The 1995 Legislative Session

LB 613 - Spending Lid

In his State of the State address to the Legislature on January 12, 1995, Governor Ben Nelson outlined an ambitious plan to streamline state government and place tighter spending limits on local governments.  In what some thought may have been as much a bid for higher office as anything else, Nelson also took aim at the federal government by criticizing its "inefficiency and inflexible regulation."¹  "The federal government has more control over our state budget than we do," Nelson said.² Ironically, another Nelson initiative in 1995 would cap appropriations for special education services, which would ultimately leave school districts with less control over their own local budgets.

Governor 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%, and LB 742 (1995) would cap appropriations for special education services.  Senator Jan McKenzie of Harvard would introduce both pieces of legislation at the request of the Governor.  Senator McKenzie was appointed to the Legislature by Governor Nelson in 1993, and she served as a member of the Education Committee.

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.  LB 613 would mark the first of several reductions in the spending lid for schools (and other political subdivisions) since the passage of LB 1059 in 1990.  LB 742 would impose the first ever cap on special education appropriations and would lead to unsuccessful efforts to remodel the special education funding mechanism.

From the start of the session, it was clear to local governments and organizations representing local governments that the Legislature intended to do something about both spending and property tax relief.  Numerous bills were introduced in the session to address over-reliance on property taxes and at the same time control local spending authority.  Among these bills, LB 610, introduced by Senator LaVon Crosby, sought to allow certain school districts to levy a half-cent city sales tax to relieve the property tax burden.³  LB 606, introduced by Senator Ed Schrock, sought to eliminate local-option sales taxes levied by cities and impose a 2% increase in the state sales tax to compensate for lost revenue.⁴  LB 648, introduced by Senator Jim Cudaback, sought to eliminate local sales taxes and personal property taxes on farm and business machinery and also allow school districts to levy income taxes to fund education.⁵ However, the only bill to advance, among the many options available, was LB 613.

Legislative Bill 613 was referred to the Revenue Committee for disposition.⁶  As introduced, the bill eliminated the sunset on the lid for political subdivisions other than school districts,⁷ and decreased the lid from 5% to 4%.⁸  The lid was scheduled to automatically sunset on July 1, 1995.⁹  The result of the Governor's proposal would be a permanent 4% lid for municipalities, counties, and other local governments other than school districts.  The bill decreased the base spending lid for school districts from 4% to 3% and the maximum lid under the lid range from 6.5% to 5.5%.¹⁰  It also eliminated the sunset clause that required school boards to conduct an initial vote (requiring a 75% majority vote) to access the spending lids contained within the school finance formula.¹¹  This extra vote requirement was due to sunset at the end of the 1994-95 school year.  In addition, the bill imposed a new requirement that school boards must hold a special public hearing prior to taking the initial vote in order to access the spending limitation.¹²

LB 613 would also eliminate a school district's ability to set aside unused budget authority.¹³  Under the original formula enacted in 1990, a school district was allowed to choose not to increase its general fund budget of expenditures by the full amount of its applicable allowable growth rate.  If a district chose to do so, the Department of Education would calculate the amount of unused budget authority so that it may be carried forward to future budget years.¹⁴ The elimination of this provision was particularly upsetting to school officials who believed it would actually cause more spending not less as the Governor intended.  It would force school boards to adopt a "use it or lose it" attitude each year in setting annual budgets.

If this was not enough insult to injury, at least in the minds of school officials, LB 613 also proposed to eliminate one of two methods of exceeding its applicable spending limitation by an additional amount.  Under the existing formula, a school board was permitted to exceed its applicable allowable growth percentage by an additional 1% upon a 75% vote of the board after a special hearing was held on the matter.¹⁵  A second method allowed the voters of the district to approve a resolution by the board or a petition by the general citizenry to exceed the lid by a specific amount at a special election.¹⁶  LB 613 sought to eliminate the first option, which would leave only the second method, a vote of the people, available to exceed the lid.¹⁷

At the hearing on February 9, 1995, Lt. Governor Kim Robak testified on behalf of the Governor and praised the "quality public servants in our cities and counties and schools."¹⁸  Her comment was likely due in part to the criticism by local officials who believed the bill demonstrated a lack of faith and trust in their ability to address the spending and revenue issues at the local level.  Robak continued, "I'm also a taxpayer, and the real question that we have to answer is, what can we afford."¹⁹  Other supporters of the bill included tax activists Ed Jaksha of Omaha and David Hunter of Lincoln.²⁰

As would be expected, organizations representing local governments had a strong presence at the hearing in opposition to the bill.  First among opponent testifiers was Jim Griess, Executive Director for the Nebraska State Education Association (NSEA).  Griess also represented the Citizens for Responsible Tax Policy, which he called "a broad-based coalition of education and farm organizations interested in promoting property tax reform and property tax reduction."²¹  During his testimony, Griess submitted a report from the coalition that outlined the findings from a series of public forums conducted by the coalition in November 1994.  The findings in the report indicated property taxes as a major concern among citizens across the state.  "But we also found that citizens are not interested in dismantling essential local government services and I would contend that public schools and the programs that are provided by public schools are, in fact, viewed by most Nebraskans as an essential public service," Griess said.²²

Other opponents included the Nebraska Association of School Boards (NASB), the League of Nebraska Municipalities (LNM), the Nebraska Rural Community Schools Association (NRCSA), and the Nebraska Council of School Administrators (NCSA), among others.  Harlan Metschke, Superintendent at Papillion-LaVista Public Schools, represented NCSA and provided some specific concerns with the legislation.  "Our foremost concerns with regard to this legislation include the elimination of the unused budget authority, currently provided in the law, [and] the elimination of a local board of education's options to exceed the limit by one percent and the establishment of expenditure lids," Metschke said.²³  He emphasized the value of local control over budgetary decisions and the counter-efficiency contained within the legislation.  With regard to the elimination of unused budget authority, Metschke said, "Had this authority not been allowed, many [school districts] would have budgeted to the maximum amount allowed to maintain flexibility for future emergencies."²⁴  In essence, he concluded, "[B]y eliminating unused budget authority, the Legislature would effectively penalize efficient school boards."²⁵

Summarizing their concerns, opponents of the bill claimed the bill would harm essential services at the local level, penalize efficiency among local governments by encouraging maximum spending, and, generally, create a loss of local control.  And their arguments apparently earned at least some merit among members of the Revenue Committee.

