The 2004 Legislative Session

LB 1093 - Extension of Levy Increase/Adjustment Factor

For the third consecutive year, the Nebraska legislature faced an uphill battle to address the economic plight of the State.  Although at long last, it seemed there was a light at the end of the tunnel.  Revenue receipts had demonstrated a turn-around in the months leading up to the 2004 Session, and there was a general feeling of hopefulness among policymakers and the administration.  Nevertheless, there was still a budget shortfall to address and the forecast for the next biennium was not entirely pleasant.  Some projected as much as a $315 million shortfall for the 2005-07 biennium, although it was hoped that healthier revenue receipts would help to dissipate some of this gap.  Included within the shortfall was the ultimate thorn in any state government's side:  a judgment.  In 2004 Nebraska had nearly exhausted its legal options to delay or negotiate a $160 million judgment over the State's withdrawal form the Central Interstate Low-Level Radioactive Waste Disposal Compact.¹

The most accurate way to describe the 2004 Session was that it positioned the State to deal with the projected financial problems of the next biennium.  In fact, the 2005-07 biennium, the "out years" as lawmakers referred to it, was a constant focus of the 2004 Session.  But without question one of the more remarkable footnotes of the 2004 Session was the about-face by Governor Mike Johanns concerning critical issues from the two previous sessions.  What he had objected to in both 2002 and 2003, he would embrace in 2004.

"The Governor is sometimes wrong"

The 2004 Session found the Legislature's Education Committee once again a pivotal cog for the successful outcome of the budget crisis.  State aid to public education was once again placed on the table and open for discussion and revision.  The public education community was once again expected to "play ball" for the betterment of the overall budget situation, even though it may not have been in the best interests of the taxpayer or, some would argue, the consumers of public education services:  the students.

At the request of the Governor, Senator Raikes introduced LB 1093 (2004) to make permanent two of the major issues of the previous two years.  First, the bill proposed to permanently extend the maximum levy for schools to $1.05.²  The $1.05 levy was meant to sunset after the 2004-05 school fiscal year, as per LB 540 (2003).  LB 1093 also proposed to make permanent the temporary aid adjustment factor first established in 2002 under LB 898.³  In fact, the factor would be renamed the "total aid adjustment factor" rather than the "temporary aid adjustment factor."⁴  As before, the total aid adjustment factor would equal 1.25% of the formula needs of a local system.  State aid for the local system would then be reduced by the amount of the factor using three different components of the state aid calculation.  The factor essentially reduced the amount of aid owed by the State in order to reduce the State's financial burden.  As recompense, of sorts, the Legislature permitted an exclusion to the levy limitation in the amount of state aid lost by a local system by virtue of the aid reduction factor.  This provision also would become permanent under LB 1093.⁵

Several important notes about LB 1093 include the fact that it applied to the next biennium and beyond.  In order to extend the levy provisions and to prepare for the 2005-06 state aid certification, it was necessary to pass the bill in 2004.  The provisions of LB 898 (2002) and LB 540 (2003) were due to automatically sunset after the 2004-05 school fiscal year.  On the positive front, at least for school officials, LB 1093 did not extend the zero percent base spending lid that was imposed under LB 540 (2003).  In fact, the legislation did not even mention the spending limitation.  This meant that schools would enjoy a 2.5% to 5.5% spending lid range beginning with the 2005-06 year.  The range had been extended from 2% (i.e., 2.5% to 4.5%) to 3% (i.e., 2.5% to 5.5%) under LB 540 (2003).⁶ The wider range would help to some degree in recapturing some of the spending authority lost under the temporary two-year 0% base lid.

Of particular importance to state lawmakers and the administration, LB 1093 was expected to take a sizable bite out of the projected budget shortfall for the 2005-07 biennium as illustrated in Table 148.

Table 148.  Projected Savings to the State:
Reductions in State Aid as per LB 1093 (2004) as Introduced

	2005-06	2006-07
$1.05 maximum levy/LER $.95*	$49,076,711	$51,615,547
Total aid adjustment factor	$26,507,329	$28,034,653
Total projected savings to State	$75,584,040	$79,650,200
* LER = Local Effort Rate

Source:  Nebraska Legislative Fiscal Office, Fiscal Impact Statement, LB 1093 (2004), prepared by Sandy Sostad,
Nebraska Legislature, 98th Leg., 2nd Sess., 2004, 3 March 2004, 1.

LB 1093 was given special status as one of the first bills to be publicly reviewed by the Education Committee in 2004.  The hearing was conducted on January 27th, the 14th day of the 60-day session.  Senator Raikes, who guided the Legislature through two veto overrides in as many years, presented opening remarks on the legislation that represented the content and issues the vetoing Governor once opposed.  The irony was not lost on Senator Raikes, members of the committee, or the representatives of education organizations present that day.  "The Governor and I don't always agree, which is another way of saying that the Governor is sometimes wrong," Raikes said jokingly, adding, "In this particular case, we do agree."⁷

Senator Raikes provided a summary of the events of the past two years leading up to the introduction of LB 1093.  He admitted the financial circumstances of the State necessitated the continuation of programs that would otherwise be considered distasteful for all concerned.  The programs, to which he referred, included the extension of the levy limitation and the aid reduction factor coupled with the corresponding levy exclusion.  Raikes explained:

We can not, however, in my judgment and also, I think, in that of the Governor, end these programs after the 2004-2005 school year, the next year, and have any reasonable hope of balancing the budget for the next biennium without sizable tax increases or major cuts elsewhere or a revenue miracle.⁸

He mentioned the fact that LB 1093 effectively ended what he called the "most troublesome" of the provisions within LB 540 (2003), which was the zero percent base lid.⁹ Of course, LB 1093 eliminated this provision by simply not addressing it.  The temporary lid would be allowed to expire.

