What should Nebraska do with more federal money?

What should Nebraska do with more federal money?

The COVID-19 pandemic has resulted in an unprecedented amount of money sent to the state of Nebraska from the federal government. First, the CARES Act sent $1.25 billion directly to the state. However, when you include all the money sent to the various agencies and operations, the total was closer to $10 billion.

Then, the American Rescue Plan Act (ARPA) sent another $2.3 billion in aid to Nebraska. Of that amount, the state of Nebraska received $1.1 billion, counties got $375.2 million, and select cities were given $292 million. However, the U.S. Treasury decided not to give states their full amount all at once if their unemployment rate was below the national average. Nebraska had one of the lowest unemployment rates in the nation, so a second payment through ARPA will be coming in the spring of 2022.

Now, the Nebraska Legislature’s Appropriations Committee is holding a special hearing to hear public comment on how the second batch of ARPA money should be spent. The Platte Institute will be participating in the hearing.

Overall, the Platte Institute’s philosophy for the use of these funds is not to grow government in a way that will burden future taxpayers or put a strain on the state’s existing revenues. ARPA funds should not be used for recurring expenses since these are one-time funds. In addition, Nebraska needs to prepare for the possibility of future federal tax increases or reductions in federal aid that may be needed to pay for the continuously growing national debt.

These are important principles for using federal money, in our view:

  • Spending projects should be temporary with defined projects and end dates.
  • Spending should be transparent for taxpayers so that government expenditures can be examined, understood, and their necessity evaluated.

While there are numerous potential uses for these funds that fall within these principles, here are three of our top recommendations.

First, the impact of federal funds on the finances of Nebraska’s local governments is a significant concern. Many of our smaller local governments do not have the financial infrastructure or knowledge of how to properly account and handle the large sum of money they received. The U.S. Treasury guidance has specifically stated proper accounting of these funds will be required for all units of government receiving funds.

Providing grants to local entities to for education for local clerks and treasurers on how to handle their financial records, including audits, basic financials, and budgeting, would be a wise use of these funds to avoid future issues.

Second, these funds could also be used to study how to change to Nebraska’s education finance formula. The current finance formula, TEEOSA, was created in 1990, over 30 years ago. There is an interim study committee currently in progress on this topic, but with the growing property tax problem, it is worthwhile to consider future research or a more extensive review of the financing of public elementary and secondary schools.

Finally, our third recommendation is to hold onto the second payment coming in the spring and place it into a special account until updated Treasury guidance and courts rulings are made. These developments will clarify whether any additional uses of funds are allowed. There has been a lot of confusion about the impact ARPA funds can have on potential tax or fiscal policy changes at the state level.

In total, there have been six lawsuits filed to challenge the ARPA ban on state tax cuts. To date, two judges have invalidated the provision, while two other decisions to uphold the law are being appealed. What this means is that it will ultimately be decided in the courts, and a resolution has not been determined.

Potentially, a future court ruling may enable Nebraska to make more flexible use of the funds, such as putting the remaining money into the rainy-day fund to offset a future recession. That would put Nebraska in a much more secure fiscal position in case commodity prices drop again, inflation continues to increase, or we experience a national recession. Waiting to earmark any additional money allows the Appropriations Committee to make the best decision for Nebraska with all the options on the table.

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