Following the hearing, on February 16th, the committee met in executive session to review the bill with all eight members of the committee present.  By an 8-0 vote, the committee voted to amend the bill by removing the provision that would have eliminated unused budget authority for school districts.²⁶  A vote to advance the bill, as amended, failed by a 4-1 vote (three present, not voting).²⁷  On March 1st, the committee once again met in executive session with six of the members present.  Once again, however, a vote to advance failed on a 4-1 vote (one present, not voting).²⁸  On March 8th, the committee met for a final time with one member absent.  The panel voted to restore school district authority to exceed its spending limit by 1% if approved by a 75% vote of the board.  At last, on a 5-2 vote, the committee voted to advance the bill as amended.²⁹

At this point in the legislative process, opponents of the bill had won a few battles but certainly not the war.  The legislative proposal had become strictly one of reducing the spending limits on all political subdivisions and eliminating the sunset clauses on the lids for all political subdivisions.

General File debate on LB 613 began on May 9, 1995.  By this time, the bill had been designated as Senator Kate Witek's priority bill for the 1995 Session.³⁰  However, it was Senator McKenzie, the chief sponsor, who took on the role of guiding the bill through floor debate.  McKenzie's first challenge was to ward off Speaker Ron Withem's attempt to eliminate any applicability of the bill to school districts.  In an amendment offered by Withem, the spending lid provisions for school districts would be left in tact.³¹ But Withem's intent behind the amendment was, perhaps, as much or more an attempt to place perspective on the school finance formula as any serious attempt to carryout the objective of the actual amendment.

Specifically, Withem tried to remind his colleagues of the original intent of LB 1059 relevant to the spending limitation and also some broader policy goals set forth by the Legislature.  "One of the most misunderstood things ... was that the lid in LB 1059 on school districts was meant to be a temporary lid," Withem said, "Never was meant to be temporary."³² In addition, he said, the lid was supposed to be reviewed on an annual basis, which, he insisted, had not been done.

Moreover, Withem said, the Governor and the Legislature had failed to uphold the spirit and intent of LB 1059 almost from the very beginning.  For instance, the state had yet to meet the 45% state support goal originally set forth five years earlier.  "Consequently and because of the inactivity of the Legislature and the inactivity of the Governor, we have ended up with 1059, which again was supposed to have been a breathing, living document, is going stagnant," he said.³³  LB 1059, Withem believed, was "supposed to promote equalization and we found each year since it passed we've moved further and further from the concept of equalization."³⁴  Rather than "arbitrarily lowering the limitations by one percent," as proposed under LB 613, Withem concluded, the Legislature should be addressing some of the larger policy issues concerning the state aid formula.³⁵  Having made his point, Withem eventually acknowledged the concern about growth in spending by school districts and withdrew his amendment.³⁶

Speaker Withem was not alone in his concern for broader policy discussion of the school finance formula.  Several senators used the debate on the Withem amendment to add their own commentary on both the spending and resource sides of public education.  Senator Ardyce Bohlke, chair of the Education Committee, pointed out the concern for spiking or "radical fluctuations" in state aid received by school districts and how difficult that made the school budget process.³⁷  This concern and others would eventually lead to future legislation in the 1996 Session.  Senator Jerome Warner also spoke on the Withem amendment and issued one of the more prophetic comments during the debate on LB 613, if not the entire 1995 Session.  Said Warner:

Seems to me the goal that we need to look at over the next three, four years if in fact we're going to do something on property tax and taxes generally and restructuring the government and all the rest, is that in that interim period at least we ought to be striving to keep the growth in government budgets consistent with the growth in revenue and that we should not authorize expenditures beyond a lid that will exceed normal growth in revenue without a change in rates.³⁸

Warner's comments represented one of the earliest public references to what would become legislation to impose property tax levy limitations on political subdivisions during the 1996 Session.

Considering the magnitude of the bill, the General File debate on LB 613 was neither prolonged nor overly contentious.  Senator Floyd Vrtiska made an unsuccessful bid to delay any changes to the lid provisions for another year to help local governments determine the impact of decreased spending authority.³⁹  "I guess I have enough faith in the local governing people to not expend any more money than they need and just because they are given the ability to do it doesn't mean they're going to do it so," Vrtiska said.⁴⁰  But the provisions relevant to school districts remained relatively unchanged from those suggested by the Revenue Committee under the committee amendments, which were adopted by a 27-4 vote.⁴¹  LB 613 advanced to Select File on a 30-4 vote.⁴²

Select File debate took place on May 25th, the 86th day of the 90-day session.  Senator Tim Hall made an unsuccessful attempt to re-insert a provision from the original bill to eliminate school boards' authority to exceed their growth limit by 1% through a supermajority (75%) vote of the board.⁴³  "I offer this because I believe that the bill as it was introduced was good policy," Hall said.⁴⁴  The amendment failed on a 7-13 vote.⁴⁵

