tempted to compensate for lost revenue by raising their property tax levies.  This was a very real fear to Governor Nelson who would address the issue later in the session.

The third major issue involved in LB 271 had to do with the distribution of motor vehicle taxes to various political subdivisions.  In fact, this became one of the key sticking points to final passage of the bill.  As a matter of background, the Nebraska Constitution was amended in 1952 in part to establish a distribution system for motor vehicle taxes.  Article VIII, Section 1 was amended to permit a different method of taxing motor vehicles so long as:

Such tax proceeds from motor vehicles taxed in each county shall be allocated to the state, counties, townships, cities, villages, and school districts of such county in the same proportion that the levy of each bears to the total levy of said county on personal tangible property.⁵⁶

This same section of the Nebraska Constitution would be amended in 1998 to change the system of allocation, but in 1997 this was the constitutional provision the Legislature had to abide.

Nevertheless, LB 271, as originally introduced, provided a different scheme for revenue distribution.  The bill required 65% of the tax revenue to be channeled to the TEEOSA Fund for distribution through the state aid formula.  Twenty percent of the revenue would be allocated to county governments and 15% would be allocated to municipalities.⁵⁷ Some believed the proposed distribution system might create a constitutional challenge and the issue was brought up several times during the hearing.

However, as the bill slowly moved its way through the legislative process most of the issues were resolved, including the distribution of revenue.  As passed by the Legislature, LB 271 would create separate schedules for a motor vehicle tax and a motor vehicle fee.  The tax would be based upon the age and original selling price of the vehicle, except for certain vehicles such as trucks and mobile homes that are based on weight.  The original selling price would be based upon the manufacturers' suggested retail price and would be established by the Property Tax Administrator (although the duty would later be transferred to the Department of Motor Vehicles).  The fee portion would be graduated so that lower priced vehicles will pay a lower fee than higher priced vehicles, and older vehicles would pay a lower fee than newer vehicles.

The distribution of the motor vehicle tax would be similar to the old tax system.  After each county treasurer deducts a 1% collection fee, the proceeds would be allocated to each taxing unit in the proportion of each unit's levy to the total levy on taxable property of all the taxing units in which the motor vehicle has situs.  However, revenue generated from the fee would be distributed only to counties and municipalities.  The premise behind LB 271 all along was to create a measure as revenue neutral as possible, resulting in little or no fiscal impact on anyone.  But LB 271 also brought at least initial considerations toward helping certain classes of local government to generate replacement revenue in light of the pending levy limitations.  While schools were destined to receive substantial assistance under the appropriation bill to LB 806, other classes of political subdivisions were scrambling during the 1997 Session to corner any revenue mechanism they could.  For the most part, the lobbying effort by public school interests was to simply ensure that LB 271 did not reduce funding for schools.

The bill was passed on June 4, 1997 by a 34-11 vote.⁵⁸  However, by the time the bill passed, the Legislature had taken action to reduce the tax and fee schedules sufficiently to cause some doubt about the fiscal impact on political subdivisions, particularly school districts.  The Legislature's Fiscal Analysis Office reported that the fiscal impact on political subdivisions was "indeterminate" and may result in a "shift to other taxable property."⁵⁹  The concern was that certain local governments would raise their property tax levies in order to compensate for any lost revenue from the new motor vehicle tax/fee system.  Perhaps no one was more concerned about this possibility than Governor Nelson.  In a June 10, 1997 communication to the Legislature, the Governor made his concern very clear:

Today I signed LB 271 and LB 271A into law.  LB 271 eliminates the property tax on motor vehicles and replaces it with a tax and a fee.  LB 271A provides funding for the Department of Motor Vehicles to carry out the bill's provisions.

LB 271 is designed to implement a motor vehicle tax system more closely tied to vehicle value and age, and to provide motor vehicle owners with property tax relief.  I do not believe it is the intention of the Legislature--nor is it mine--for local subdivisions to use passage of this bill to shift the local tax burden further onto real property taxpayers.  If local subdivisions respond to any losses of revenue under LB 271 by attempting to increase real property taxes, rather than by reducing spending, taxpayers will rightly believe they have been betrayed.

