Texas Should Act Now to Address the 2021 Budget Crunch

Recently, Texas Comptroller Glenn Hegar briefed legislators on the potential fiscal effects from the COVID-19 shutdown and 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.

If Texas policymakers are going to adequately address this challenge, they should begin doing so now; especially since Texas is already facing a potential $7 billion budget crunch that has nothing to do with the current economic downturn.

In the 2015 and 2017 budget cycles, policymakers showed relative fiscal constraint in keeping spending growth near population growth plus inflation. However, the restraint disappeared in 2019. Last session, policymakers adopted a budget that increased spending of state funds by more than $17 billion, or 12.5 percent over what they appropriated in 2017.

At first glance, this spending spree doesn’t look so bad. 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 a couple of problems that make this figure less than rosy.

First, the Texas Legislature typically underfunds Medicaid by several billion dollars each budget cycle. There is nothing wrong with this; it makes sense given the uncertainties of how much funding is needed over two years. This means, however, that perhaps $1 billion to $2 billion of state funds must be appropriated in 2021 to make up the difference.

Second, the state’s Legislative Budget Board (LBB) made a mistake when it touted 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.”

The truth is that the much publicized $11.5 billion increase from House Bill 3 in education funding never happened. The LBB missed a rider in House Bill 1, the appropriations bill, that limited total education funding to a certain amount. So 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.  This has significant implications for how Texas deals with any revenue losses. Given that HB 3 was supposed to have increased classroom spending by $4.5 billion, lowered property taxes by $5 billion, and increased teacher salaries by $2 billion, the Legislature must either go back on its promises 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 evaporates, leaving policymakers without the $2 billion or so needed to pay for Medicaid. Then, taking into account that the Legislature will be expected to fully fund Medicaid and education in the following budget cycle, policymakers could be facing as much as a $7 billion budget crunch heading into 2021. Before even considering the reduced funding that the economic downturn will possibly bring.

The good news is that we are only about 7 months into the current 24-month budget cycle. This means that the LBB and the governor can instruct state agencies to give back some of the increases they received in 2019. A 10 percent across the board spending roll back (excluding funds required by federal law) could recapture about $5 billion in state funds, providing about $10 billion over two budget cycles to eliminate the $7 billion shortfall and begin dealing with potential revenue reductions.

No people have ever taxed their way to prosperity. Increased wealth starts with savings, and savings start with fiscal restraint. Texas policymakers have the opportunity to lead our state to prosperity even in the midst of the current crisis we are facing. But if they want to do so, they had best start now.