Senator Jerome Warner also made an unsuccessful attempt to view LB 613 from a broader perspective and extend a form of spending limitation on state government.  The Warner amendment would have prevented the Legislature from spending anymore than the level of growth in revenue each year.⁴⁶  Warner's amendment was ruled not germane to the subject of the bill, thereby precluding a debate on the issue.  But Warner's amendment and the concept of a "state lid" had been one of the ongoing themes throughout the debate on LB 613.  At least a few lawmakers believed what was good for local governments would also be good for state government.  "From my viewpoint the consistency would be in a broad area of limitation that we are attempting to apply...to both entities of government," Warner said.⁴⁷

In what would become an ongoing trend in future sessions, Senator Jan McKenzie attempted to amend her own bill on the issue of school district budget prioritization.  The McKenzie proposal took aim at school administration in favor of protecting classroom teachers as demonstrated in the text of the amendment:

It is the intent of the Legislature that reductions in school budgets made to meet spending lid reductions as a result of enactment of this legislative bill:

(1) Protect the instructional expenditures for children and their activities as much as possible;

(2) Unless every reasonable reduction in middle management and central office expenditures and positions has been made, there should be no reduction in expenditures or positions in music, drama, summer school, or like activities;

(3) Reductions should be made as far from the classroom as possible and should include administration travel, memberships, lobbying, transportation, and capital outlays; and

(4) Any cuts in school spending as a result of the enactment of this legislative bill should affect the classroom last. ⁴⁸

"[A] district will identify key programs, band uniforms, the art program, music, other areas, rather than look for cuts in spending that might come from administration and management or other such areas of the budget," McKenzie said.⁴⁹

The counter argument to McKenzie's amendment was the violation of local control and the ability of an individual local school board to know best how to handle necessary budget cuts.  Senator David Bernard-Stevens brought just such an argument to the forefront of the debate.  "I would have to oppose the amendment based upon the concept that micromanaging is not the place for the Legislature...it's the elected local officials and their philosophy that should determine where cuts are or are not going to be made," he said.⁵⁰  On a personal level, however, Bernard-Stevens said he agreed with McKenzie about the need to somehow protect the educational welfare of students first and foremost.  Ultimately, the McKenzie amendment was withdrawn without a vote.⁵¹

Shortly after the withdrawal of the McKenzie amendment, a vote to advance the bill proved successful on a 29-6 vote.⁵²  The bill would need at least 33 votes to pass with the emergency clause attached, which it did on the last day of the session, June 8th, by a 36-11 vote.⁵³  Prior to the final vote, however, there were already rumblings that LB 613 was just the tip of the iceberg for a solution to the property tax situation, which some wanted to elevate to the status of a crisis situation.  Governor Nelson was not entirely content with the somewhat watered-down version of LB 613, a bill he had originally requested.  At a dinner hosted by the school board of Westside Community Schools in Omaha, Nelson alluded to a plan he hope to introduce in the 1996 Session to create property tax relief through state-mandated lids on property tax rates and even tighter restrictions on spending by local governments.⁵⁴  Nelson knew, as did lawmakers, that the property tax situation was becoming acute, and, if not addressed soon, state leaders would lose control of the matter to those outside state government who were already pursuing remedies through popular initiatives.

Source:  Legislative Bill 613, in Laws of Nebraska, Ninety-Fourth Legislature, First Session, 1994, Session Laws, comp. Patrick J. O'Donnell, Clerk of the Legislature (Lincoln, Nebr.: by authority of Scott Moore, Secretary of State), §§ 1-4, pp. 1-3 (1159-61).

LB 742 - Special Education Funding Lid
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The second major education-related funding piece introduced on behalf of the Governor in 1995 concerned special education programs and services.  Both LB 613 (relating to general fund expenditures) and LB 742 were essentially on the same legislative timeline in that the hearings and floor debate occurred relatively parallel with one another throughout the session.  The hearings occurred in different committees but within several weeks of one another.  Initial floor debate occurred within a few weeks of one another.  The bills advanced to the final stage within a few days of one another, and the bills passed on the same day.  A part from the parallel timeline, however, the bills would take entirely different paths with LB 742 consuming twice as much floor debate and considerably more emotional dialogue among legislators.

As introduced by Senator Jan McKenzie, LB 742 would have eliminated the requirement for the state to fund 90% of the allowable excess costs for Level II and Level III special education programs and 80% for Level I programs for school age children.  The requirement to fund 90% of allowable costs for early childhood special education programs would also have been eliminated.⁵⁵  In its place, the bill established a somewhat open-ended process by which the Legislature would set the annual appropriation (for the prior year's cost reimbursement) and the State Board of Education would then set a "percentage" for cost reimbursement to school districts.⁵⁶  Although not expressly stated in the bill, the intent was to cap the special education appropriation at $121.3 million for each year of the 1995-97 biennium.⁵⁷ Since the projected appropriation for FY1996-97 was $133.6 million, the state would theoretically save $12.3 million by capping the appropriation at the FY1995-96 level.

Only two proponents appeared during the public hearing for LB 742 on February 21, 1995 before the Education Committee.  The first was the sponsor of the legislation, Senator McKenzie, and the second was Lt. Governor Kim Robak on behalf of Governor Nelson.  In her opening remarks, McKenzie outlined the rationale for the legislation, which ostensibly boiled down to high projected annual increases in appropriations and the allegation of over-identification of special education students by school districts.  The official line was, as stated by McKenzie, the need to "identify cost containment strategies through which the current system can be made more efficient and effective in closing the large and growing gap between special education and general education."⁵⁸

While most members of the Education Committee may not have disagreed with the ever-increasing costs of special education, both the motives and strategy behind the bill remained less than clear from McKenzie's testimony.  Seeking to understand the intent of the bill, Senator David Bernard-Stevens pressed McKenzie on the overall strategy for the bill, as illustrated in the following excerpt of the hearing transcripts:

SENATOR BERNARD-STEVENS:  Final question, if the bill made it out of committee in its present form, and got to the floor of the Legislature, is going to be debated, would you want the bill passed this year?

