TTARA
Texas Taxpayers and Research Association
Fiscal Drought to End in
Rain…
…y Day Fund?
The last pieces of the state’s financial puzzle have been laid on the table with the release
of the LBB’s budget work for the 81st Regular Session of the Legislature. Matched
against a gloomy revenue forecast by State Comptroller Susan Combs, either budget—
House or Senate—is written in red ink. A federal economic stimulus package may put
additional dollars into the state treasury that the Comptroller has not yet counted, but
most likely, lawmakers will look to make a big withdrawal from the state’s Economic
Stabilization, or “Rainy Day,” Fund to put an end to the prospect of new taxes or
draconian spending cuts. With a record balance in the fund, there is more than enough to
cover either budget; still, lawmakers will have to be judicious in using the fund lest they
plant the seeds of a fiscal crisis that will sprout in 2011.
Revenues
Comptroller Susan Combs welcomed lawmakers to Austin with a rather sobering revenue
outlook. Her estimate of $77.1 million of general revenue funds1 available for 2010-11
shows a $9.1 billion drop in revenues from the previous biennium.
Her estimate reflects continuing concerns over the slowing Texas economy. She projects
that the national recession will linger through 2009, and that flat Texas job growth will
not recover substantially until 2011. Oil and gas prices are expected to slide, with oil
bottoming out at under $40 in 2010 and natural gas prices near $5.00. State sales tax
revenue is expected to be stagnant until 2011. Motor vehicle sales tax is expected to drop
over 20 percent in 2009, and see modest growth thereafter. The Comptroller projects that
the state’s new franchise tax will continue to disappoint, in fact dropping slightly in 2009
and growing little over the two years thereafter. State investment income, used to
1
Much of the budget deliberations focus on the state’s general revenue fund, which holds the more
discretionary dollars that account for the bulk of state spending and revenues. The general revenue fund is
the only state fund that may incur a cash deficit, and all appropriations are subject to the Comptroller’s
certification that sufficient funds are available to meet proposed obligations.
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State Fiscal Drought to End in Rain…y Day Fund?
subsidize funding for local schools, has suffered from the stock market collapse—
effectively zeroing out a $1.4 billion source of revenue. On the positive side, however,
higher than expected property values are reducing the formula calculations of state aid for
public schools, and state public education spending in 2008-09 is expected to be $1.4
billion less than initially budgeted.
Ironically, the biggest single source of falling revenues is actually one of the brighter
spots of the Comptroller’s forecast. With $2.1 billion cash on hand to begin the next
budge cycle, Texas has a bankroll that any other state would envy. However, that
balance is a drop of $6.7 billion compared to the record surplus of two years ago. Gross
state tax revenues are projected to be down by $1.7 billion, but only $0.2 billion on a net
basis. A big part of the last budget’s tax revenues were from excess oil and gas revenues
which by law are transferred into the Rainy Day Fund. Oil and gas prices will be less in
2010-11, and the required transfers into the Rainy Day Fund will drop correspondingly.
Non-tax revenues are projected to decline, mostly attributable to falling investment
income. All totaled the raw figures anticipate a dramatic $9.1 billion drop in revenues
(Figure 1).
The Comptroller’s figures bring back memories of 2003, when a slumping economy took
its toll on the state’s revenue outlook. In a no-new-taxes session, many programs faced
substantial budget cuts. A quick look at a few key numbers shows that today’s problems
are nowhere near as severe (Figure 2).
Both years saw lawmakers facing relatively similar drops in revenue—roughly ten
percent of the budget in place at the time. In 2003 lawmakers faced an immediate cash
Figure 1
The Comptroller’s Revenue Estimate, 2009-2011
(All figures are in billions)
Item
Beginning Balances
2008-09
2010-11
Difference
$8.8
$2.1
($6.7)
Current Tax Revenues
Less: Rainy Day Fund Transfer
Equals Net Tax Revenues
$70.3
($3.3)
$67.0
$68.5
($1.7)
$66.8
(0.2)
Current Non-Tax Revenues
$10.2
$8.2
($2.0)
$0.2
$0.0
($0.2)
$86.2
$77.1
($9.1)
Other Adjustments
Total Revenue Available
Notes: Figures are for general revenue related funds, including the general revenue fund, the
available school fund, the state textbook fund, and the foundation school fund, but exclude the
property tax relief fund (which holds a $3 billion cash balance).
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State Fiscal Drought to End in Rain…y Day Fund?
deficit of $1.8 billion. Today, lawmakers have $5.1 billion of cash immediately on hand
($2.1 billion in general revenue balances plus $3.0 billion in property tax relief fund
balances set aside in the previous budget). In 2003, the Rainy Day Fund was projected to
have only $1.3 billion in reserves—not enough to cover the impending cash deficit much
less any budget growth; in 2009, the Rainy Day Fund is projected to tally $9.1 billion—
enough to offset the revenue drop in its entirety.
