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The Great Texas Budget Debate of 2013

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The Texas Legislature’s adoption of a two-year, $197 billion budget in late May has spawned a great deal of debate. 

The Texas Public Policy Foundation has been closely involved in the budget process for over a decade now. During that time, we've seen some good budgets and some not so good budgets. 

We began to get concerned about the growth in spending this session even before the Texas Legislature convened this year for its 83rd regular session. Calls for taking money from the state’s Economic Stabilization Fund (ESF) to pay for water and transportation infrastructure, rather than using the $21 billion in new general revenue (GR) the state had on hand, indicated that fiscal restraint might not be a top priority. 

Our concerns increased throughout the session as the high spending levels in the general and supplemental appropriations bills made it clear that 1) any spending for infrastructure improvements would indeed have to come from the ESF rather than general revenue, and 2) there wouldn’t be room in the budget for the $1.6 billion in tax cuts called for by Texas Gov. Rick Perry, much less than the $2.2 billion sales tax cut the Foundation favored. 

On April 26 we expressed these concerns in a commentary, “The Texas Budget—Bigger isn’t Always Better.” In part it read: 

Unfortunately, after the Texas Senate passed SJR 1 this week to raid Texas’ Rainy Day Fund of $5.7 billion, it appears that the Texas budget is about to get much bigger. Two key votes in the Texas House of Representatives in the next few days will let us know if the House is going to follow the Senate’s lead in ignoring fiscal restraint. 

It’s a shame that only two years after doing a pretty good job of holding the line on spending in addressing a $15 billion budget shortfall, the Texas Legislature is poised to embark on a spending spree. … 

[A] tax cut—along with the restraint on spending growth—would put money back into the hands of Texans, boosting the Texas economy and increasing jobs. 

If we don’t take this path, we might find ourselves heading toward another budget shortfall—and this one may not wait six years to show up. With the economic recovery still wavering, higher Medicaid and health care costs heading our way with the full implementation of ObamaCare, and the harm to the Texas economy caused by higher spending, we could face another budget shortfall as early as next session—2015. 

About a month later, as the session neared its end, there was a lot of contentious debate over the budget within the Legislature. However, most of it was not about whether to restrain spending, but about how much need be spent to get the 100 votes required to take money from the ESF. 

The background for these debates was that additional spending was ok because the new budget represented only a modest increase from the previous budget. In order to counter this claim, the Foundation on May 24 released the graph that began to change the debate about how much spending was growing: 

Budget Graph

There is a lot of information contained in the graph, but the key point to grasp is that the Legislature was in the process of appropriating $106 billion in GR and ESF funds; $22 billion, or 26 percent, more in than it had appropriated in 2011.                                                                          

This “session to session” analysis of spending is different than the information available in the official budget documents that looked at spending from a traditional “biennium to biennium” perspective. The examination of session spending revealed a significant increase in spending that was largely masked in official budget documents showing a spending increase of only $7 billion. 

The Legislature adopted the final parts of the budget over the Memorial Day weekend, including $4 billion taken from the ESF and a $1 billion tax cut—though only about $700 million of the cut is permanent. Notable, however, was that four conservative senators joined 30 conservative House members in voting against the budget; never had so many members of the majority party voted against the budget. At this point, the media starting covering the debate over the numbers in the Foundation’s budget graph. Here is how the Houston Chronicle reported it on May 25: 

Senate Finance Committee Chairman Tommy Williams, R-The Woodlands, called it "a very fiscally conservative budget," while dismissing critics who advocate limited government and contend it spends too much. 

"One of the things that I would note about some of the most vocal critics from the extreme right - they don't do math very well," Williams said. 

The Senate voted 27-4 for the version of SB1 produced in negotiations with the House. Against it were Republican Sens. Brian Birdwell of Granbury, Donna Campbell of New Braunfels, Dan Patrick of Houston and Ken Paxton of McKinney. 

A little less than two weeks later, the debate went national when the Wall Street Journal ran this editorial: 

REVIEW & OUTLOOK  June 7, 2013, 6:59 p.m. ET

Texas Goes Sacramento

Republicans spend their energy gusher, and then some. 

Call it the downside of prosperity: The Texas growth spurt has produced a near $20 billion gusher of new tax revenue, and the Republican-dominated legislature, with the support of seemingly every lobby in Austin, wants to spread the bounty. The biennial general-fund budget that awaits the Governor's signature is $102 billion compared with $84 billion two years ago. 

Those numbers understate the blowout because $4 billion more was snatched from the state's rainy day fund. Add various accounting stunts and the Texas Public Policy Foundation calculates a 26% spending increase for the biennium. A broad coalition of taxpayer and tea-party groups is urging Mr. Perry to veto. … 

Republicans defend the budget by noting that Texas has urgent public-works needs. Two years of droughts make new water projects a necessity, and with nearly half the new jobs in the U.S. over the last four years springing up in Texas, roads and school funding are priorities too. But the Houston Chronicle notes that nearly everything from mental health to family planning to Medicaid to Mr. Perry's pet corporate welfare program—the Emerging Technology Fund—won fat funding increases. 

