Texas Will Face Major Fiscal Challenges in 2011
The next Texas legislative session will convene in less than a year, on Tuesday, January 11, 2011. As TPEA prepares for the 82nd Texas Legislature we have attempted to assess the state’s likely fiscal situation for the 2012-2013 biennium. Based on our discussions with state fiscal and budget experts, it is clear that Texas legislators will face extreme fiscal challenges in trying to fashion a state budget in 2011. Before considering possible use of the state’s “Rainy Day Fund” or any growth in tax revenues, TPEA has concluded that the state can reasonably expect to face a budget deficit of $15 to $20 billion.
To begin with, the current budget enacted in 2009 used about $11 billion in non-recurring funding sources. Budget writers will need to find other sources of revenue to replace these funds, or make comparable budget cuts. The $11 billion in non-recurring funds includes the $2 billion surplus available in 2009 from the prior biennium, $6 billion in federal stimulus funds that are being used as general revenue to fund ongoing state programs, and $3 billion that the legislature “pre-funded” in 2007 for the Property Tax Relief Fund.
In addition, TPEA believes it is likely that state tax receipts will be lower than projected (see the related article at http://www.tpea.org/news/newsarticle.php?id=76), while actual state expenditures for this biennium will likely exceed budgeted amounts because of increased demand for Medicaid and other programs. Lower tax revenues coupled with higher than predicted expenditures could result in a deficit of perhaps $2 to $4 billion this biennium. Finally, budget writers will face several billion dollars in increased costs to maintain current programs and to pay for ongoing growth in student enrollment and other population and service demands.
On the positive side, legislators will have at least $8 billion, and possibly more than $10 billion, available for use in the state’s “Rainy Day Fund”. Legislative rules require a two thirds vote of the legislature to appropriate “Rainy Day” funds, and current expectations are that legislative leaders will attempt to preserve half of whatever is available for future use. Fiscal experts also expect that once the economic recovery begins, sales tax and other revenues will grow by several billion dollars over the 2012-2013 biennium.
In recognition of these potential fiscal problems state leaders issued a letter on Friday, January 15th directing all state agencies to show how they would cut spending by 5 percent for the current biennium.
TPEA Alerts State Leaders to ERS Healthcare Issues
TPEA Executive Director Gary Anderson recently wrote to Governor Perry, Lt. Governor Dewhurst, Speaker Straus, and members of the Legislative Budget Board to express concerns about potential cuts in ERS health benefits.
The urgency of the letter is based on two recent developments. First, based on early cost trend data, ERS could face a deficit in the Group Benefits Program of as much as $148 million. As we state in the TPEA letter, closing a deficit of this size would impose significant hardships on state employees, retirees and their families during already difficult economic times.
As TPEA previously reported, the Employee Retirement System (ERS) experienced an unexpected increase in health care costs during the final quarter of FY 2009, which ended on August 31, 2009. If subsequent cost data indicate an ongoing increase in the healthcare cost trend above what was funded under the current Appropriations Bill, this will likely require a reduction in health benefits for fiscal year 2011, beginning in September 2010. Click here to see the ERS document summarizing this situation.
Legislative budget writers in 2009 intended to maintain current ERS health benefits through this biennium. However, they also required ERS to spend down its Reserve Fund as a method of finance, thereby leaving no margin for error if any significant change in the cost trend occurred.
To further complicate the situation, state leaders have issued an instruction letter to all state agencies that directs them to develop plans to identify cost savings measures to achieve a 5 percent reduction in general revenue expenditures for the 2010-11 biennium. These reductions have been under consideration for several months, as you can see from this article: http://www.tpea.org/news/newsarticle.php?id=74.
Some agencies and programs are exempted from these reductions, including retirement contributions for both ERS and TRS. But TPEA is concerned that a 5 percent reduction in general revenue funding for the ERS health plan will be in addition to any cuts necessary to close ERS’ budget gap. The combined impact of these two separate reductions will be dramatic, painful and inequitable cuts to our ERS health benefits. TPEA has requested that state leaders consider how to prevent, or limit, the combined impact of such reductions, should they prove to be necessary. The TPEA letter also makes clear why such cuts to ERS would be inequitable and impose a disproportionate burden on state employees and retirees.