Spending
The LBB revealed its budget work during the second week of the session. Given the
intention that the budget would attempt to realistically meet the funding needs of
maintaining the current level of state services, it was not unexpected that proposed
spending would increase. In an unusual, but not unprecedented, twist the House and
Senate opted to start with different bills—essentially the same in structure, but with the
Senate spending more in a handful of areas. Figure 3 compares the House and Senate
spending plans.
The House proposed budget for 2010-11 totals $83.4 billion in general revenue
spending—a $1.1 billion increase over 2008-09.
Health and human services funding—primarily driven by Medicaid—is up $1.8 billion
over the base figures for 2008-09 (which includes an expected supplemental appropriation). This substantial increase is still $1.1 billion below the “no new services” amounts
requested by the Health and Human Services Commission. A federal stimulus package
may provide additional, perhaps substantial, funds that may alleviate this shortfall.
Public Education funding appears to be down $928 million, but there are a number of
moving parts that impact the numbers. The 2008-09 spending base included an extra
monthly state aid payment—an accounting shift of $1.4 billion that does not impact
program spending. Included in the numbers for 2010-11 is a $1.4 billion appropriation
(for general support, textbooks, and technology) out of earnings from the Permanent
School Fund—a figure the Comptroller estimates at zero, so the funds may not
materialize. And included in the Public Education budget is a $1.9 billion rider
appropriation over and above the amounts called for under current law. These funds are
contingent on enactment of legislation “relating to the return to a formula-driven public
school finance system that improves equity and reduces recapture,” an effort that will
require passage of a major school finance bill.
Figure 2
Comparing Two Difficult Times, 2003 and 2009
($ Billions)
Item of Comparison
Projected Drop in Revenues
Current Cash Balance
Economic Stabilization Fund Balance
2003
($5.8)
($1.8)
$1.3
2009
($9.1)
$5.1
$9.1
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State Fiscal Drought to End in Rain…y Day Fund?
Higher education funding grows with enrollment, but no special appropriation is provided
in the draft budget to “buy down” recent tuition hikes. General revenue funding for
business and economic development is down, as bonded debt service is shifted to the
State Highway Fund and the Texas Mobility Fund. Use of state highway funds for nontransportation agencies is reduced by $314.0 million, a figure not reflected in the
Department of Transportation’s general revenue budget (though the Department of Public
Safety still uses $985 million of stage highway funds).
In addition to the amounts in the House budget, the Senate Bill adds $451.8 million for a
variety of initiatives, including teacher pay incentives, care for persons with disabilities,
and higher education incentives—offering an early glimpse of issues that are apt to be the
focus of debate when the expected conference committee on the budget meets later in the
session.
Yet before the new budget takes effect, lawmakers will have to deal with some more
immediate problems in the current state budget for 2008-09. A number of agencies are
Figure 3
Overview of the House and Senate Budgets
($ millions)
2008-09
Base
General Government
Health and Human Services
Agencies of Education
Public Education
th
25 Payment
Contingent PSF Rider
Contingent Equity Rider
Baseline Funding
Higher Education
The Judiciary
Pub. Safety & Crim. Justice
Natural Resources
Business & Economic
Development
Regulatory
General Provisions
The Legislature
Total
Note:
$2,109.8
$21,499.6
$48,202.5
$35,783.8
$1,487.6
n.a.
n.a.
$34,296.2
$12,418.7
$402.9
$8,048.0
$682.5
$648.3
House
Proposed
2010-11
$2,060.9
$23,348.3
$47,654.2
$34,856.1
n.a.
$1,433.1
$1,866.0
$31,557
$12,798.1
$407.8
$8,066.2
$744.8
$380.2
Increase
over
2008-09
($48.9)
$1,848.7
($548.3)
($927.7)
($1,487.6)
$1,433.1
$1,866.0
($2,739.2)
$379.4
$4.9
$18.2
$62.3
($268.1)
Senate
Proposed
2010-11
$2,060.9
$23,548.3
$47,906.0
$35,005.9
n.a.
$1,433.1
$1,866.0
$31,706.8
$12,900.1
$407.8
$8,066.2
$744.8
$380.2
Senate in
Excess of
House
$0.0
($200.0)
($251.8)
($149.8)
$0.0
$0.0
$0.0
$2,589.4
($102.0)
$0.0
$0.0
$0.0
$0.0
$338.6
$0.0
$343.5
$82,875.8
$360.3
$0.0
$354.9
83.377.5$
$21.7
$0.0
$11.4
$1,101.7
$360.3
$0.0
$354.9
$83,829.3
$0.0
$0.0
$0.0
$451.8
Senate figures for 2010-11 not in the House bill include $200 to the Department of Aging
and Disability Services to expand and reshape the system of care for individuals with
developmental disabilities; $149.8 million in higher funding for the Texas Educator
Excellence Grant and the District Awards for Teacher Excellence programs; an additional
$100 million for Higher Education Performance Incentive Initiatives; $2 million for
Alzheimer’s Disease Centers
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State Fiscal Drought to End in Rain…y Day Fund?
facing cost overruns—particularly in the state’s Medicaid program. Since Medicaid is an
entitlement program, any person who meets certain criteria is eligible to receive services.
