As Coronavirus Prompts Economic Downturn, Texas is Facing Fiscal Uncertainty on Two Fronts

This article originally ran April 8 on The Texan

Recently, Texas Comptroller Glenn Hegar briefed legislators on the potential fiscal effects of the coronavirus shutdown and the collapse of oil prices.  

While no one knows for sure at this point, it is likely that the state could face a significant revenue shortfall that could disrupt the ability of the Texas government to fund its $248 billion biennial budget. 

“I know they are going to be looking for money,” said Talmadge Heflin, former House Appropriations Committee chairman and senior fellow at the Texas Public Policy Foundation. “Until we get any federal money and the comptroller estimates how the revenue is flowing, it is difficult to guess what the hit is going to be. But we know there is going to be one.”

Some revenue sources are likely to be affected more than others. Dick Lavine, a senior fiscal analyst at the Center for Public Policy Priorities, points to the property tax as one area of concern. Revenue from the sales tax and oil and gas taxes are also likely to fall short of expectations.

In addition to the effects of the economic downturn, Texas is facing a potential budget shortfall based on a significant increase in state spending in the current budget.

In the 2015 and 2017 budget cycles, policymakers kept spending growth near population growth plus inflation. However, in 2019 policymakers adopted a budget that increased spending of all funds by $31.7 billion, or 14.63 percent, over what they appropriated in 2017. Much of the increase went to public education spending and Hurricane Harvey relief.

At first glance, this spending increase doesn’t appear to be problematic. Late last year, the comptroller estimated that the current two-year budget cycle would end with a surplus “available for certification of $2.89 billion.”

However, there are two potential underfunded areas in the budget that could lead to a revenue shortfall by 2021.

First, the Texas Legislature typically underfunds Medicaid by several billion dollars each budget cycle.

For instance, the state’s Legislative Budget Board (LBB) reported that in 2019 the legislature included $2 billion in general revenue (GR) funding and $2.15 billion in federal funds in the supplemental appropriations bill “to cover a Medicaid shortfall.”

Heflin believes that the state is going to have to spend significantly more for Medicaid this biennium than is currently budgeted, in part because he expects increased demand for Medicaid in this downturn.

Second, the state’s Legislative Budget Board (LBB) made a mistake in 2019 when it stated that “a total of $11.5 billion in General Revenue Funds above current law funding for public schools is provided to increase public education funding, including salary increases for classroom teachers and other educators, provide school district property tax relief, and reduce recapture.”

What happened was that the LBB missed a rider in House Bill 1, the appropriations bill, that limited total education funding to a certain amount. Even though the LBB reported that $54.6 billion had been appropriated for the Foundation School Program, the actual amount was about $3 billion less.

This means, according to the LBB’s September update, that new education funding increased by only $8.6 billion.  Given that the LBB reported that HB 3 was supposed to have provided “$6.5 billion for increased school funding” (including salary increases to teachers) and “$5.0 billion for property tax relief through the compression of school district tax rates,” there may be some difficult decisions that need to be made.

If all the funding is needed, one short-term option would be for the commissioner of the Texas Education Agency to transfer funds forward from the 2021 budget to make up for the shortfall in 2020.

However, an agency official indicated that they are not aware of any funding shortfalls and that funding for public schools is continuing based on statutory entitlements under HB 3.

At this point, it remains unclear whether an adjustment will need to be made. But it may be the case that the legislature will have to either not fund some of these items or adopt $3 billion in supplemental education funding in 2021. 

If the legislature decides to appropriate those additional funds, the comptroller’s projected budget surplus could be entirely used up, leaving policymakers without the billions likely needed to pay for Medicaid or to keep up with the increased education spending moving forward.

Whether because of past spending or future revenue declines, state leaders are likely to face some difficult decisions about how to deal with the shortfall. 

In the past, officials have dealt with potential shortfalls through reduced spending. In May 2010, Governor Rick Perry, Lt. Governor David Dewhurst, and Texas House Speaker Joe Straus directed state agencies to implement budget savings of about $1.2 billion. 

“Every penny we save now in the 2010-11 biennium is one penny closer to balancing the budget in the next legislative session,” Gov. Perry said at the time. “These reductions reflect our state’s ongoing commitment to keeping taxes low by limiting government spending, a key aspect of the continued strength of our state’s economy.” 

Heflin says that the state should similarly begin to take steps now to address the potential shortfall.

“I would send a letter out next month to the agencies asking them to tell me what their spending would look like at 85% of their current appropriations,” said Heflin. “I’d put them on notice. While they have money is the time to cut back on spending.”

Lavine believes a different approach is warranted. 

“What needs to be done is to spend what is necessary to deal with this crisis and then come back to fill the state’s coffers next year,” he said.

Rather than a revenue shortfall, Lavine sees the current situation more as a spending shortfall where the state has failed to adequately fund its priorities in the past. He looks back to previous efforts where the state used similar situations to increase revenue. 

“One thing has been used before in times in fiscal crisis in 1984, 1987, and 1991 was an omnibus tax bill,” Lavine said. “I suspect that is what is going to be necessary. There is no one approach we can use to address the situation.”

Texas is only about 8 months into the current 24-month budget cycle. Depending on which approach they take, state leaders still have time to address the shortfall through savings.