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| Legislative Fiscal Office Study |
| OVERVIEW OF STATE SPENDING LIMIT
INITIATIVE PETITION (PROPOSED 2006) The following discussion paper has been prepared at the request of Senator DiAnna Schimek, 27th District, Nebraska Legislature. Her request was for our objective assessment of technical issues that could emerge should the proposed language be added to the Nebraska Constitution and a more subjective evaluation: "What-if" the limitation had been in effect for prior years and state aid to local governments became the means of balancing, as discussed below on page 2 and in Appendix B, (the "property tax relief" issue). In the latter analysis we limited ourselves to the General Funded aid to quantify the impact under the limit–we would expect similar results if extended to other (limited) fund types (primarily Cash Funds). On May 4, 2006 language for an initiative petition for a constitutional amendment providing for a limit on the growth of state spending was filed with the Secretary of State. Initiative sponsors are Mike Groene from North Platte and an Illinois organization "Americans for Limited Government". The full language the petition initiative as filed with the Secretary of State is in Appendix A. Sponsors are required to file petitions containing the signatures of 10% of the registered voters (roughly 115,000) by July 7 to place the initiative on the ballot this fall. This paper is designed to provide an overview of the proposed language and a discussion of some potential practical and technical problems with the proposed constitutional amendment. The key components of the initiative are: • Spending growth is limited to the growth in inflation plus growth in populationAs a preface to our analysis it needs to be understood that the state's budgeting process has been defined over many years to fit within Constitutional and statutory definitions that describe budget and revenue functions and how they inter-relate. The new language that is offered changes how this complex structure operates, in obvious (and not so obvious) ways. Part of the frustration in trying to describe outcomes associated with the proposed language is if the language is inserted in to the Constitution, it will depend on a very literal reading of the language, devoid of any interpretation of intent. However, the new language doesn't fit well with the operation of current law, which raises questions in our minds as to how the limit will operate, which will ultimately lead to litigation to provide definition where it is insufficient in the text of the new language itself. While there are several of these technical problems with the petition language there are also some general concerns. Implied in the "CPI+population" spending limit concept is that inflation plus population change should be adequate to cover the increased costs of government. Anything above this level is an implied excess. While this appears rational on the surface, other factors are involved. First, the consumer price index (CPI) is based on the "market basket" of urban consumers and the cost increases in each category. The relative proportions of the market basket items is as significant if not more significant than the price increases of the individual items. A significant concern is that the market basket of state government purchases is significantly different than the CPI market basket. For example, medical care, which grew at a rate 50% above the overall CPI since 1995, accounts for only 6.2% of the CPI market basket. Medicaid alone accounts for 17.6% of the state General Fund budget while other health care related costs include operation of the state regional centers and veterans homes, state employee health insurance, and a significant portion of public assistance programs. Second, increased spending may be the result of changes in fund mix beyond the control of state agencies, but NOT an overall increase in total spending. For example, this last session there was a $29 million increase in state General Funding for Medicaid and other programs tied to the federal match rate (applicable to the spending limit) not because of an overall increase in spending but to replace a $29 million decline in federal funds (not applicable to the spending limit) due to a lower match rate allowed for by the Federal government. This last issue also is relevant to state aid to local governments and "property tax relief". State aid is financed by sales and income tax dollars collected and expended at the state level. This part of the budget would be covered under the spending limit while the local property taxes that would be offset by the state aid are not applicable to the limit. The impact of the spending limit could be softened or even eliminated by freezing or reducing aid to local governments. The loss of the state aid could be made up at the local level (where revenue and spending are not applicable to the spending limit) through higher property taxes, elimination of local services or authorization of other revenue sources. From a practical standpoint, this virtually eliminates property tax relief especially in the most rural areas. Sales and income taxes are not viable options for most local subdivisions (especially schools) due to implementation problems such as multiple and constantly changing local sales tax rates and income tax withholding rates for hundreds of taxing entities. In the more rural areas, their