The TEEOSA

The chief sponsors of the bill were Senator Ron Withem of Papillion and Senator Scott Moore of Stromsburg.  Withem and Moore were two of the three members of the Legislature who served on the commission that produced the legislative proposal.  The third legislator on the commission, Senator Howard Lamb, declined to attach his name to the bill.  But other senators would attach their names to the legislation.  In fact, no less than 32 of the 49 members of the Legislature signed on as sponsors or co-sponsors of the bill, including the Speaker of the Legislature, Senator Bill Barrett of Lexington.² And while some of sponsors would defect to the opposing side and some opponents would resolve to become proponents, the same number, 32, would ultimately signal the successful passage of the bill over the Governor's objections toward the end of the session.

LB 1059 was officially introduced on January 9, 1990, just six days after the Second Session of the 91st Legislature convened in Lincoln.  The Executive Board of the Legislature, serving in its capacity as Reference Committee, accepted the recommendation to refer LB 1059 to a unique joint panel for disposition.³ This joint panel would be comprised of members of the Education Committee and the Revenue Committee, sixteen legislators in all, the majority of whom were sponsors or co-sponsors of the bill.

LB 1059, as introduced, consisted of 36 separate sections, most of which explained the method to be used for computation and distribution of state equalization aid.  The bill was comprised mostly of new sections, new language to be incorporated into law, but it also included sections to amend existing statutes relevant to the subjects of education and revenue.  The first section provided the name of the new school finance system, the "Tax Equity and Educational Opportunities Support Act."⁴ The name of the act itself, often referred by its acronym, TEEOSA, embodies the two central focuses of its mission:  to provide tax equity for both taxpayers and schools, and to provide equity of educational opportunity for students.

The second section housed both a statement of the problems to be resolved and the specific objectives or philosophical goals to be met.  This section was divided into two subsections, one to establish the legislative "findings," and the other to spell out the intent of the legislation.  The findings involved factual statements that supported, and, perhaps, justified the passage of the bill.  Under the findings subsection, the Legislature declared that:

1. Nebraska currently finances over seventy percent of the costs of operating its public school system from the property tax and other local sources while nationally only forty-three percent of the costs are supported by property taxes and other local sources;
2. State support for the public school system has not kept pace with the increased costs of operating such system;
3. Nebraska has a higher per capita property tax burden than most other states while the overall state and local per capita tax burden in the state is below the national average;
4. The cost of operating the public school system is near the national average in per pupil cost as well as per capita spending;
5. The overreliance on property tax for or the support of the public school system has resulted in great disparities in local property tax rates; and
6. The overreliance on the property tax for the support of the public school system has created inequitable educational fiscal resources for students.⁵

The majority of these findings were tax-related, but the underlying mission was not solely about tax relief.  Enmeshed within the findings were concerns about the ability of school districts to operate, the level of support to be expected from the state, and educational opportunities afforded to students.

The subsection describing the intent of the Legislature set out some specific objectives to be achieved through the creation of the new school finance system.  LB 1059 proposed to create a new system that would:

1. Provide state support from all sources of state funding for forty-five percent of the general fund operating expenditures of school districts;
2. Reduce the reliance on the property tax for the support of the public school system;
3. Broaden financial support for the public school system by dedicating a portion of the revenue received from the state income tax for support of the system;
4. Keep pace with the increasing cost of operating the public school system;
5. Assure each district a foundation support level for the operation of schools within each district taking into consideration the taxable wealth and other accessible resources of the district;
6. Assure a greater level of equity of educational opportunities for students in all districts;
7. Assure a greater level of equity in property tax rates for the support of the public school system; and
8. Assure that there is a shift to sustainable revenue sources, other than property tax, for the support of the public school system through the establishment of limits on the growth of general fund budgets of districts.⁶

The intent subsection restated, in many cases, the objectives set out in LB 940 (1988) and also LB 611 (1989), especially as it pertained to the notions of a dedicated income tax rebate, property tax relief, increased state spending on education, and a focus on equity of educational opportunity.

Section 4 of the bill established the income tax rebate to schools.  This section dedicated 20% of all income tax receipts collected by the state, minus credits and refunds, to fund public education.  It further provided for the direct return of 20% of identifiable individual income tax receipts to the school district where such receipts originated.  Class I school districts, Class VI school districts and county nonresident tuition funds would receive a pro rata share of the income tax receipts.  Any portion of individual income taxes not identifiable to any school district plus 20% of corporate, nonresident, trust and other non-individual income tax receipts would be distributed through the equalization formula.⁷

Section 5 of the bill was probably the most complicated part of the bill, but it established the real heart of the distribution formula.  This section created a structure whereby all school districts would be placed in a specific "tier" based upon average daily membership (ADM) in various grade groupings (i.e., kindergarten, grades 1-6 plus full-day kindergarten, grades 7 and 8, and grades 9 to 12).  The tier structure would provide a basis to calculate each school district's "tiered cost per student" for use in the equalization formula.⁸ The tiered cost per student varied among the different grade groupings on the theory that it generally cost more to educate a high school student, for instance, than a kindergarten student.

Sections 6 to 11 established various components of the system.  This system called for each district's "formula needs" to be subtracted from its "formula resources" in order to arrive at the appropriate amount of state aid.⁹ This created the basic formula:

The initial list of additional accountable receipts included the following revenue sources:

1. Public power district sales tax revenue;
2. Fines arid license fees;
3. Nonresident high school tuition receipts;
4. Tuition on receipts from individuals, other school districts, or any other source except those derived from adult education;
5. Transportation receipts;
6. Interest on investments;
7. Other miscellaneous local receipts;
8. Special education receipts;
9. Receipts from the state for wards of the court and wards of the state;
10. All receipts from the Temporary School Fund;
11. Receipts from the Insurance Tax Fund;
12. Pro rata motor vehicle license fee receipts;
13. Help Education Lead to Prosperity Act funds;
14. Other miscellaneous state receipts;
15. Impact aid receipts to the extent allowed by federal law;
16. Johnson O'Malley receipts; and
17. All other noncategorical federal receipts.¹²

A few of these receipts require some elaboration.  For instance, "impact aid" refers to a federal program that provides funding for a portion of the educational costs of certain students whose parent is a part of a military installation.  The Help Education Lead to Prosperity (HELP) Act refers to the state program to supplement teacher salaries.  The Johnson O'Malley Program was a supplemental educational program enacted to meet the specialized needs of eligible Native American students.

Sections 14 through 20 established a spending limitation for school districts along with exceptions to the lid, the method of computation, and methods to exceed the lid.  For the initial year of implementation, the "base spending limitation" was set at 4% with a "growth range" of up to 6.5%.¹³  This meant that a given district's budget growth rate could be set anywhere between 4% and 6.5%.  The Department of Education was assigned the duty to annually determine each district's "applicable allowable growth rate" based upon each district's spending from the previous year.¹⁴ Essentially, a district would receive a higher growth rate if it did not have high spending the year before.  Conversely, a district would receive a lower growth rate if it had high spending the year before.  The idea was to balance spending from year to year.

The bill initially provided for three exceptions to the spending lid, but this list would later grow as the Legislature debated and amended LB 1059.  The initial list of exceptions included:

1. New or expanded programs or services mandated by changes in state or federal law;
2. Enrollment increases for the ensuing school year; and
3. Construction, expansion, or alterations of school district buildings that cause an increase in building operation and maintenance costs.¹⁵

The bill also permitted a school board to exceed its allowable growth rate by an additional 1% if approved by a 75% ("super") majority vote of the board or, alternatively, by any amount upon the approval of the voters at a special election.¹⁶  Finally, the bill permitted a district to carry-over unused budget authority from one year to another within prescribed limitations.¹⁷

Section 22 required the Department of Education to provide data to enable the Governor to introduce legislation each year to (1) appropriate funds to reach the goal of 45% state support for schools, (2) appropriate 20% of income tax receipts, and (3) set allowable budget growth rates for the upcoming year.¹⁸ While the intent may have been to fully fund the formula, this section permitted politics to enter the school finance arena.  The Legislature would attempt to come close to meeting the 45% funding goal, but, for one reason or another, the Legislature would never achieve it.