While it is not uncommon for the Governor to appear and testify at a public hearing when a measure is introduced on his behalf, Governor Mike Johanns chose instead to send his Chief of Staff, Larry Bare.  "In the mid-biennium budget assessment presented on January 15, 2004, the Governor recommended that a portion of the 2004 Legislative Session be used to plan and prepare for the development of the state's 2005-2007 biennial budget," Bare said.¹⁰  LB 1093, he added, was a significant component of the plan.  And the plan, of course, meant avoiding what Bare called a "sudden increase" in necessary appropriations for state aid.¹¹ In fact, there would have been sudden increases if the provisions of LB 898 (2002) and LB 540 (2003) were allowed to fall away.  If the maximum levy were allowed to return to $1.00, the State would, theoretically, owe the difference in state aid to schools.  Similarly, if the temporary aid adjustment factor lapsed, the State would owe the difference in state aid.

The education lobby did what was expected.  It came to the table to voice support for the measure, albeit reluctant support.  John Bonaiuto, Executive Director for the Nebraska Association of School Boards (NASB), testified:

[I]deally if the state were able to maintain the amount of state aid that it looked like schools would need to meet their needs, it would be terrific to be able to stay at the $1 levy.  Schools were used for property tax relief and that was the target, but I think this is fluid right now that the state needs some help to relieve the pressure that is on the state budget based on the revenues that the state can generate.¹²

Mike Dulaney, Associate Executive Director for the Nebraska Council of School Administrators (NCSA), agreed with Bonaiuto's testimony.  "[W]e would like to reserve the opportunity, at some point when the economy improves, that we come back and talk to you about maybe increasing the state obligation with regard to state aid, but we do support LB 1093," he said.¹³

The only opposition to the bill came from the Nebraska Farm Bureau.  "I'm sure it comes as no surprise to you that our members do not like property taxes," testified Jay Rempe, Bureau Director of Governmental Relations.¹⁴  Rempe reminded members of the Education Committee of the policy established in 1996 to implement maximum levy limitations for political subdivisions for the purpose of property tax relief.  "I think the Legislature set the course a few years back on trying to work towards property tax reduction and set the levies to ratchet down to $1, and the $1 on schools kind of became the benchmark, if you will, for property tax relief for schools," he said.¹⁵  Rempe encouraged the committee to re-evaluate the notion of making the $1.05 school levy permanent.  "In our view, we should continue to look at the $1.05 as a temporary measure and not something that's on a permanent basis," he said.¹⁶

In his closing remarks, Senator Raikes acknowledged the change of policy outlined in LB 1093.  "We ... the Legislature has, for a number of years, been working on the issue of property taxes and the goal was $1," he said, "This is a retreat from that."¹⁷  He expressed regret that more of the burden to finance public education was being placed on the backs of property taxpayers.  He also expressed his hope that, someday, the Legislature could re-evaluate the $1.05 levy.  "If a future Legislature can see to it to return it to $1, I hope they will and I think they deserve the appropriate credit, or whoever deserves the credit at the time it happens," Raikes said.¹⁸

Temporary versus permanent; $1.05, $1.10, $1.07?

The Education Committee met in executive session on February 9, 2004 to review LB 1093.  Senator Ed Schrock of Elm Creek, a second year member of the committee who began his service in the Legislature in 1995, moved to amend the bill so that the temporary aid reduction factor and the $1.05 maximum levy would remain in effect for two additional years and then fall away.¹⁹  The motion failed on a 3-3-1-1 vote.²⁰  The committee met again on February 24th.  This time the committee would find consensus, and those anxious to maintain a temporary status to the provisions contained in the bill would be pleased.  The committee voted to advance the bill with committee amendments attached.  The amendments would extend the $1.05 levy, the temporary aid reduction factor and the accompanying levy exclusion for a period of three years (2005-06, 2006-07, and 2007-08).²¹  The bill was advanced on a 7-1 vote with Senator Chip Maxwell casting the lone dissenting vote.²² The committee appeared relatively united on a course of action, but the issue was far from resolved.

On February 27, 2004 the Nebraska Economic Forecast Advisory Board (NEFAB) met at the State Capitol to review the latest economic reports and revise, if necessary, the State's revenue projections.  The board not only found it necessary, but necessary in a big way.  The nine-member appointed board is comprised of citizens having expertise in tax policy, economics, or economic forecasting.  One of the board's principal duties is to make educated guesses about the immediate future of tax revenue projections.  In the case of the February 2004 meeting, the board voted to decrease revenue projections over the next two years by a combined $104 million.  Their decision would throw a large wrench in the proposed budget plan crafted early in the session by the administration and key members of the Legislature.  It meant doubling the amount of the shortfall state leaders had planned to address in 2004 and it meant additional worries for the next biennium budget.  "It's pretty serious stuff," said Senator Roger Wehrbein, chair of the Appropriations Committee.²³  "It's going to make us examine more closely how deep we can go into many of the state's services," he added.²⁴

The Legislature is not necessarily bound to the advisory board's projections, but, if the projections are ignored, then why have the board in the first place.  The initial reaction from Wehrbein matched that of the Governor.  The news meant more cuts in the budget, but additional taxation was not immediately in the cards.  This too would change, at least in the minds of some members of the Legislature's budget-setting committee.

In February 2004 the Appropriations Committee was already hard at work trying to mold and massage all the many complicated budgetary considerations into a final proposal for the full Legislature to consider.  However, the advisory board's downward revenue projections required the committee to evaluate options not previously imagined.  The most startling of these options actually became part of the committee's final budget report, which was unveiled on March 16, 2004.  The report stated in part:

Without the February revenue forecast changes, the projected status for the following biennium would have been only $53 million below the required 3% reserve when annualizing the Appropriations Committee's FY04-05 budget actions into the following biennium.  Unlike the remainder of the current biennium, the minimum 3% reserve requirement is applicable to the next biennial budget.  This relatively balanced position (at least from the standpoint of estimating three years into the future) was estimated even incorporating a large increase in TEEOSA school aid (average growth of 13.5% per year) due to the expiration of the temporary aid adjustment factor and the school levy limit returning to $1.00 after two years at $1.05 per current law.