I have previously voiced my support for caps on local subdivision spending once the LB 299 spending limits expire.  It is my intent to work in developing legislation for consideration next year to impose spending limits and, where appropriate, adjust the current LB 1059 limits.  Taxpayers and local officials should understand that the response of local subdivisions to LB 271 will play an important role in what types of limits will be included in that bill.

Owners of real property and motor vehicles deserve tax relief.  That was the purpose of LB 299 and LB 1114.  Any attempt by political subdivisions to circumvent the spirit of these tax relief measures; and LB 271 becomes unacceptable to me, the Legislature, and the taxpayers.⁶⁰

Governor Nelson's warning was obviously directed to the Legislature and at local governments, perhaps at school officials in particular.

Nevertheless, it was obvious to all concerned that the Legislature and the Governor would be watching to see what action school districts take in response to LB 271.  The Governor's threat to extend the restrictive budget lids imposed under LB 299 (1996) was sufficient to gain everyone's attention.  It effectively set the stage for the budget lid battles to follow in the 1998 Legislative Session.

For purposes of the school finance formula itself, LB 271 amended one section that referred to motor vehicle tax revenue for purposes of establishing adjusted valuation for each school district.⁶¹  The existing law referred to motor vehicles and the method by which the "state aid value" would be determined.  LB 271 eliminated these references because they would no longer be necessary.  Motor vehicles would henceforth be treated as any other personal property for purposes of establishing adjusted valuation.  And section 3 of the bill, which was codified as section 60-3003, would now govern the allocation of tax revenue to each school district.

Timelines to Establish Adjusted Valuation

The intent of LB 342 (1997), sponsored by Senator Warner, was to provide a procedure for correcting clerical errors in the process by which valuations are adjusted for purposes of school aid.⁶² The use of adjusted valuation in calculating state aid was one of the key components of the school finance formula created under LB 1059 (1990), but it was not until 1995 that adjusted valuation was actually implemented.  In 1994 the Legislature passed LB 1290 to allocate additional funds to the Department of Revenue in order to hire necessary personnel and put the adjusted valuation system into place.

The problem, as ably explained by Dennis Pool, then School Finance Administrator for NDE, was that no process or authority existed to correct mistakes made in certifications of adjusted valuation.  Pool testified at the public hearing for LB 342 on January 24, 1997 before the Revenue Committee.  Pool explained that the department might very well have prior knowledge that the adjusted valuation for one or more districts is incorrect, but they have no power to change it.  The incorrect adjusted valuation would then be used to compute state aid, which would then result in incorrect certifications of state aid.  Some districts would receive less than they should while others would receive more than they are entitled.  The mistakes, if they occur, would typically be made by county assessors who incorrectly place certain property within School District A into School District B or simply make mistakes in writing down the correct figures.  Pool said the consequence of one clerical error in one district's adjusted valuation would essentially have a ripple effect, large or small, throughout the entire state aid certification.  The mistake would cause some to lose and others to gain state aid funds.⁶³

The existing law already provided for a formal process in which a school district may protest its adjusted valuation.  LB 1290 (1994) provided that any school district may file with the Property Tax Administrator (PTA) written objections to the adjusted valuations that are certified by the PTA.⁶⁴ The process requires the PTA to set a hearing date where either party may submit evidence on the matter at issue.  The PTA must then submit an order to modify or decline to modify the adjusted valuations and must then certify the order to NDE.  The final determination of the Property Tax Administrator may be appealed to the Tax Equalization and Review Commission (TERC).

LB 342, on the other hand, proposed what might be considered an informal process, a "nonappealable" process, to remedy clerical errors in adjusted valuations.  The bill provided that, by October 31st each year, any school district or county official may file with the Property Tax Administrator a written request for a nonappealable correction of the adjusted valuation due to clerical error.  The legislation defined clerical error as transposition of numbers, allocation of value to the wrong school district, mathematical error, and omitted value.  The Property Tax Administrator must then approve or deny the request by November 30th.  If approved, the PTA must then certify the corrected adjusted valuations to NDE.