Section 23 of the bill created the School Finance Review Committee to provide oversight of the school finance system.  The committee would be composed of representatives of the Department of Education, the Department of Revenue, the Legislative Council, and each class of school district (Classes I-VI).  The committee would also consist of an expert in school finance and a member of the general public.  Committee members were to be appointed by the Governor.¹⁹

The purpose of the committee would be to monitor the operation of the school finance system and suggest needed revisions.  The bill gave the committee the specific duty to review the implementation and operation of the average daily membership tiers, budget growth limitations, and expenditures of school districts.  The committee was required to submit annual reports to the Governor, the Legislature, and the State Board of Education on (1) the progress of the plan in effectuating property tax relief, (2) broadening the tax base for the support of public schools, (3) equalization of the tax burden for the support of public schools, (4) equalization of educational opportunities for students, and (5) the effects of budget limitations on district spending patterns.²⁰

Sections 27 and 28 of the bill contained the tax increases to fund the new school finance system.  Section 27 increased the state income tax primary rate to 3.7% effective for tax year 1991.  Section 28 increased the state sales and use tax rate from 4% to 5% effective July 1, 1990.²¹

Public Hearing for LB 1059
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The public hearing for LB 1059 was held in the evening of Tuesday, January 23, 1990.²²  Typically, public hearings are held in the early afternoon and conclude in the late afternoon or early evening.  Due to the joint committee venue for this particular bill, the hearing was held in the evening.  The hearing was conducted jointly by the Education and Revenue Committees with Senator Ron Withem, chairman of the Education Committee, serving as the presiding officer.²³

The hearing was structured to allow a presentation on the findings of the commission, an explanation of the mechanics of the proposed bill, and public testimony on the measure.  Senator Withem began the hearing by explaining the reason for a special joint committee public hearing.  The rationale, he explained, was "that we have a bill here that changes significantly the way in which schools are funded in our state."²⁴  He further explained that the bill also "changes significantly the tax base of the state."²⁵

Senator Scott Moore, who co-sponsored the legislation, presented the opening remarks at the hearing.  He began his comments by stating his belief "that this piece of legislation has the potential to be probably the biggest piece of legislation we passed in this Legislature in the last twenty years and probably the next twenty years after that."²⁶  He also set the stage for what will, in successive years, be a commonly quoted formula for property tax relief (i.e., the more the state contributes to state aid, the less local governments will have to request in terms of property tax revenue).  He reminded those present that the 1989 Legislature passed significant legislation relating to property tax relief.  Moore referred specifically to LB 84 and LB 611, which were passed a year earlier.  LB 84 (1989) provided a one-year, $98 million, property tax relief program, and LB 611 (1989) provided intent language to replace the existing school finance formula and to share the income tax base with public schools in order to bring about lasting property tax relief.²⁷  Moore said that following the 1989 Session, many senators, including himself, believed it was time to "come up with a solution to do some major surgery to the property tax problem in the State of Nebraska."²⁸

Moore also credited Senator Ron Withem and the work of the School Financing Review Commission, on which both Moore and Withem served as members.  He said the commission kept the best interests of both taxpayers and students in mind during its work sessions.  He referred to statistics indicating that Nebraska ranked tenth in the nation in terms of property tax rates, but 38th in the nation in terms of "income taxes collected" and 42nd for "sales tax collected."  He believed this meant that the overall tax burden upon Nebraska taxpayers was somewhat average (approximately 27th in the nation).  He suggested a tax shift would provide the answer to the property tax issue while at the same time providing increased resources to fund a school finance formula.²⁹

The second focus of the commission, according to Moore, was the best interest of students, which he broke into three objectives:

The first thing we do is, we just overhaul a system that we know is wrong in this state and it causes a lot of problems.  If we don't fix it, it's going to cause a lot more problems, and more importantly, cause some problems for those kids out there.  Secondly, for once the State of Nebraska is going to have a major commitment to the cost of education in this state and catch up with our peers nationwide on what commitment the state should have that cost of education.  Thirdly, we're basically going to try to guarantee that there's, you know, an average dollars per student out there.³⁰

A stable school finance formula, Moore said, would permit a student to receive essentially the same educational opportunities no matter where that student resides.

Moore attempted to provide an equal measure of rationale in favor of LB 1059 from both perspectives, the student and the taxpayer, but it was clearly the tax issue that received the bulk of his attention during his opening comments.  Toward the conclusion of his remarks, he noted that "there is no magic to fixing our tax system in the State of Nebraska," referring to the difficulty in satisfying everyone's interests on the issue of taxation.³¹  He admitted, "[T]his isn't going to fix our property tax problem in the State of Nebraska."³²  But, he insisted, "[I]t's going to be a giant step forward."³³

Following his opening remarks, senators were permitted to pose questions.  Several issues raised during this question/answer exercise would reappear throughout the hearing and throughout floor debate on the bill.  The first of these issues relates to the act of raising both the sales and income tax rates, and, to some degree, the perceived lateness by the commission to arrive at a revenue solution as part of the overall legislative proposal.  Senator Richard Peterson of Norfolk, a member of the Revenue Committee, chastised Moore and the commission generally for coming late with a plan to raise taxes:

Senator Moore, you and a number of them [members of the commission] have spent eighteen months devoted to this issue, but it seems to me that there's only been about two or three weeks in regards to funding the mechanics of it.  Now I'm concerned that this aspect of the proposal needs further analysis.  Analyzed how that's going to effect Nebraska taxpayers, their sales and income tax, and specifically the concern about the elderly, the low income, the people that don't pay rent, how it's going to effect them because they're going to be paying more.³⁴

Moore disagreed with Peterson's assertion that the addition of a tax increase to the measure was a last minute decision.  He said that tax increase had always been a part of the plan and that such a proposal had been discussed at many of the commission's meetings.  The issue had also been raised at public hearings held by the commission across the state prior to the unveiling of the final legislative proposal.

Another major issue brought to Senator Moore's attention related to those school districts that would actually lose state aid by virtue of LB 1059 once implemented.  Senator Rex Haberman of Imperial noted that some districts would lose as much as 100% of state aid in comparison to that received under the existing school finance formula.  Senator Haberman asked if a "hold harmless" provision had been considered to maintain a minimum level of state aid for each district for at least a couple years after implementation LB 1059.  Moore responded that "ninety percent of the kids in the state are in districts that win" under LB 1059, but that he would nevertheless consider such a provision if it would help move the legislation forward in the process.³⁵

Following Senator Moore, several key testifiers were permitted to give their comments and respond to questions from the joint panel.  The first of these testifiers were representatives from the Department of Education, Larry Vontz, Deputy Commissioner of Education, and Tim Kemper, Director of Organization and Support Services.  Both individuals had provided integral support and assistance to the commission during the research phase of the study and were also instrumental in the development of the actual language used to fashion the legislative proposal.  Their testimony was particularly important at the public hearing in order to help those present understand some of the more technical aspects of the bill.  These individuals would also play a role during floor debate to help senators understand how the formula would work under LB 1059.

Larry Vontz lead the presentation with a series of overhead visual slides to help participants understand some of the fundamental aspects of the proposed formula.  He first explained that all equalization-oriented state aid formulas have three basic components:  (1) the financial "needs" of the district to operate, (2) the available financial "resources" of the district, and (3) the amount of state financial "equalization aid" owed to the district under a formula.³⁶

Vontz explained that the existing formula (under the School Foundation and Equalization Act) similarly contained all three components noted above, but that the distribution of equalization aid had not kept pace with the rising needs of school districts.  Vontz said with the "amount of money we distribute to schools we can only insure them, as far as needs, about thirty-five percent of the cost of education."³⁷  In other words, Vontz explained, it costs approximately $4,000 per school year to educate a high school student, but the existing state aid formula would only contribute about $1,500 toward that amount.³⁸ The first problem, therefore, was that the needs had far exceeded the level of state support, which necessitated a disproportional level of local support to fund public schools.

According to Vontz, the second problem, which paralleled the first, was that the property tax, and hence property ownership, was the "only indicator of wealth" in the existing formula.³⁹  If you own property, the false theory alleges, you must be rich, and "[t]hat's how we're going to determine whether you can afford an education or not, or pay for an education."⁴⁰  Part of the problem, of course, is that property ownership may or may not be an indicator of wealth in terms of income.  Some school districts, Vontz explained, look "pretty good as far as property is concerned," but are nevertheless considered income poor.⁴¹ Other districts are income rich and property poor.

The other part of the problem, related to using property as the sole indicator of wealth, has to do with assessment.  Property is assessed at the county level and assessment practices varied from one county to another.  Vontz testified that:

Because we use property as the primary component, if it is not assessed properly we are distributing money improperly.  For the past twenty years, or more, we've been doing that.  The district, or the counties which are under-assessed are winners as far as state aid is concerned.  They are entitled to more money.⁴²

Income, as a component, was absent in the old formula, and this was something the commission wanted to fix.  The answer, according to the commission, was a school finance formula similar to that used by the State of Kansas.  "The commission was not interested in reinventing the wheel," Vontz said.⁴³

The Kansas model, in part, utilized the level of income from each district as a means to help determine overall wealth.  Accordingly, one of the major components of LB 1059 was the 20% income tax rebate provision.  Under section 4 of the introduced version of the bill, "twenty percent of the projected state income tax receipts shall be dedicated to the use and support of the public school system."⁴⁴  Since income tax receipts fluctuate from year to year, the formula would, theoretically, compensate with lesser or greater equalization aid, as the situation may require.  "[T]hat's what a good state aid formula ought to do ... [i]t ought to take care of those peaks and valleys which occur as far as the income of the residents of a district," Vontz said.⁴⁵

Property tax relief was unquestionably one of the principal aims of the commission.  As a general rule, Vontz concluded in his testimony, districts profiting the most under LB 1059 would be those with high property tax levies.⁴⁶  The local contribution for such districts would be considered excessive and those districts would generally be entitled to additional state support to lessen the property tax burden.  Property tax relief would be further guaranteed by the inclusion of a spending limitation in the bill.  The lid consisted of a 4% base limitation with a maximum range of 6.5%.⁴⁷

Following Vontz's testimony, various individuals who served on the commission were invited to present their remarks concerning LB 1059.  Included among these individuals were Duane Stehlik, Superintendent at Table Rock Public Schools, Don Leuenberger, Vice Chancellor for Business Finance at the University of Nebraska Medical Center, Gene Koepke, Provost at Kearney State College, and Charlyne Berens, co-publisher and editor of the Seward County Independent.  Their testimony essentially endorsed the final product of the commission.  Duane Stehlik echoed comments made earlier in the evening concerning the importance of income as a component in the formula.  "It is a measure of the wealth of the patrons of the school district and it becomes a resource for your local school district," Stehlik said.⁴⁸ The spending limitation, on the other hand, was something less favorable to Stehlik, who noted the ever-rising costs of health insurance and other factors that would make a spending lid difficult for school districts.