However the February forecast revisions significantly altered the outlook.  The revised NEFAB forecasts, and subsequent adjustments to the revenue estimates for the "out years" yielded a cumulative revenue reduction of $245 million over the four years raising the $53 million shortfall to $292 million.  Even when incorporating an extension of the current $1.05 school levy limit and temporary aid adjustment factor per LB1093, the projected shortfall is still $137 million.  For this reason, the Committee proposal reflects an increase in the school levy limit to $1.10 resulting in an additional $102 million savings in TEEOSA school aid and reducing the "shortfall" to a manageable $35 million.²⁵

Considering the difficult challenge endured by the Legislature to raise the maximum levy from $1.00 to $1.05 in 2003, it seemed almost unfathomable for the same body to buy into a $1.10 levy for schools.

Table 149.  Projected Savings to the State Reductions in State Aid
as per LB 1093 (2004) as Advanced to General File and the
$1.10 Levy Proposed by the Appropriations Committee

	2005-06	2006-07
$1.05 maximum levy/LER $.95*	$49,076,711	$51,615,547
Increase levy to $1.10/LER $1.00*	$49,646,229	$52,128,540
Temporary aid adjustment factor	$26,507,329	$28,034,653
Total projected savings to State	$125,230,269	$131,778,740
* LER = Local Effort Rate

Sources:  Nebraska Legislative Fiscal Office, Fiscal Impact Statement, LB 1093 (2004), prepared
by Sandy Sostad, Nebraska Legislature, 98th Leg., 2nd Sess., 2004, 3 March 2004, 1.  Committee
on Appropriations, "Budget Recommendations, Mid-Biennium Budget Adjustments FY2003-04
and FY2004-05," March 2004, 1-2.

As stated in the excerpt of the committee's report, the proposed increase in the maximum levy for schools to $1.10 would bring the State very close to fully addressing the shortfall for the out years (i.e., the 2005-07 biennium).  The bulk of the overall budget crisis would be placed on the backs of school districts and property taxpayers.  Of course, the notion of a $1.10 maximum levy for schools was certainly not unprecedented.  In fact, the original levy limitation for schools was established under LB 1114 (1996) at $1.10 for fiscal years 1998-99 through 2000-01.

Table 150.  Public Schools' Maximum Levy (1998-2005)

1998-99	$1.10	as per LB 1114 (1996)
1999-00	$1.10	as per LB 1114 (1996)
2000-01	$1.10	as per LB 1114 (1996)
2001-02	$1.00	as per LB 1114 (1996)
2002-03	$1.00	as per LB 1114 (1996)
2003-04	$1.05	as per LB 540 (2003)
2004-05	$1.05	as per LB 540 (2003)

Sources:  Legislative Bill 1114, in Laws of Nebraska, Ninety-Fourth Legislature, Second Session, 1996, Session Laws, comp. Patrick J. O'Donnell, Clerk of the Legislature (Lincoln, Nebr.: by authority of Scott Moore, Secretary of State), § 1, p. 1 (1245); Legislative Bill 540, Slip Law, Nebraska Legislature, 98th Leg., 1st Sess., 2003, § 2, p. 2.

But would the Legislature go along with this fast and easy approach to pulling the State out of the budget doldrums?  And, even if the Legislature accepted the idea of a $1.10 levy, would the Governor sign such a measure into law or veto it?

The trial balloon on the concept of a $1.10 levy would be floated on the morning of Thursday, March 18, 2004 when the Legislature took up first-round debate on the budget package.  The body devoted the entire first day to discussion on LB 1089, the mainline budget bill.  Since the entire budget package depended upon the acceptance of the $1.10 levy for schools, it was not surprising that property taxes and state aid to education consumed the better portion of the discussion time.  Just before the body adjourned in mid afternoon, the committee amendments to LB 1089 were adopted, narrowly.²⁶  The bill was advanced, again narrowly, by a 25-6 record vote.²⁷ So what did this mean?

To the casual observer, it might have appeared that the Legislature reluctantly bought into the idea of increasing the maximum levy for schools.  The levy change was, after all, a major provision of the budget proposal.  However, the truth of the matter was more complicated since LB 1089 did not actually pertain to the levy provision.  Nor did the measure have the capacity to reduce appropriations to state aid for the out years since it was designed only to address the second year of the 2003-05 biennium.  In essence, the Legislature could agree to LB 1089 without necessarily agreeing to the levy increase.  Nevertheless, it was important to the Appropriations Committee that the Legislature go along with the $1.10 levy since other decisions to reduce or not reduce various line items was contingent upon the reduction in state aid owed in the out years.  It all tied in together.

The Legislature would continue debating the budget package through the remainder of the week.  On Monday, March 22nd, the body finally arrived at the anticipated showdown on property taxes.  LB 1093 was the subject of intense debate from morning until late in the afternoon.  In fact, it was the only bill considered that day, and the policy decision at stake warranted at least that much time and attention.  LB 1093 would be unraveled and reassembled all in the course of one legislative day.

Senator Wehrbein's mission that day was to ask his colleagues to formally approve his committee's recommendation concerning the $1.10 levy.  He did so in the form of an amendment to the committee amendments.  The Wehrbein amendment would leave the temporary aid adjustment factor in tact along with the accompanying levy exclusion to win back lost revenue from state aid.  The amendment would also leave in tact the notion that the levy increase applied only for three additional years and would then automatically return to $1.00.  The only proposed change in the Wehrbein amendment was to increase the maximum levy from $1.05 to $1.10.²⁸

Senator Wehrbein emphasized to his colleagues that, without the $1.10 levy and the savings the State would incur, the bigger problem faced in the out years would be magnified.  He also stressed the need to warn school officials of the severity of the situation.  Said Wehrbein:

And if we're going to leave a bigger gap out there, or whether we're going to try to narrow it, whether we're going to try to give warnings to the schools, which, to me, is one of the most critical parts of this, is giving some kind of direction or at least a guide to the school districts as to what they will be able to do in two years hence ... .²⁹

He asked fellow members to look at the issue in terms of an overall timeframe involving the current year and three years into the future.  "The one thing I can promise is, our demands are going to continue to go up on the state budget," Wehrbein said.³⁰

After a very tense, sometimes heated, debate, the body voted to reject Senator Wehrbein's amendment, and, accordingly, one of the underpinnings of the Appropriations Committee budget proposal.  Perhaps one of the more interesting aspects of the debate and subsequent vote was the disagreement among members of the Appropriations and Education Committees.  Senator Raikes, chair of the Education Committee, supported the Wehrbein amendment, but no other member of his committee followed suit.  The majority of the Appropriations Committee voted in favor of the Wehrbein amendment, but there were several notable dissenters.

