The Deficit Monster

How did Texas get so far down in this financial hole?
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Posted March 2, 2011 by STORY BY VINCE LEIBOWITZ PHOTOS BY JOHN OEFFINGER in News

In 2006, Texas had a multi-billion-dollar budget surplus. Under state court order — yet again — to come up with a school finance system that would provide decent funding for poor districts without unduly robbing from rich ones, the Texas Legislature passed a package of bills that lowered maintenance and operations property tax rates for school districts and provided additional state funding to replace the lost local tax revenue.



Legislators accomplished the reforms by dipping into the budget surplus and raising or reallocating several different state taxes. But the surplus looked so nice and inviting that the Republican-led House and Senate — with the acquiescence of Gov. Rick Perry — went further and tacked on almost $6 billion in other education spending measures.

coverThen-State Comptroller Carole Keeton Strayhorn issued a warning: The legislature was building a long-term spending plan on the shaky foundation of budget surpluses that might not be there in future years, plus a franchise tax that likely might not produce the hoped-for amounts of revenue. She feared the plan would produce massive budget shortfalls. Legislative leaders treated her like Chicken Little.

“I remember that this all sounded too good to be true,” said former State Rep. Carter Casteel, a New Braunfels attorney who was defeated in a GOP primary by a more conservative candidate weeks before the session began.

Fast-forward five years, and the sky really is falling. Strayhorn’s predictions have come true, in Technicolor. The financial problems she predicted have been multiplied by a recession that took the whole country to the brink of disaster.

Now Texas is staring down the barrel of a $27 billion budget shortfall.

How worrisome is that? It’s the worst budget shortfall in these parts since World War II. It’s so big it could swallow the combined shortfalls projected by several other states. And it’s so bad that that first-grade students in Texas could be looking at sharing their classroom with as many as 45 other students next year, as schools are forced to lay off teachers. Hundreds of nursing homes could close, and as many as 9,600 state workers could be laid off.

To understand why the proposed cuts are so deep and the shortfalls so large, one must roll back the clock to a time when fanny packs were cool, America Online was in its infancy, and Nirvana was at the top of the charts with “Smells Like Teen Spirit.”

In the early 1990s, Texas was already trying to figure out what to do with school finance in the aftermath of the groundbreaking Edgewood school finance lawsuit of several years earlier. The Texas Supreme Court had ordered state leaders to figure out a way to ensure that poor school districts had the money they needed to educate their students. On two separate occasions, the legislature passed reform bills that were subsequently ruled unconstitutional by the state’s highest civil court. Finally, in 1993, the legislature passed what would be known as “Robin Hood” — the controversial system of  equalizing funding of Texas public schools by “recapturing” money from wealthy school districts to send to poor districts.

Today, the Tea Party would probably call that socialism.

It took a decade, but in 2004 the Robin Hood plan, too, was declared unconstitutional. The next year, the Texas Supreme Court gave legislators yet another deadline: They had until mid-2006 to put up or shut up.

That effort to restructure public education financing and provide property tax relief didn’t start out like a drunk driver going the wrong way on a service road. On the contrary, it started with respected state officeholders, business leaders, and politicians actually crafting a roadmap they believed would work.

Months before the 2006 session began, and after multiple failed attempts in regular and special sessions to produce a school finance bill, Perry appointed his one-time college roommate (who’d been his rival for the lieutenant governor’s chair in 1998), former Texas Comptroller John Sharp, to head a blue-ribbon commission to come up with a plan to fund Texas schools equitably while also providing property tax relief.

The panel proposed a number of changes, including a major revision of the state’s franchise tax, changes in motor vehicle sales and use taxes, and a $1 per pack hike in the cigarette tax. The package was designed to increase state aid to school districts in amounts high enough to allow local districts to reduce maintenance and operations taxes by about a third, at a cost of approximately $7 billion per year to the state.

Strayhorn urged caution. It would take time, she told lawmakers, to be able to assess the true effects of changes in the franchise tax, for instance.

“If you recall, the comptroller said the [franchise] tax can’t be fully assessed at this point because we are bringing in a lot more taxpayers — over a million — and right now we are just estimating what kind of business activity they had,” said State Rep. Warren Chisum, a Pampa Republican who chaired the House Appropriations Committee during the special session that year. “And we were wrong.”

