Monday, March 14, 2011

Why is there a Texas shortfall

The following letter from Senator Dan Patrick make the Texas budget problems very understandable.    Share it with your friends, especially teachers.  There are so many rumors in the education circles that are very critical of our legislators and Erwin Cain.  This also gives interesting facts for a 'Letter to the Editor' in local newspapers.
Dear Friends,


I have recently given a number of presentations on our current budget situation in Texas. People ask where do we spend our money, how deep is the budget gap, how did it happen, what can we do about it, what does the future look like beyond this current budget, and what exactly is the purpose of the Rainy Day Fund. Several people asked me to send them the information so they can share it with others. 


The internet is a powerful tool to disseminate information.  Unfortunately there are many e-mails flying around that either are not factual, based only in part on facts, take facts out of context, or have more opinion than facts contained in them.  Therefore I thought I would respond as requested and lay out the facts, not as I see them, but as I they are.  As Reagan said, "facts are stubborn things." I have made brief editorial comments in various sections to help better explain a particular issue.  However, the purpose of this is to share information based on fact and not editorialize. I can do that in other forums and at other times appropriate. The editorial notes you see are my opinion only and do not represent the views of any caucus, or other elected official.


Please feel free to share this with your e-mail lists.  I believe knowledge is power. The more informed the public is about government the better government we will have.


My Background:


I serve on finance. I am on the special committee for education finance. I served on the special interim committee to study education finance, I serve as vice-chair of education, and I have served on the Health and Human Service committee now for three sessions.  


Senator Dan Patrick




First key point: Education and health care, primarily Medicaid on the health care side, account for nearly 80% of our budget.

People say all of the time, including recent polls, cut spending but don't cut spending for education and health care. With our current economy and budget gaps it is impossible to cut spending without at some level cutting spending in those two areas.  (editorial note: the key is to cut spending and preserve the quality in the classroom and provide for those truly in need)


Our budget is broken down into an All Funds Budget and General Revenue Funds Budget.

All Funds represents all of the money available to us, state sales tax, federal dollars, dedicated dollars, and other dollars.


General Revenue Funds are Texas dollars only, made up primarily of sales tax revenues. Texas has other revenue sources like the lottery, motor taxes, oil & gas taxes, tobacco taxes, business taxes, fees, fines, and more, that are either in dedicated funds or G.R.


The legislature passes a two year budget each session. The legislature is not allowed under law to appropriate funds beyond 2 years. The current budget year ends August 31, 2011. The budget we will pass this session is for the years 2012 and 2013 which begins this September.


Note:The Texas General Revenue Budget saw a 1.3% decrease in spending from the 2008-2009 budget. State employees have grown 3% in the last 8 years based on committee testimony. Note: school district employees are not state employees.


Review: Our budget is comprised of dollars generated in Texas and federal dollars, the largest portion of federal dollars are sent to our state for Medicaid reimbursement.  The Comptroller sets the amount of money the legislature can spend for each 2 year budget cycle based on Texas dollars only.

Fiscal year ends August 31st of each year. Education and Health & Human Services account for the vast majority of spending each year.


ECONOMIC STABILIZATION FUND. This fund is more commonly known as the "Rainy Day Fund"The fund was established in 1987 and approved by the voters after the recession of the mid-eighties brought about large budget cuts and new taxes.  


The fund receives excess oil and gas production taxes and general revenue dollars not spent. The intended purpose of the fund was to level out spending in tough economic times to avoid massive cuts or massive tax increases. The fund could also be used in times of other crisis in the state that impact the budget. 


It is estimated the fund will reach $9.2 billion or more for this budget cycle. Since the Republicans took control of the legislature in 2003 they have made it a priority to grow the fund so that the state would have money available in the event of tough economic times or other crisis that might arise.


In 2003, the first time that Republicans had control of both chambers and the Governors office, the fund stood at approximately $200 million.  Republicans have not spent all of the money each year, growing the fund to now over $9 billion.  In 2003, when the state faced nearly a $10 billion shortfall, $1.3 billion was used from the fund for the 2004-2005 budget years. That is the last time it was tapped.


Note: If the legislature uses the Economic Stabilization Fund to pay current bills it requires a three-fifths vote of the legislature.  If the legislators choose to use the fund for any other purpose it requires a two-thirds vote of the Senate and House.






First, why do we have a budget gap or shortfall ? Basically the problem can be broken down into a few basic points:


1. Sales tax revenues did not match estimates made in 2009 because of a slowdown in the economy. The slowdown was driven primarily by policies in Washington, but Texas has been impacted as have all states. The slowdown has also impacted home sales and property values.  Property taxes pay for about half of local school district funding, as well as funding for county and city government. For nearly a decade property taxes increased over 8% a year, and higher in some areas, as appraisals increased each year. ( editorial note: -I believe they are still too high, will price residents out of their homes, and can not be sustained. But that is an issue for another day, the purpose of this paper is to help explain the budget)


NOTE: Our sales tax revenues are growing again, but not fast enough to have a great impact on this budget cycle in any dramatic manner.  Property taxes are estimated to remain nearly flat for several more years.  This data means the budget the legislature will face in the next session could be difficult as well. (editorial note: that is why I believe we should keep all, or as much of the Rainy Day Fund as possible)




There is another factor that is greatly impacting our budget, incredible growth. In the mid 1980s, when we also experienced a major economic slump, many people who came to Texas looking for work in the late 1970s, left Texas and went back home. Today the people are not leaving, they are coming at a rate of over 1200 a day.