Table 151.  Record Vote:  Wehrbein AM3027 to
Committee Amendments, LB 1093 (2004)

(A) = Appropriations Committee     (E) = Education Committee

Voting in the affirmative, 15:
Aguilar	Engel (A)	Kruse (A)	Pederson (A)	Redfield
Brown	Jensen	Landis	Price (A)	Synowiecki (A)
Cudaback (A)	Johnson	Mines	Raikes (E)	Wehrbein (A)
Voting in the negative, 31:
Baker	Connealy	Janssen	Pedersen	Thompson (A)
Beutler (A)	Cunningham	Jones	Preister	Tyson
Bourne (E)	Erdman	Kremer	Quandahl	Vrtiska
Brashear (E)	Foley	Louden	Schimek
Burling	Friend	Maxwell (E)	Smith
Chambers	Hartnett	McDonald (E)	Stuhr (E)
Combs	Hudkins	Mossey	Stuthman
Present and not voting, 1:
Schrock (E)
Excused and not voting, 2:
Bromm	Byars (E)

Source:  Neb. Legis. Journal, 22 March 2004, 1168-69.

In the spirit of compromise, Senator Ernie Chambers of Omaha believed he had the solution for the issue.  Shortly after the failure of the Wehrbein amendment, Senator Chambers offered a floor amendment to establish a $1.07 maximum levy for schools for a period of three years.³¹  "Senator Wehrbein felt that what is being presented by the committee amendment is betwixt and between," Senator Chambers said referring to the committee amendments to LB 1093.³²  "Well, I'm offering another 'tweener,'" he added.³³  Perhaps desperate at this point in time, Senator Wehrbein appeared eager to support the Chambers' amendment.  "I think I will support $1.07, because it's better than $1.05 in terms of solving our problem," Wehrbein said.³⁴  Senator Raikes also consented the compromise plan.  "This gets us closer, and I'm in favor of that," Raikes said.³⁵

Senator Chris Beutler of Lincoln, on the other hand, attempted to bring the Legislature back to the impact on property tax relief.  Senator Beutler, a member of the Appropriations Committee, had voted against the Wehrbein amendment and now rose to oppose the Chambers amendment.  Beutler said:

I'm not sure that this retreat from our position on property taxes is necessary at this particular point in time.  If we leave it at $1.05, we're already 5 cents worse than we were a year or two ago when we were on our path to property tax reform.  If you take it to $1.07, then instead of being $100 million short, you'll be $60 million short.³⁶

Senator Beutler urged his colleagues to consider other options in order to address the shortfall, such as an income tax increase.  He believed the body could always return to the concept of a $1.07 levy if all else failed.

Senator Chambers had to be commended for offering the compromise in an attempt to help the situation.  "I love having Senator Chambers playing the role of the reasonable compromiser on General File," said Senator Kermit Brashear, a fellow Omaha legislator.³⁷  But this proposal also failed to meet consensus among members of the body.  The Chambers amendment failed on a 17-26 vote.³⁸

Table 152.  Record Vote:  Chambers FA1580 to
Committee Amendments, LB 1093 (2004)

(A) = Appropriations Committee     (E) = Education Committee

Voting in the affirmative, 17:
Aguilar	Cudaback (A)	Jensen	Price (A)	Stuhr (E)
Bromm	Engel (A)	Johnson	Raikes (E)
Brown	Hartnett	Landis	Redfield
Chambers	Janssen	Pederson (A)	Schrock (E)
Voting in the negative, 26:
Baker	Foley	Maxwell (E)	Quandahl	Vrtiska
Beutler (A)	Friend	McDonald (E)	Schimek	Wehrbein (A)
Bourne (E)	Hudkins	Mines	Smith
Burling	Jones	Mossey	Stuthman
Cunningham	Kremer	Pedersen	Synowiecki (A)
Erdman	Louden	Preister	Tyson
Present and not voting, 2:
Combs	Kruse (A)
Excused and not voting, 4:
Brashear (E)	Byars (E)	Connealy	Thompson (A)

Source:  Neb. Legis. Journal, 22 March 2004, 1178.

Following the failure of the Chambers amendment, Senator Wehrbein immediately offered a motion to reconsider the vote, and another round of debate ensued.  Senator Wehrbein attempted to redirect the discussion from taxes to the best interests of students.  Said Wehrbein:

I think we're forgetting about the kids, the students, those that need to be educated.  We're sitting here talking all morning talking about taxes and taxes.  And I agree that that's a serious problem.  But the issue is, what all this is about, is trying to get adequate funding into our schools.  And whether it comes from the state or whether it comes from local property taxes, it appears to me education for our kids is important.  I think education for our kids is important.³⁹

However, to many lawmakers that day it was not a matter of choosing between students and taxpayers.  "I could see people digging their heels in here and bringing kids into it," said Senator Tom Baker of Trenton.⁴⁰  "So we're all concerned about kids, I understand that, but that to me is not a good argument," he added.⁴¹ To Senator Baker and others, time was not of immediate essence in this discussion.  He believed the Legislature could always re-address the issue of raising property tax rates in the following year if necessary.

