LINCOLN, Neb. (Nebraska Examiner) – With a projected $471 million budget deficit on the horizon, Gov. Jim Pillen looked to the state Department of Health and Human Services for the largest chunk of his proposed budget cuts.

Pillen previewed his preferred mid-cycle adjustments to the state’s biennial budget Thursday during his annual State of the State Address. Overall, the governor’s changes would reduce state spending by 0.4% in the current fiscal year and by 1.8% in fiscal year 2027.

Across the whole of state government, Pillen proposes $495 million in spending cuts over both years, the current one and next. Calculations from his office indicate this would lead to Nebraska having a $125 million surplus by the end of FY 2027, a projection partially based on expected increases to state revenues.

While the last year has seen a mixed bag of monthly tax revenues, State Budget Administrator Neil Sullivan argued that state tax receipts have been gradually increasing over the last decade.

During his State of the State Address Thursday, Pillen said Nebraska’s budget challenges have been largely exaggerated, saying “doomsday stories are not to be believed.” He said Nebraska’s economy is stable, steady and healthy, pointing to the fact that the state’s GDP grew 5.2% in the second quarter of 2025 according to the U.S. Bureau of Economic Analysis.

Pillen said the spending cuts he wants to enact would not be completed within one budget cycle.

“We’re pleased, but we’re sure as heck not satisfied,” he said.

Roughly 30% of the cuts Pillen is pursuing would come out of DHHS, Nebraska’s largest state agency. Pillen’s plan proposes a $22 million cut to the department this year and a $130.4 million cut next fiscal year.

Sullivan said the DHHS cuts would be covered by staffing adjustments, increasing federal funding and “replacing expensive contracts.” The governor’s plan proposes the agency use more than $25 million to convert roughly 360 outside contractors to in-house positions.

On staffing adjustments, Sullivan said there would be no need for new layoffs to meet the budgeted reductions.

“The changes are already done,” Sullivan said.

When asked by the Examiner, Pillen declined to say how much the department’s full-time staff had shrunk over the past year. He said the staffing adjustments aren’t as simple as just reducing full-time workers, but also through reducing the use of contractors.

Of the proposed DHHS cuts, one of the largest would be to the state’s Aged and Disabled Waiver program, which would be reduced by more than $14.1 million. AD waivers allow aging Nebraskans and those with a disability to remain at home.

Sullivan said broad-based provider rate increases under the program led to increasing costs Nebraska shouldered that “got so far out of line.” He said the governor wants to take a more strategic approach.

“We can’t be paying four times the cost of nursing homes so one person can stay home,” Sullivan said. “We can’t be paying [for] 24 hours of services for someone that lives with their disabled family member.”

Some AD Waiver recipients and caregivers told the Examiner the program has been a “lifeline.” They say the reimbursements help stabilize incomes, as many caregivers and recipients might be unable to work outside the home due to the need to care for a loved one 24/7.

The Governor’s Office could not immediately confirm how much the proposal would cut from the program, if approved. DHHS officials previously said annual costs for the waiver program totaled $383.6 million in mid-2025, compared to $91 million in mid-2016.

Pillen’s proposal also boosts the budgets of some programs within DHHS, which brings the total reduction for the department to $152 million. Some notable increases include an additional $32.7 million to Children and Family Services and an increase of $56.5 million to cover a higher-than-expected increase in Medicaid-eligible individuals.

In a somewhat surprising move, Pillen’s budget proposal would not make any changes to state appropriations for the University of Nebraska. Last year, Pillen proposed a 2% decrease in state funding for the university, but lawmakers landed on a modest increase of roughly $8.7 million per year.

On top of filling the state’s projected budget hole, Pillen hopes to pass $170 million in new property tax relief, according to Sullivan. However, he noted, that change is contingent on state revenues increasing enough to meet that amount.

Sullivan said much of Pillen’s budget plan relies on cash fund transfers, a staple of the governor’s budget strategy since he took office. The overall impact would cut more than $80 million over what Pillen’s team identified as “idle cash funds.” Some of the top funds Pillen is looking to pull from are the Nebraska Environmental Trust Fund and the Permanent School Fund.

Sullivan said some of the cash funds the state considered have not been touched in over a decade. In previous years, state officials were looking for excess cash balances, Sullivan said. This time around, all cash funds were weighed.

“We looked at everything,” Sullivan said.

Other highlights of the governor’s budget proposal include:

$18.4 million reduction in special education reimbursements for FY 27

$19 million reduction to Tobacco Products Administration Cash Fund

$50.7 million increase to Water Recreation Enhancement Fund

$31.6 million reduction to Department of Revenue Operations in FY 27

$22 million reduction to Kinship Foster Care program

$15 million increase to Business Innovation Act

$11.9 million added to Nebraska’s school funding formula, the Tax Equity and Educational Opportunities Support Act

$23.8 million increase to Nebraska Capital Construction Fund