We will add approximately 160,000 new students for the 2012-2013 budget cycle, of which more than 50% are economically disadvantaged. This factor adds even more expense to our education budget.  Growth also brings an increase to health services, demands for more public safety, roads, and other areas of government.  Our population is expected to grow from 25 million to nearly 45 million in the next 30 to 40 years.  People are coming to Texas because the states they are leaving are in desperate shape 


Summary: lower sales tax revenue, lower property values in school districts, and a rapidly increasing population, made up of many economically disadvantaged children coming into our systems, has created a situation that Texas has not seen in modern times.  Other states are having economic issues, but they are not experiencing the growth we are seeing in Texas.





There have been a lot of numbers flying around the internet and the legislature about how big the budget gap is. First it is important to break down the budget shortfall into two areas.


1. The current budget year ends this August 31st.  The legislature passed a budget in 2009 based on Comptroller estimates for the year 2010-2011. Those estimates were based on various economic indicators and projections. Two major indicators, sales tax revenue, and property tax values, did not perform as expected.  (sales tax revenues have been on the increase the past several months which is a positive sign and could create a small revised revenue estimate for 2012-2013 ) 


Our revenues are approximately $4 billion short, based on the projections in 2009, to pay current expenses. The Governor called for a 5 and 10% cut in many agencies several months ago that will help mitigate this shortfall. This is the budget shortfall we must address.  We obviously have an obligation to pay our bills.


2. The next budget issue is the budget for 2012-2013 that we must pass under our Constitution.  The budget is the only actual bill we must pass. Like most states, and unlike the Federal Government, we must pass a balance budget.  We cannot print money. We cannot borrow money for ongoing budget expenses with the exception of certain projects like roads and infrastructure.


The confusion on the budget and the estimates of the budget gap vary because the the blurring of several issues; the current budget gap, and future budget needs which are based on either what we have spent, or what we need to spend based on the past spending levels and accounting for growth.


If the legislature funds education, higher education, and health care at the same levels as the past two years, pays for the additional growth in student enrollment, makes up for lower property tax revenues for school districts, and pays for increases to our medicaid rolls, as well as other areas of the budget, the gap is the following for the two largest areas of the budget:  


$3-4 billion in current budget that ends in August. Nearly $20 billion or more for the projected 2012-13 budget based on the factors mentioned. We obviously need to pay our bills for the current budget that ends in August one way or the other. We are still looking at ways to cut dollars in the last few months of this cycle.  It is the next budget which we are spending most of our time. We are scrubbing it to find cost savings everywhere and at the same time maintain the quality of education and health care needs the public expects. 


The breakdown in the two largest areas of our budget.




Education K-12 shortfall could be as high as $9.2 billion plus $500 million for textbooks.

Breakdown: ( all numbers approximate estimations )


$2.1 billion to pay for local school district property tax shortfall as property taxes revenues are down for schools at the local level

$1.4 billion to balance local school district monies owed by the state

$2.2    billion for student growth  (80,000 new students expected in 2012 and 2013 - many economically disadvantaged)

$3.2 billion to replace stimulus money that was supposed to one time money, but was spent on new teachers, employees, and salary increases for teachers. The state does not have to replace those dollars, but that means those teachers and employees who were hired with those dollars would be terminated.

$ .2 other 


NOTE: Education is financed by local property taxes, the state, and a small percentage of federal dollars. 





We are facing nearly $9 billion in our health care side of the budget due to two major factors. First, we have seen a major increase in those applying for Medicaid. Secondly, we expect the federal government will send us less in the Medicaid match programs.  Currently the feds might pay up to 70% of every medicaid dollar we spend. We pay the other 30%.  If they drop their match rate, because they are trimming their budget as well, to 55-60%, our share goes up from 30% to 40-45%.  That increase will cost billions.


A SIDE NOTE: If Obama Health care goes into effect in 2014 as scheduled, the cost to Texas will increase our cost of health care by an estimated 20 billion or more between 2014 and 2025. This would place health care costs in Texas at a level that could exceed education in a short time.




As of March 1, 2011, we are facing a possible $3-4 billion deficit for the current budget year that must be paid.  We are facing a potential funding gap in education of $9.2 billion in education, plus $500 million for textbooks, and a possible $9 billion in health care in addition to other budget requests. 






Many people ask about why the lottery doesn't pay for education as promised by Democrats in the 1990s.  It never did nor was it intended to pay for a large part of education funding. All lottery proceeds go into education today.  However, those proceeds only account for about 5% of the total education budget.




In 2006, before I was a member of the legislature, the legislature was under court order to address education funding. Our Constitution prohibits a statewide property tax. However, with almost every school district at the maximum allowed under law of $1.50 per one hundred dollars of evaluation for M&O (maintenance and operation of their schools) the courts said we had an unintended statewide property tax.  The legislature created the gross margins tax in order to buy down the local property tax rate from $1.50 to $1.00 to resolve that issue.  In order to pay for that buy down the business tax was created.  However, the business tax under performs by approximately $4-5 billion per budget cycle from expected collections creating a "structural deficit" each budget cycle.  Local districts can raise the rate by 4 cents to a $1.04 without a vote of the taxpayers.  Most have done so.  Districts are allowed to raise the rate up to 13 cents in total to a cap of $1.17 but must have approval of the voters for anything over $1.04




Schools districts are required to keep a fund balance for at least two months of operations in the bank at all times. However, many districts have more in their "local version of the rainy day fund."  The total that all districts in the state have in reserve is estimated to be $10 billion.  Again, a large portion of this is required reserve.


I hope you have found this review helpful in better understanding the budget process and the current status of our budget. This will be an ongoing process over the next several months for the legislature.


Senator Dan Patrick


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