The result of the motion to reconsider was the same as the original decision.  Wehrbein's motion failed on a 22-21 vote.⁴²  LB 1093 had nearly suffered an unraveling on the floor of the Legislature, but survived.  Most lawmakers were willing to make a concession with regard to extending the $1.05 levy, but were unwilling to move beyond that with regard to property taxes.  This was demonstrated by the ultimate adoption of the committee amendments to the bill on a unanimous 33-0 vote.⁴³  This was eventually followed by a successful vote to advance the bill on a 27-3 vote.⁴⁴

"It's time to focus on school finance"

Second-round consideration of LB 1093 on April 2nd would have been merely a formality had Senator Chip Maxwell not decided to make one last plea for school finance reform.  The Omaha lawmaker threw out a motion to bracket the bill in order to make his point.  "I'm just trying to take one last shot to convince you of the basic proposition that change is necessary in school finance," Maxwell said, "If you want to do something, if you are really serious about fundamental long-term reform, then it's time to focus on school finance."⁴⁵  Senator Maxwell had introduced several measures to effectuate a comprehensive overhaul of the school finance system.  He proposed LB 1248 in 2004 to fund public schools by a uniform $6000 per student subsidy.  The funding for public schools would derive from a state tax on all taxable income and a state property tax.  He introduced LR 228CA as a companion piece to LB 1248.  The constitutional amendment would allow the state to levy a tax on real property to fund K-12 education.⁴⁶  The Education Committee took no action on either measure.  "How far can we push the burden back on property and not cross some threshold that does make us vulnerable to a lawsuit, to a lawsuit," Maxwell said before withdrawing his motion.⁴⁷  "Remember, the other states, the more they relied on property tax, the more vulnerable they've been to legal challenges," he said.⁴⁸

LB 1093 advanced to the third and final stage of consideration by a 26-5 vote.⁴⁹  By this time, the mainline budget bill, LB 1089, along with the remainder of the budget package had already advanced to Final Reading.  Of all the pieces to the budget package of 2004, LB 1093 was one of the few that remained unchanged throughout the legislative process.  This was a testament to the will of the members of the Education Committee who held fast to their original commitment upon advancing the bill out of committee.  It was also proof of the Legislature's belief in holding as true to the objectives of property tax relief as fiscally possible.  The final demonstration of the unity of the body, or near unity, came on April 7, 2004 when LB 1093 was passed by a sturdy 43-5 vote.⁵⁰  Governor Johanns, having reversed his opinions about the content of the legislation in comparison to years past, signed LB 1093 into law on April 13th.⁵¹

Table 153.  Summary of LB 1093 (2004) as Passed into Law

1. Extended the existence of the $1.05 levy through the 2007-08 school year.  After 2007-08, the maximum levy would return to $1.00.
   
   
2. Extend the existence of the $ .95 Local Effort Rate (LER) through the 2007-08 school year.
   
   
3. Extend the existence of the 1.25% temporary aid adjustment factor through the 2007-08 school year.
   
   
4. Extend the existence of the authority of local school boards to exceed the maximum levy to recover lost state aid due to the temporary aid adjustment factor through the 2007-08 school year.
   
   
5. Because LB 1093 did not address the spending lid provisions, the zero percent base spending lid would end after the 2004-05 school year.  The base spending lid would then return to 2.5% with a lid range to 5.5% beginning in 2005-06.

Source:  Legislative Bill 1093, Slip Law, Nebraska Legislature, 98th Leg., 2nd Sess., 2004, §§ 1-6, pp. 1-7.

The actions of the Legislature in 2004 resulted in a balanced budget for the remainder of the 2003-05 biennium, but the State would still face as much as a $295 million shortfall in the next biennium.  This figure included the $160 million final judgment against the State for failure to act in good faith concerning its involvement in the Central Interstate Low-Level Radioactive Waste Disposal Compact.⁵²

Table 154.  Summary of Modifications to TEEOSA as per LB 1093 (2004)

Click to view file

Source:  Legislative Bill 1093, Slip Law, Nebraska Legislature, 98th Leg., 2nd Sess., 2004, §§ 2-6, pp. 3-7.

LB 1091 - Resurrection of Reorganization Incentives

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The 2004 Session was generally considered an inappropriate time to launch new spending programs no matter how well intended.  After all, the session's primary focus appeared to be fixing the current 2003-05 biennium budget and situating the State in a favorable position to deal with the next biennium budget crisis.  On the other hand, the administration itself had requested, and ultimately received, new spending authority for such necessary services as mental healthcare and child protection and advocacy.  As bad as things were on the budget front, there was in fact new spending in 2004.  Some of the spending derived from General Fund resources, while other spending resulted from shifts in existing funds.

In 2004, the legislative vehicle to address transfers of funds was LB 1091, which was one of a series of bills comprising the official budget package forwarded by the Appropriations Committee.  Introduced by Speaker Bromm on behalf of the Governor, LB 1091 provided for cash transfers from various State created funds in an effort to cover necessary expenses and generally lighten the overall budget shortfall.  Such transfer bills are introduced almost every year, in good economic times and bad, but the 2004 transfer vehicle contained some significant, if not ominous, provisions.  Of most interest to public education, LB 1091 transferred $8 million over the 2005-07 biennium from the Education Innovation Fund to the General Fund.⁵³  The Education Innovation Fund is one of the main beneficiary funds under the State Lottery Act.⁵⁴ Of the $8 million transferred, $6 million was earmarked to remain in the General Fund while the other $2 million would be used for a new program, or perhaps more accurately termed a resurrected program.

In 2004, Senator Ron Raikes, chair of the Education Committee, had introduced legislation, LB 1105, to revive the state policy of encouraging school districts to voluntarily merge or consolidate in exchange for monetary incentives to ease the financial burden of reorganization.  This state policy was instigated in 1995 under LB 840 at the request of then Governor Ben Nelson.  The underlying idea was simple.  The State would provide a mechanism within the state aid formula to eliminate what many called the "disincentives" to reorganize.  The disincentives referred to past reorganization efforts that actually produced more hardships to the joining school districts than when the districts were separate and distinct entities.  The formula, in effect, penalized some districts for the act of merging or consolidating, an act otherwise supported and encouraged by the State.

LB 840 (1995) created a system within the formula to reward reorganized school districts by offering additional state aid over a period of years to offset any possible dips in aid the individual districts comprising the reorganized district would have otherwise received.  The program was later expanded in 1998 to include unification districts.  LB 1219 (1998) created a new type of reorganization effort that involved two or more K-12 districts joining for all intent and purposes with the general objective of someday uniting as one district.  And, similar to other forms of mergers and consolidations, unified districts also were provided incentive aid under the school finance formula.

