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LINCOLN — Proposed adjustments to Nebraska’s two-year budget will reach the floor of the Legislature Monday, where lawmakers will be tasked with fixing a projected state deficit that has grown to over $646 million.
A collection of cuts, changes and cash transfers approved by the Appropriations Committee would, if approved by the full Legislature, shrink the deficit by more than $500 million.
After those changes, the remaining shortfall is somewhere between the $125 million listed and the $140 million that legislative fiscal staff say will be reflected in corrections for some math errors once the budget bills reach the floor.
Balancing the budget last year required a series of cuts that lawmakers acknowledged were painful, cutting government spending by more than $193 million on top of another $160 million in cash fund sweeps.
Now, with multiple senators saying the state budget has already been cut to the bone, lawmakers seem to have reached an impasse about the best ways to fill the remaining gap. While there are multiple options at their disposal, it’s unclear if any have enough support to pass.
“We have the responsibility to appropriate. We cannot abdicate that because we can’t come to agreement,” Speaker of the Legislature John Arch of La Vista said Thursday. “My greatest concern is that we’re going to look like Washington D.C., before we get done with this session.”
Lawmakers have until March 25 to send a balanced budget proposal to Gov. Jim Pillen’s desk for final approval.
Cash reserve
Over the past month, the Appropriations Committee has reduced the size of the deficit by approving a series of piecemeal fund transfers into the state’s general fund, ranging from $25,000 to $5.8 million.
Beyond those individual transfers, the biggest single contributor to closing the budget gap is a $130 million transfer from Nebraska’s rainy day fund.
Lawmakers approved a separate $152 million transfer from the state’s cash reserve last year, bringing the total transferred from the reserve to $282 million for the two-year budget cycle, if accepted by the full Legislature. This would draw down the reserve’s balance to about $546 million by the end of the budget cycle.
This is a marked shift from just three years ago, when the reserve hit a record-breaking $1.6 billion, partially due to an influx of temporary federal pandemic relief program funds. When the reserve hit its peak in 2023, it actually held around $2.2 billion, but lawmakers elected to use some of those dollars for other projects.
That same year, the Legislature approved over $1.2 billion in transfers out of the reserve, though most of the transfers did not take effect until 2024. Some of the approved cuts were $182 million for Nebraska’s Capital Construction Fund, $240 million for the Economic Recovery Contingency Fund and $575 million for the Perkins County Canal.
These transfers raised concerns at the time, including from progressive thinktank OpenSky Policy Institute, which posted a 2023 report predicting the expenses would lead to future budget deficits.
“The unprecedented Cash Reserve Fund balance was built in part on federal pandemic relief that won’t be there two years down the road,” the report reads. “As a result, long-term commitments made by this year’s Legislature potentially could set the stage for shortfalls in future budget cycles, when a new group of senators will be tasked with the balancing act.”
Critics have also blamed the state’s budget challenges on an increase in government spending under Pillen, driven by the creation of multiple property tax credit funds, which together account for more than $1 billion in spending per year.
Transferring $282 million from the reserve would bring its ending balance below what Legislative Fiscal Analyst Keisha Patent said is generally considered healthy — between 12-16% of state expenditures. A $546 million reserve would represent about 10% of expenditures, with the reserve’s balance slated to shrink further in the following years.
“You build (the reserve) up in the years you’re above so you get to 12% to 16%,” Patent said. “Maintaining 12% to 16% in the years you’re below is very, very challenging.”
State Sen. Rob Clements of Elmwood, chair of the Appropriations Committee, initially requested a larger transfer from the reserve, but limited it to $130 million because he said he didn’t want the reserve’s balance to fall below 10% of expenditures. He didn’t realize at the time that there were two $50 million transfers scheduled in both years of the following biennium for Project Health, an Omaha hospital and training complex project by the University of Nebraska.
This would reduce the reserve’s balance by another $100 million, bringing the total to $446 million — about 8% of state expenditures. The last time the reserve’s balance was that low was 2021.