This may be the first time in history that a state experienced a rush of new tax collections and lowered its reserve fund. The supplemental spending earlier this year also allowed an end run around the state's constitutional spending cap. (Expenditures can't rise faster than the rate of personal income growth.) By spending more in 2013 the state can now appropriate more in 2014-15, because the baseline for calculating future expenditure growth is ratcheted upward. This is the kind of stunt one would expect from Nancy Pelosi. The budget contains a roughly $1 billion tax cut, but for every $1 of tax relief, $19 in new revenue will be spent. 

The danger is that Texas will repeat the fiscal mistake that California has made repeatedly: spend during the glory days and, once the economy slows, raise taxes to cover the deficit. The Texas oil patch is riding high on $95 a barrel oil and a doubling in production in four years. But Texans shouldn't forget the lesson of the 1980s and late 1990s that oil prices are volatile and a decline can be painful and prolonged. … 

The discussion in the Wall Street Journal continued a week later with these two letters to the editor in response: 

LETTERS  Updated June 14, 2013, 4:27 p.m. ET

The Lone Star State, Fiscal Responsibility and Budgets 

The Journal editorial page almost always gets it right. Unfortunately, the "Texas Goes Sacramento" editorial (June 8) about the budget recently approved by the Texas legislature gets it wrong.

Apparently you used the same fuzzy math promoted by one Texas special-interest group to sully our rock-solid Texas budget. However, that group drastically distorts the numbers by inaccurately taking figures that should be attributed to the previous budget and instead counting them as new spending. 

Here are the facts: The 2014-15 biennial budget approved by the legislature actually represents an 11.7% decrease from the 2002-03 Texas budget when adjusted for inflation, population growth and property tax cuts. 

In addition, the legislature made a one-time, $2 billion withdrawal from our reserve funds to address our increasingly severe water shortage. According to conservative estimates, this will preserve at least $8 billion in reserves. 

Not only did the legislature pass a balanced budget that limits spending, but we also cut about $1.4 billion in taxes and fees. This is a responsible, reasonable and conservative approach. The only way to spin it otherwise requires fuzzy math. Most Texans prefer honest numbers and the plain truth. 

Jim Pitts

House Appropriations Chairman 

Tommy Williams

Senate Finance Chairman

Austin, Texas 

Perhaps my GOP-dominated Texas legislature should have just renamed the state "Texafornia" and handed the keys to the Treasury over to the Democrats. Your editorial precisely describes the budget mess big-spending Republicans are creating for the Lone Star State down the road. 

Clearly, this isn't the kind of history conservatives expected a Republican-dominated legislature to make. But that's the point: Despite comparative conservative appearances, our legislature is Republican-dominated, but moderate-led. Our economic success in recent years has owed as much to not making as many bad governing decisions as Albany and Sacramento, as in Austin making the right decisions. 

If Texas is to maintain its position as a haven for entrepreneurs and a bastion of rational governing, voters must do some serious housecleaning in 2014 lest 2013's reckless spending exercise becomes an unsustainable pattern. 

Michael Quinn Sullivan

President

Texans for Fiscal Responsibility

Austin, Texas

 The following Monday, the Foundation’s letter to the WSJ further explained our budget calculations: 

LETTERS  Updated June 17, 2013, 8:09 p.m. ET

A Nonfuzzy Take on Texas's Budget 

The June 15 letter from the Texas legislature's Jim Pitts and Tommy Williams takes exception to your June 8 editorial "Texas Goes Sacramento," which notes that the Texas Public Policy Foundation calculated a 26% increase in general revenue spending by the Texas Legislature in 2013. However, our numbers are simple to follow: The legislature spent $95 billion of general revenue in the general appropriations bill for the 2014-15 budget, $7 billion more in two supplemental appropriations bills for the current budget and another $4 billion from the state's reserve fund in both budgets. This $106 billion in spending is difficult to discern in official documents, with some of it being spent in 2013, some in 2014 and some in 2015, some of it appropriated in 2013 but spent in 2014 and 2015, and $2 billion of it being potentially taken "off budget" by Texas voters in the coming November constitutional amendment election. After all these maneuvers the appropriators are able to claim the new budget rose only by 8%. The truth, though, is that the legislature spent $22 billion more this legislative session than the $84 billion it spent 2011, using almost every penny of new revenue generated by the strong Texas economy. 

As your editorial correctly points out, "This may be the first time in history that a state experienced a rush of new tax collections and lowered its reserve fund." 

Bill Peacock

Texas Public Policy Foundation

Austin, Texas

At this point, I hope you have a good idea of what the debate over the 2014-15 Texas budget was all about and why the Foundation’s concerns about it remain. In subsequent posts, we’ll examine more in depth the distinction between session to session and biennium to biennium spending, why the analysis of session spending was so crucial to understanding the budget debate this year, and what markers conservatives should set in place for 2015 to check the growth in spending in the 84th Texas Legislature.