sales taxes would mostly be paid outside of the local government in which they reside. And for income tax, one could have very high and variable rates on the non-farm residents in order to generate enough money to offset substantial property tax amounts from range and farm land. Appendix B illustrates the impact the petition would have had over the past 10 years IF (a) General Fund spending was only allowed to grow at inflation and population growth as required by the petition and (b) funding for the state's use (ie... operations, construction, and aid to individuals) increased as originally enacted. This means that aid to local governments becomes the "balancing" portion of the formula to keep the overall growth within the spending limit yet allow spending for state's use to grow at its original rate. In this illustration, overall spending would be limited to 3% per year growth versus the 5.4% as actually enacted. Aid to local governments would have been $643 million less. This is about 40% of the current funding level and equal to 28% of property taxes levied. These are just a few of the practical implications of the petition. The following takes the specific language of the petition and identifies some of the more technical problems. Article III, Section 22, new subsection 2 (2) For any state fiscal year that commences on or after January 1, 2007, the Legislature shall be subject to a state spending limit that is the greater of:Issue: The first year the limitation applies is FY2007-08 This appears to require the percent population growth calculated for CY 2006 over CY2005 would apply to for FY2007-08 and the measure of inflation (apparently CPI–All Urban Midwest) would be the (percentage change) in the index through December, 2006, compared to the index as of December, 2005. We presume that the index and population values are subject to revision. How are revisions to be handled once a budget is set and perhaps subsequently, out of compliance with the limitation? Article III, Section 22, new subsection 3 (3) A total fiscal year appropriation may only exceed the state spending limit under the following circumstances:Issue: First, if needed, there would likely be a special election since the two year biennial budget is enacted in a long legislative session held in odd numbered years and there are no statewide elections in May or November of odd numbered years.(a) Two-thirds of the member of the Legislature must first approve the total appropriations budget and its referral to the voters,The Legislature is empowered to refer a voter authorization question to the ballot at any statewide election in compliance with this subdivision. Second, typically, in a long session, the budget is passed and put before the Governor mid to late May, leaving little time for submitting the ballot question in time for the start of the new fiscal year on July 1. This suggests that the budget, if an authorization to exceed is sought, must be passed in detail, in two tiers, one complying with the limit and the detailed, item by item increments by budget program that is to be the budget that is to exceed the limitation. The only other option is to seek a vote to exceed the limit in the fall prior to the start of the budget process. The vote of the Legislature would take place in the prior short session, placed on the fall general election ballot, and then the results would be known prior to the start of the budget process. The interesting problems here are that first, one "Legislature" is voting to place the issue on the ballot affecting a budget that will be enacted by another "Legislature". Historically there hasn't been substantial turnover with the convening of a new Legislature, but this will change under term limits. Secondly, the estimate of how much to exceed could not be based on an officially enacted budget, but on general estimates which would have to match the approved budget passed at a later date. These two conditions seem to make it unlikely an "early" vote would occur. Article III, Section 22, new subsection 4 (4) For purposes of this section:Issue: Timeliness of data. It appears that the intended CPI measure is likely available by mid-January, 2007, which is a very short time line to incorporate into the budget/planning process for FY2007-08. In fact, the Governor would be compelled to submit a budget on incomplete data for the calendar year since the typical due date for a Governor's budget is on or about January 15 of each year.(a) "Inflation rate" means the change during a calendar year expressed as a percentage, in the consumer price index for the Midwes region, incorporating all goods and services for all urban consumers, as officially reported by the Bureau of Labor Statistics of the United States Department of Labor, or its successor index. Population statistics available also won't be available until approximately January, 2007, and will be as of July 1 of each year not a calendar year as referenced in the petition language. Article III, Section 22, new subsection 5 (a) through (f) (5) A total fiscal year appropriation shall include every legislative appropriation authorizing an expenditure of funds from the state treasury within a specific fiscal year, with the following exceptions;Issue: The proposed language must be read in context with the existing Article III, Section 25 of the Constitution, which reads in part, "No money shall be drawn from the treasury except in pursuance of a specific appropriation made by law,......"