Commission member Gene Koepke admitted a personal bias throughout the work of the task force to shift a part of the cost of public education away from property tax and to some other source of revenue.  Koepke said:

More than seventy percent of the aggregate cost of running public elementary and secondary schools in Nebraska comes from local support.  The average local support in the United States is under forty-five percent.  While state governments across the United States have assumed a greater responsibility for public education, Nebraska in recent years has gone the other direction ... .⁴⁹

He also quoted statistics indicating that the typical farmer in Nebraska paid $1.64 in property taxes for every $100 of market value of his or her property in 1986, while the national average was 71¢ per $100.  Similarly, the typical homeowner in Nebraska paid an average property tax rate of 2.29% in 1985, while the national average was 1.21%.  "[T]hat's punitive for the people that own property," Koepke said.⁵⁰  But the problem, according to Koepke, was not high spending or poorly managed school districts.  He quoted statistics indicating per pupil spending in Nebraska for 1988 was $3,756 per student, while the national average was $3,977.00 per student.  "Our problem is not tied to expenditures; our problem is tied rather to source of funding," he said.⁵¹

Eleven individuals, mostly representing school districts that would lose state aid under the bill, provided opponent testimony throughout the evening.  Some suggested that a hold harmless provision would assist their districts in coping with the changes in the formula.  The Class VI Schools Association and the Nebraska School Improvement Association (NSIA) also opposed the legislation.  Former state senator John DeCamp testified on behalf of the Class VI Schools Association and said that the high school only schools opposed the bill for "three philosophical reasons."⁵²  The foremost of these reasons was their belief that the bill failed to move the state away from property as "the fundamental underpinning of financing education."⁵³

The second philosophical reason the Class VI schools opposed LB 1059, as expressed by DeCamp, was their belief that "you cannot divorce the financing of education from the quality of education."⁵⁴  DeCamp complained that the commission's central focus was more about property tax relief and less about improving the quality of education.  He seemed to be saying that the formula under LB 1059 would ensure high quality for some schools, particularly urban schools, and would fail for some of the rural schools (presumably by loss of state aid).  The third complaint alleged by DeCamp appeared to mirror the first to some extent, but he classified it as the "ability to pay" and focused on the principal that municipal areas are generally property poor and income rich while the rural area is property rich and generally income poor.

Rick Baum, representing the NSIA, renewed the debate on LB 662 (1985), which was repealed by the voters in the 1996 General Election.  Baum presented a brief post mortem of the referendum to repeal LB 662, a ballot issue supported by the organization he represented.  His concerns seemed to focus on the fact that Class I districts were once again the target of the Legislature because LB 1059 generally reduced or eliminated state aid to elementary-only school districts.⁵⁵ Essentially, Baum contended, LB 1059 would hurt rural schools.

Testifiers in support of LB 1059 included various organizations such as the Nebraska Association of School Boards, Nebraska Council of School Administrators, the Nebraska Realtors Association, the Nebraska Farmers Union, Nebraska Farm Bureau, and the League of Women Voters (although the League emphatically opposed the imposition of a spending lid).  The State Board of Education also appeared at the hearing in support of the bill.  Representatives for some of the urban public schools appeared in support of LB 1059, including Grand Island, Scottsbluff, Norfolk, Columbus, North Platte, Lincoln, Millard, Beatrice, and Waverly.  Several rural public schools, such as Petersburg and Pierce, also testified in favor of the legislation.  But some of the real fireworks at the hearing were not tied to opponent or proponent testimony, but rather the sole individual testifying in a neutral capacity.

Governor Kay Orr did not personally appear at the hearing but she did send a representative to deliver her comments concerning LB 1059.  Prior to the hearing, there had been rumors that the Governor would oppose the bill based primarily upon the sales and income tax increase portions of the measure.  She did not offer any official stance on the bill prior to the hearing except to say that she would "follow the debate" on the school finance issue.⁵⁶ During the hearing, however, the Governor's position seemed to lean toward opposition with concerns over the tax increases and the impact on taxpayers.

Deb Thomas, then director of the Nebraska Department of Administrative Services, represented the Governor at the hearing.  Thomas said LB 1059 actually represented two distinct yet intertwining proposals, one to revamp the school finance system and the second to provide a funding mechanism in order to achieve the first proposal.  Since the proposals intertwined, she alleged, the bill must be "judged by how their interaction effects all Nebraska taxpayers."⁵⁷  To this end, Thomas offered the following suggestion:

Governor Orr recommends that the effect of a funding mechanism be studied and discussed to the same degree as the formula changes were studied and discussed by the education community.  In addition, she would like to have assurances that income and sales tax increases would indeed providing property tax relief.⁵⁸

This cautious recommendation seemed to indicate a back-to-the-drawing-board position by the Governor and a reassertion of earlier comments made during the hearing when Senator Peterson complained that the sales and income tax increases were very late additions to the overall proposal.  Perhaps, it was also an attempt by the Governor to demonstrate that the discussion on LB 1059 must not only focus on the winners and losers in terms of school districts and state aid, but also the average taxpayer.

Thomas distributed preliminary figures prepared by the Nebraska Department of Revenue indicating the impact of LB 1059 on various groups of taxpayers.  The figures demonstrated a 12% overall reduction in tax burden for farmers but a 5% increase in the overall tax burden of average homeowners.⁵⁹  The business community would witness a .6% increase in tax burden while renters who own no real property would be particularly impacted by the sales and income tax increases and no form of tax relief.⁶⁰

Thomas emphasized the preliminary nature of the data during her testimony, but this admonition failed to quell the wrath of several key members of the hearing panel.  Senator Withem attacked Thomas' testimony on two fronts.  The first concerned the Governor's recommendation for further study on the revenue component of the bill.  "You indicated that there has been ... eighteen months worth of work, discussion about the equalization concept ... [y]ou made allusions to the same type of attention needs to be given to the revenue sources," Withem said.⁶¹  "Does that imply we need another eighteen months?" he asked.⁶² Thomas replied that it did not, but also declined to offer a suggested timeline for such a study.

The second item of contention related specifically to the data on the projected impact on taxpayers.  On this matter, Withem said:

The purpose of the bill is to deal with inequities that exist between school districts, and until such time as we have that information that talks about the inequities between school districts, I think the information you present is not particularly worthwhile, and frankly, I think it's a little bit misleading.⁶³

Thomas defended the data by reiterating the need to examine not only the negative and positive impact on school districts but also to the taxpayers.  "[T]here can be as many inequities built into the finance side as through the delivery side," Thomas cautioned, "And I think, the Governor's point simply is that those two must be harmonized."⁶⁴  However, Withem, soon joined by Senator Bernard-Stevens, questioned whether it was proper to release preliminary data that may or may not draw an accurate picture of the measure's impact.

The joint panel of the Education and Revenue Committees took relatively quick action on the legislation under their jurisdiction.  On January 26, 1990, the group of lawmakers met in executive session to discuss the comprehensive school finance legislation and voted to advance the bill with amendments by a 12-2 vote.⁶⁵  The committee amendments included various technical revisions and also several substantive changes.  Perhaps the most significant among the substantive modifications was a hold harmless provision designed to prevent a school district from losing as much state aid as it might under the new formula.  Under the hold harmless provision, no district would receive less than 100% of the amount it received in 1990-91 (under the old formula).  In 1991-92, no district would receive less than 80% of the amount it received under the old formula in 1989-90.  And for 1992-93, no district would receive less than 60% of the amount it received in 1989-90.⁶⁶  The inclusion of the hold harmless provision was testament to the panel's close attention to the concerns addressed at the public hearing, but there was more to be said on the issue of hold harmless during the long floor debate.

Aye, 12:  Senators Withem, Hall, Dierks, Hefner, Bernard-Stevens, Hartnett, Crosby, Landis, Chizek, Rogers, Nelson, Baack

Nay, 2:  Senators McFarland, Peterson

Not Voting, 1:  Senator Haberman

Absent, 1:  Senator Labedz

While the joint panel appeared in a hurry to advance the bill, the Legislature was not in a hurry to debate it.  General File debate began on the morning of March 6, 1990, the 40th day of the 60-day session, and concluded later in the day with the successful advancement to the second stage of consideration.  Only ten amendments were considered throughout the first stage of debate with five ultimately adopted, three withdrawn, and two defeated.  The major issues addressed within those first ten amendments were the same major issues that reappeared on Select File several weeks later.  Those issues included:  (1) the way in which the Legislature assists districts that lose state aid under the new formula; (2) issues related to the spending lid imposed under LB 1059; and (3) issues related to the sales and income tax increases contained in the bill.

