The Deficit Texas Didn’t See Coming

For weeks Rene Oliveira has been traveling across Texas, warning groups as small as 20 people and as large as 2,000 about the state’s coming fiscal crisis. Many in his audiences have little idea how dire the budget situation is.

Oliveira, a state representative from Brownsville, is a Democrat who chairs the House Ways and Means Committee in a Republican-majority chamber. He was appointed to that post by the Republican Speaker, a gesture of bipartisanship that has made him the state’s official bearer of bad news. “I’m not getting a standing ovation when I’m giving these speeches,” he says.

When Oliveira and his colleagues gather for the next legislative session in January, he reports, they will have to grapple with a budget shortfall that could exceed $21 billion over two years. That’s an almost unimaginable number in Texas, where the legislature has authority to make cuts to about $87 billion of the state’s spending, the rest being mandated by federal or state statute.  

Whatever the exact numbers, it’s a shock to many Texans who believed they had weathered the recession better than almost any other state. Unemployment stood at 8.3 percent in August, lower than the national average of 9.6 percent. The state created more than 129,000 jobs over the past year, more than any other state, according to the U.S. Bureau of Labor Statistics. Also, the waves of foreclosure that have pounded California, Florida and Arizona have mostly spared Texas.

The state is in the unusual position of having a fairly robust economy and a budget crisis at the same time, a combination that has led some Texans to wonder if the fiscal fears might be overblown.

“Some people try to look at it as doom and gloom but if you didn’t have these (hard) times to reset the footprint of state government then your spending would continue to run unchecked,” says Talmadge Heflin, a former lawmaker who now directs the Center for Fiscal Policy at the Texas Public Policy Foundation, an Austin think tank.

But Dick Lavine, senior fiscal analyst for another Austin group, the Center for Public Policy Priorities, says spending cuts alone won’t fix the problem. “At some point you’re going to have to start examining exemptions, closing loopholes, raising fees and looking at raising taxes,” he says.

The debate has bled into the gubernatorial campaign, with incumbent Republican Rick Perry airing ads touting the state’s strong economy while his opponent, former Houston mayor Bill White, has accused Perry of mismanaging state finances.

Plummeting sales revenue

How did the shortfall get so big?

First, the state’s sales tax returns, which had been expected to increase, dropped precipitously and unexpectedly in the 2010 fiscal year, ending the year $2 billion short of projections, although they have rebounded somewhat since then. Texas has no income tax, so it relies on sales receipts for up to 60 percent of its tax revenue, and a drop in the volatile sales tax is bound to have dramatic consequences.

Second, the Texas legislature meets in regular session only every two years. That makes it difficult for lawmakers and the executive branch to adapt to changing economic conditions. It   allows shortfalls to widen for months before they are addressed. Although Perry called on all agencies to prepare 5 percent reductions during the course of the current fiscal 2010-2011 biennium, the state will almost certainly end the current cycle with a shortfall that will have to be made up before lawmakers can address the much-tougher 2012-2013 biennium.

Third, Texas used about $6 billion in federal stimulus funds to balance its current budget. That money put off the state’s obligation to deal with its shortfall until this year.

Meanwhile, the state continues to grow. Texas has added 1.2 million people since 2006 and school enrollments have increased by more than 800,000 over the past decade.

But the roots of this year’s shortfall can also be traced back to 2006, when the legislature changed the way the state’s public schools are financed. Before then, school districts relied primarily on local property taxes, which were capped at $1.50 per $100 of assessed value. A group of districts sued, arguing that reliance on the local property tax was not enough for them to provide an adequate education. The State Supreme Court agreed and tasked lawmakers to come up with an alternate way of funding school districts.

Lawmakers lowered local property taxes down to $1.00, but allowed school districts to raise them to $1.04 with a vote of the school board and to $1.17 with a local referendum. The legislature agreed to make up the difference in funding and increased the state’s corporate income tax accordingly. Those tax revenues have not met expectations, however, and state officials have found themselves responsible for a larger share of school funding than they had hoped.

“We just postponed the day of reckoning with the temporary cash on hand and the stimulus,” Lavine says.

It doesn’t help that state government has provided little information about the shortfall so far. By law, the state comptroller has until January to release revenue projections and Susan Combs, the current comptroller, has resisted requests from Democratic lawmakers to unveil her projections ahead of time.

The comptroller’s last official report, issued in November 2009, predicted a modest increase in sales tax revenue but an overall drop in state revenues. But documents submitted to Wall Street ratings agencies this summer showed the state collected $6.5 billion less than forecast in 2010.

The uncertainty has left candidates free to use conflicting numbers. Perry, citing the chairman of the Senate Finance Committee, Republican Steve Ogden, has disputed the $21 billion shortfall figure and pegged the gap at closer to $11 billion. An aide to Ogden said the chairman was busy campaigning for reelection and was not available to discuss the budget. Oliveira, meanwhile, says the shortfall will hit at least $21.5 billion and will likely climb higher.

Fears of a sweep

Texas has more than $8 billion in a rainy day fund that would help cover part of the shortfall, if lawmakers chose to tap into it. Agencies have also been asked to prepare 10 percent cuts from their current budgets. If approved, the cuts would entail laying off thousands of employees but would bring $4 billion in savings. Officials have said they will try to protect K-12 education from this round of cuts.

Human services advocates are already rallying to defend pet projects. Among the Perry administration’s proposals is a plan to cut about $21 million out of the state’s child abuse and neglect prevention programs, a cut that would eliminate most of their funding. These programs are vulnerable because they are among a relatively few that are not mandated by the federal government.

Besides service cuts, Texas officials are considering a sweep of previously dedicated funds into the general fund to balance the books. Texas operates hundreds of dedicated funds, which raise money for specific causes, such as state parks, conservation programs and trauma centers. Together those funds have an available balance of roughly $3.7 billion. The state has used that money in the past to back short-term loans.

One of the largest such funds is the System Benefit Fund, which helps low-income households with electricity bills. Utility customers throughout the state automatically pay a surcharge of a few dollars on their bills, which is devoted to the fund. But lawmakers decide every year how much of the money raised should go into the program. Earlier this decade, during another difficult budget period, they suspended the assistance for two years while continuing to collect money from ratepayers. That could happen again, says Carole Biedrzycki, executive director of the Texas Ratepayers’ Organization to Save Energy. “They pass a bill to collect money for one purpose and then they use it for another,” she says. “That to me is a type of phantom tax.”

Texas, which has a lottery, has also started to consider slot machines as a way to raise revenue, but legalizing slots would require a constitutional amendment, which means that new casinos in Texas won’t provide money in the immediate crisis. Oliveira says he’s working on a plan to close certain tax loopholes but declines to offer details. “I’ve been in the legislature 13 terms and we’ve never encountered a deficit of this magnitude,” he says. “That sum is just mind-boggling to us.”