LB 342 was placed on the legislative fast track due to an actual clerical error that occurred in Adams County between two difference school districts, one equalized and one non-equalized district.  The error occurred on the 1996 certified adjusted valuation, so the bill contained a special allowance for filing nonappealable corrections from the year before.  The special allowance provided that errors occurring on the 1996 adjusted valuation had to be filed with the PTA by March 15, 1997.  Even on the fast track, LB 342 passed just barely in time for the parties involved to take advantage of the new procedure.  The bill passed on March 4th by a 43-0 vote.⁶⁵  LB 342 was signed into law on March 10th, which made the effective date for the bill March 11th.⁶⁶

Tax Equalization Review Commission Cleanup

LB 397 (1997) represented the follow-up bill to a two-year process to fully implement the Tax Equalization Review Commission (TERC).  The TERC was the brainchild of Senator Doug Kristensen of Minden, a member of the Revenue Committee in 1997, who would later be elected to the office of Speaker.  The idea behind TERC was to replace the State Board of Equalization with a fulltime commission having oversight of the equalization process.

In 1995 the Legislature passed LB 490 and LR 3CA.  LB 490 embodied the Tax Equalization Review Commission Act, which established the structure and duties of the commission.  LB 490 also created the office of Property Tax Administrator to work closely with the commission.  LR 3CA was a constitutional amendment to eliminate the old State Board of Equalization and replace it with the TERC.  The amendment appeared on the 1996 Primary Election Ballot as Amendment Number 4 and was passed by the voters with a 54% to 46% margin.⁶⁷

With all the pieces in place by 1997, it was time to fine-tune the TERC Act in order address issues that were discovered since the passage of LB 490.  The bill also transferred the powers and duties from the State Board of Equalization to the Tax Equalization and Review Commission.  The only change to the school finance formula under LB 397 involved the elimination of an outdated and obsolete reference to amounts paid by the state to refund litigated personal property taxes to school districts in 1988.⁶⁸ These amounts were listed as receipts to school districts and counted as part of their formula resources for purposes of calculating state aid.

LB 397 passed with the emergency clause attached on March 10, 1997 by a 42-0 vote.⁶⁹  The Governor signed the bill into law on March 13th.⁷⁰

Income Tax Rate Reduction

LB 401 (1997) was the subject of intense debate and controversy during the 1997 Session.  The bill originally contained the Economic Growth Income Tax Reduction plan introduced on behalf of Governor Nelson by Senator Jerome Warner, chair of the Revenue Committee.  This was one if not the most important objective for Governor Nelson during the 1997 Session.  As introduced, the bill would provide an individual income tax cut of $50 million annually.  The average Nebraskan would receive a 5.5% income tax cut, equaling $65 per average return.⁷¹

For guardians of the school finance formula, the potential issue with this plan related to the goal of LB 1059 (1990) to dedicate a portion of income tax revenue to fund public schools.  If LB 401 proposes to reduce state income tax revenue, how would this impact the school finance formula?  Anticipating this concern, the Governor's plan included a "hold harmless" provision to increase the appropriation to fund the income tax rebate to schools.

The concern with the Governor's proposal, as it relates to schools, was two-fold.  First, the Legislature's Fiscal Office reported that the Governor's proposal, as submitted, would be anything but harmless to school districts.  The initial Fiscal Note indicated that, "[T]his bill could reduce the total amount calculated to be available as state aid to schools under LB 1059 by an estimated $9.6 million in FY1997-98 and $7.9 million In FY1998-99."⁷²  Second, the Legislature had taken action a year earlier to cap the income tax rebate to schools at the 1992-93 level under LB 1050 (1996).⁷³ Under the new cap, schools could expect the dedication of approximately $102 million each year for income tax rebate funding.

