But will they? Why do they seem to loathe, at least initially, to propose much new state spending — other than to again buy down local school property taxes?
As Senate hearings on the next two-year state budget kicked off last week, Comptroller Glenn Hegar spoke of a “historic and unprecedented” flow of money into the treasury since Texas emerged from the COVID-19 pandemic.
When the current budget cycle ends on Aug. 31, Hegar expects a $32.7 billion balance in the state’s general fund.
But in addition to the whopping “revenue surplus,” as some call it, Hegar projects that $155.5 billion of general-purpose revenue will be collected in 2024-25. Compared with current spending of $119.2 billion, that leaves $36.3 billion more on the table for lawmakers to use, not counting the surplus. Adding it all together, some analysts spoke of $69 billion of “new money.”
While federal COVID relief funds let the state reduce how much it planned to spend in the current cycle, Texas leaders didn’t use $5.4 billion of the federal aid. That’s not included in the $69 billion figure. Nor is the $27.1 billion that Hegar says will accrue by August 2025 in the state’s “rainy day fund.” Oil and gas production tax dollars are its main source of cash.
As he spoke to the Senate Finance Committee, Hegar seemed awestruck by the news he was delivering. A nearly 26 percent increase in state tax collections in the fiscal year that ended last Aug. 31 blew away the past three decades’ average annual growth in state tax receipts — 5.4 percent. Last year’s tax receipts growth rate nearly doubled the previous record of 13 percent.
It wasn’t just high inflation but also strong job gains and a robust oil and gas sector that drove the flood of revenue, Hegar said.
“We are unlikely to have another budgeting session like this again,” he said. “We have never seen anything like this in the past and I surely don’t think we will ever see anything like this in the future.”
To further explore Texas’ “once-in-history cash bonanza,” as a leading business-backed tax research group put it recently, The Dallas Morning News late last week invited two people who’ve been paid to watch the Legislature’s budget-making for decades to participate in a wide-ranging virtual interview.
Dale Craymer, a former chief revenue estimator and state budget director, worked in succession for Democratic Gov. Ann Richards and Republican Gov. George W. Bush. Earlier, as a House committee staffer in the late 1980s, Craymer drafted the legislation that created the rainy day fund. He is president of the Texas Taxpayers and Research Association, which published the “cash bonanza” research report.
Eva DeLuna Castro, the other participant, formerly was budget analyst for the center-left think tank Every Texan, which supports more spending on public schools and health care. Previously, she worked in the Texas comptroller’s office and for a state representative.
The interview has been condensed and edited for length and clarity.
Q. How do you explain to laymen what’s going on here? Why is this year’s budget such a big deal?
DeLuna Castro: By now, everybody has heard the comptroller’s explanation about all the elements that will not repeat themselves and have never happened before at the same time — the record-high inflation. He’s been cautioning over and over again that inflation has really done a lot to sales tax revenue, that we shouldn’t expect it to be there for the 2025 Legislature.
But what I explain to people is inflation is having a tremendous impact on the revenue side. And the way the state budget works, it does not automatically adjust what we provide for schools or higher education or health care providers. The Legislature has to choose to do that. So on the revenue side, inflation gave the Legislature a tax increase they would never have voted for.
What I’m hearing is that federal aid is going to continue to make up for what the state has not provided. School districts, for example, have so much federal aid they need to spend. So until that runs out, the conversation is about what the state has to do when things go back to normal. This is different because of the pandemic, obviously, and inflation.
Craymer: I’ve been doing this since 1983 and this session is definitely different for one reason, and that’s money. We’ve got a record surplus, near $33 billion. That’s three times bigger than anything we’ve seen before. And when you add that to the comptroller’s estimate of revenue growth, lawmakers have close to $70 billion of new money compared with the current budget. That’s close to 10 times more than what we’re used to. So that’s the equivalent of your boss giving you a 50 percent pay raise.
It has a very direct impact. And inflation is part of that. But there’s still a lot of strong underlying growth in the economy, and we’re seeing a much healthier oil and gas industry than we expected. So, though inflation will dissipate, a large part of what’s going on does provide a pretty solid foundation and will continue into the next couple of years.