According to a recent report by the Texas Taxpayers and Research Association, a nonprofit that studies state and local fiscal policies, the franchise tax produced about $1.8 billion less than it was supposed to in the most recent two-year period. In addition, the sales tax, from which the state gets nearly three-quarters of its general revenue funding, is highly susceptible to downturns in the economy, when families are tightening their belts and have less disposable income to spend.

Still, Sharp said, the franchise tax’s failing to meet projections wasn’t the main problem to come out of the 2006 special session.

For that, many astute observers say, we have the Texas Senate to thank.

When the Republicans in that chamber got their hands on the legislation, they hung enough costly amendments on it to make it look like a gaudy Christmas tree — teacher pay raises, incentive pay for teachers, and other measures that added up to roughly $5.6 billion per biennium.

That’s when Strayhorn really sounded the alarm. She said the bill and the Senate’s freewheeling election-year spending spree left Texas taxpayers holding a “$23 billion hot check” and warned lawmakers that the only reason she could certify the legislation was because of the state’s surplus. Even with that, she said, she could only certify that the house of cards wouldn’t collapse before the end of fiscal 2008.

“Because of the huge surplus, I would have enough revenue to certify this bill through 2008, but not 2009 and 2010,” she said in her message certifying the legislation.

Strayhorn, who was running as an independent for governor at the time, was pooh-poohed by Perry and many, if not most, Republicans. She had taken so many shots at Perry in the previous months that many regarded her revenue estimates as purely political. She predicted shortfalls that could top $13.9 billion — and that was more than five years before the state and U.S. economy tanked, a development that drained state surpluses and shrunk state revenues like a cotton shirt washed in hot water.

And what about those property tax cuts that were supposed to provide so much relief to homeowners at such great expense to the state? “I think we saved something like $25 on our tax bill the next year,” Casteel said.

Two years ago, in the midst of the Great Recession, $15 billion in federal stimulus money helped balance Texas’ 2009 budget — and helped postpone the fiscal situation now facing the state. That’s why some analysts say that the absence of that stimulus package this time around shouldn’t be counted as a cause of the current deficit crisis.


Chisum said the extra $5.6 billion in annual spending tacked on by the Senate in 2006 “plays a huge role” in the shortfall the state is facing today. “Once you spend a dollar, the way our deals are made up, there is a constituency after that — teacher incentives, teacher pay raises, building additional infrastructure out there for colleges. So it was a huge spending deal that went in after we’d passed the [franchise] tax,” he said. “Yeah, we overspent, and the comptroller was right.”

Sharp said Senate spending in 2006 was important but, “When it comes to primary culprits, one of the main culprits was the recession of 2008. The recession dropped sales tax income a bunch and dropped franchise taxes as well.”

feat_1Chisum agreed. The sales tax “gets hammered in the marketplace because people aren’t spending money as rapidly,” he said.

Sharp is one of those who believe the absence of federal stimulus money this time around is a major source of the current financial crisis. “The state took $15 billion of the surplus money to avoid having to actually make [back then] some of the drastic cuts they are having to make now.”

F. Scott McCown, director of the Austin-based Center for Public Policy Priorities, an advocate for poor and middle-income families, disagrees with Sharp on that point.

“Stimulus funds being used to balance the budget have nothing to do with the shortfall,” McCown said. “We got the stimulus funds because an economic downturn was already causing sales taxes to fall, so we got the stimulus to replace falling sales taxes,” McCown said. “When the economy comes back, sales tax dollars come back, and that is why it is so important to use the Rainy Day Fund,” to help offset the current shortfall, he said.

Sharp also said lawmakers are blaming the franchise tax because it is an easy scapegoat. In truth, he said, income from that tax was never going to be as advertised. “They [legislators] made a bet that the economy would do good and that the surpluses would continue, and that didn’t work out.”

Given the climate in the Texas Capitol these days, the $27 billion shortfall sounds like a great excuse for Tea Party Republicans to create a version of government that would please Grover Norquist. (To quote former State. Sen. Elliot Shapleigh, an El Paso Democrat who wrote a book about Norquist’s philosophy and how it affected Texas, “Grover Norquist is the famed right- wing ideologue who said his goal was ‘to cut government in half in 25 years ago to get it down to the size where we can drown it in the bathtub.’ ”)

Chisum, among the most senior members in a chamber filled with freshmen, said the shortfall is actually an opportunity. “We haven’t had an opportunity like this to clean our house because we just add programs and think they are doing fine and don’t have time to look at them,” he said. “It’s time for a major, Texas-sized house cleaning to eliminate some of the spending we do that is probably not necessary. And I am OK with that.”

feat_2State Rep. Garnet F. Coleman, a Houston Democrat and chair of the Texas Legislative Study Group, said the budget as proposed will result in dire cuts to services of all types.

