(a) Restricted funds are defined to include property taxes, local sales taxes, payments received in lieu of taxes, surpluses generated from a fee-supported activity (like an electric utility) which are budgeted for general uses, and state aid. State aid includes homestead exemption reimbursement, insurance premium tax receipts, street and roads funds, MIRF funds, general personal property tax exemption reimbursement fund, equalizing city and county aid, and state aid to community colleges.

(b) The law prohibits adopting a budget which contains restricted funds totaling more than the budgeted restricted funds for the previous year, plus

i. a statutorily set percentage allowable growth rate, currently 2.5 percent,

ii. growth in valuation due to improvements to real property between the two most recent available years but only to the extent such growth exceeds the basic allowable growth rate (2.5 percent),

iii. any carryover of unused budget authority from previous years, including amounts under previous limitations,

iv. one percent if approved by at least a three-fourths majority vote of the governing body. (in 2001-02, 55% of Nebraska municipalities voted to use this additional 1%),

v. amounts approved by the voters.

Adjustments are to be made if a subdivision annexes property, transfers responsibility for paying for a government service, or changes fiscal years.

(c) There are six exceptions to the limitation:

i. expenditures of restricted funds for capital improvements, defined as real property and improvements thereto.

ii. expenditures of restricted funds to retire bonded indebtedness,

iii. expenditures of restricted funds from a sinking fund set up to fund equipment purchases,

iv. expenditures of restricted funds in support of a jointly financed local service,

v. expenditures of restricted funds to repair infrastructure required by a declared natural disaster, and

vi. expenditures of restricted funds to satisfy judgments, except judgments of the Commission on Industrial Relations.