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By Jason Embry
AMERICAN-STATESMAN STAFF
Sunday, January 28, 2007
When comptroller announced state had billions extra, needy programs came out of shadows.
A national economic rebound coupled with extremely high returns in one of the state's bedrock industries — oil and gas — have lifted Texas out of the financial doldrums and produced a cash windfall for lawmakers about to write the next state budget.
The bounce back from a budget crisis just four years ago has caused celebration and self-congratulations in the opening weeks of the legislative session. It even has Gov. Rick Perry looking for ways to refund money directly to Texas taxpayers, if the opportunity arises.
But just beneath the surface are questions about how long Texas government will feel flush.
"It's like your bank account the day after payday," said Billy Hamilton, the state's former deputy comptroller. "It's going to look pretty good, but a lot of that money is already committed."
On Jan. 8, state Comptroller Susan Combs projected lawmakers would have enough money to increase state spending by about $14.3 billion over the next two years.
But last week, legislative leaders said that they'll need to spend most of that money on prior commitments and that they have only about $2.5 billion for other needs.
So where did the money come from, and where did it go so fast?
On the revenue side, about $7 billion of the $14.3 billion windfall is money that the state collected over the past two years but did not spend.
The other $7.3 billion is how much more Combs projects the state will collect in the next two years than it is now spending.
About half of the state's revenue comes from sales taxes.
After the 2001 terrorist attacks, the collapse of the tech bubble and Enron-type corporate scandals, consumer sales taxes grew marginally, while sales tax collections from businesses dropped significantly. State sales tax collections stayed almost flat between 2001 and 2003 before starting to pick up steam again in 2004.
By 2006, sales-tax receipts were growing faster than they had in almost 30 years.
"The national economy started to pick up and Texas was right along with it," Hamilton said. "Businesses started to reinvest, consumers started to get a little more income in their pocket, people could go in and refinance their houses and get a lower interest rate."
Even more striking in recent years has been the increase in revenue from taxes on oil and gas production. Collection of natural gas taxes has increased from $1.7 billion in the 2002-03 budget cycle to an estimated $4.1 billion in the current cycle.
"While the Texas economy is much more diversified than it historically has been, we are still very sensitive to oil and gas," said Dale Craymer, chief economist at the Texas Taxpayers and Research Association, which represents businesses. "The fact that oil and gas prices have been riding a very nice wave over the last several years has put a lot of money in the treasury."
Some of the money from oil and gas taxes flows into the state's so-called rainy day fund, which state lawmakers have tapped in the last four years to fill budget holes.
Legislative leaders say they do not plan to use money from the fund in their next budget.
Oil and gas companies also have been spending more, adding to the sales-tax receipts, Craymer said.
Part of the reason the Legislature has so much money today is because the current budget does not spend all the cash that's been coming in. Two key factors limit that spending. One is a constitutional provision that limits increases in state spending to follow projected growth in the economy.
Legislative leaders set that limit before the 2005 legislative session, and they chose the lowest-growth economic model presented to them. When, in 2006, some complained that the Legislature wasn't spending enough on education, legislative leaders said they could not spend more because of the cap.
Also limiting spending when lawmakers wrote most of the 2005 budget was former Comptroller Carole Keeton Strayhorn's estimate of how much money the state would collect in 2006 and 2007. Lawmakers can only spend what the comptroller says is there, and the state has been collecting more money than Strayhorn predicted.
"We were coming out of the recession when the comptroller first put the numbers on the table, and it's always difficult to estimate the strength of the economy when you're coming out of a recession," Craymer said. "It turns out we had a much stronger recovery than it would have been prudent to forecast."
On the spending side, the reins were still tight, despite the money that's been pouring in.
About 25,000 students who qualified for a Texas Grant scholarship, which offers free tuition to students who take challenging classes in high school and show financial need, did not get them last year.
About 85,000 Texans with mental retardation and other disabilities are on waiting lists for home-based nursing care, physical therapy and respite care, instead of seeking those services at institutions. Meanwhile, problems such as paperwork mix-ups and inadequate training have kept eligible Texans from receiving public assistance programs as the state has tried to save money by giving private companies a larger role in providing those services.
"In higher education, in the Children's Health Insurance Program, in Medicaid, in mental health services, we are not nearly meeting the needs of this state," said state Sen. Eliot Shapleigh, D-El Paso.
Lt. Gov. David Dewhurst rejected a suggestion that the state underfunded services in its current budget.
He said that, in 2005, lawmakers brought dental, vision and mental health benefits back to the Children's Health Insurance Program while boosting state higher education funding by more than $800 million.
Referring to 2005, Dewhurst said, "When our budget passes out of the Senate 31-0 and it passes out of the House with a large majority, I think it's got overwhelming support."
Perry feels good enough about the budget situation that he's contemplating devising a way that state government could rebate tax money to individual Texans in good times. But that time might not be now.
Two major spending commitments that lawmakers made in 2006 will drive much of the state's budget discussion: a one-third reduction in school property taxes (a net tax cut of about $6 billion) and about $4 billion over two years in education spending, including a teacher pay raise enacted already.
But those costs come as the economy is cooling.
Combs projects that sales tax collections, after seeing growth rates of 12 percent and 7 percent over the last two years, will grow by about 4 percent during each of the next two years. And she predicts natural gas prices will flatten out. That's raised some concerns about whether the state can pay for the education increases and property-tax cuts without slashing other areas of the state budget.
Lawmakers already are talking about setting aside $3 billion in the next budget, maybe more, to help pay for the budget they'll write in 2009.
Hamilton said lawmakers may have to look to spending cuts in 2009 to pay for the property-tax cuts and school measures. Or, maybe, the economy and the state's new business tax will perform better than expected.
"You just don't know what the taxpayers are going to do," he said. "A lot of the issues are unresolved. But the nature of things is to have unresolved issues."
jembry@statesman.com; 445-3654