(a) Money received directly or indirectly from the federal government; Issue: If the limit applies to "every legislative appropriation" literally this will include not only new appropriations but also reappropriations and encumbrances (ie, obligations that carry forward from the base year to the next year) from one fiscal year to the next. These are variable year to year and are not known until after the close of the fiscal year, thus calculating compliance with the limit will be a guess. Issue: Again, "every legislative appropriation" is problematic in that not all appropriations are currently done by specific amount. Depending on interpretation of the definition of what is limited, fund appropriations or appropriation of amounts as of a specific date may fall under the limit. As an example, the distributive fund used to process refunds to taxpayers is appropriated in name only, without numeric limitation. These appear to be excluded from the limitation, (see subsection [5][d]). However, other distributive funds are used as clearing accounts for paying the cost of state employee benefits, such as health insurance, and will include the state and employee amounts. The state share will also be included in agency budgets, thus likely included under the limit in those totals, but is it also to fall under the limitation once again as it passes through the distributive fund, along with the employee contributions? Other appropriated funds that appear to fall under the broad definition of "every legislative appropriation" are used to process statutorily defined distributions of city sales taxes, the local share, (city and county), of gas taxes, local share of insurance premium taxes and state tax "throwbacks" to Omaha. Though logically these may be seen as exclusions from the proposed limit, a literal reading of the language may include these items under the limit by flowing through appropriated funds. Issue (subsection b): The language appears to exclude some trust funds from the limit, however, are any sums awarded by a court in a dispute with a political subdivision or another state under the limit? Issue (subsection c): Is this real property only or any asset, real or personal (equipment)? Why would sale proceeds of assets to another government (political subdivision) be excluded? Asset sales will be more likely, such as sale-leaseback contracts, in effect, privatizing ownership of public property. Issue (subsection d): What is pro-rata tax payer relief? Does the Homestead Exemption qualify? Do categories of state aid (Cities, Counties, NRD's) qualify? Issue (subsection e): Under subsection (e) determining what qualifies as an exclusion will not be simple, given the definition above. Where do licensing and other regulatory fees fit? Are they wholly discretionary or not? Some General Fund miscellaneous receipts may fall within the exclusion, resulting in a split of the General Fund into a "limited" and "not limited" accounting structure. The confusion will be even greater with the 200+ cash funds that may have multiple revenue sources, some of which would be limited, some of which will not, depending on how it conforms with (e). Issue (subsection f): "Income earned" is an allowable exclusion, but what of the principal, which may be a legitimate obligation of the fund, such as the accumulated assets accrued by employees in pension and deferred compensation funds. Is this to say that assets accrued for many years prior are to fall under the spending limit when it is already a lawful obligation to the state to pay out (over time) the accrued assets, principal and interest? In the example of the Health Care Cash Fund, whose assets are accrued tobacco settlement and IGT payments, investment income and ongoing deposits from tobacco settlement distributions and IGT payments, will this subsection put under the budget limit those expenditures that are funded by a portion of the accrued principal? Issue: With respect to all of the above subsections (a) through (f), express revenue criteria to define an expenditure limit, which is awkward and will be very difficult to quantify compliance. There likely will need to be extensive work/litigation to determine what parts of the revenue stream fall under the budget limit concept, and what does not, followed by information system changes to monitor and assure compliance. Issue: University and State College tuition does not seem to neatly fit in to any of the revenue based exclusions from the limit. It appears in other states, where similar limits operate, tuition has been included under the expenditure limits. Absent a specific exclusion for tuition here, we would presume likewise, that expenditures supported by tuition revenue would be part of the limit. This raises another interesting conflict when Board of Regents vs. Exon is considered in context with the limitation language–Exon in effect prohibits sum specific appropriation(s) of University (non-General) funds, however, such monies flow through the state treasury, and thus must be appropriated to meet the Constitution's requirement of valid appropriations in order to draw a warrant from state funds. In effect, this may result (for petition language purposes), in a limited expenditure that, because of Exon, cannot be limited (and thus controlled) by the Legislature. Article III, Section 22, new subsection 5 (g) and (h) Issue: There currently is a rainy day fund (the Cash Reserve) that