Senator Withem, as chief sponsor of LB 1059, initiated the debate with opening remarks on the legislation and also introduction of the committee amendments.  Withem appropriately set the stage for the debate by noting the high level of public attention attributed to the bill, perhaps more than any other measure proposed that session.  Withem said "forces in the State of Nebraska" have compelled the Legislature to address the "whole question of how we fund education and how we tax property."⁶⁷  The "forces," to which Withem referred, involved several critical factors, as outlined during his opening remarks.  Certainly not the least of the factors was the lawsuit filed on January 2, 1990 against the state concerning the constitutionality of the existing school finance system.⁶⁸  Said Withem:

We are facing a legal challenge.  There are some farmers from right around the Lincoln area that are taking a case into our court challenging our education system.  These types of things have been very successful in states like Kentucky, like Texas, like Montana, other places.⁶⁹

The three court cases to which he referred involved incidents where individuals, school districts, and education groups had filed suit against their respective states alleging the unconstitutionality of their school finance systems.  All three cases received final judgments in favor of the plaintiffs.⁷⁰

Another important factor addressed by Withem involved what he termed a broken property tax system, both as it relates to the taxpayer and to the educational system.  Withem said:

It is irreparably broken unless you do a massive change like the change we have before you.  We have in Nebraska huge variances in the amount of dollars that are behind each student, and you can explain some of those away but you can't explain it away in the aggregate.⁷¹

From the perspective of the taxpayer, Withem indicated, property tax levies for school funding ranged dramatically across the state from 50¢ to $3.50 per $100 of assessed valuation.  From the perspective of students, and the educational system generally, per pupil spending also ranged dramatically from $3,000 per student per year to $6,000.  This, Withem alleged, was an "unfair" system.⁷²

In addition to the pending lawsuit and the unfair property tax system, Withem reminded his colleagues that LB 1059 represented a response to the Legislature's own wishes for a new school finance system.  He reminded senators of their commitment made under LB 940 (1988) to formulate a study group on school finance with the intent to recommend changes to the school finance system.⁷³  He also spoke of the Legislature's commitment under LB 611 (1989) to repeal the existing School Foundation and Equalization Act on June 30, 1991 and make operational a new school finance system by January 1, 1992.⁷⁴  "[W]e, as a Legislature," Withem proclaimed, "do not have the luxury of doing nothing," indicating an urgent need to respond to the issues facing the state.⁷⁵

Withem conceded that LB 1059 "doesn't solve all of the problems in education," nor, he said, does it purport to do so.⁷⁶  He argued, however, that it does take "a major swath down the middle of those problems that are out there."⁷⁷  Furthermore, Withem said, the bill was the result of compromise even before it arrived for floor action.  The best example of this spirit of compromise, he said, was the inclusion of a hold harmless provision in the committee amendments.⁷⁸ The hold harmless provision, Withem said, was the result of listening to the concerns expressed at meetings across the state and also at the public hearing held in January.

The hold harmless provision was particularly important to Senator Dennis Baack of Kimball, who, as a member of the Education Committee, proposed the concept during committee deliberations.  Baack rose to speak immediately after Withem's opening comments and said the provision was a necessary and fair thing to do for those districts that lose state aid under LB 1059.  But he fell short of saying, at least publicly, that his support for the bill was contingent upon the inclusion of the hold harmless provision.  Baack said:

I think that my support for this bill is based on the philosophy that the system that we have now is not fair and it is not correct, and I am willing to change that system, and I want that system to be changed so that we go away from such a heavy reliance on the property tax to begin to rely on other sources of income for the financing of schools, and I think that 1059 does that.  I come from a district that has a number of school districts, probably over half of my school districts are losing school districts under 1059.⁷⁹

The overriding concern to his constituents, Baack said, was reducing the reliance upon property taxes to pay for public education and moving toward other "financing mechanisms for schools."⁸⁰

Of course, not all legislators were willing to cast their support for LB 1059, not even all members of the School Finance Review Commission would ultimately support the measure.  Senator Howard Lamb of Anselmo, for instance, had been the chief opponent of LB 662 (1985), relating to the merger of Class I school districts.  He also was one of the chief supporters of the referendum to repeal LB 662 (Referendum 400), which passed overwhelmingly by the voters in 1986.  However, despite his involvement in its development, Lamb chose not to endorse LB 1059 in order to, as he said on the opening day of debate, "keep my options open and take what I would like to think is an objective view of the bill and the work of the commission."⁸¹  He said he favored one part of the bill, the income tax rebate.  "For the first time ... we have income taken into consideration when we consider state aid," he said.⁸² Nevertheless, Lamb ultimately voted against advancement of the bill throughout the entire process, and was one of the more outspoken critics of the measure.

Lamb's opposition to the bill, however, did not prevent him from offering an amendment in an effort to improve the legislation.  Following the opening remarks and a brief discussion on the bill, Senator Lamb offered an amendment to the committee amendments to require permanent hold harmless status for all school districts.  Under his amendment, no school district would ever receive state aid less than that received for the 1989-90 school year.⁸³ Lamb argued that the committee amendment version of the hold harmless provision would eventually leave residents of some counties with a higher property tax burden to compensate for the lost state aid to their respective school districts.

Following the introduction of Lamb's perpetual hold harmless amendment, Withem rose to offer his opposition to such a plan.  He called it a legitimate policy question but said the additional cost to the bill would have to be studied first.  Withem also cautioned members of the body concerning hold harmless clauses by drawing upon the recommendations of school finance consultants against such provisions.  Said Withem:

[I]f you're going to build your education finance system on a theory of equity and you don't want to be challenged on equity, you need to stick consistent with that equity.  And if our philosophy is that programs need to be funded based on needs of students and the state ought to make up for dollars that aren't available on the local level, anything you do for a hold harmless shifts dollars away from that.⁸⁴

On the other hand, a hold harmless provision with a limited duration, Withem argued, has both practical and political merit and would have the effect of "cushioning the shock" while moving into a new school finance system.⁸⁵ Naturally, the shock, to which Withem referred, would be felt by those taxpayers who witness tax increases under LB 1059 and also the school districts that would lose state aid under the new formula.

Asked by Withem if he had any figures on the cost of a permanent hold harmless, Lamb responded that he did not.  He did note, however, that the fiscal analysis on the first year of implementation for the committee amendment version of the hold harmless indicated a cost of $3 million.⁸⁶ The committee amendment version provided for 100% hold harmless to all school districts for the first year of implementation of the new formula.  This, Lamb suggested, should give legislators an idea of the annual cost for a permanent hold harmless clause.

Other lawmakers rose to support the Lamb amendment, including Senators Schellpeper and Schmit.  Senators Moore and Landis argued against the amendment.  Senator Elmer also opposed the amendment saying it would merely continue the tax inequities between school districts.⁸⁷  After a spirited debate, the Lamb amendment was defeated on a 14-25 vote.⁸⁸

More debate followed the vote on the Lamb amendment, most of which focused on the impact of LB 1059 on taxpayers.  In his closing remarks on the committee amendments, Senator Withem did his best to get potential opponents of the measure to support adoption of the committee amendments.  He reminded his colleagues that the failure to adopt the committee amendments meant the exclusion of a hold harmless provision.  The amendments were adopted just prior to the noon recess on a 33-1 vote.⁸⁹

Following the noon recess, the Legislature once again took up General File debate.  Speaker Barrett permitted Senator Scott Moore to provide an official introduction of the bill since the courtesy had not yet been extended to the senator who designated the measure as his personal priority bill for the 1990 Session.⁹⁰  Moore had the benefit of observing the direction of the morning debate and used the opportunity to redirect the body's attention to the principal goals of the School Finance Review Commission and the legislation itself.  "I think it's important as we begin the debate this afternoon, we couch the debate in terms of ... our goals and does 1059 accomplish those goals?" Moore asked rhetorically.⁹¹

The first goal, Moore said, "[W]as to try and shift the burden of taxes in this state from property to sales and income, [and] do away with the overreliance on property taxes."⁹²  The second goal was:

[T]o equalize some of the disparities in the funding we have of school districts in the State of Nebraska, particularly because of lawsuits around the country and lawsuits in this state and this county, there is a reason that it would be prudent for this body to be out in front of that and do something about it.⁹³

Moore presented the often-used statistics indicating Nebraska's low rank among other states on sales and income tax burden while ranking high in property tax burden.  LB 1059 would attempt to reduce one tax burden while increasing the other to keep pace on a national perspective.  He also referred to the recent decisions in Kentucky, Montana, and Texas where the courts ruled the respective school finance systems as unconstitutional.  "I think if LB 1059 is passed, we'll take us a long step towards keeping us out of court," Moore said, alluding to the equalizing characteristics of the legislation.⁹⁴ Both goals, he concluded, would be met at least to some degree by the passage of the bill.