Both of these points were brought out during the public hearing for LB 401 on February 7, 1997 before the Revenue Committee.  Neither point was entirely addressed by the Governor's emissaries present to testify and explain the legislation.  It was, therefore, left to the members of the Revenue Committee to sort out the facts and produce a bill similar to what the Governor wished.  And this alone was no small task.  The committee was deadlocked (4-4) on advancement until Senator Wickersham, a member of the committee, proposed a compromise.  The compromise would provide a 3% across-the-board income tax cut and a $20 per dependent increase in the personal exemption credit, but these provisions would only apply to the 1997 and 1998 tax years.⁷⁴ In other words, a two-year, temporary income tax reduction instead of a permanent reduction as proposed by the Governor.  And a 3% rather than 5.5% across-the-board cut as originally proposed.

As for public schools, the committee amendments to LB 401 made no provision for any potential loss of funding due to the income tax cut.  It was generally believed that, so long as the biennium budget accounts for approximately $102 million in annual income tax rebate to schools, there would be no need to insert any kind of "hold harmless" provision.  So long as the income tax cut was a temporary, two-year reduction.

At first the Governor was simply happy to have his bill advanced from committee.  "We've gone from a dead-on-arrival bill to a bill on the floor," Governor Nelson said.⁷⁵ He believed there was support among the body to restore provisions of his original bill during floor action.  His real concern had more to do with whether the bill would even see floor action.  Senator John Hilgert of Omaha had designated LB 401 as his individual priority bill, but he did so late.  In fact, his priority filing came dead last among the 49 state senators.  Since priority bills were placed on the agenda in the order they were filed with the Speaker's office, LB 401 did not stand much chance.  Not much chance, that is, unless the bill received additional help.  And here is the point at which LB 401 became a political football and would in fact have a bearing on the outcome of such important issues as LB 806, the comprehensive school finance bill.

Both Governor Nelson and Speaker Withem had fired shots across each other's bow during the 1997 Session.  The political sparring was particularly evident at the time LB 401 was advanced from committee on April 3rd.  "I don't see any assurance that it will be debated," Speaker Withem said, referring to the Governor's bill.⁷⁶  However, he added, "If there is a sense of cooperation from the Governor's Office, there will be a reciprocal cooperation from the speaker's office."⁷⁷

The Governor wanted an income tax cut as per LB 401 and the Speaker wanted the successful passage of LB 806, the school finance bill.  The two politicians were potentially quite useful to one another, but for the time being the ball was in the Speaker's court.  The Speaker had the authority to special order a bill to the top of the agenda, but this would not be fair to the other senator priority bills awaiting floor debate.  The other alternative would be to make LB 401 a Speaker major proposal, a super priority bill for the 1997 Session.  This would have the same effect as special ordering the bill for purposes of agenda setting, but it would also allow the Speaker more control over the order of amendments debated on the bill.  And this is exactly what he did.  On April 29th, LB 401 officially became a Speaker super priority bill.⁷⁸ In the end, however, Speaker Withem would not be entirely happy with the final product in LB 806 and neither would Governor Nelson find LB 401 entirely to his liking.  Both measures and both politicians endured compromises.

The debate on LB 401 may not have lasted quite as long as the school finance bill, but the debate was just as intense.  The income tax cut bill just barely cleared the first stage of debate on a 27-4 vote.⁷⁹  The bill was almost at the point of stalling once again during Select File debate.  Once again, it took a compromise, suggested by Senator Wickersham, to move the bill forward.  The compromise amendment provided for a 5% across-the-board income tax cut for both the 1997 and 1998 tax years, an increase in the individual personal exemption credit by $10 per individual, and a full deduction on the Nebraska income tax return for health insurance premiums paid self-employed individuals.  The amendment also provided for a $40 million transfer from the State's Cash Reserve Fund to, in part, make the fiscal status come out in an even balance.⁸⁰