operates for the General Fund as a means of capturing revenue over the year ahead revenue estimate. Current law requires a two step process to use accrued balances in the Cash Reserve; a bill to make the transfer to the expending fund and an appropriation(s) that makes use of the transferred money. What constitutes a surplus under the petition language is in question; first, the limit applies to more than one fund–is the surplus a fund by fund calculation or in total? Though it would appear to be in total, given it will apply to multiple funds of various types, cash flows, revenue streams, etc, the defining of a "surplus" could be different in every case. The exact wording seems to require a comparison of actual revenue to an expenditure number (the spending limit) in any one year, which probably is not the proper indicator–more correctly, (At least for the General Fund) it should be the (limited) revenue estimate used to arrive at the spending level that fits within the limitation. However, the more reasonable definition of what constitutes a surplus won't happen as the proposed constitutional language is not worded to allow that calculation.(g) Surplus funds may be designated by the Legislature to be held in a budget reserve fund to provide funding when state revenues fall below the state spending limit. Appropriations from any such fund shall remain subject to the state spending limit and no such monetary designation may cause the total amount of funds available for the purpose to exceed twelve percent of the allowable state spending limit for the fiscal year in which the designation is made; Article III, Section 22, new subsection 6 (6) Any taxpaying resident of Nebraska shall have standing to enforce the provisions of this section. It is the intent of the voters in amending this section that legal interpretations that restrain growth in government spending are favored over interpretations that do not restrain such spending. If a court of competent jurisdiction in a final order shall adjudge any category of legislative appropriation exempt from this Article, the state spending limit shall be reduced accordingly and the remaining provisions shall be in full force and effect.No comments on this final section. Finally, given the relatively short amount of time to complete this discussion paper and the complexity of the topics, the authors acknowledge it may not be complete and the conclusions contained here are subject to revision. Further analysis, involving more individuals may be warranted at a later date. This paper was prepared by Michael Calvert, Legislative Fiscal Analyst and Tom Bergquist, Deputy Legislative Fiscal Analyst. They may be contacted at (402).471.0059 or (402).471.0062 respectively. Appendix B INITIATIVE PETITION CONSTITUTIONAL AMENDMENT Object Clause: A measure to establish a limit on the growth of state spending only to be exceeded with voter approval. To amend Article III Section 22 of the Constitution of Nebraska Article III Section 22 Appropriations for state; deficiencies; bills for pay of members and officials (1) Each Legislature shall make appropriations for the expenses of the Government. And whenever it is deemed necessary to make further appropriations for deficiencies, the same shall require a two-thirds vote of all the members elected to the Legislature. Bills making appropriations for the pay of members and officers of the Legislature, and for the salaries of the officers of the Government, shall contain no provision on any other subject. (2) For any state fiscal year that commences on or after January 1, 2007, the Legislature shall be subject to a state spending limit that is the greater of: a. the total amount appropriated in the preceding fiscal year increased by a percentage amount equal to the result obtained by adding the inflation rate plus the percentage change in state population for the calendar year in which the immediately preceding fiscal year began; or(3) A total fiscal year appropriation may only exceed the state spending limit under the following circumstances: a. Two-thirds of the members of the Legislature must first approve the total appropriations budget and its referral to the voters,(4) For purposes of this section: a. "Inflation rate" means the change during a calendar year, expressed as a percentage, in the consumer price index for the Midwest region, incorporating all goods and services for all urban consumers, as officially reported by the Bureau of Labor Statistics of the United State Department of Labor, or its successor index.(5) A total fiscal year appropriation shall include every legislative appropriation authorizing an expenditure of funds from the state treasury within a specific fiscal year, with the following exceptions: a. Money received directly or indirectly from the federal government;(6) Any taxpaying resident of Nebraska shall have standing to enforce the provisions of this section. It is the intent of the voters in amending this section that legal interpretations that restrain growth in government spending are favored over interpretations that do not restrain such spending. If a court of competent jurisdiction in a final order shall adjudge any category of legislative appropriation exempt from this Article, the state spending limit shall be reduced accordingly and the remaining provisions shall be in full force and effect. Appendix B Illustration of Potential Impact of the Initiative on State Aid to Local Governments |
