‘We Have Tremendous Needs…You Have Some Very Hard Choices’

Austin, Texas — “What you do today will go forward into the 2013 session,” State Comptroller Susan Combs told members of the House Appropriations Committee Thursday as they attempt to craft a budget around a multi-billion-dollar hole. The Comptroller warned budget writers that their budget decisions of this legislative session not only will affect the current budget, but also future budgets. “Please look forward,” she said. “We have tremendous needs in this state. You have some very hard choices. You have the next several years to think about.”

Appropriations Chair Jim Pitts invited the Comptroller to the hearing, looking for her “insight into the challenges we face” and to give legislators “a broader picture of our state budget.” As it stands now, that budget has legislators turning over every couch and chair cushion looking for literally billions in spare change.

The state’s leadership and the Legislative Budget Board have already asked agencies to make substantial cuts to their budgets – twice. Now, he said, the committee must consider whether there is cause for even deeper cuts, and if so, if such cuts would be both practical and reasonable.

Combs was asked about the circumstances that led to the huge budget deficit. “The most significant factor that caused the shortfall was the downturn in the economy,” she responded. John Helleman, chief revenue estimator for the Comptroller’s Office, agreed. “The largest measure of what happened to our revenues system was the recession.” It was, in fact, the recession in the mid-80s that led to the creation of the state’s Economic Stabilization (Rainy Day) Fund. “The recession we just had was somewhat worse than that one.” The severity of the current budget crisis in the state, according to Helleman, worsened because the state’s business tax is not bringing in as much as was expected ($4 billion instead of the anticipated $6 billion) and because of the state’s increasing investment in public schools.

Asked if a recent Standard and Poor’s report was correct when it said the structural imbalance between revenues and expenditures in the state will be “perpetual,” Helleman replied that the fact that the property tax reduction (approved by lawmakers in a previous session) was not paid for “then or now” and with a continued poor performance of the franchise tax, “those are issues that are going to continue.”

Limited Options

No rose-colored glasses in sight, Combs said the legislature has limited options to try to plug the gap in the budget. It can use all or part of the Rainy Day Fund or other available revenue sources, delay some spending, make further cuts in this year’s budget or some combination of those options.

“When you look at what is left in agency budgets, it’s up to you all to discuss if further cuts can be made from March 3 to Aug. 31 (the end of the fiscal year).”

Deferral of some payments is a financial tool that has been used by legislatures in the past facing financial hardships. Combs said the question there is whether such deferrals will be made in the current fiscal year or later.

Rainy Day Fund

And regarding the Rainy Day Fund, Combs reminded the panel members that the fund was created as a result of a “very serious recession” in the mid-80s when the state was largely dependent on oil and gas tax proceeds to feed its budget needs. She said when the fund was created, it was intended to provide economic stabilization, with hopes that the state would in the future diversify its economy. Pitts this week filed legislation that would take $4.3 billion from the Rainy Day fund. He plans to bring the bill up in committee as early as next week.

The comptroller cited instances in past sessions when all or part of the Rainy Day Fund was utilized to balance the budget. The largest raid of the fund occurred during the 78th Legislative Session, when lawmakers used approximately $1.26 billion of the fund’s $1.5 billion balance to help make budget ends meet. More than $416 million of that went for Medicaid expenses. Another $516 million helped bridge the gap for state retirees’ health insurance costs and $295 million went to the Texas Enterprise Fund, which is dedicated to economic and job development.

Job Creation Funds

Mention of the Texas Enterprise Fund led Rep. Sylvester Turner to question funding of the Texas Enterprise Fund and the Texas Emerging Technology Fund, both of which benefitted from the Rainy Day Fund when both had “just come into existence.” Neither, he said, was a long-standing entity, but both were recipients of money that presumably was set aside for emergency needs. And both are overseen by the Governor’s Office.

Combs responded that the funds are “job creation funds” used to attract jobs to the state.

The Future

Rep. John Otto noted that following the 2005 legislative session, the subsequent biennium had near-record growth. He said with no control over what will happen regarding funding at the federal level, he is not sure Texas can depend on that to happen after the next biennium. Otto said he is concerned about the risk if all of the Rainy Day Fund were to be used – “You’d have nothing left.”

Combs responded, “I’ve been a small business owner for 30 years and I’ve never emptied my bank account.

“You do have some long-term challenges.”

The largest deferral that the state might consider would be payments to the state’s public schools in August. Officials with the Comptroller’s Office said they did not know how that might affect the schools; that question would be better asked of school officials, who would see their funding delayed by a week to 10 days. But Combs did point out that schools “request their money early and their revenue from their property taxes comes in late.”

When asked which of the three scenarios she might favor, Combs said, “There’s no free lunch. If you do deferrals, you have to unwind it at some point. The Rainy Day fund was established for a rainy day. The question is not if it should ever be used, but to what extent.

“Take a look at 2013. The franchise tax is not performing. Sales tax is coming back – but from a very big hole. I urge you to really look at this as a two-biennium problem. It’s not just about today. What you do today is the seed for the next biennium.”

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