The Wickersham amendment also provided some protection for schools in light of the income tax cut.  It amended the section of law within the school finance formula that required the Governor to annually appropriate sufficient funds from income tax revenue to facilitate the income tax rebate to school districts.  Specifically, the amendment required the Governor to set aside 20.28% of income tax revenue for tax year 1997 and 21.25% for tax year 1998.⁸¹  The Wickersham amendment was adopted by a solid 34-2 vote.⁸²  The Legislature passed LB 401 on June 4th by a 38-7 vote.⁸³  Governor Nelson signed the bill into law one day later.⁸⁴

Adjusted Valuation for Greenbelt Land

LB 595 (1997) could fairly be classified as an anomaly given the many major legislative proposals debated in the 1997 Session.  The bill was referred to the Government, Military & Veterans Affairs Committee for disposition and related to election law for school boards, specifically Class III school boards.  Introduced by Senator Bud Robinson of Blair, then chair of the Government Committee, the bill would simply permit, not require, the members of a Class III school board to be nominated by district or ward and elected at large.⁸⁵ At the time, members were to be nominated and elected at large or by district or ward.

The bill was never prioritized and its prospects appeared bleak given the major agenda items waiting to be debated.  Senator Robinson managed to place the bill on special consent calendar agenda for "non-controversial" legislation.  LB 595 successfully made it through the first and second stages of debate.  But when the legislation arrived on Final Reading, Senator Robinson asked his colleagues to expand the purpose of the bill to include an entirely different subject matter.

During Final Reading deliberation, Senator Robinson rose to ask that the bill be returned to Select File for specific amendment.  Robinson explained that school administrators from his legislative district had approached him about an issue involving the use of adjusted valuation one year in arrears and the designation of land for special valuation (greenbelt).  Some districts had encountered an unanticipated side effect of adjusted valuation for purposes of calculating state aid when the county involved adopts special valuation for qualifying property.  The higher adjusted valuation resulted in a lower state aid certification because the school finance formula attributed a greater level of formula resources to the district.

As a matter of background, special valuation came about in the early 1970s.  The Nebraska Constitution had long provided that, "Taxes shall be levied by valuation uniformly and proportionately upon all real property... ."⁸⁶  But there were exceptions to this "uniformity" clause and one such exception was created in 1972 when voters approved an amendment to the Nebraska Constitution to permit the classification of certain agricultural land.⁸⁷  In 1974, the Legislature took action to create necessary laws to implement the "special valuation" of agricultural land.⁸⁸

Often referred to as "greenbelt," these new provisions addressed the problem of land that is being used for agricultural production, but which has a much higher value than land used solely for agricultural production due to its proximity to urban development, which can have an economic impact on neighboring agricultural land.  The actual purpose of the greenbelt laws was perhaps best stated in a March 1985 Attorney General Opinion in which was stated:

The purpose of the greenbelt provision was not only to allow preferential tax treatment for this particular agricultural land, but to promote the conservation of agricultural land and the orderly and controlled growth of urban areas.⁸⁹

The laws enacted in 1974, and subsequently modified from time to time, allowed such land to be valued solely on the basis of its value for agricultural use and also contained a tax-related recapture provision when the land is subsequently developed.

Whatever good special valuation possesses to the overall property tax system, it also reduces the value base for property tax purposes and greenbelt land is included in the adjusted valuation used for purposes of calculating state aid.  The Robinson amendment to LB 595 provided that when a county board adopts special valuation for qualifying property in the county, the adjusted valuation used to calculate state aid may not exceed 108% of the assessed valuation for the property tax year on which the adjusted valuation is based.  The new provision would take effect in the 1997-98 school year.⁹⁰

The amendment would affect the valuations used by some counties for state aid purposes.  It would lower the adjusted valuation of property for some counties, which will decrease the yield of a school district from the local effort rate in the state aid formula.  In turn this would decrease the formula resources of a school in the state aid calculation and potentially increase the district's equalization aid.  Overall, the effect of the amendment would be a shift in state aid between school districts, albeit just slight.