The state policy relevant to financial incentives to reorganize reached its pinnacle when the Legislature passed LB 313 in 2001.  Under the efforts of Senator George Coordsen, the State would obligate additional funds and extend the timeframe to take advantage of the incentive aid program.  Unfortunately, 2001 would also mark a black year for the nation and for Nebraska as the economic morass following "9/11" took hold.  The Legislature met in special session in October and November 2001 to begin what would be a three-year effort to right the ship, to address shortfalls in tax revenue through budget cuts and tax increases.  As part of this effort, the Legislature passed LB 3s1 (2001), which reversed the action taken under LB 313 (2001).  LB 3s1 essentially closed the book on the incentive aid program by affixing a retroactive date of August 2, 2001 as the deadline for reorganized districts to apply.⁵⁵ For all practical purposes, the reorganization incentive aid program was shut down except for any existing obligations to those reorganization districts that applied prior to August 2, 2001.

In 2004, Senator Raikes attempted to revitalize the incentive aid program through the introduction of LB 1105.  The measure was designed to "encourage consolidation of Class II and III school districts" that had less than 390 students into existing K-12 districts that had greater than 390 students.⁵⁶  In 2002-03, there were 134 Class II and III school districts with less than 390 students.⁵⁷  Similar to the original incentive aid program established in 1995, LB 1105 proposed to set aside an amount of funds otherwise allocated for equalization aid each year.  This meant, of course, that less money would be available for equalization aid in order to pay for reorganization incentives.  The bill called for $1 million to be set aside from TEEOSA funds in fiscal years 2005-06 through 2009-10 and $500,000 per year thereafter.⁵⁸

The public hearing for LB 1105 was held before the Education Committee on January 26, 2004, but the bill was never advanced.⁵⁹  Instead, Senator Raikes used a different legislative strategy, and a different funding source.  During first-round debate on LB 1091, one of the pieces of the budget package, Senator Raikes floated a trial balloon on the subject.  The amendment he offered would transfer the bulk of the proceeds from the Education Innovation Fund to the State's General Fund for the 2005-07 biennium.⁶⁰  While not stated in the amendment, Senator Raikes intended that $2 million of that amount be set aside for reorganization incentive aid ($1 million for each year of the following biennium).  Said Raikes:

This reorganization incentive proposal was a part of the Education Committee's interim work.  The committee came to the conclusion that if you want to achieve efficiencies among particularly smaller K-12 schools, it makes good sense to see to it that mergers and consolidations occur.  Those activities are expensive initially, even though long-run benefits occur in terms of cost savings.  So it just makes good fiscal sense, I think the committee believed, to go ahead and provide the school systems that are interested in reorganization some up-front money to help them cover these initial costs.⁶¹

Senator Raikes told his colleagues that he did not intend to "press this amendment," on that particular day, on that particular stage of consideration.⁶²

The act of pressing the issue had not escaped a somewhat nervous chair of the Appropriations Committee, whose job it was to watch over every aspect and every decision made with respect to money flowing in and out of the State's General Fund.  "You said you weren't going to press this," said Senator Roger Wehrbein, "Are you ... does that mean you're not going to iron the money, or what?"⁶³  "How far are you going to push this amendment?" he inquired.⁶⁴  "Boy, you guys are tough to deal with," Raikes responded good-naturedly.⁶⁵ Of course, Senator Raikes, true to his word, would pull the amendment, but not before he had a chance to hear the debate on his trial balloon.

What followed on March 19th was what Senator Raikes had hoped to hear, a reasonably good discussion on the floor of the Legislature on the merits of renewing such a program.  "[I]t's just sad to me that we put money in new initiatives when we badly need money to reorganize government and we can't even squeeze out enough dollars to reorganize government to get us on the right track before we start with new initiatives again," said Senator Chris Beutler of Lincoln.⁶⁶ Beutler encouraged Senator Raikes to bring the amendment back on second-round debate of LB 1091.

Not everyone was all together sure about Senator Raikes' idea to rejuvenate the reorganization incentive aid program, especially on the basis of a bill that had not yet nor ever would be advanced from committee.  Senator Pat Bourne of Omaha, for instance, was concerned about whether such use of lottery funds would violate the intent of the Education Innovation Fund.  Senator Wehrbein was concerned that the Raikes proposal would pull another $2 million away from the General Fund and would widen the budget shortfall for the next biennium.  But on the whole, Senator Raikes had good reason to be optimistic about his chances to amend LB 1091 during second-round debate.

Senator Raikes would, in fact, try again during Select File consideration of LB 1091 on April 2, 2004.  Unlike the amendment he withdrew during first-round debate, Raikes intended to take the second attempt to a vote.  This amendment would provide incentive payments to encourage Class II and III school districts with less than 390 students to reorganize into K-12 school districts with greater than 390 students.  The incentive payments apply only to consolidations occurring after May 31, 2005 and before June 1, 2007, so the window of opportunity was limited.⁶⁷

Under the new program, incentives would be paid to reorganized schools for a period of two years (rather than three years as prescribed in the original program created in 1995).  Base year incentives would be paid in the initial year of reorganization and would be equal to 50% of the "per-student incentive amount" multiplied by the number of students in the district or districts having less than 390 students.⁶⁸ This amount would be calculated using a formula established in the amendment as follows:

$4,000 - ((ADM x (3,000 / 390)) = per student incentive amount⁶⁹

The "ADM" used in the formula represents the average daily membership of each district having less than 390 students prior to the reorganization.  Therefore, in a simple example involving the consolidation of District A, with 100 ADM, into District B (the district already having greater than 390 students) the per-student incentive amount would be approximately $3,230.77.  The per-student incentive amount ($3,230.77) multiplied by the 100 ADM equals a total reorganization incentive amount of $323,077.  Half this amount would be paid as base year funds and the other half in the second year.⁷⁰

The amendment required $1 million to be transferred from the Education Innovation Fund to the State's General Fund in both 2005-06 and 2006-07 for base year incentive payments.  Second year incentives would be funded through General Funds as part of the distribution of state aid in 2006-07 and 2007-08.  Incentive payments would be prorated to reorganized districts if the payments exceeded the amount of funds available.  The amendment provided that base year incentive payments would not be included in the formula resources for purposes of calculating state aid and schools may exceed the spending lid by the amount of incentive payments received.⁷¹

