Zach Wendling
Nebraska Examiner
LINCOLN — Gov. Jim Pillen presented his first answers Wednesday to a projected two-year $432 million budget shortfall that key Nebraska lawmakers said they’re ready to dive into.
Pillen unveiled the proposal as part of his annual State of the State speech to the Legislature, put together a budget request for the two fiscal years between July 1, 2025, and June 30, 2027.
The request to lawmakers would close the projected shortfall with more than $62.4 million in the other direction, filling the projected hole in Nebraska’s more than $17.5 billion budget.
The governor’s budget proposal
Read the full 2025-27 budget proposal from Gov. Jim Pillen here.
Key contours of the Pillen-led plan include:
- Repealing recently passed state laws that included new spending or cost the state significant revenue, totaling $120 million, some of which were passed back in 2020 while others haven’t yet taken effect.
- Holding many state agencies flat for spending and implementing key cuts in others, the largest proposed cut of which was $14.3 million from the University of Nebraska system where Pillen previously served as a regent.
- Tapping into more federal dollars, particularly in health care programs, as mandated Medicaid and health costs rise and as a continued change from his predecessors.
- Increasing “sin” taxes on cigarettes, vaping, consumable hemp products, spirits, fantasy sports and gambling cash devices.
- Adding new taxes on candy, soft drinks, alternative nicotine products and electricity rates for cryptocurrency data-mining facilities while adding back sales taxes to net wrap and twine, which were recently exempted.
“We must balance the budget, we must reduce spending to offset these costs and we must have the courage to say, ‘No,’” Pillen wrote in a Wednesday letter to the Legislature. “We have to use what we have before we ask for more.”
Pillen’s proposal would still grow property tax relief programs by more than $400 million over the next two years and take incremental steps toward a long-term goal to stabilize state aid to public schools.
Impact of tax cuts
Speaker John Arch of La Vista, who sets the daily agenda for the Legislature, has described the state budget and closing the shortfall as “without a doubt” the biggest issue of the 2025 session.
He has noted part of the hole comes from some “pretty big swings in the last couple of sessions,” including income tax cuts for corporations and the wealthiest Nebraskans that won’t be fully implemented until Jan. 1, 2027.
Estimates show that the state budget hole could grow to $1.13 billion by the middle of 2029 if the budget is left unchanged, a circumstance that State Sen. Myron Dorn of Adams, an Appropriations Committee member, said would be more of a challenge to address.
Pillen’s proposal would close that hole with more than $5 million to spare.
“We didn’t get here by COVID, overspending or by inflation or recession,” said State Sen. Machaela Cavanaugh of Omaha, a new member of the Appropriations Committee. “We got here by aggressive tax cuts that were short-sighted, and I think we need to revisit some of those tax cuts.”
Cavanaugh joins the nine-member committee that will balance Pillen’s recommendations with lawmakers’ proposals and agency requests and propose its own budget this spring.
She said her priority will be ensuring that funding is preserved to continue providing high-quality services and access to health care for vulnerable populations. That includes protecting essential government services — behavioral health, developmental disabilities and child welfare.
Spending and program cuts
Among the recently adopted laws Pillen plans to cut are incentive tax credit programs to offset relocation expenses for businesses that hire out-of-state workers, which was led by Pillen); film or TV expenditures for in-state productions; qualified shortline rail maintenance and food donations by grocery stores, restaurants or agricultural producers.
His budget proposal also would claw back $528,352 annually from a yet-to-be-enacted prescription drug donation program for low-income or uninsured Nebraskans, which was delayed due to a newly enforced federal rule.
Pillen also recommended rejecting a Nebraska Supreme Court request for $4.5 million to implement a veterans justice program to complement Veterans Treatment Courts and further improve outcomes. It was slated to begin July 1; it didn’t include legislatively authorized funds.
The push for that 2024 law was led by former State Sens. Tom Brewer, Lou Ann Linehan and Justin Wayne, with support from former U.S. Sen. Chuck Hagel, R-Neb., a former U.S. Department of Defense Secretary.
School finance reform
Another key component of the budget would have the state take on more K-12 school operational expenses, albeit at a much smaller amount than Pillen proposed for the 2024 summer special session.
Rather than taking on the entirety of school operational expenses — about 80% of the portion of property taxes that go toward local K-12 schools — Pillen is partnering with State Sen. Jana Hughes of Seward to cover a smaller amount. Legislative Bill 303, introduced by Hughes at Pillen’s request, would reduce maximum general fund school property tax rates from $1.05 to $1.02, per $100 of property valuations.
That’s down from a previous Pillen plan last summer to take the maximum tax rate from $1.05 down to 15 cents in the first year. The maximum rate would have gone down to 0 cents, with the state taking over the operational expenses, in the third year.
Hughes had proposed a slower, 10-year plan to go down to 25 cents as the maximum property tax rate for schools, keeping some local “skin in the game,” an idea that received backing from many educational leaders.
The new $1.02 plan is flexible, depending on available state funds.