SENATOR McKENZIE:  Gee, I would prefer to see us work on solving part of our problem in Nebraska in terms of how we deliver services and to just see a flat cap passed with no allowance for growth from year to year.

SENATOR BERNARD-STEVENS:  I think that is a no.

SENATOR McKENZIE:  That's a no, a qualified no, if I might.⁵⁹

At least one representative of the media interpreted her response to mean, "[S]he'd prefer that the Legislature allow the next year for studying ways to contain special education costs - and take up the bill next year."⁶⁰ The confusion over legislative intent was understandable considering McKenzie's remarks, but nonetheless inconsistent with that of the administration, as Lt. Governor Robak would make clear in her testimony.

"Legislative Bill 742 really addresses financial reality," Robak testified, "[O]ur state expenditures for special education have doubled in the last six years, and if we don't tackle the problem now, we are headed for the 200 million dollar mark by the year 2000, nearly doubling again in five years."⁶¹  Robak said a cap on special education appropriations was not a revolutionary idea.  In fact, such a cap was proposed in the December special session in 1986, but Robak said, "The response at that time was that the issue was too complex and controversial to tackle in a special session... ."⁶²  In 1993, Robak continued, the Legislature created the Special Education Accountability Commission "to look at the growing cost of special education."⁶³  The Legislature created the commission under LB 520 (1993) with the primary goal to "identify strategies for accomplishing cost containment in special education that will result in average special education costs increasing at a rate no greater than the average annual education growth rate."⁶⁴ The commission issued a report to the Legislature outlining several recommendations, one of which was to limit growth in appropriations for special education by matching such growth to the aggregate general fund growth rate (between 4% and 6.5%).  But this recommendation was either unacceptable or simply ignored by the administration.  The Governor preferred a more immediate and lasting savings, hence the cap coupled with a 0% growth on special education appropriations.

Being tough on spending when it comes to students with special needs is not exactly the most popular thing a politician could do, and Robak addressed that concern head on.  "We have no intention of abandoning children with needs," Robak said.⁶⁵  Nor she said was the bill intended as a "punishment to school districts for not holding down the costs" referring to alleged over-identification of special education students in order to reap more state financial assistance.⁶⁶  "We don't believe that there is a wholesale dumping of kids into special education programs to get more state dollars," she said.⁶⁷  But the bottom line for the administration was about savings to the state while at the same time providing the same services to the same students.  "We believe, however, that special education services can be provided in a more cost-effective manner, and it is time now to look to those local districts, those teachers, and those parents, and students to find better ways of delivering the services," she said.⁶⁸

As to the issue of a timeline for the bill, Robak made it perfectly clear that a delay was not part of the plan.  "[I]t is the Governor and my belief that this bill does need to become law in order to provide incentives for change to the special education program," Robak said.⁶⁹  The use of the word "incentives" was an interesting choice of terminology, since the bill provided no incentive at all.  As noted by Senator David Bernard-Stevens, the bill represented more of a "hammer" than any form of incentive.⁷⁰  As he said somewhat sarcastically:

[T]he attitude now is let's go ahead and give them two years of their funding, the next years after that, they are going be nailed, school districts will be hit incredibly hard, and that will be the hammer necessary to make them come to the table.⁷¹

The metaphorical table, to which Bernard-Stevens referred, was the overall discussion about how to change the service delivery system along with the funding system.  Whether one calls it a hammer or an incentive, however, the fact remained that there was only so much local school districts could do about complying or not complying with federal and state mandated special education service requirements.  As Elkhorn Superintendent Roger Breed testified, "The dilemma we face...is that the expense of providing services to students with disabilities and the expense of complying with multiple levels of special education rules is to a large extent beyond the control of the local school board and school administrators and teachers."⁷²

Representatives for school boards and school administrators appeared at the hearing to oppose the bill and to explain what seemed to be unclear to some state leaders.  First of all, the Lt. Governor insisted the bill was not meant to harm students or otherwise deprive any student of needed services.  What may not have been understood by the administration, however, was that the reduction of special education funding meant the very real possibility that regular education funding would have to be used to make up the difference at the local level.  As Martha Fricke of the Nebraska Association of School Boards testified, "[T]he repercussions that could take place if this lid is placed would affect all of public education, we feel, not just special ed."⁷³

The second issue, perhaps unclear to the Governor's office, concerned the actual practices used to identify special education students.  As Don Anderson of the Department of Education testified:

Individuals closest to the child, the parents, educators, and the child when appropriate, are in the best position to make program decisions for individual children.  State special education reimbursement and funding systems should be as program neutral as possible and should not drive individual program decisions for children.  Reimbursement and funding systems should allow school districts and approved cooperatives the flexibility to make program decisions based on individual needs rather than standardized eligibility criteria.⁷⁴

Anderson represented the State Board of Education, which opposed the bill as drafted.  However, he did offer several recommendations to improve the bill.  The primary recommendation was to link the growth in annual special education appropriations to the aggregate statewide percentage growth in general fund expenditures within the existing spending lid range (4% to 6.5%).  "This would allow the growth rate of special education reimbursement and funding and the state appropriation to increase at the rate of the average annual education growth rate," he said.⁷⁵ The result of such a proposal was expected to produce a 6% to 6.5% increase in special education appropriations each year.  This was certainly less than the existing growth of upwards to 10% annually, and certainly more preferable than the zero percent growth proposed by the Governor.