Senator Adrian Smith of Gering posed one of the more obvious questions about the proposal during debate on the amendment.  "I guess to cut to the chase, why 390?" he asked Senator Raikes.⁷²  The chair of the Education Committee had actually anticipated the question in his opening remarks on the amendment.  Even before Senator Smith's question, Senator Raikes had distributed a handout to his colleagues to illustrate the sizable increase in cost per student for local systems with fewer than 390 students.  "In rough numbers, at ... for an average at 390 students or thereabout, it looks like it's $7,760 or $7,800 per student; whereas, you go back to an enrollment of 150 or so, it approaches or exceeds $10,000 per student," Raikes explained.⁷³  The theory went that local systems with at least 390 students would generally have lower per student costs, and would, therefore, require less overall financial resources, including state aid.  Senator Raikes believed this would produce more efficient school systems and ultimately provide savings to the state.  "[T]he idea is this ... if you move a school system in size from, say, 150 students to 390 or more, probably on a year-in/year-out basis, there may be as much as a $4,000 per student saving," he said.⁷⁴

Senator Raikes' assertions were supported by the research performed by the Legislative Fiscal Office.  In a fiscal impact statement submitted on April 5, 2004, analyst Scott Danigole wrote:

The reorganization of schools into districts with 390 or more students will result in reorganization efficiencies which will reduce the amount expended by schools to operate with less than 390 students.  These efficiencies should result in a savings for property taxpayers in those merged school districts with costs greater than their cost grouping cost prior to the merger.  The state will also realize a savings in state aid payments two years after the consolidation due to lower overall school expenditures.  Lower school spending results in lower cost group costs which will reduce state aid for schools receiving equalization aid.⁷⁵

Danigole noted, however, that any savings in state aid would not be realized until the 2007-08 fiscal year.  This would become the first year in which any participating reorganized school districts would graduate, so to speak, from the incentive aid program.

Following Senator Smith's question, Senator Raikes also disclosed that "390" was the product of an efficiency model based upon an optimum K-12 system.  He noted there were thirteen grade levels in a kindergarten through twelfth grade school system.  If one assumes an optimal class size of 15 students per classroom and two classes per grade level multiplied by 13 (the number of grade levels), one arrives at 390.  Senator Raikes admitted there was not anything particularly magical about 390.  It depended upon what assumptions one wishes to make when creating a financial aid program.  Perhaps no different than when the Legislature makes various assumptions and political decisions concerning the school finance formula on the whole.  There is an inevitable element of educated guesswork in the parameters and factors used in any formula.

Another question anticipated by Senator Raikes related to the manner in which the program would actually encourage districts to consolidate.  Senator Raikes explained that the process of reorganization does not immediately produce cost savings to anyone involved.  In fact, the opposite is true.  For example, obtaining appropriate facilities to house the additional students often produces expenses.  There is also the possibility that the state aid formula would produce less state aid for the reorganized district than if the participating districts had remained a part.  The needs minus resources equation within the state aid formula tends to produce less equalization aid to those local systems with greater property tax revenue generating capacity.

Generally, the physical landmass and property tax capacity of a school district increases once joined with one or more other districts.  The incentive aid program was meant to provide a financial bridge for the initial years of the reorganized district's existence.  "The reorganization incentive proposal here is simply one that would provide school systems that amount of money to sort of get over the hump, if you will, to make the change," Raikes said.⁷⁶ It would provide state financial assistance over and above the amount of state aid due to the reorganized district.

The amendment received mostly positive comments during Select File debate.  There was considerable discussion about the use of 390 students as the benchmark for qualification.  There also was discussion on the merits of encouraging rather than mandating consolidation of school districts.  "I don't know if the 390 number is right, but certainly the way it's been described I think it's extremely logical," Speaker Curt Bromm said, "Taking this approach is consistent with what Nebraskans have wanted us to do in terms of the way we approach school reorganization for years and years."⁷⁷  Support was also evident among some of the urban legislators, including Senator Chris Beutler of Lincoln and Senator Pam Redfield of Omaha.  "I agree that it is always preferable to encourage people with positive incentives to change behavior that might be in the best benefit of all," said Redfield.⁷⁸  Senator Bob Kremer of Aurora agreed.  "I believe in incentives more than I do forced consolidation," he said.⁷⁹

Several lawmakers were less concerned about the mechanics of the amendment as the fiscal aspects.  Senator Pat Bourne of Omaha continued his opposition launched during first-round debate to using monies from the Education Innovation Fund for programs other than what was intended.  Said Bourne:

I don't want to see the money continue to be diverted from the lottery.  Whether it's from the education side or the environment side, I think we need to stop diverting that money.  If we're going to divert it, we should divert it into the General Funds and it should be on an equal basis.⁸⁰

Senator Bourne's comments were certainly supported by some school officials who had hoped to see things return to normal with regard to lottery funds following the 2003-05 biennium.  The Raikes amendment appeared to some as a continuation of a dangerous precedent to raid the Education Innovation Fund upon the whim of the Legislature.

Senator Roger Wehrbein, in keeping with his role as the Legislature's budget guru, also cast some concerns about the potential cost of the program if all 134 eligible K-12 districts having fewer than 390 students sought reorganization and applied for funds.  Part of Wehrbein's function, of course, was to look at worst-case scenarios.  The Legislative Fiscal Office examined the concern raised by Wehrbein and reported that:

The fiscal impact of the amendment for the state depends upon the consolidations that occur.  In 2002-03, there were 134 Class II and III school districts with less than 390 students.  These systems had an average daily membership (ADM) of 32,891 students.  It is estimated that if all school districts (76) in the standard cost grouping with less than 390 students were to consolidate, the fiscal impact for incentives will be $36.4 million over the three-year period from 2005-06 to 2007-08.