For example, one proposed potential revenue source to help Hughes possibly drop the maximum school tax rate further is from State Sen. Tom Brandt of Plymouth and Dorn to broaden the sales tax to about two dozen currently exempt goods and services.
Hughes, a former school board member, said she was “really happy” that Pillen was partnering with her on funding stability, which is at will to rising valuations. The state’s “equalization aid” is projected to decrease by $17.6 million in the next fiscal year before increasing $8.6 million.
“I’m pleased that the governor and his staff have seen merit in our past work and that we’re collaborating together to do what’s best for Nebraska,” Hughes said. “They see it as a trajectory for years to come, not just a one-time ‘fix.’”
Under Hughes’ LB 303, state foundation aid to schools, established in 2023, would increase by 6% to about $1,590 roughly per each student.
Dorn said he also appreciated increased property tax funding to match increased taxes because of those rising valuations.
“It would put it so that people aren’t now going to have to end up paying more than what they are today, which we haven’t had any concept like that the last few years,” Dorn said.
‘One day at a time,
State Sen. Danielle Conrad of Lincoln, the longest-tenured member in the body, said governor’s proposals are often seen as a “good start,” but she hadn’t yet dived into the budget proposal.
Conrad, who is working with Hughes, Brandt, Dorn and others on school finance reform, said lawmakers need to be honest that the shortfall is projected not because of an economic recession or because of a natural disaster but because of Pillen-led tax cuts.
She said postsecondary institutions, such as the University of Nebraska, might have to raise tuition to stay afloat. Regents last summer raised tuition rates and requested an increase in state dollars to help grow research and expand a new Pillen-led scholarship program for top students.
State Sen. Rob Clements of Elmwood, chair of the Appropriations Committee, described Pillen’s recommendations as part of a “balanced approach” that doesn’t include drastic cuts to agencies or heavily tap into cash reserves. He noted it also preserves pay increases for state employees.
Clements noted that the latest projection of a state shortfall included “very flat” revenues and was “very conservative.” He and others hope that a revised forecast at the end of February might narrow the projected shortfall, aided by strong receipts in December.
Pillen budget staffers said that if the state doesn’t see as much of a shortfall, it might lead to investments in more tax relief or school finance reform rather than preserving programs slated to be cut.
Clements, who joined the Legislature in February 2017, said the budget will be a challenge, but lawmakers will go day by day.
“It’s not easy,” Clements said. “Feeling like we’ll take it one day at a time and try not to look ahead too far, just one day at a time and prioritize the items that, as we look through the budget, what’s most important.”
The ins and outs of the governor’s proposed 2025-27 budget
WHAT IS INCLUDED:
- $67.6 million to ensure the state can continue to reimburse local school districts for 80% of special education costs.
- $30 million to invest in a Nuclear Command, Control and Communications Enterprise Center as part of U.S. Strategic Command at Offutt Air Force Base.
- $23.6 million as federal “clawback” payments to reimburse the federal government for Medicaid/Medicare dual-eligible prescription drug costs.
- $6.4 million, and $10.6 million in federal funds, for mandated coverage of new high-cost drugs entering the market.
- $5.5 million to the Nebraska Corn Board for local, regional and international marketing.
- $4.5 million for operational improvements at the Lincoln Regional Center.
- $4 million to continue high-priority infrastructure and maintenance in the Nebraska Department of Correctional Services.
- $2.5 million to upgrade security systems in Correctional Services.
- $512,300 for a Wildland Incident Response Assistance Team (WIRAT) coordinator for local and state wildfire responses.
- $250,000 to carry out a pilot program for distributing menstrual products in select K-12 school districts next school year.
WHAT IS OUT:
- $44.5 million from income tax exemptions for Nebraska businesses that recruit out-of-state workers, which was led by the governor.
- $42 million from the Broadband Bridge and Precision Agricultural Incentive programs that the governor’s budget proposal said are “redundant” to the $405 million federal Broadband Equity, Access and Deployment (BEAD) program.
- $15 million to award grants to a federally recognized Indian tribe to construct, develop and manage a Standing Bear Museum and Visitor Center.
- $11 million in additional dual enrollment funding for Nebraska community colleges.
- $9.4 million requested by the Nebraska Supreme Court to administer a veterans court program to complement Veterans Treatment Courts and further help justice-impacted veterans.
- $5.5 million in 2020 and 2021 increases in local public health department aid and “return to a normal pre-pandemic spending level.”
- $1.5 million for income tax credits for in-state film or TV production expenses and $1.5 million for shortline rail maintenance.
- $1.1 million to partner with Iowa nonprofit SafeNetRx to begin distributing donated and safe prescription drugs to low-income and uninsured Nebraskans.
- $1 million in income tax credits for 50% of food donations from grocery stores, restaurants or agricultural producers to food banks, food pantries or food rescues.
- $500,000 from the University of Nebraska designed to provide legal services to low-income families facing eviction (under Nebraska Supreme Court precedent, NU does not receive specific cash fund appropriations).