Having already completed the first round of discussion on the hold harmless provision, the afternoon debate focused on the remaining two major themes that arose throughout the debate process:  taxes and the spending limitation.  The focus of debate concerning taxes took a different direction in the afternoon session, from property taxes to sales taxes.  Senator Rex Haberman introduced an amendment to exclude motor vehicles from the sales tax increase, thereby creating one sales tax rate for motor vehicles (4%) and another rate (5% as proposed under LB 1059) for all other taxable items covered under the Nebraska Revenue Act.⁹⁵

Haberman acknowledged the sales tax increase to help fund public schools, but said he could not support increased funding to the Highway Trust Fund.  Prior to 1990 and still to this day, the sales tax collected on the sale of motor vehicles in Nebraska is dedicated (credited) to the Highway Trust Fund for purposes of highway construction.⁹⁶  Haberman explained his viewpoint:

I can stand up here and support an increase in the sales tax to support the schools, but I really can't understand why we should also take a 1 percent sales tax increase and put it in the Highway Trust Fund.  That has nothing to do with schools. ... The amendment leaves the sales tax on motor vehicles at 4 percent instead of raising it to 5 percent.⁹⁷

In subsequent debate, it became apparent that the fiscal impact of the Haberman amendment would mean about $15 million less revenue to the Highway Trust Fund.

The amendment came at a particularly bad time for Senator Jerome Warner, the unofficial guardian of the Highway Trust Fund since 1969 and chief critic of any proposal to alter or otherwise raid the fund.  Senator Tim Hall explained during debate on the Haberman amendment that Senator Warner was ill and unable to attend session that day, but Hall, chair of the Revenue Committee, volunteered to say what he thought Warner would express if he were present.  If adopted, Hall said, the Haberman amendment would set a precedent concerning the untouchable nature of the fund and would permit future Legislatures to raid the fund or deprive the fund of monies.  Hall admitted to past legislative attempts to raid the fund, but had since taken a different view about the fund and its important purpose.

The Haberman amendment represented the first attempt at chipping-away the sales and income tax increases proposed under LB 1059, something the chief proponents of the measure expected to arise during debate.  However, since this first amendment did not directly impact the funding level or mechanism for schools, the chief proponents may or may not have deemed it necessary to enter the fray.  Perhaps they knew instinctively that one of the "sacred cows" of the Legislature has always been, and still is today, the Highway Trust Fund.  Whatever the reason, the amendment failed to garner sufficient support and was defeated by a 13-26 vote.⁹⁸

The second major amendment addressed in the afternoon debate of March 6, 1990, concerned the spending limitation contained in LB 1059.  The amendment, offered by Senator Elroy Hefner, would extend the duration of the 4% base spending lid from one school year, as proposed in the original bill, to three school years (from 1990-91 to 1992-93).⁹⁹  Hefner made clear his principal concern and reason for offering the amendment:

Why do we need a lid?  Well, I believe we need a lid because we want to be certain, ... we want to be 100 percent sure that this will replace property taxes.  I've been down here 14 years now and as we've increased state aid to education we find that many times it does not replace property taxes and so we want to be sure that it does.¹⁰⁰

A three-year spending lid, Hefner reasoned, as opposed to a one-year lid, would provide more assurance for property tax relief.  Hefner also rationalized his amendment by alleging major public support for spending lids in general.  He also reminded his colleagues that county governments have had resource/spending lids for some time and, while a county may "get into trouble" once in awhile, "eventually they work it out."¹⁰¹  Finally, Hefner offered aloud, the Nebraska School Board Association had reportedly told him that, "[T]hey do not have a problem with this, that they could support it."¹⁰²

Following Hefner's opening on the extended lid amendment, no senator, not even sponsors of the legislation, spoke against the idea.  Most mentioned their general dislike for lids, but said they supported the amendment to further the goal of real property tax relief.  Senator Withem, for instance, gave unqualified support for the Hefner amendment:

[B]udget limitations are a necessity not just in the short term, not just because of another lid proposal out there that we may like less, but because with this proposal if we are underwriting, guaranteeing the support of education at the 45 percent level, not just for a year, not just for a one-time shift, but ideally in perpetuity, we have to have a say over how much is spent.¹⁰³

The other "lid proposal" Withem mentioned was the initiative petition measure promoted by tax activist Ed Jaksha of Omaha to impose a constitutional 2% spending lid on state government and all local governments.

For some senators, certainly not all, the Jaksha amendment was a real threat.  It was as much a motivating factor for some legislators as the potential that the pending Gould case could force the Legislature to change the school finance system.  Senator Hefner mentioned the Jaksha amendment during the opening on his own amendment and Senator Schmit reminded his colleagues of the "terror" in the Legislature from a previous Jaksha amendment:

[I]f you recall a number of years ago when we were under some pressure because we thought Mr. Jaksha was going to put a lid in the Constitution, I recall the almost terror that was on this floor as we attempted to circumvent Mr. Jaksha and install a statutory lid as opposed to a constitutional lid, the argument being that we can get rid of the statutory lid and thereby we can go back to realistic financing for schools when the time-comes.¹⁰⁴

Schmit offered a "hunch" that the 1990 Jaksha amendment "might actually be successful" implying that it might be beneficial to beat the petition movement to the punch and adopt the Hefner amendment.¹⁰⁵ (Jaksha's petition group was still in the process of collecting signatures at the time of the debate on LB 1059.)

Senator Hall also supported the Hefner amendment saying that it may even be prudent to keep the lid in place permanently.  "I'm looking at drafting an amendment that would make the proposal that Senator Hefner has offered one that would stay in statute unless there was an affirmative act by the Legislature to change that lid," Hall said.¹⁰⁶ Senator Hall did, in fact, file such an amendment but ultimately withdrew it during Select File debate.

The Hefner amendment marked one of the few instances throughout the debate on LB 1059 when proponents and opponents of the measure came together in a strong and united way.  The message was clear.  School districts must demonstrate restraint in spending and the 4% lid would not only force accountability but also ensure property tax relief.  The Hefner amendment was adopted by a 38-1 vote.¹⁰⁷

Source:  Neb. Legis. Journal, 6 March 1990, 1174-81.

Following disposition of all pending General File amendments, the discussion turned to the merits of the bill on the whole since the only vote remaining before the body was whether the bill should be advanced to the next stage of consideration.  Those senators opposing the bill emphasized the severity of the property tax problem and questioned whether LB 1059 would improve the situation.  Senator Loran Schmit, one of the more outspoken critics of the measure, insisted there would be no real shift or change from the heavy reliance upon property taxes to fund education.  Rural Nebraska, he insisted, would continue to be unfairly burdened under the new school finance system.  Senator Bernice Labedz argued that parents of children who attend private schools would be unfairly burden by increased sales and income taxes.  She suggested that a tuition tax credit should be afforded those individuals if they were expected to bear more of the cost to operate public schools.

Senator Jim McFarland, among others, was concerned for the property renters of the state, those individuals who own no real property and would be forced to accept higher sales and income taxes.  "[W]here are they going to benefit from this tax bill?" he asked aloud.¹⁰⁸  Perhaps realizing the magnitude of his own comment, Senator McFarland reiterated:

And it really is, a major portion of it, is a tax bill.  They are not going to see any property tax relief whatsoever, and yet they are going to see, on the average, an increase of 17.5 percent in their state income tax, and they're going to see an increase of 25 percent in their sales tax when it goes from 4 cents to 5 cents.  They do not benefit.¹⁰⁹

McFarland's comments were certainly shared by others and bolstered by reports issued by the Department of Revenue, which indicated a heavier impact from LB 1059 on those who rent but do not own real property.

The proponents, for the most part, took the strategy of accepting and acknowledging some of the complaints and allegations made by the opponents.  Rather than denying the validity of the opponents' concerns, some of the proponents embraced the same concerns themselves but at the same time called on the Legislature to look beyond the issue of taxes.  Perhaps no proponent delivered this argument more effectively than Senator Dave Landis of Lincoln, who, just prior to the vote to advance, spoke about a constituent who had called his office that day and inquired about his position on LB 1059.  When the senator's aide replied that Senator Landis would support the bill, "the anonymous caller indicated that with that act I had lost, forever, the support of this particular constituent and the phone slammed down and that was the end of the conversation."¹¹⁰  Landis continued:

I suppose there is an obligation to explain why I would vote for a bill that I know will raise taxes in my home district and probably in greater measure than the property tax relief that those constituents will receive.  I first do it because they will receive a certain amount of property tax relief, and for that I'm grateful.  For the extra costs which they bear, and which they will not receive in the form of property tax reductions, I would give as my rationale this language from Article VII of the Nebraska Constitution.  Section 1 of Article VII says, 'The Legislature shall provide for the free instruction in the common schools of this state of all persons between the ages of 5 and 21 years.'¹¹¹

While others had alluded to the Constitution during the debate or generally referred to the pertinent constitutional language, no one until that point in time had actually read aloud the section concerning the obligation of the state to public education.

Landis was trying to instill in his colleagues a need to view the legislation at a higher level in order to overcome whatever shortcomings it may or may not possess.  Said Landis:

You cannot go through the checkered history of Nebraska school finance without coming to the conclusion that there are kids in this state who did not receive education of the first quality because of the areas that they come from.  It's not because it's not wished for, or hoped for, but because the wealth of the district is such that they are just not capable of providing it.¹¹²

Landis reminded his fellow senators that the obligation under the Nebraska Constitution begins with the Legislature, "It begins with that constitutional principle that says, this is our obligation."¹¹³  "In fact, it is exactly the failure of states to make a living, breathing reality of those kinds of promises that have brought states before the bar to justify and explain their school financing system," he said referring once again to the recent successful court challenges in other states.¹¹⁴

Whether by design or accident, the Lincoln senator provided exactly the right words at the right time to properly focus attention on the real purpose of the legislation.  Landis concluded, saying:

We owe kids in this state a good public education, no matter where they come from, no matter how wealthy their parents are, no matter how wealthy their district is, that's our constitutional obligation.  And 1059 seeks to replace a system which falls short, in my estimation, of that constitutional obligation.¹¹⁵

The passion behind Landis' comments seemed to touch even some of the ardent opponents of the bill.  Senator Schmit, for instance, said he agreed with the principals raised by Landis, but also said his opposition would stand.