The potential fiscal impact is overstated since all Class II and III school districts in the standard cost group with less than 390 students will probably not consolidate.  The fiscal impact is understated due to the use of 2002-03 ADM.  This is because declining membership in smaller school systems results in a greater number of schools being eligible for future incentives which may be higher as membership declines.  The fiscal impact may also be understated if school systems in the sparse or very sparse cost groups consolidate.  The fiscal impact may also be impacted by consolidations of Class I and Class VI districts with Class II and III districts.⁸¹

But how likely was the worst-case scenario?  The Fiscal Office assumed that only about 5-10% of all eligible districts would actually utilize the program based upon historical trends with regard to school consolidation in Nebraska.  "If this number of consolidations occur, then the total fiscal impact will range from $1.8 to $3.6 million over the three year period," the Fiscal Office reported.⁸²

In truth, the Raikes amendment contained language to prorate incentive payments if the number and amount of requests exceeds the available funds.  This would be the safety valve for the State in terms of its overall financial commitment to the program.  Although pro-consolidation policymakers would be delighted to encounter a problem such that additional funding became necessary due to large numbers of reorganization efforts.  This would, after all, meet their ultimate objective:  fewer districts.

Senator Raikes' amendment was adopted after several hours of discussion on a 26-7 vote.⁸³  Reorganization incentives were once again a part of the school finance formula, at least for a period of a few years.  It also meant that the Education Innovation Fund would once again be diverted to the State's General Fund to help the budget circumstances faced by the Legislature.  For each year of the 2005-07 biennium, $1 million would be set aside for the reorganization incentive aid program and another $3 to $4 million would be transferred to the General Fund.  LB 1091 was passed on a unanimous 48-0 vote on April 7, 2004 and signed into law by Governor Mike Johanns.⁸⁴

Table 155.  Summary of Modifications to TEEOSA
as per LB 1091 (2004)

Click to view file

Source:  Legislative Bill 1091, Slip Law, Nebraska Legislature, 98th Leg., 2nd Sess., 2004, §§ 8-11, pp. 8-10.

LB 973 - Adjusted Valuation/Clerical Errors

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Legislative Bill 973 (2004) represented an omnibus technical cleanup bill for the Tax Equalization and Review Commission (TERC).  The legislation was intended to clarify and improve existing law relevant to the equalization responsibilities incumbent upon the commission.  The Commission was created in 1996 to provide a less complicated, less expensive avenue of appeal for taxpayers challenging real property valuation decisions.  The Commission also carries the duty to hear and decide other petitions and appeals.

By the time the bill passed, LB 973 also had absorbed several other provisions from revenue-related bills.  In general, LB 973 made various appeal timelines and procedures uniform throughout state law and adopted more general language concerning appeals.  Procedures covering perjury, subpoenas and continuation of an action after the death or disability of a party or sale of the underlying property would be outlined in statute.  The TERC would be provided more flexibility to decide whether an adjustment must be made, and requirements for subclass adjustments would be modified.

During General File debate on March 16, 2004, an amendment was successfully offered by Senator Ray Janssen of Nickerson that would allow certain taxpayers who are eligible for a special valuation (greenbelt) under existing law to apply for the valuation within 30 days of receiving a property valuation notice from the county.  Senator Janssen said the amendment was introduced in response to a clerical error in Dodge County that caused about 900 property owners to miss a deadline for filing for a special valuation.⁸⁵

The amendment also provided that, by June 30th of the year following the certification of adjusted valuation, a local school system or county official may file with the Property Tax Administrator a written request for a "nonappealable correction" of the adjusted valuation due to changes to the tax list that change the assessed value of taxable property.⁸⁶  Upon the filing of the written request, the Property Tax Administrator must require the county assessor to recertify the taxable valuation by school district in the county.  The recertified valuation must be the valuation that was certified on the tax list increased or decreased by changes to the tax list that change the assessed value of taxable property in the school district in the county in the prior assessment year.  By the following July 31st, the Property Tax Administrator must approve or deny the request and, if approved, certify the corrected adjusted valuations resulting from the action to the Department of Education.⁸⁷

The impact of the Janssen amendment was not immediately known at the time of its adoption.  The Department of Education reported that the year-end recalculation of state aid could cause a shift in the distribution of state aid.  A statewide decrease in adjusted valuation may cause the local effort rate (LER) in the year-end recalculation of state aid to increase.  Such an increase in the LER may cause local systems to receive less equalization aid.  Similarly, any local system that witnesses a decrease in adjusted valuation may receive an increase in equalization aid.⁸⁸

The Janssen amendment also made changes to existing law concerning corrections and errors in adjusted valuation for purposes of calculating state aid.  Under the provisions of the school finance formula at the time, county assessors must, by August 25th, certify to the Property Tax Administrator the total taxable value by school district in the county for the current assessment year.  LB 973 amended the formula to state that the county assessor may amend the filing for changes made to the taxable valuation of the school district in the county if corrections or errors are discovered on the original certification.  Amendments must be certified to the Property Tax Administrator by September 30th.⁸⁹

Other changes contained in LB 973 included clarification of existing law relevant to orders from the Property Tax Administrator concerning changes in adjusted valuation.  The previous law required the Property Tax Administrator to enter an order modifying or declining to modify the adjusted valuations by January 1st each year and must certify the order to the Department of Education.  The final determination of the Property Tax Administrator may be appealed to the TERC.  LB 973 clarified that the order must be in written form.  The legislation also required a copy of the written order to be mailed to the local school system within seven days after the date of the order.  The written order of the Property Tax Administrator may then be appealed within 30 days after the date of the order to the TERC.⁹⁰

Finally, LB 973 included provisions of LB 970 relating to special valuation or greenbelt land.  Greenbelt land involves agricultural land actively devoted to agricultural or horticultural purposes but has value for purposes other than agricultural or horticultural uses and meets the qualifications for special valuation.  LB 973 specified that such land constitutes a separate class of property and would be valued at 80% of its agriculture-only use for purposes of taxation and recapture.⁹¹  LB 973 changed the acceptable range for greenbelt land from 92% to 100% of the special or recapture value, to 74% to 80%.⁹² While LB 970 clarified the assessment and equalization of greenbelt land, it did not change the valuation or taxation of such land.

LB 973 passed on April 1, 2004 by a 46-0 vote.⁹³

Table 156.  Summary of Modifications to TEEOSA
as per LB 973 (2004)

Click to view file

Source:  Legislative Bill 973, Slip Law, Nebraska Legislature, 98th Leg., 2nd Sess., 2004, §§ 66-67, pp. 26-28.