However, Clements and Patent noted there are multiple factors that might eliminate the need for those transfers from the reserve. Patent said the dollars could come from a different part of the budget if lawmakers find the revenue for it, and Clements said it’s possible the transfers could be delayed if the university doesn’t hold up its end of the bargain to match the state’s contributions.
Where do we go from here?
With well over $100 million still left to find, lawmakers have come up with plenty of ideas to fill the gap, but few seem to have consensus among the body. On Wednesday, the Legislature rejected a $50 million proposal to increase the state’s cigarette tax by $1, and increase taxes on vape products.
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The bill’s failure surprised some lawmakers who supported the measure, and led to raised tempers on the floor the next day. State Sen. Myron Dorn of Adams said the outcome will force lawmakers to consider more unpopular options to fix the deficit.
Some of the options Dorn threw out were increasing transfers out of the Nebraska Environmental Trust and the Nebraska Board of Educational Lands and Funds, or potentially furloughing all state employees for 20 hours. These suggestions drew backlash from State Sen. Danielle Conrad of Lincoln, who described Dorn’s comments as a “threat” to hurt low-income Nebraskans further if lawmakers don’t agree.
State Sen. Machaela Cavanaugh of Omaha, a registered Democrat on the Appropriations Committee, expressed frustration that the Republican majority in the Legislature appears unwilling to listen to progressive ideas to balance the budget.
Cavanaugh and other progressives on the committee have pushed for transfers out of Nebraska’s multiple property tax credit funds, the new prison construction fund and the Perkins County Canal Fund. Some also have recommended lawmakers pause the final phase of Nebraska’s income tax reductions. All of those options were firmly rejected by the committee.
“If we’re not going to touch the property tax fund and we’re not going to touch the Perkins Canal fund and we’re not going to touch the prison fund, we have to pause the income taxes,” Cavanaugh said Wednesday. “One of those things has to happen to balance the budget … We can’t cut anymore and function. We’ve cut everything we can.”
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Republican State Sen. Tom Brandt of Plymouth introduced Legislative Bill 171 in 2025, proposing a pause on Nebraska’s income tax rate reductions. The current income tax rate is 4.55%, and is set to stop in 2027 when it reaches 3.99%.
Brandt estimated that pausing this reduction would generate $200 million per year. However, he hasn’t heard much interest from other Republicans to advance the bill, and he said he doesn’t plan to push the measure until he sees that change.
Dorn, a Republican member of Appropriations, has said pausing the income tax reductions is a “non-starter” for him, same with pulling any funding out of the state’s property tax credit funds. He said doing so would increase taxes for Nebraskans and set a bad precedent that could invite future Legislatures to pull dollars from the funds.
State Sen. Christy Armendariz of Omaha, another Republican member of Appropriations, argued against pulling money out of property tax relief efforts because Nebraska’s highest-income earners contribute the largest amount of tax revenue to the state. And, unlike some low-income earners, wealthier residents can afford to move out of Nebraska if living here no longer benefits them.
“When they are the ones that are saying ‘You’re squeezing us too much,’ we have to listen,” Armendariz said.
Republicans on the Appropriations Committee resisted calls to take money from the prison fund mostly because construction is officially underway, with the new prison on track to open in Lincoln in 2028.
“I would call that money obligated,” Clements said.
The Perkins County Canal Fund is a slightly different story. Fiscal analysts actually brought up the fund as a potential revenue source during the committee’s budget negotiations last month, noting that the fund’s balance is about $613 million, but $595 million of that is expected to remain unobligated for at least six years.
Republican committee members argued that every dollar in the fund must remain there because any money transferred out would make Nebraska appear “unserious” about the project to Colorado. Nebraska has sued Colorado over its rights to build the canal, and the fight could reach the U.S. Supreme Court.
State Sen. Paul Strommen of Sidney said Attorney General Mike Hilgers told him the outcome of the case could hinge on the canal funds remaining obligated. Colorado officials have asked the high court to reject Nebraska’s lawsuit, calling the state’s assertions that Colorado is violating the compact “unripe and premature.”
State Sen. Rob Dover of Norfolk said the canal’s potential value as a future water resource is enough for him to preserve the funds.
“The Perkins Canal, for ag, is like the holy grail,” Dover said.
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