Attorney General Rules Against $500 Retiree Payment
On November 23, 2009 Attorney General Greg Abbott issued a ruling that prevented both ERS and TRS from issuing $500 supplemental payments to qualifying retirees. The funding for and language authorizing this potential supplemental payment were included in HB 1, the General Appropriations Act, but it required that the Attorney General render a legal opinion on whether such payments would violate state law or specific constitutional provisions. TPEA submitted a legal brief supporting the legality of such a payment. The Attorney General’s ruling seems to indicate that the language of the provision requiring the AG to render an opinion created an insurmountable hurdle by requiring that the AG find “conclusively” that such a payment was legal.
The AG’s ruling has implications for both ERS retirees and active state employees.
During the 2009 session TPEA worked with key legislators on HB 2559, to try to put the ERS retirement fund back on a path to actuarial soundness. TPEA’s willingness to work with legislators on this issue was predicated, in part, on finding a way to help state retirees, who have not received any type of retirement enhancement since January of 2002. TPEA is bitterly disappointed that our deserving state retirees will now go another 2 years without any help from the legislature.
The AG’s ruling also resulted in a slightly higher retirement contribution rate for active employees, effective January 1, 2010. Under HB 1 if the $500 supplemental payments were determined not to be legal, the funds appropriated for that purpose would instead be used to increase the state’s ERS contribution rate from 6.45 percent to 6.95 percent. Correspondingly, the state employee retirement contribution rate will increase from 6.45 percent to 6.5 percent since HB 2559 requires employees to contribute at the same rate as the state, up to 6.5 percent. The current combined state/employee ERS retirement contribution rate of 13.45 percent is the highest rate since 1985.
National Perspective on Texas’ Fiscal Situation
The likelihood of multi-billion dollar budget deficits in Texas is sobering, particularly with the severity of the 2003 budget cuts still vividly recalled. In order to get a better perspective on how the State of Texas and its employees have fared during the current recession, TPEA compared Texas’ experience with that of other states.
The current national recession is the deepest and most prolonged since the Great Depression. Some states have been harder hit than others. Tax revenues in some states have declined by more than 20 percent, which has caused significant budget deficits in virtually every state. To give an idea of the scale of these budget gaps, the National Conference of State Legislatures (NCSL) found that “states closed budget gaps in excess of $145 billion while crafting their FY 2010 budgets, only for a new round of shortfalls to open totaling $28.2 billion.” Similarly, the Washington-based Center on Budget and Policy Priorities (CBPP) concluded “Counting both initial and mid-year shortfalls, 48 states have addressed or still face such shortfalls in their budgets for fiscal year 2010, totaling $193 billion or 28 percent of state budgets—the largest gaps on record.”
Texas faced a relatively small budget gap for FY 2010 (estimated at $3.5 billion by the CBPP) but was able to bridge that gap with use of federal stimulus funds, while preserving the roughly $8 billion balance in the Rainy Day Fund.
TPEA also looked at comparisons of the measures various states used to close budget gaps that affected state employees. According to information compiled by the NCSL (http://www.ncsl.org/?tabid=17255) 31 states instituted furloughs of state employees as a cost saving measure. Furloughs are required time off without pay. While a number of states also used employee layoffs as a cost saving measure, furloughs gained acceptance as a way to spread the economic pain across the workforce without exacerbating unemployment. California, which has probably had the most difficult budget problems, instituted furloughs of 3 days a month for most employees. States used a number of other cost cutting measures affecting state employees to help balance their budgets, including hiring freezes, reductions in health care and retirement benefits, salary freezes or reductions, and early retirement.
Texas is among a handful of states that have thus far avoided the sorts of harsh cost saving measures affecting employees that have been employed in most other states.
April 8 Date for All State Employee Celebration in Austin
TPEA is proud to once again host our annual All State Employee Celebration. This year’s event will be on Thursday, April 8 at historic Scholtz Garten in Downtown Austin. The event is free to all state employees, retirees and their families. We’ll once again have great live music and complimentary beverages and snacks. Put it on your calendar!
Get Better Informed, Provide Your Home Email Address
TPEA has been working to inform state employees about relevant issues and concerns through our legislative update email program since 2003. TPEA takes pride in being the most reliable source of accurate and timely information on legislative developments and other concerns for active and retired state employees.
However, because this information is sent to your state email address, TPEA is necessarily constrained in the types of information and recommendations that we can provide. TPEA is therefore encouraging all interested state employees to provide their home email addresses, or other non-state email address, so that TPEA can offer you the full range of information we have available. TPEA will not sell or otherwise permit access to these addresses to any other party.
Follow this link to submit your home email address to TPEA.
Watch TPEA’s website www.tpea.org for special event announcements and to read about TPEA’s future schedule.