For his closing on advancement of the bill, Senator Withem outlined the two objectives of LB 1059:

This bill does two things, basically.  It shifts from overreliance on property tax to other methods of funding education, using the sales and income tax.  Secondly, it provides for a different distribution formula to provide greater equity of funding for students.  It does those two things.  Simplistically, that's what the bill does.¹¹⁶

Withem candidly admitted the "bill does not right a property tax system that has been crumbling for the last 20 years."¹¹⁷  LB 1059 was not designed to resolve the entire property tax problem, but to take a positive step in that direction.  "What this bill should be expected to do is provide a fairer basis of educating children in our state by providing a fairer distribution of funds, and it should get away from our overreliance on property tax to fund education," he said.¹¹⁸

Following a day-long debate on the bill, the Legislature took a record vote to advance the measure to Select File, the second stage of consideration.  The measure advanced on a 34-12 vote.¹

Select File debate occurred over a two-day period and, as with so many major pieces of legislation, this is when the majority of amendments were offered and considered.  This is typically the time when opponents of a legislative proposal make their individual or collective stands, either to delay indefinitely or to at least hold out until some of their demands are met.  In the case of LB 1059, over 30 amendments were considered on Select File in comparison to the ten considered on General File.  And yet the focus of the debate really did not change from the first stage to the second.  Legislators continued to express concern about the sales and income tax increases, the content and scope of the spending limitation, and the effect the new formula would have on those districts that would lose state aid (i.e., the hold harmless provision).

The Legislature took up second-round debate on the morning of Tuesday, March 20, 1990.  Two weeks had passed since the contested bill had been advanced to the next stage of consideration, and legislators used the time to file numerous amendments, form alliances, and, perhaps, seek compromises.  Some of the behind-the-scenes politicking became obvious on March 20th and also March 21st, the second and last day of Select File debate.  In the end, there were just as many issues left unresolved as there were issues resolved, and this became clear as the discussion progressed.

Between the three major issues addressed on Select File, sales/income taxes, spending limitations, and the hold harmless provision, the award for efficient resolution would be given to the latter issue.  As LB 1059 advanced from General File, the existing hold harmless provision ensured each school district would receive in the first year of implementation no less than 100% of the amount of state aid it had received in school year 1989-90.  In the second year of implementation, each district would receive no less than 80% of the state aid received in 1989-90.  In the third year of implementation, each district would receive no less than 60% of the state aid received in 1989-90.

To some legislators, this represented sufficient redress to those districts otherwise entitled to little or no state aid under the new formula.  For the majority of the Legislature, however, this was not sufficient, and they wanted change.  Accordingly, Senator Dennis Baack, co-sponsor of the bill, and Senator Doug Kristensen, who ultimately voted against passage of the bill, co-filed an amendment to put the hold harmless issue to rest.  The amendment would also address several other substantive issues, including the spending lid and special education.

The Baack-Kristensen amendment would accomplish five items.  First, it would eliminate the gradual, phase-out hold harmless provision described above in favor of three-year, 100% hold harmless provision.¹²⁰  The second item was to require the oversight committee, to be created under the bill, to also monitor the progress of the hold harmless provision, presumably to make suggestions for change as necessary.  The third item was to establish a minimum levy requirement to ensure that each district produces a minimum level of local revenue (60% of the local effort rate) before being eligible to receive state aid.  The fourth item would establish a separate growth rate for special education expenditures.  The fifth and last item would permit a district to apply to the Department of Education in order to exceed the spending lid in the event of higher than expected special education enrollment.¹²¹

The separate spending limit for special education was actually one of the most far reaching changes to LB 1059 that could have been made.  Special education costs have always been one of the great uncertainties for school districts each year, especially when, in some cases, the addition of just one special education student could cause major financial burdens.  School officials were constantly trying to keep pace with federal mandates dictating how and what special education services were to be offered.  Senators Baack and Kristensen realized there had to be some measure of flexibility to school districts in this arena.  Accordingly, under the amendment, an annual special education budget growth rate would be established by averaging the growth in special education expenditures from the previous two-year period.¹²²

In spite of the number of major items contained in the Baack-Kristensen amendment and the fact that it had been filed the very day of the debate, it took little time for the Legislature to be convinced of its merit.  This may have been due to Senator Baack's thorough explanation of the amendment, but it may also have been due to the support it received from the chief sponsor of the bill, Senator Ron Withem.

Senator Moore, who prioritized LB 1059, expressed his conditional support for the amendment.  He did not want to see the hold harmless provision extend beyond three years since it would impede the realization of property tax relief.  In addition, Moore did not want education groups and lobbing entities to believe that, since the Legislature agreed to add special education enrollment as another lid exception, it would be willing to add other excluded items to the list. Said Moore:

[T]he special ed exemption to the lid is something that I support, but I must say, I support a little bit nervously or anxiously.  The fact of the matter is there are some people, when we open up this provision, people in the back here are going to say, holy, shucks, hallelujah, the dam is broke, we're going to take a run at that lid.  I guess I'm serving notice to you this is the only one that I'm going to support because I think it's different than the other things and there are going to be some other amendments that are going to be brought to us I think later today that will try and further loosen that lid.¹²³

Moore added that he would "stand bitterly opposed" to any other amendments that in his opinion weaken the purpose of a spending limitation.¹²⁴  The Baack-Kristensen amendment was ultimately adopted by a 26-0 vote.¹²⁵

Senator Moore would oppose other attempts to broaden the list of exclusions from the spending limit.  But he would fail to prevent one other "exclusion" amendment from successful adoption.  Later in the same day, Senator Brad Ashford of Omaha would attempt to exclude increases in employee salaries when the district was bound by a long-term collective bargaining contract and the salary increase exceeded the applicable allowable growth rate for the following year.¹²⁶  In essence, districts would be able to exclude from the spending lid that amount in excess of the applicable allowable growth rate.  In this particular case, Senators Withem and Moore were at odds with one another on the correct course for the Legislature to take.  Withem supported the Ashford amendment and Moore, true to his word, opposed the amendment.  "You once again just further erode that lid," Moore warned his colleagues.¹²⁷  The Ashford amendment was adopted by a 28-10 vote.¹²⁸

Yet another attempt was made on the second day of Select File debate to exclude an item from the spending limitation.  Senator Wesely of Lincoln offered an amendment to exclude a portion of any increase in health insurance costs from the lid.¹²⁹  Wesely argued that health insurance costs would continue to rise and such increases were beyond the control of school districts.  This time it was Senator Withem rather than Moore who reminded the body that the list of exclusions could continue ad infinitum, but the Legislature really needed to draw the line somewhere.  The Wesely amendment failed after a very short discussion on a 7-16 vote.¹³⁰

One of the last amendments to be considered during Select File debate concerned spending limitations on all other political subdivisions.  It must be remembered that LB 1059, in its original form, was intended to impose spending limits on school districts alone and only for one year.  During General File debate, Senator Hefner successfully amended the bill to extend the duration of the spending lid to three years (i.e., school years 1990-91, 1991-92, and 1992-93).¹³¹  Senator Gerald Conway of Wayne proposed to change this with an amendment to extend the 4% spending lid to all other political subdivisions, including municipalities, counties, and educational service units.¹³² Interestingly, this particular lid proposal would have a two-year duration in contrast to the three-year lid imposed on schools through the Hefner amendment.

The concern, as expressed by Senator Withem and other supporters of the Conway amendment, was that any headway made on property tax relief via the schools' spending lid could be negated by increased spending by other political subdivisions.  Naturally, there was no evidence available to prove that various local governments were simply waiting for the chance to increase spending upon the passage of LB 1059.  Therefore, perhaps more than anything else, the Conway amendment, which was adopted by a 29-7 vote, was a demonstration of good faith to the general public that property tax relief was a major objective under the bill.¹³³

While not all senators supported the Conway amendment, perhaps due to territorial protection of one class of political subdivision or another, they did appear unanimous on the goal to provide property tax relief.  Schools, after all, were the largest consumers of property tax dollars.  Accordingly, one of the few unanimous votes to occur during Select File debate was an amendment jointly offered by Senators Stan Schellpeper and Cap Dierks.  The amendment expounded upon the existing intent language within the bill to declare that state aid was to be used specifically for the purpose of reducing property taxes in each district receiving such aid.¹³⁴  Senator Schellpeper called it a "clarifying amendment" to ensure the public knew where the reduction in property taxes derived.¹³⁵  The Schellpeper amendment was adopted by a 34-0 vote.¹³⁶

Except for a few technical amendments to revise the sales and income tax provisions, no other tax-related amendment was adopted.  That is not to say there were no attempts.  For instance, Senator Jim McFarland proposed an amendment to impose a higher income tax increase upon the wealthy.¹³⁷  Senator Jacklyn Smith sought an amendment to exempt the sales tax increase on motor vehicles.¹³⁸  Senator Tim Hall tried to reduce the sales tax increase to one-half percent rather than a full one percent.¹³⁹  Senators Schimek and Wesely attempted an amendment to create a tax refund program for those who rent property.¹⁴⁰ All such amendments failed, some after short debates and some after lengthy consideration.  Some failed by close votes while some failed by wide margins.  The Legislature appeared committed to the concept of greater state support in exchange for reduced local support for schools.