It was a compromise.  It also embraced the original goal of the Special Education Accountability Commission as set forth under LB 520 (1993), which was, once again, to "identify strategies for accomplishing cost containment in special education that will result in average special education costs increasing at a rate no greater than the average annual education growth rate."⁷⁶

The Education Committee accepted Anderson's recommendation and advanced the bill with a significant change from that recommended in the original bill.  As proposed in the committee amendments, LB 742 would limit the total annual state appropriation for special education services to an increase between 4% and 6.5%.⁷⁷ The idea was to mirror the existing general fund spending lid base and range, which would decrease by 1% upon the passage of LB 613.  LB 613 proposed to reduce the base lid and lid range to 3 - 5.5%.

General File debate commenced on April 19, 1995.  By this time, Senator Curt Bromm had designated the bill as his priority measure for the 1995 Session.⁷⁸  After four hours of debate and the adoption of several amendments, including the committee amendments, the bill would retain the 4% to 6.5% growth lid, but would also take on several new components.  One of these new provisions would direct the Special Education Accountability Commission to suggest a plan to the Legislature for a block grant approach to funding special education to replace the existing cost reimbursement system.  The bill advanced on a 28-0 vote and appeared, at that time, to be on solid ground with the majority of the body.⁷⁹

As advanced on first-round debate, LB 742 would:  (1) maintain the amount of reimbursement/funding to school districts and approved cooperatives for school age, early childhood and transportation programs for FY1995-96; (2) allow the Legislature to determine the amount of appropriation for special education funding in FY1996-97; (3) establish a 4% to 6.5% growth rate on appropriations for FY1997-98 and thereafter; and (4) establish an intent to change the funding mechanism from a cost reimbursement system to a grant system.

Second-round debate began on May 16, 1995 and would last through three separate session days.  The debate would temporarily divide members of the Education Committee and the Legislature as a whole on just how to address the issue of rising costs in special education services.  The debate would also address Governor Nelson's original contention that schools had been over-identifying special education students, which thereby drove the overall need for funding at higher and higher levels.

After a relatively contentious period of debate, the Legislature adopted a compromise amendment concerning the funding elements of the bill.  Even at the second stage of debate, there were still those who felt the spending on the part of school districts was out of control.  They believed the only way to control spending was to cap the state appropriations for special education services.

The compromise amendment would appropriate $122 million for FY1995-96 (for special education costs arising from service year 1994-95).  The appropriation amount would increase by 2.5% for FY1996-97 (for service year 1995-96), and 3% for FY1997-98 (for service year 1996-97).⁸⁰  The amendment would carry a sunset provision to repeal the existing cost reimbursement system on August 31, 1998.  This would require the Legislature to enact a new funding system for special education services during the 1998 Legislative Session.  The new system would be designed so average annual special education costs increase at a rate no greater than the growth rate of general education.⁸¹

LB 742 was passed by a solid 45-3 vote on June 8, 1995, the 90th and last day of the 1995 Session.⁸² However, while the legislation certainly seemed important at the time, much of what it proposed in policy never came to pass.  The Legislature would not adopt a new funding system to replace the cost reimbursement system.  And the Legislature would eventually settle on a maximum 5% annual growth in state appropriations for special education programs.  On the other hand, school officials did receive the message loud and clear that special education appropriations would not be open ended, blank checks from state government.  No doubt the most important lesson from LB 742 was that both local and state governments have only so much flexibility on issues related to special education in light of federal laws, rules and regulations.  In addition, some policymakers learned or would learn in subsequent sessions that unrealistic caps on appropriations for special education would necessarily have an impact on the state aid formula.

LB 490 - TERC
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Prior to 1996, the body established to equalize the values of real property among counties was the State Board of Equalization and Assessment, which was comprised of the Governor, Secretary of State, State Auditor, State Treasurer, and the Tax Commissioner.  The board was established under the State Constitution and had a variety of functions and duties that were, from time to time, modified by the Legislature.  By the 1990s it became evident that some major changes were needed in order to achieve true equalization.  In 1994, the Legislature passed LR 277CA to replace the board with the Tax Equalization and Review Commission (TERC), but due to a technical defect the amendment did not appear on the 1994 General Election Ballot.⁸³ In 1995, Senator Doug Kristensen of Minden made a second attempt to eliminate the board and implement the TERC, and ultimately succeeded with the passage of LB 490 and LR 3CA.

Legislative Bill 490 (1995) would 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 and the granting or denying of tax exempt status for real or personal property.⁸⁴  LB 490 would also empower the commission to hear and determine appeals of various decisions of the Property Tax Administrator, a newly created position.⁸⁵ The companion piece to LB 490 was LR 3CA, a constitutional amendment to eliminate the Board of Equalization and replace it with the TERC.

Kristensen renewed his effort to create the TERC in 1995 due in part to the "dire need for equalization" and to ensure that the property tax system operates as fairly as possible.⁸⁶  "The only way, in my opinion, that you're going to achieve good equalization across the State of Nebraska is by proper equalization and valuation and proper assessment of individual tracts," Kristensen said.⁸⁷  The Minden senator would designate LB 490 as his priority bill for the 1995 Session.⁸⁸

Critics of the measure, including the Nebraska Association of County Officials (NACO), alleged that it would merely add another layer of bureaucracy to state government.  Other critics, including several state senators, argued against the bill due to the cost of creating a new state agency, which was expected to exceed $300,000 per year.⁸⁹ The public education community remained fairly silent on the proposal even though the bill would amend, albeit slightly, the school finance formula.

