Legislators expect to increase taxes because of school finance, but the economic/budget outlook is much improved over this time two years ago, according to the state's Comptroller of Public Accounts.The surplus/shortfall that matters is the one you'll see at the end of the week, when the Legislative Budget Board opens the curtains to reveal its starting budget for the session. The number the comptroller controls -- how much money is available -- is now in hand. But Carole Keeton Strayhorn has little say over how and how much state money is actually spent, just as the Legislature has little to say over how much revenue will flow into the treasury over the next two years. Use her numbers for income, theirs for spending; the politics are muddled, but at least the arithmetic works out.
Two years ago, Strayhorn started the session by saying lawmakers would have $54.1 billion in general revenue to spend, or about $7.4 billion less than they had appropriated in the previous budget. The comparable numbers this time: $64.7 billion in general revenue will be available to spend, or $6.4 billion more than they appropriated the last time they wrote a budget.
Another way to put it: This estimate says the state's general revenue income (federal and some other funds are left out) is up $10.6 billion over the estimate two years ago. And where started last session with $7.4 billion less than they needed to maintain spending, they're $6.4 billion ahead of the game at the moment.
If we were in an auditorium full of budgeteers and political and lobby types right now, they'd be yelling and throwing calculators and beer bottles at the stage. So let us quickly acknowledge some Ifs, Yets, and Howevers.
The $6.4 billion doesn't include what it would cost to extend current services in critical areas to new students, patients and other recipients. School enrollments, Medicaid caseloads and utilization rates, increased costs of this and that and the other thing all eat into the starting number. Which is why the LBB's budget is the thing to watch. Strayhorn says that stuff will eat up $6 billion, but the LBB's version is the one that counts.
Two years ago, for example, the LBB started with a baseline budget that called for $64.6 billion in general revenue spending and $124.6 billion in all funds spending. Combining those with the comptroller's revenue estimates, the finger-wavers in the Lege came up with their $10.5 billion budget shortfall estimate. After they whittled spending and raised revenue (but not, they would insist, by raising taxes), the thing was in balance.
Lt. Gov. David Dewhurst and House Speaker Tom Craddick had predicted starting shortfalls of $1 billion to $2 billion, having seen the LBB numbers but not the comptroller's. Their guesses were based on what they think it'll cost to stay even, to fully or partially restore cuts to the Children's Health Insurance Program, and what it'll cost to bail the state out of its self-created scandals in the child and adult protective services programs.
Strayhorn told reporters the state would begin with a surplus of $400 million, and that might turn out to be right. But it's not clear what all she added in and what she left out. Two years ago, she began by saying the shortfall was $10 billion after all those things were added in. When the Lege was finished raising money here and there and cutting programs here and there, it all balanced.
The second part of the fight will be over what to add. Here, school finance could be the mechanism for a huge sleight of hand. If lawmakers reach an agreement on a school finance plan and a tax or revenue scheme to pay for it, they'll be able to hide revenue increases there. Who'll know in the end whether new revenue measures attributed to school finance raised 100 percent of what was needed, or 104 percent? That's not a conspiracy theory: Estimates of what new taxes would produce are usually conservative, and any overflow can be used for general spending.
If, on the other hand, lawmakers get everything done during the regular session except for school finance, they can avoid tax bills and such by saying they'll do that and school finance together in a special session. They'll write specific budgets for everything else, write a "placeholder" budget for schools, and then figure out that education piece during a special session when the rest of the budget is locked up and kept away from the finance negotiators.
Either way, Strayhorn wasn't likely to get any leverage. In the first case, a tax/fee/revenue bill resulting from school finance would cover any shortfall budgeteers might produce. In the second, the education "place-holder" can be sized to make the budget balance. That takes the suspense out of her session-end budget certification, and reduces any impulses from the comptroller's office or the Pink Building to politicize the numbers.
Other Numbers
• Strayhorn said the state will have a total of $130.5 billion available for the 2006-07 budget -- including federal funds, general revenue and everything else. That's up from the $114.2 billion she estimated at this point two years ago.
• The numbers tend to grow during the legislative session, largely because lawmakers fiddle with tax and revenues on one hand, and spending patterns and federal matching funds and such on the other. When the comptroller revises the estimate at the end of the legislative session, she incorporates the changes made in the Pink Building, plugs in any new economic stuff she thinks is important, and spits out a new estimate. At the end of the 2003 legislative session, Strayhorn's final revenue certification estimated $58.4 billion in general revenue would be available, up from the $54.1 billion she predicted in January; the all funds revenue projection grew to $118.1 billion from $114.2 billion.
It happens often. At the end of the 2001 session, she said general revenue sources would produce $61.6 billion and that all funds would total $109.4 billion. The corresponding January projections: $60.8 billion in general revenue, and $106.8 billion in all funds.
• Strayhorn is forecasting a 3.2 percent annual increase in the state's economic output during the 2006-07 biennium, down from the 4.1 percent rate in the current two-year period.
• Sales tax collections are expected to rise. Franchise taxes, which have been in an actual and rhetorical slump for several years, are expected to rise slightly. That's the tax in the headlights when you hear people talking about "broad-based-business-taxes" as a solution for school finance. Strayhorn and her estimators expect drops in the levies on natural gas, cigarettes, insurance, oil production and regulation, and inheritances. They're also expecting some non-tax revenue sources to go backwards, including the state lottery, and interest and investment income. Insurance taxes are dropping in spite of the number-crunchers' belief that rates are still rising; it's because of a lag between premiums paid the companies and taxes the companies pay to the state.
The entire biennial revenue estimate is available on the comptroller's website if you want or need to read the fine print: www.window.state.tx.us.