After two full days of Select File debate, the body had simply exhausted itself of reasons to delay a second-stage vote to advance.  And there was little fanfare in the closing remarks before advancement.  Senator Moore had the last word before the vote to advance.  His remarks were both brief and poignant considering the length to which issues were addressed and readdressed.  Moore said:

I've had more than one [person], some gently, some not so gently inform me that I've pretty well ruined my political future by pushing this bill.  And if that be it, so be it.  But, nevertheless, the time has come, let's move this puppy over.¹⁴¹

And move the "puppy over," they did.  Interestingly, LB 1059 advanced to the final-round of debate by the same vote margin (34-12) as it advanced to the second-round.¹⁴²  The twelve individuals in opposition to the bill remained relatively consistent.  Several senators who were present, not voting on General File had switched their votes to the affirmative on the second-round vote.

LB 1059 remained remarkably consistent from its introduced version as it moved to the third and final stage of consideration.  All the major provisions of the bill, from the tax increases to the distribution formula itself, had remained essentially the same as that originally proposed by the commission.  There were a few additions, some major and some minor, but no real change in the direction of the legislation.

The Legislature strengthened the intent language in the bill to remind all concerned that the additional state aid was meant to reduce property taxes.¹⁴³  The bill had acquired a few additional terms in the definition section to help administer the formula.¹⁴⁴  A new factor was added to the formula relevant to calculating tiered cost per student for students residing on Indian lands.¹⁴⁵  The section defining "other actual receipts" for purposes of calculating formula resources had been amended to exclude receipts for private foundations, individuals, associations, or charitable organizations.¹⁴⁶

One of the major additions was the three-year 100% hold harmless clause to preclude any district from receiving less state aid than it received in school year 1989-90.¹⁴⁷  Another major change was the inclusion of a minimum levy provision to ensure a minimum local effort.¹⁴⁸  Another major change was the creation of a separate growth rate for special education costs based upon the average of each district's growth in actual expenditures for special education for the most recently available two-year period.¹⁴⁹  The spending lid for general fund expenditures remained mostly in tact, except that several new lid exclusions had been added.  The new exclusions involved (i) the incursion of unexpected costs due to additional special education students enrolled in a district for the ensuing school year, and (ii) collective bargaining agreements that bind a district to a certain level of budget increase over its applicable allowable growth rate.¹⁵⁰

The fiscal impact of the bill was meant to be revenue neutral in that the state would expend essentially no more than it would receive in new revenues.  In fact, the projected figures indicated a relatively close match on new state expenditures and new revenue.  The Legislative Fiscal Office reported on March 26, 1990 that the bill would produce expenditures of $211,687,410 in 1990-91 while producing $185,889,900 in new revenue due to the sales and income tax increases.¹⁵¹  This would create a slight loss to the state for the first year of implementation.  For 1991-92, it was projected that the state would expend $229,160,466 in new appropriations to fund LB 1059 while it produced $242,971,136 in new revenue.¹⁵²

The new revenue would derive from approximately equal amounts of new sales tax receipts and new income tax receipts.  The bill would increase the primary income tax rate from the previous rate of 3.15% to 3.43% on January 1, 1990 and a second increase to 3.7% on January 1, 1991.¹⁵³  LB 1059 would also increase the sales tax rate from 4% to 5% on July 1, 1990.¹⁵⁴  Since property tax relief was one of the major objectives of the bill, LB 1059 was projected to cause a reduction in local property taxes by approximately $192 million in 1990 and $255 million in 1991.¹⁵⁵

What appeared before the Legislature on April 3, 1990, the day of Final Reading, was a policy proposal that, on balance, would produce the results it was designed to produce.  It was on this day that the Legislature would give final consideration to one of the truly historic pieces of legislation since statehood.  It represented a dramatic re-direction of policy concerning public education and the extent to which the state would offer its direct financial assistance.  It also was meant to produce a greater equity of educational opportunity for each Nebraska student enrolled in public schools regardless of the student's geographic residence.  Finally, the bill would address the on-going issue of over-reliance upon property taxes to fund public education and the need to provide tax relief to property owners.

At least in theory, these objectives would be met or partially met by the passage and implementation of LB 1059.  To some policymakers, the projections provided sufficient basis for voting in favor of the bill.  The concept was worth whatever political risks might be at stake.  To other lawmakers, the tax increases could not be justified, and genuine property tax relief could not be guaranteed by the passage of LB 1059.

The first victory relevant to the passage of LB 1059 was initiated the day before the bill was set for Final Reading.  On April 2, 1990, the Legislature debated Speaker Barrett's motion to suspend the rules and take a final vote on LB 1059 without further amendment, motion, or debate.¹⁵⁶  The Barrett motion actually applied to a whole list of bills, twenty bills in all, that were pending before the Legislature in 1990 and LB 1059 was one of bills on the list.  Debate on the Barrett motion began on April 2nd but was eventually laid-over until the next day.  On April 3rd the Legislature once again took up debate on the Barrett motion and approved it by a 39-8 vote.¹⁵⁷ With the adoption of the Barrett motion, the remaining, pending amendments would simply fall away in order to permit a final vote on the bill.

Since LB 1059 contained the emergency ("E") clause, the bill would require a two-thirds vote, or 33 affirmative votes, for final passage.¹⁵⁸  The E-clause would make the bill operational one day after the Governor signs it into law, or, if the Governor vetoes it, one day after the Legislature votes to override the veto, assuming such an override was successful.  When the record vote was taken on April 3rd, supporters of the measure would find themselves three votes short.  LB 1059 would fail to pass on Final Reading with the E-clause attached by a 30-15 vote.¹⁵⁹

Under the Rules of the Legislature, a bill failing to pass on Final Reading with the E-clause attached will automatically receive a second vote with the E-clause removed.¹⁶⁰  In such cases, the bill would require a simple majority vote to pass.  And pass it would on the second try.  The Legislature approved LB 1059 on a 30-16 vote and also LB 1059A, the accompanying appropriation ("A") bill, by a 30-14 vote.¹⁶¹

Without the emergency clause, LB 1059 would become operative 90 days after the Legislature adjourned sine die, which, in this case, was July 8, 1990 (the session adjourned on April 9, 1990).  Supporters of the bill had wanted as early an effective date as possible in order to provide necessary time to implement the legislation.  The July 8th effective date would not leave much time for school districts to prepare for a new school finance system, not to mention time for the Department of Education to set up the administration of the new formula.  But a late effective date would become the least of the problems faced by supporters of the measure as events unfolded.

Governor Kay Orr announced to reporters the day after LB 1059 passed that she would indeed veto the bill.  "I think it's a foregone conclusion I will veto 1059," Orr said, adding that the Legislature had not addressed her concerns about the bill.¹⁶²  She opposed the legislation on the grounds that it raised state taxes and had no guarantee of producing property tax relief.  Orr pulled no punches in her criticism of the Legislature.  Referring to LB 1059 Orr said, "It's got such a head of steam, some [senators] still have blinders on."¹⁶³  Orr promptly vetoed both LB 1059 and LB 1059A on April 6th, three days before the session was set to adjourn sine die.¹⁶⁴

In a lengthy message to the Legislature, Orr "applauded the tremendous efforts" of the School Financing Review Commission, the study group whose representatives Orr had appointed.¹⁶⁵  Orr wrote that she supported some of the commission's findings, particularly, "the concept that state aid to education is more equitable when distributed to school districts based on a definition of need that includes both assessed valuation of property and income within a school district."¹⁶⁶  Nevertheless, her objections with the bill stemmed from the "hastily included tax provisions that were added to the Commission's studiously prepared work without any analysis of the impact and essential fairness of the provisions."¹⁶⁷  She criticized the lateness to which the tax proposal was added as a "second part" of the legislation, especially since the commission had been at work for 18 months.¹⁶⁸  She wrote:

I believe that it would have been apparent that the combination of the tax provisions with the school finance provisions prevents LB 1059 from meeting either of its two purported purposes.  It does NOT achieve property tax relief, and it does NOT promote educational equity.  Rather, it is simply the largest spending and tax increase measure to be considered in the history of the State of Nebraska.¹⁶⁹

She added that her objections with the bill had been substantially ignored by the Legislature and that other flaws in the legislation had come to light since final passage.

Orr believed the issues of educational equity and property tax relief were not addressed "well or wisely" under LB 1059 and warranted her sustained veto.¹⁷⁰  To bolster her viewpoint, Orr included a list of ten major objections to the bill.

1. LB 1059 is not property tax relief.  Even though sales taxes increase 25% and income taxes increase 17.5%, property taxes are still projected to increase next year.  This is not the kind of property tax relief Nebraskans can afford.
   