LB 490 would amend three sections of the formula.  Most of the amendments simply harmonized the law by including the newly created position of Property Tax Administrator within relevant sections of law.  In one of the few substantive changes, the Property Tax Administrator replaced the Tax Commissioner in the duty to receive objections by school districts concerning adjusted valuations, which would now be established by the Property Tax Administrator rather than the Department of Revenue.  LB 490 also changed the date by which the Property Tax Administrator must enter an order to modify or decline to modify the adjusted valuations from September 1st to December 1st.  The final determination may be appealed to the Tax Equalization and Review Commission whereas before such appeals were filed with the Tax Commissioner.⁹⁰

LB 490 was passed on May 31, 1995 by a 28-10 vote.⁹¹  The bill was signed into law by Governor Nelson and became operative on January 1, 1996.  The companion piece to eliminate the State Board of Equalization, LR 3CA, was eventually passed by a sufficient margin to be placed on the primary election ballot rather than the general election ballot in order to expedite the implementation process.  LR 3CA became Amendment No. 4 on the 1996 Primary Election ballot and was passed by the voters on May 14, 1996.⁹²

LB 542 - Federal Impact Aid
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Legislative Bill 542 (1995) represented what one prominent school attorney called a "fairly complicated fiscal matter."⁹³  It was, said Lincoln attorney James Gessford, a "matter that's so complicated that almost no one can explain it."⁹⁴  The chief sponsor of the bill, Senator Chris Beutler of Lincoln, called the legislation "a real brain teaser."⁹⁵  In fact, it was socomplicated that it generated very little debate and passed by a unanimous vote.  If such a thing exists within the realm of the Legislature, LB 542 would certainly be classified as an "I'll take your word for it" piece of legislation.

LB 542 concerned the long-standing issue of back payments to a select few school districts that were denied certain amounts of state aid for the 1990-91 school year, the first year of implementation of LB 1059 (1990).  Specifically, the bill focused on some, but not all, the school districts that receive federal impact aid funds provided to districts in which the presence of the federal government resulted in a financial burden.  This federal presence may be through the acquisition of land that is no longer taxable or because of educational needs of children who either reside on federal land or have parents who work on federal land.

As passed by the Legislature under LB 1059, the state aid formula provided that district resources include all local revenue from property taxes as well as a list of "other receipts," which include such items as interest on investments, transportation receipts, and special education receipts, and others.  Within this list of "accountable" receipts was the impact aid funds received by school districts "to the extent allowed by federal law."⁹⁶  In addition to listing specific accountable receipts, the same section of law provided that district formula resources "shall include other actual receipts as determined" by the Nebraska Department of Education.⁹⁷  The language was sufficiently ambiguous to cause a disagreement between the department and various affected school districts as to the extent to which, or whether, federal impact aid funds should be an accountable receipt within the school finance formula.  The matter came to a head prior to the 1995 Session, when the U.S. Department of Education ruled that "none of the impact aid receipts should have been held accountable" for the 1990-91 school year.⁹⁸ Consequently, LB 542 was introduced as a means to resolve the issue at the state level, but final resolution was still contingent upon the passage of federal legislation to sort out the matter once and for all.

At the time LB 542 was introduced, there were several categories of federal impact aid awarded to school districts across the nation depending upon specific circumstances.  Historically, the Nebraska school district receiving the most federal impact aid was Bellevue Public Schools due to the location of the U.S. Air Force base.  Bellevue Public Schools received sizable amounts of impact aid for several reasons.  First, the Air Force base consumes a considerable portion of tax-exempt land, designated federal land, which would otherwise be subject to local property taxation.  The result, naturally, is a loss of local revenue to the school district.  In addition, the residency laws require the Bellevue Public School District to educate the school-age children whose parent(s) are employed by the Air Force base.  Another category of federal impact aid springs from the lost property valuation due to federally designated lands within a school district but without the dual burden of significant populations of school-age children.

In the 1990-91 calculation of state aid, Bellevue Public Schools was denied approximately $3 million in state aid due to the receipt of about the same amount of impact aid funds.  Eleven other Nebraska school districts were held accountable for about $1 million in impact aid receipts under the then newly created state aid formula.  These districts included Lincoln and Grand Island to a large extent and several other districts to a lesser extent.  Simple math would produce a total price tag of $4 million in state aid to be recovered by the passage of LB 542.  But, in fact, this was not the amount to be recovered under LB 542, and this was where part of the complexity derived.

Due to the nature of the category of impact aid received by Bellevue Public Schools, any funds appropriated or otherwise forwarded to the district under LB 542 would have to flow back to the federal government.  In essence, the federal government would have viewed the funds under LB 542 as reimbursement for the funds it allocated to Bellevue Public Schools in 1990.  Accordingly, the twelve districts involved, including Bellevue, decided against pursuing back payment of the full $4 million.  Instead, LB 542 applied only to the remaining eleven school districts, excluding Bellevue, which effectively lowered the total asking under the bill to slightly less than $1 million ($912,050 to be exact).⁹⁹ This amount would be divided among the eleven applicable districts according to the computations of the Nebraska Department of Education.

Even with the agreement among the districts involved, there were still legal entanglements to sort out at the federal administrative level.  In addition, the Nebraska congressional delegation would have to secure federal legislation within a short timeframe, by October 1, 1995, to essentially legitimize the steps taken at the state level through LB 542.  Among all the facets of this complicated matter, it was the passage of federal legislation that caused the most concern and skepticism.  After all, it was one thing to pursue legislation through the Nebraska Legislature and quite another to pursue legislation through Congress.  In essence, LB 542 was one piece among several that had to fall into place at just the right time.