The cost of higher-than-expected caseloads accounts for the overwhelming bulk of an
anticipated $1.1 billion supplemental appropriations bill, although additional costs for
teacher retirement, criminal justice and employee health benefits are included in this
initial estimate as well. The figures make no assumption about federal stimulus funds.
The Bottom Line(s)
So how do(es) the budget(s) match up against available revenue? Both budgets run in red
ink, but it takes a bit of math to figure out exactly how much. The Senate and House
budgets on paper run $6.3 and $6.7 billion, respectively, over the Comptroller’s estimate
of general revenue funds available in 2010-11. Adding the $1.1 billion supplemental
appropriations needs for 2008-09 expands the corresponding red ink to $7.5 and $7.9
billion. However, the Comptroller’s and LBB’s figures omit a critical component that
impacts general revenue and reduces those numbers—the property tax relief fund.
In crafting the property tax relief initiative in 2006, lawmakers created a new “property
tax relief fund” into which the increased franchise and cigarette taxes are deposited. To
the extent those taxes generate additional dollars, the general revenue cost of property tax
relief is reduced. To the extent less tax dollars materialize, an additional withdrawal is
made from the general revenue fund. Only by including the property tax relief fund can a
clear budget picture be developed.
In 2007, lawmakers wisely took $3 billion of the state’s record surplus and deposited it
into the property tax relief fund to be used in funding the 2010-11 budget. That money is
not reflected in either the Comptroller’s or the LBB’s general revenue numbers. In
addition, the House and Senate budgets underestimate the general revenue cost of
property tax relief by $455 million. Making these adjustments, along with adjusting for
the appropriation contingent on school investment income, reveals the House spending
package is roughly $3.5 billion over and the Senate is $3.9 billion over the amount the
Comptroller estimates is available in 2010-2011 (Figure 4)
Raindrops, So Many Raindrops
For most states, such a shortfall(s) would invite immediate discussions of budget cuts or
tax increases. Fortunately, Texas benefits from the wisdom of lawmakers past. In 1987
the tax-weary chair of the Ways and Means Committee authored a constitutional
amendment which voters approved, setting aside a portion of future surpluses and excess
oil and gas revenues into a new Economic Stabilization Fund, commonly called the
“Rainy Day Fund.” The Comptroller forecasts the fund will amass $9.1 billion by the
end of 2011—money that will be available to close the budget gap, should lawmakers opt
to spend it. That will require political compromise, though, for drawing down those
funds requires a supermajority vote of the members present in each house. In general it
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State Fiscal Drought to End in Rain…y Day Fund?
Figure 4
Balancing the House and Senate Budgets
House Budget as Drafted
Item
Beginning Balances
Current Revenues
Less Rainy Day Reserve
Total Available Revenues
Supplemental Spending
General Budget
Less Contingent PSF Rider
Total
Funding Shortfall
General
Revenue
$2.1
$76.7
($1.7)
$77.1
Property
Tax Relief
Fund
$3.0
$5.5
$0.0
$8.5
($1.1)
($83.4)
$1.4
($83.1)
$0.0
($6.0)
$0.0
($6.0)
Total
Senate Budget As Introduced
(Senate Bill 1 by Ogden)
General
Revenue
$5.1
$82.2
($1.7)
$85.7
$2.1
$76.7
($1.7)
$77.1
Property
Tax Relief
Fund
$3.0
$5.5
$0.0
$8.5
($1.1)
($89.4)
$1.4
($89.1)
($1.1)
($83.8)
$1.4
($83.6)
$0.0
($6.0)
$0.0
($6.0)
($3.5)
Total
$5.1
$82.2
($1.7)
$85.7
($1.1)
($89.8)
$1.4
($88.4)
($3.9)
takes a two-thirds vote to spend money from the Rainy Day Fund, but the Constitution
establishes a lower threshold for certain circumstances.
It takes only a three-fifths vote to cover existing appropriations should revenue fall short
of funding the budget in place (i.e. 2008-09). This is not the case with the 2009
supplemental bill because the state will end 2009 with a cash surplus, and the
supplemental spending represents amounts over and above the current budget. The
supplemental bill will likely require a two-thirds vote if it is funded out of the Rainy Day
Fund. Of course, a simple majority would be required if the Legislature opted to use
general revenues.
It takes only a three-fifths vote to use the Rainy Day Fund for an appropriations bill for
the upcoming biennium, up to the amount of revenues that were available in the previous
biennium. The Comptroller has projected that revenues available in 2010-11 are $77.1
billion, down $9.1 billion from the $86.2 billion of 2008-09. It appears that the
Legislature by a three-fifths vote could spend up to $9.1 billion from the Rainy Day Fund
to pay for the 2010-11 budget—well under the amount either the House or Senate Budget
currently anticipates spending.
Still, lawmakers will have to be judicious in their use of the Rainy Day fund and any
federal stimulus funds—money that may prove to be a one-time cash reserve. If
lawmakers rely too much on one time money to finance ongoing programs in the 2010-11
state budget, they may find they have no money to keep the programs going two years
from now when they come to Austin to write the 2012-13 state budget.
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