   
2. LB 1059 is unfair to the one in three households, whether in town or on the farm, who rent, as well as to the elderly and disabled who receive the homestead exemption.  This group, with the least ability to pay, receives a cruel tax increase.
   
   
3. Property tax relief can not be guaranteed given the ineffective spending lids contained in LB 1059.  The lid on school districts is too loose and too full of exceptions to have any impact, while the lid on other political subdivisions terminates in just two years.  For example, some school districts will be able to increase their tax levies over 19.5% annually without a vote of the people.  Specifically, the lid proposal allows the following tax taking increases:
   
   

   Base Growth Rate	Up to 6.5%
   Enrollment Increase	Up to 10.0%
   Reserve Requirement	Up to 2.0%
   75% Board Approval	Up to 1.0%
   Building Maintenance	Unlimited
   Special Ed. Costs	Unlimited
   Current Employee Contracts	Unlimited
   New Mandated Programs	Unlimited
   TOTAL	19.5% +

4. LB 1059 does not promote educational equity.  Although it redistributes tax burdens by shifting funding sources, it does not permit financially poor school districts to achieve "average spending per pupil" levels within a reasonable time period.  While the lid is ineffective in guaranteeing property tax relief, it restricts these poorer districts from increasing their spending to achieve educational equity.  Consequently, for this and other reasons, LB 1059 is not the solution to the pending court challenge of our school finance system, as has been claimed.
   
   
5. The Legislature designates education funding as the top state appropriation priority in LB 1059.  However, the Legislature failed to meet their commitment in the First year of funding LB 1059, as the bill is underfunded by $33 million.  This reluctance to meet their commitment from the outset bodes ill for the future stability of education funding under this scheme.
   
   
6. The funding assumptions of LB 1059 include the state's continued funding of teachers' salary supplements (LB 89) at $20 million per year.  However, LB 89 expires next year.  Consequently, after 1991 taxes will need to be raised or other current obligations will need to be raided in order to fully fund the provisions of LB 1059.  Since the Legislature failed to fully fund LB 1059 this year, I question their willingness to increase taxes further in the future to fulfill the commitment made in this legislation.
   
   
7. LB 1059 raises $17 million in sales taxes that will go into the Highway Trust Fund, rather than for education.
   
   
8. The use of "tiers" within LB 1059 to group school districts gives an unfair advantage to some school districts in the funding formula.  Conversely, the groupings also hurt school districts who are growing faster than other schools in their tier.
   
   
9. LB 1059's "hold-harmless" clause contradicts the "equity" purpose of the bill.  It provides many school districts with more aid than the formula computes their need to be.  Conceptually this provision defeats the purpose of the bill.
   
   
10. Finally, the sponsors of LB 1059 admit that there are problems with this bill that have not yet been found.  Two major flaws, including the unintentional repeal of the sales tax for two and a half months, were found hours before the bill was passed.  There may well be other flaws with equally dire consequences that have not yet been discovered.

Orr's catalogue of concerns seemed to mirror, to some degree, a few of the concerns expressed by both proponents and opponents of the bill throughout the legislative process.  Senator Withem, for instance, was not an immediate supporter of the hold harmless provision, but was ultimately willing to compromise on the issue in a concession to opponents of the bill.  Senator Moore argued against further adoption of spending lid exclusions because it would weaken the purpose of the lid.  The issues surrounding the Highway Trust Fund and the disparate impact of the tax increases on renters of property were both subjects of failed amendments.

The veto action was certainly not a surprise to anyone.  If boiled down, the Governor's objections principally concerned the state sales and income tax increases and this was not a secret to anyone.  Proponents, nevertheless, remained optimistic about the prospects of overriding the Governor's veto.  Using a baseball analogy, Senator Moore quipped, "We're going into the bottom of the ninth with a two-run lead," referring to the 32 senators lined up to support a veto override (two votes over the required 30 to successfully override).¹⁷¹  Senator Withem also had reason for confidence in a successful override.  Speaking to reporters, Withem referred to a recent report by the Legislative Fiscal Office that predicted a 16.5% increase in property taxes in the coming year.  Approaching the 60th and final day of the session, Withem said the failure to override the veto would mean the Legislature does nothing about the projected property tax increase.  "If you don't vote the override," Withem said, "you're voting for a 16 1/2 percent increase in property taxes."¹⁷²

But not all proponents of the bill were as optimistic about a successful override.  Senator Jerome Warner, for instance, had recently changed his view on the bill from opposition to support and had voted in favor of the bill on Final Reading.  He also noted the 16.5% projected property tax increase, but thought an override would not be possible.  "Obviously it will not have 30 votes," Warner said.¹⁷³  Conversely, several senators who supported LB 1059 in the early stages of debate had changed their minds and now opposed the bill.  Senator Doug Kristensen of Minden, for instance, supported the bill but then voted against the bill on Final Reading.  Kristensen, a co-sponsor of the bill, was quoted as saying, "I think 1059 is the right way to go for the state, but I've got to make this decision for my district."¹⁷⁴ He said about half the school districts in his legislative district would fair well under LB 1059 and half would not.

The Legislature convened early in the morning of April 9th, the 60th and final day of the 1990 Session, to take up motions to override vetoes and to conclude its business for the year.  The body convened at 8:00 a.m. that morning and would not conclude until after 10:00 p.m. that night.  For Governor Orr, in particular, this would be a final session day to remember, or perhaps forget.  Five motions to override line-item vetoes were successfully passed concerning LB 1031 (1990), the mid-biennium budget bill.  And no less than 21 motions to override vetoes of legislative bills and accompanying appropriation ("A") bills were passed throughout that long day.¹⁷⁵

It was late in the afternoon by the time the body reached LB 1059 on the agenda.  Lt. Governor Bill Nichol had returned to the chamber to serve as presiding officer and, upon reaching LB 1059 on the list of override motions, aptly said, "The one you have all been waiting for, LB 1059."¹⁷⁶ Nichol then called on Senator Withem to open on his motion to override.

Withem made it simple for his colleagues by way of introducing his motion.  Without overriding the Governor's veto, he said, there would be no school finance system in existence and there would be no property tax relief for the coming year.  He reminded his colleagues of the recent report projecting an aggregate property tax rate increase of 16.5% in the coming year.  Finally, Withem reminded his colleagues of the pending lawsuit concerning the constitutionality of the existing school finance system and that such suits had been successful in other states.

Withem also took some time to address a few of the objections provided in the Governor's letter to the Legislature after she vetoed LB 1059.  The first and foremost, he said, was the Governor's complaint that the commission introduced the revenue portion of the bill "at the last minute."¹⁷⁷  Withem said the Governor was well aware of the commission's proposal to "raise the state funding to 45 percent to be funded with 20 percent of the state income tax and probably a one cent sales tax or some other source that we may come up with, so it wasn't anything new."¹⁷⁸

On the Governor's charge that property tax relief was not guaranteed under LB 1059, Withem said simply that it was guaranteed.  But he saved the real venom for Orr's objection relating to the spending lid and that some districts could have as high as a 19% growth rate.  "I don't know where in the world that came from, that's wrong," Withem said.¹⁷⁹  Most districts, he said, would be at or near the base growth rate of 4% with only a small number of districts receiving spending authority at the higher end of the growth range of 6.5%.  He added that most school districts in the state do not have major growth in enrollment and most school districts do not have major growth in special education costs.  In short, Withem said, LB 1059 moved the state forward:

It moves the state from being the next to the last in the terms of state support for education up to the middle.  We aren't going to be any leaders, but we're going to be up to the middle.  It deals with the inequities that exist.  You're not going to see the types of gross, gross, gross inequities where an individual that owns property, the same type of property paying four or five, six times as much as another individual the same type of property, just based simply on the school district in which they live.¹⁸⁰

He acknowledged to his colleagues that there would be criticism of the bill "when it passes," but added, "You're also going to get the thanks from an awful lot of people in the state that realize it's the right thing to do."¹⁸¹

Debate on the motion to override may have lasted longer in any other situation but this one.  The body had already considered and voted on numerous motions to override on other bills, and, by the time the LB 1059 motion arrived, the body was simply tired.  A quick and successful motion to cease debate allowed Senator Moore to have the final word on the matter.  Moore said:

Now much has been said about LB 1059 and there's probably been more newsletters written, more press releases, more TV shows, more analysis than any bill in a long, long time and it all comes down to a few people are nervous with good reason about a few unknowns that probably, simply cannot ever, never be answered.  You can't take the total risk out of everything.¹⁸²

What was known, Moore said, was that the Legislature might never again come this close to doing something about the issues of property tax relief and the problems with the existing school finance formula.  LB 1059, he said, was an idea "whose time has come."¹⁸³

Following the closing comments, the Legislature proceeded to vote on the motion, which was approved by a 32-16 vote.¹⁸⁴  The vote, as predicted by Senator Moore, had two votes to spare over the 30-vote minimum to override.

Every senator who voted in favor of the bill on Final Reading also voted to override the veto.  This accounted for the minimum 30 votes required to override.  Senators Rex Haberman and Dan Lynch, who were excused on the day of Final Reading, were both present and voting in the affirmative to override the veto.  This accounted for the other two votes.  The motion to override the veto of LB 1059A, the appropriation bill, was passed on a 31-15 vote.¹⁸⁵