The other major question, specifically related to the mechanics of LB 542, was how the state would make the back payments to the eleven applicable districts.  Where would the money come from?  And this is, perhaps, where the careful crafting of LB 542 was most evident.  The language in the bill presented two methods of financing the back payments.  The first, and preferred method was a separate appropriation by the Legislature in the amount of $912,050.  The second method was to require the Department of Education to set aside this amount of funds from the total appropriation granted to the state aid fund for the 1995-96 fiscal year.  The second method, to use equalization funds, was believed to be feasible due to the sunset of the original hold harmless provision under LB 1059 (1990).  This would free up nearly $3 million in state aid of which roughly $1 million could be set aside for the one-time back payment prescribed under LB 542.

What was not immediately taken into consideration was that the Governor already earmarked the $3 million in hold harmless funds to be used for reorganization incentives under LB 840 (1995), which was ultimately passed by the Legislature.  Therefore, in the absence of a separate appropriation by the Legislature, the only way to fund LB 542 would be through equalization aid under the annual TEEOSA appropriation.  And, in fact, that is what happened.

LB 542 breezed through the legislative process.  The only potential snag occurred during Select File consent calendar when Senator Ardyce Bohlke attempted to suspend the rules to permit consideration of a non-germane amendment.¹⁰⁰  The Bohlke amendment related to a federally mandated requirement that students should be (but are not required to be) expelled for a full calendar year for the offense of possession of a firearm on school grounds.¹⁰¹  Bohlke said the failure to comply with this mandate would mean the loss of $33 million in federal education funding.  The motion to suspend the rules was passed by a 32-0 vote,¹⁰² but consideration of the amendment exceeded the fifteen-minute time limit for consent calendar bills.  No vote was taken on the Bohlke amendment and no vote was taken to advance the bill that day.  A week later, on April 13, 1995, the Bohlke amendment was withdrawn and the Legislature took quick action to advance the bill.¹⁰³

LB 542 was passed by the Legislature on April 27, 1995, with the E-clause attached, by a 36-0 vote.¹⁰⁴  The Governor signed the bill into law on May 3rd, which made the bill operative on May 4th.¹⁰⁵  By this time, the concerned school districts had already commenced lobbying efforts at the federal level to secure necessary congressional legislation prior to the October 1, 1995 deadline imposed under LB 542.  Ultimately, however, the federal legislation did not materialize within the timeline anticipated by the proponents of LB 542.  An extension of the deadline would be sought a year later and contained within one of the most significant school finance bills to pass since the inception of the new formula:  LB 1050 (1996).

LB 840 - Reorganization Incentives
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Legislative Bill 840 (1995) represented a significant policy change in that, for the first time, financial incentives for reorganization would be built into the school finance formula.  One of the principle advocates of this policy objective was Governor Ben Nelson, who, during his 1994 re-election bid, heard from citizens and educators alike on the problems faced by school districts that were contemplating consolidation.  The major problem encountered was what many called the "disincentives" to reorganization.  The disincentives involved real examples of school districts voluntarily consolidating only to discover that the reorganized district actually received less state aid than the school districts involved would have received had they not consolidated.  The effect of the disincentive caused more than a few school districts to reconsider plans for consolidation.

Senator Ardyce Bohlke, serving in her second year as chair of the Education Committee, was asked by the Governor to file the legislation on his behalf.  Senators Bob Wickersham and Ron Withem served as co-sponsors of the legislation, which added the credibility from both rural and urban-based lawmakers.  The bill would be designated a priority by Senator Ed Schrock, also a rural area legislator.¹⁰⁶ And the bill would have only a minor fiscal impact to the state with an anticipated expenditure of a few thousand dollars to the Department of Education for computer reprogramming costs.  In short, LB 840 was a well-crafted bill both on technical and political considerations.  But how would the disincentives be addressed?

As with many political ideas before and since, LB 840 was the result of opportunity and timing.  The Governor and key lawmakers closely connected to the state aid formula were well aware that the hold harmless provision implemented as a part of LB 1059 (1990) was about to sunset (after the 1994-95 fiscal year).  The funds set aside for the hold harmless provision could either revert to normal use under the equalization formula, or, perhaps, be used for a different purpose, a different policy objective.

The general objective to reduce the number of school districts was certainly not new to the Nebraska political landscape.  From 1985 with the passage and ultimate repeal of LB 662 through the passage and retention of LB 1059 (1990) and through the early 1990s, the issue of consolidation had not dissipated within legislative debates nor faded from public attention.  While the total number of school districts had decreased over a fifteen-year period, most of the reductions were elementary-only (Class I) districts.  In 1985 there were 977 school districts of which 288 were K-12 districts, in 1990 there were 838 school districts of which 278 were K-12, and in 1995 there were 680 school districts of which 269 were K-12.¹⁰⁷ Whether progress was being made depended upon who was asked.  But by 1995, it was not just the Class I districts at issue but also some of the smaller K-12 districts that existed within a few miles from one another.

LB 840 would address the issue by offering financial incentives to reorganize and thereby eliminate the so-called disincentives to reorganization.  It would also establish, whether consciously or not, the policy of the state to encourage rather than forceconsolidation of school districts.  This unwritten policy became an understanding between policymakers and school officials, although every session it seems at least one attempt is made to forcibly restructure school districts.  But LB 840 was not about forcing anyone to do anything.  It was meant to address the barriers to reorganization and was brought forward by those who would otherwise consider consolidation if the law was changed to make it an acceptable proposition to all concerned.

