State warned not to spend much of Rainy Day Fund

The State of Texas will have little money for frills this session. A baseline budget presented to the Senate Finance Committee Monday afternoon by state budgeting agencies indicate expenditures already exceed revenues, even under the most conservative estimates of potential spending for the next biennium.

The state has $77.1 billion to spend this biennium, roughly $9.1 billion less than two years ago. An anticipated $9 billion surplus was adjusted down to no more than $2 billion because of current commitments, including the cost of a property tax cut approved last session. And the state is sending more money back to businesses than it is taking in under the new franchise tax, due to last-minute appeals the Comptroller’s Office is settling.

Already, Lt. Gov. David Dewhurst and Speaker of the House Joe Straus have asked state agencies to cut an additional 2.5 percent out of the current year’s budget. At yesterday’s Finance Committee meeting that was estimated to be about $300 million in new revenues, once dedicated funding was excluded from cuts.

“As we begin budget discussions for this Session, the Legislature needs to be mindful of the uncertain economic conditions around us and every family in Texas,” Dewhurst and Straus wrote in a letter distributed to lawmakers and the media. “Texas is doing better than almost every other state, but we must always be prudent with taxpayer dollars, and leave a reasonable reserve in the Rainy Day Fund to ensure we do not face a large deficit in the 2011 Session.”

 

Yesterday’s budget presentation to Senate Finance had two parts. John Helleman, chief revenue estimator for the Comptroller’s Office, presented the anticipated revenues – and lack thereof — for the upcoming biennium. Director John O’Brien and Assistant Director Ursula Parks of the Legislative Budget Board then presented a conservative baseline budget, one that indicates what Dewhurst would term a “structural deficit” – or shortfall – of $4 billion.

So the Senate starts in the hole this session in the budget-writing department, even before it touches high-cost promises like reversing tuition deregulation. O’Brien also noted that the baseline budget also does not carry the cost of debt service payments on the promised cancer and transportation bonds.

Constitutional prohibitions also have stopped the Permanent School Fund from disbursing any payouts this biennium for textbook costs, to the tune of $1.1 billion. The only way that will be reversed will be if a sudden market upswing in the second year of the biennium pushes the growth of the PSF out of the red and into the black.

Sales tax, the lion’s share of state revenues, is expected to take a big hit this biennium. Helleman has downgraded growth from a robust rate of about 10 percent three years ago to about one-half of one percent in the upcoming biennium. Also, growth in property values – which would increase the state’s share of school funding – is expected to be no more than 2.5 percent this biennium.

Unlike the recession of the mid-80s, the current economic downturn will not come with a Texas housing bust, Helleman said. While sales of existing homes in Texas have declined, problems are nowhere near what they are in states like Florida.

According to Helleman, Texas lost 25,000 jobs in December. The biggest hit has come in the oil-and-gas sector. Job losses also were heavy in the construction and service sectors. Helleman predicts the state will end up losing all the oil-and-gas jobs it gained in the last two years, especially in drilling and exploration. While Helleman predicted current drilling projects will be completed, he did not expect to see any new drilling for oil in the coming biennium.

Still, the state appears to be more resistant to economic downturns than states in the Rust Belt. Helleman predicted a continued downturn through the fourth quarter of the current fiscal year, at which time he predicted a slight uptick in job growth. Helleman predicted the state should regain its financial footing, slowly, as it enters Fiscal Year 2011.