|Issuer credit rating|
|May 5, 2011||Rating upgrade||AAA||Stable|
|October 11, 2006||Initial rating||AA+||Stable|
S&P Global Ratings views Nebraska's strong government framework and resilient economic conditions, compared with other U.S. states, during the COVID-19 pandemic as supportive of its 'AAA' (ICR) rating. At the same time, the state's deep budgetary and cash reserves, very low debt levels and relatively low postretirement liabilities, and history of active budget management practices will likely aid it in addressing lingering economic headwinds or slower-than-forecast revenue growth heading into the fiscal 2022-2023 biennium.
Prior to the sudden-stop recession, Nebraska experienced solid revenue growth in the preceding biennium and through the first three quarters of fiscal 2020. As of February 2020, its year-to-date net general fund revenues were up 8.6% compared with cumulative projections for the fiscal year, exhibiting strong increases in individual income, corporate income, and sales tax collections. Thereafter, the state experienced revenue declines through the final quarter of fiscal 2020, eliminating most of its earlier revenue gains. At fiscal year-end, individual income tax collections were down by 6.8% compared with budgeted projections, primarily due to a temporary spike in unemployment and deferral of the state income tax filing dates to July 15, 2020, from April 15. However, the state reported net receipts exceeded projections by $10.7 million, or 0.2% above the fiscal year estimate, illustrating how it had a financial cushion to absorb the economic shock. Nebraska reported a $207.6 million surplus, on a generally accepted accounting principles (GAAP) basis, at fiscal year-end June 30, 2020.
In January 2021, Nebraska's governor delivered his 2021-2023 biennial budget recommendation, with total general fund appropriations of $4.73 billion for fiscal 2022 and $4.86 billion for fiscal 2023, or a 1.5% average annual increase over the biennium. Revenue growth estimates in the budget recommendation were based on Nebraska Economic Forecasting Advisory Board (NEFAB) October 2020 estimates, showing net adjusted general fund tax receipts will increase by 4.3% for fiscal 2022 but decrease by 2% for fiscal 2023, although NEFAB's estimate for general fund receipts improved in its February 2021 forecast. In April 2021, Nebraska's legislature passed and the governor signed a biennial budget bill (with no vetoes), with total appropriations of $4.78 million for fiscal 2022 and $4.94 billion for fiscal 2023, or a 1.7% average annual increase. The now-enacted budget provides $206 million for other legislative priorities, while increasing health and human services, corrections, and school aid appropriations. The enacted budget also increases direct property tax relief to a total of $1.45 billion over the biennium.
Nebraska ended its 2017-2019 biennium with an ending balance of $1.18 billion, or about 24.8% of appropriations across its general fund and Cash Reserve Fund. If current budgetary projections hold through the end of its fiscal 2019-2021 biennium, the state estimates reserve balances (including the state's Cash Reserve Fund balance) to be $1.3 billion, or 27.3% of net general fund appropriations. The legislatively approved budget projects reserves totaling $1.26 billion, or 25.6% of net general fund appropriations, at the end the fiscal 2022-2023 biennium. We view the state's high reserve levels across various funds as providing strong flexibility to manage challenges as they arise.
Federal aid received $1.25 billion following implementation of the Coronavirus Aid, Relief and Economic Security (CARES) Act to offset pandemic-related expenses. Following the passage of the federal American Rescue Plan (ARP) in March 2021, Nebraska expects to receive $976 million in direct federal aid and an additional $128 million allocated for state capital projects, which we believe provides an additional source of flexible funding over the next two years.
In our view, Nebraska's economic indicators remain stable, although the state has exhibited slower population growth (outside of the Omaha-Council Bluffs metropolitan statistical area) and an aging working age population relative to the U.S. that could dampen its long-term economic potential. Wealth and income indicators are largely aligned with U.S. averages and its GDP growth has outpaced the nation intermittently over the last 10 years. Following a recession unemployment rate peak of 7.4% in April 2020, Nebraska's unemployment rate returned to its pre-pandemic monthly level of 2.9% in March 2021. We expect the agricultural sector to remain supportive of Nebraska's economy in the coming years, and the swift recovery of the state's core metrics and employment conditions to pre-pandemic stems, in part, from the resilience of its agricultural sector. However, as observed during previous periods of depressed prices for agricultural goods, there are close linkages among the state's agricultural sector, broader economy, and general fund revenues (though delayed) that can be cyclical in nature.