"The philosophy behind this bill is simple," said Trent Nowka, legal counsel to Governor Nelson, "If a district finds that it is cost effective and feasible to voluntarily merge into another district, they should have the opportunity to do so without being hurt in the state aid they are receiving."¹⁰⁸  Testifying on behalf of the Governor at the hearing on March 7, 1995, Nowka also emphasized the voluntary nature of the bill.  Said Nowka:

This bill is the Governor's attempt to allow local districts the ability to make changes in their structure only if they voluntarily agree to do so.  The Governor feels very strongly that these decisions should be made at the local level.  It is an attempt to allow those types of decisions to be made without the disincentives that the current formula has.¹⁰⁹

The local control aspect of the bill made it difficult for anyone to oppose it on philosophical grounds, unless affording local authority over such decisions ran counter to one's philosophy of government.  But for the school community and lobby, this bill represented a non-threatening, straightforward, perhaps even easy bill to agree upon.  No one opposed the bill at the hearing, but that is not to say no one had concerns.

The Education Committee met in executive session to discuss the bill on the same day as the public hearing.  Several changes were made and the bill was advanced on a 6-1 vote, with Senator Bernard-Stevens being the lone dissenter.¹¹⁰ Senator Bernard-Stevens would eventually support the bill but only after a compromise was struck on Select File debate.  As noted below, the compromise related to a sunset clause on the bill.

As advanced by the committee, LB 840 would enlarge the Tax Equity and Educational Opportunities Support Act by adding two new sections, both related to incentives for consolidation and reorganization.  The bill defined "consolidate" as the voluntarily reduction in the number of school districts providing education to a grade group, and "reorganized district" as any district involved in a consolidation and currently educating students following a consolidation.¹¹¹

The incentive program would essentially be a phase-in hold harmless mechanism, which would be applied when two or more districts consolidate into one or more reorganized districts.  In the "base fiscal year" (the first year of participation in the program), the reorganized district would receive 100% of the state aid each of the individual districts involved in the reorganization would have otherwise received had no reorganization occurred, or the total amount the newly reorganized district would receive under the formula, whichever is greater.¹¹²  The bill defined "base fiscal year" as the first fiscal year in which all data sources reflect the reorganized district as a single district for the calculation of state aid.¹¹³

In the second year of participation in the program, the same method would be used to compute state aid, except that the hold harmless provision would be reduced to 66% of the amount the reorganized district would receive.  In the third year of participation in the program, the same method would once again be used to compute state aid, except that the hold harmless provision would be reduced to 33% of the amount the reorganized district would receive.  At the conclusion of the three-year hold harmless program, the reorganized district would receive the amount of state aid entitled to it under the normal provisions of the school finance formula.¹¹⁴

The amount of funds available for reorganization incentives was capped at the amount of funds used for the original hold harmless clause created under LB 1059 (1990).¹¹⁵  In the final year of its implementation, FY1994-95, $2.9 million was distributed to qualifying districts under the original hold harmless provision.  Accordingly, the total amount of funds available for reorganization incentives each year, beginning in 1995-96, would be $2.9 million.¹¹⁶ If the demand for reorganization incentives exceeded the capped amount, each qualifying reorganized district would receive a pro rated share.

As advanced by the Education Committee, LB 840 did not contain a sunset provision.  Presumably, the incentive program would simply exist for use by school districts until such time as the law was changed.  But the failure to include a sunset clause was not an oversight by the Governor.  "We talked about it but we did not put one in there," said Trent Nowka on behalf of the Governor.¹¹⁷  For at least one legislator, however, this would become a sticking point because without a sunset clause school districts may not have any sense of urgency about taking advantage of the financial incentives.  Senator Bernard-Stevens, a member of the Education Committee, would eventually strike a compromise with proponents of the bill to insert a sunset provision.¹¹⁸  As amended on Select File, the bill specified that the incentive program would only apply to reorganizations occurring on or before June 30, 2005.¹¹⁹ This would essentially give school districts a ten-year window of opportunity to take advantage of the program.

LB 840 received strong support throughout the legislative process with very little debate.  Even the addition of the sunset provision came without controversy.  But one of the prevailing undertones of the brief floor debate was a sense of urgency on the part of some rural legislators to secure a policy of permissive rather than mandatory consolidation.  This was particularly evident during a brief exchange between Senator Dan Lynch of Omaha, who in the past had introduced a countywide school district bill, and Senator Ed Schrock of Elm Creek, who prioritized LB 840.  Said Schrock:

Senator Lynch, you may find this odd, but I use you when I campaign and talk about school consolidation.  I say that if you, if the people in rural Nebraska don't take some action on their own, there's always Senator Lynch with his one school district per county bill and I think it behooves rural Nebraska to listen because we all know there's fewer rural senators in the body and the fear out there that the urban Nebraska Legislature will do something in the area of forced consolidation I think is a powerful mechanism to provide incentives for these people to consolidate.¹²⁰

The tongue-in-cheek banter between Senators Lynch and Schrock may not have had any serious consequence to the passage of LB 840, but consolidation was far from a joking matter especially to those rural community residents who feared the closing of their school.  The lawmakers who represented these communities knew if something akin to LB 840 were not enacted, then those who favored the more draconian approach to consolidation would eventually have their views heard in serious legislative debates.

LB 840 passed on June 8, 1995, the last day of the 1995 Session.  The bill passed with the E-clause attached on a 47-1 vote (Senator Chris Beutler cast the sole dissenting vote).¹²¹  The bill became operative on June 14, 1995, one day after Governor Nelson signed the bill into law.¹²²