Q. After the November election, Lt. Gov. Dan Patrick said there’s so much money that lawmakers can chart an exciting, enduring new course for the state. Were you surprised that the starting-point budgets filed last month didn’t propose much new spending?
DeLuna Castro: I was surprised that it came in so low. This is another budget that doesn’t keep up with population and inflation. How much did agencies even ask for in the first place? If you look just at the general revenue part, $140 billion is what agencies last fall said they needed, for state employee raises and infrastructure needs, a lot of one-time things.
They asked for more than what’s proposed. And the $130 billion that’s proposed for 2024-25 is not technically the real number because of a lot of maneuvering and legislative intent to do more. What are we supposed to believe they’re actually willing to do if there’s only really $4 billion that they’re willing to put in, above and beyond this proposal? That doesn’t leave room for a lot more. So that is a surprise.
If it’s a once-in-a-generation opportunity, then school retirees might ask to get a cost-of-living allowance or community care workers might ask to get something other than $10 or $11 an hour. It is not drafting a vision for the state’s future. It’s adding a bunch of new things that we’re currently not doing and ignoring all the responsibilities that have been there all along.
Craymer: I’m not surprised that they didn’t propose spending more. But quite honestly, I’m surprised that they spend as much as they do in the introduced bill. For example, they set aside $2.5 billion for a new higher education endowment fund, anticipating legislation that hasn’t yet passed. So they have put money in the budget for certain new items.
But the leadership is trying to let rank-and-file members have a chance to weigh in on how this historic excess should be spent. So the numbers start low, but they’ll move north from here.
Q. In 2007, soon after the Legislature OK’d a huge school property tax reduction, it voted — without much fuss — to bust a constitutional spending cap. But leaders won’t consider doing that this time, even though new spending proposed so far is mostly for tax relief. Why?
Craymer: Lawmakers voted previously in 2007 to suspend the limit in the name of property tax relief. But obviously that was before social media. No one wants to see a tweet saying that they voted to spend more money, only to leave out the part that it was for tax cuts. And yeah, the old axiom in politics is that if you’re explaining, you’re losing. That has cast a chill on some of the policy decisions that lawmakers are going to have to make.
DeLuna Castro: The supplemental appropriations bill, passed in tandem with the budget, is where the Rube Goldberg machine kicks in. The current budget for 2022-23 started off at $119 billion of general revenue spending when the Legislature last left Austin. But then it dropped in the interim by about $9 billion, mostly because less state general revenue was needed for schools, mostly because of higher property values, which increased many property tax bills. And then of course, it’s going to go back up once we cover the Medicaid IOU, which is never there to begin with.
So that’s another $3 billion, $4 billion. And then the governor’s border security spending. So the supplemental bill that we’re also hearing about that’s planned, that’s another $6 billion that helps them not have to bust the cap. So they say they’re sticking to this strict limit, but then they’re doing everything they can to put more money into yesterday, so that they can spend more tomorrow. That makes my head hurt.
Q. What are they thinking about doing to sidestep this spending cap and spend more of the $70 billion bonanza you’ve been talking about?
Craymer: It’s hard to say yet because the leadership hasn’t laid out a detailed set of their priorities. But I expect we’ll see constitutional amendments proposed on tax relief, infrastructure, shoring up our pensions, and perhaps more money for public schools. Money dedicated to a particular program in the Texas Constitution doesn’t count toward the cap. Basically, they’re going to submit items to voters that will be popular with the voters and that there’s likely to be broad support for.
DeLuna Castro: Yeah, the new endowment for the non-UT, non-A&M universities, I’m pretty sure that’s going to be one of the first constitutional amendments proposed. I honestly don’t know why they don’t do it for the Teacher Retirement System, to allow it to do a cost-of-living adjustment. That seems like a no-brainer. Every few years, retired teachers show up at the Capitol and are told “we don’t have $5 billion.” This time, they clearly do.