Environmental, social, and governance factors
We consider Nebraska to have elevated social risks compared with the sector, given the aging demographic pressures of the state's working-age population. We believe demographic pressures could hamper economic growth and could alter revenue and spending demands that affect the state's financial position in the long term. Additionally, we view occasional, but significant, weather events such as the recent widespread flooding as elevating the state's environmental risks. Nebraska's exposure to flooding events creates additional pressures on its flexibility in spending, as well as a greater need to maintain reserves at levels we view as very strong at its current rating. However, we believe historically strong financial management helps manage these risks. Finally, we view the state's governance risks as being in line with the sector.
Biennium 2019-2021 Budget Highlights
- The general fund adopted budget totaled $4.62 billion for fiscal 2020 and $4.73 billion for fiscal 2021, an increase of 6% compared with previous biennium appropriations. The adopted budget primarily focuses on education and health and human services spending, with increases of 6.1% and 5.5%, respectively.
- In its mid-biennium budget adjustment in January 2020, the state used $109.4 million of $337 million in excess receipts from previous fiscal years for one-time disaster-related costs, capital construction costs, and critical infrastructure, while setting aside $185 million in the state's cash reserve fund.
- The state estimates it will end the 2020-2021 biennium with a combined balance of $1.3 billion, or 27.3% of general fund appropriations. We view the state's expectation of an increase in its Cash Reserve Fund from $412 million to $763 million as realistic, given improved revenue projections developed by the NEFAB.
What We're Watching
- Direct federal support to states from several rounds of pandemic relief funds, most recently the ARP, provided meaningful financial support to the state to supplement operations and steady economic conditions. Nebraska's current and fiscal 2022-2023 biennial budgets do not introduce new recurring expenditures into the budget using these revenues; a commitment to structural alignment and planning around the use of one-time federal stimulus funding could be credit supportive for the state.
- Agriculture is one of Nebraska's dominant economic sectors, and while it anchored the economy during the last two recessions, lower agricultural commodity prices and extreme weather events have periodically led to weakening effects on the state's economy and revenues. We will monitor how international trade conditions, environmental risks, and agricultural policy affect employment and population growth during the recovery, and their influence on Nebraska's longer-term economic prospects.
- While we expect Nebraska to sustain steady budgetary performance heading into the fiscal 2022-2023 biennium, any conditions that cause structural imbalanced budgets to form and prompt the state to substantially deplete reserve levels without a plan to replenish these balances--due to dampened revenue growth, a more severe drop-off in federal relief funding, or otherwise--could challenge our view of the state's credit quality.
- Active financial and budget management, including strong executive authority to identify and propose mid-biennium expenditure reductions and demonstrated willingness of the unicameral legislature to realign appropriations with estimated revenue collections.
- Very strong budgetary reserves (including the state's cash reserve balance) that provide Nebraska with sufficient budgetary flexibility to navigate economic cycles and softening revenue growth.
- Low debt burden that is very rapidly amortizing and limited debt issuance plans over the current and next biennium.
- Comparatively small and well-funded net pension liabilities, with a three-year average pension funding ratio of 84.6%, and minimal other postemployment benefit liabilities.
|Historical Financial Data|
|Mil. $ unless otherwise noted|
|Audited GAAP basis||2020||2019||2018|
|General fund revenues||4,994||4,847||4,475|
|General fund expenditures||4,752||4,613||4,582|
|Net transfers & other adjustments||(34)||79||(16)|
|Net general fund operating surplus (deficit)||208||313||(123)|
|Total general fund balance||1,181||953||657|
|% of expenditures||24.8||20.7||14.3|
|*The Cash Reserve Fund is the budget reserve committed to economic stabilization on the state's governmental funds balance sheet. By operation of law, any General Fund revenue at the end of a fiscal year which is in excess of the official certified forecast is used to build the Cash Reserve Fund. Based on the legislatively approved budget, Nebraska estimates a balance of $412.3 million as of June 30, 2021, and a balance of $762.2 million at June 30, 2023, following a transfer amount of $300.7 million above forecast and an additional $50 million from the general fund.|
This report does not constitute a rating action.
|Primary Credit Analyst:||Thomas J Zemetis, New York + 1 (212) 4381172;|
|Secondary Contacts:||Kevin R Archer, San Francisco + 1 (415) 3715031;|
|Sussan S Corson, New York + 1 (212) 438 2014;|
|Research Contributor:||Valentina Protasenko, Centennial;|
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