The constitutional amendment way of writing the budget just means that more and more of the budget is on autopilot. The Legislative Budget Board says 80 percent of the budget is already being determined by the Texas Constitution, state law, federal requirements, lawsuits, all of that. So why have more and more and more of the budget just be written by the Constitution?
Q. Are we electing representatives and senators who just punt the tough ones back to voters?
Craymer: Policy purists don’t like dedicating funds. It does limit the discretion of those that we elect to make these decisions. And dedicating funds certainly ties the hands of future legislators as well. But there’s a little bit of a silver lining here. Neither party has the two-thirds majority in either chamber needed to pass a constitutional amendment. So that ensures that whatever we do, whatever is taken to the voters, is going to be the result of a bipartisan fiscal agreement.
Q. Recently, House Democratic Caucus chairman Trey Martinez Fischer signaled the chamber’s Democrats will use their leverage on constitutional amendments to extract a big pay raise for teachers and school staff. Will that work?
DeLuna Castro: Raising the basic allotment for schools just in general is something that could be done. It has the effect of increasing teacher pay and all that. But there are so many other priorities and also other constitutional amendments that are likely to come up — for example, the one about gambling. So there’s going to be a lot of opportunities for House members to figure out like, what is it that they need to pull together on?
Q. Oil and gas prices and production are high, throwing off record amounts of severance tax. By late summer, the rainy day fund will have $13.7 billion. Two years after that, $27.1 billion. But GOP budget writers mostly won’t touch it. Wise move?
Craymer: The huge balance is certainly a blessing — $27 billion. That’s about 10 times bigger than any previous withdrawal we’ve ever made. So it’s more than what we need. Finance experts recommend a balance sufficient to fund the state for two months — about $10 billion of general revenue. But we’re far beyond that — we’re actually at the point where we may have too much money in the rainy day fund, which could create a drag on the economy.
DeLuna Castro: Legislators have to think about the rainy day fund as something that’s supposed to be there in a time of recession — not as something to use for backfilling and capital maintenance and one-time state mental hospital construction. It’s gotten so far away from the original intention, which is to stabilize the volatility of oil and natural gas severance taxes.
It’s OK to spend all of it if you have to. That’s what the 2003 Legislature did. And the world continued to rotate on its axis. But it’s a very different Legislature now, obviously.
Texas Budget Writers Slow to Spend Record Bounty
Texas lawmakers have an unprecedented amount of money to spend in this year’s session, but nearly identical “base” budgets filed in each chamber last month didn’t dispose of much of the available revenue. That surprised longtime observers of budget-writing, who cited some notable omissions:
- State public school formula spending from general revenue would shrink from $31.2 billion in the current two-year cycle to $29.9 billion (higher property values and slower-than-expected enrollment growth have reduced the state’s share of the state-local tab for schools).
- No increase in the “basic allotment,” the main component of state aid to schools.
- No increase in teacher salaries (though budget “riders” make vague statements of intent to do so).
- No increase in state university formula funding.
- For the most part, state funding for health science centers maintained at 2022-23 rates.
- No cost-of-living adjustments for retired state employees and teachers.
- No money to install air conditioning in prisons (though a House rider signals intent to do fund such improvements).
- No money to increase wages of community attendants whom Medicaid pays to help keep elderly and disabled Texans out of nursing homes (currently, base wage for most is $8.11 per hour with no benefits).
The House and Senate’s starting-point budgets would spend more in a few places:
- $12.9 billion of additional state aid related to property tax relief (leaders tout a figure of $15 billion, but $2.9 billion of it merely continues tax cuts granted in 2019).
- $2.5 billion for a new university endowment for schools not benefiting from the Permanent University Fund (requires separate bill to pass).
- $650 million of additional support for community colleges to encourage them to train workers for available jobs (requires separate bill to pass).
- 10 percent raises for most state employees (5 percent per year).
- $1 billion for mental health (in addition to $2.3 billion for new or expanded state mental hospitals, spending planned for a “supplemental” bill tweaking the current budget).
- $600 million for school safety, after the state’s worst school shooting at Uvalde last May.
- $350 million for a rural law enforcement fund (requires separate bill to pass).
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