“Right now, the worst-case scenario is that you would actually have a waiting list for kindergarten or first grade in some school districts. Now keep in mind, because of the law, there is no such thing as a ‘waiting list’ for public school, but with districts looking at teacher layoffs and 45 to 50 children in a classroom, what’s going to happen?” Coleman said.

There are ways to make the shortfall hurt less. McCown said a balanced approach would include using the Rainy Day Fund and looking at new sources of revenue as well.

McCown said that options for new revenue include raising the cigarette tax by another $1 a pack (that would bring in an estimated $1.5 billion) and a penny-per-ounce tax that could be levied on sugar-loaded soft drinks.

He said some tax exemptions that have outlived their time could be eliminated and that one measure alone — dumping the discounts given by the state to businesses for filing their taxes early or on time — could bring in about $425 million.

And of course the proverbial elephant in the room when it comes to generating piles of new revenue for the state is the broadening of legalized gambling. Groups like Win For Texas advocate bringing slot machines to Texas racetracks and Native American reservations. They note that such proposals would create an $8.5 billion economic impact and generate significant state tax revenue.

Few Texans realize that the cuts being proposed by lawmakers — from state parks to library databases — will affect nearly every citizen.

“That is the missing piece,” Coleman said. “This is real.

“There is no hidden pot of money, and even with the Rainy Day Fund, we’re looking at an $18 billion shortfall,” he said. “It’s going to be harmful in all areas, from health and human services to criminal justice to schools to senior citizens.”

Vince Leibowitz is a freelance writer who frequently covers Texas government. 

 

On The Chopping Block

The biggest ticket items:

Public schools. They’re staring at a roughly $5 billion cut in funding, which will leave the state short of even the funding levels mandated by statute. Budget writers have recommended funding formula changes that would cut roughly 14 percent of state money paid to local school districts. Pre-kindergarten and Early Childhood School Ready Programs would be slashed as well, leaving 109,000 kids statewide shut out of pre-K programs and dropping another 83,000 from early-childhood programs.

General State Government. As many as 9,600 state employee jobs could be eliminated under the proposed budget, with rural areas expected to be hit hardest since state institutions like prisons and hospitals often are the largest employers in these areas.

Nursing homes. More than $1.5 billion in reductions are proposed in payments to nursing facilities and a 10 percent reduction in the rate that the state will pay Medicaid providers. With the majority of their residents covered by Medicaid, hundreds of nursing homes could be forced to close, advocates say.

 

Other areas that would suffer:

Libraries. A half-dozen programs are at risk. The Lone Star Libraries direct-aid grant program to public libraries is up for elimination, as is the K-12 database program administered by the Texas State Library. This one is a biggie — it gives every public school in Texas access to instructional databases that students use for research. Eliminating it would create an unfunded mandate for school districts statewide.

State Parks. Wait, didn’t we just get around to increasing the budget for state parks? Yes, but that was B.S. — before shortfall. Texas Parks & Wildlife Department could lose as much as $238.2 million — a third of its funding. At stake are the jobs of more than 500 employees and possibly the closure of several state parks.

Wine and Grape Industry Development. Although Texas is the fifth biggest wine producer in the United States, the proposed budgets would slash all of the $4.3 million currently appropriated to the Texas Department of Agriculture to develop the industry here. For an industry with a reported economic impact to the state of $1.7 billion, this would be a near knock-out punch.

Autism Programs. State budget cuts would put on hold a Department of Aging and Disability Services grant program that helps children with disabilities such as autism. The House budget cut the program funding entirely, but the proposed Senate budget cuts it only by half.

Polluting Vehicle Reduction. If you missed out on Cash for Clunkers and were thinking of taking advantage of a Texas Commission on Environmental Quality program to help get polluting vehicles off the road, think again. A state program designed to fix or replace an estimated 17,000 vehicles a year would be sent to the junkyard.

Barnett Shale Monitoring. Of special interest to folks in the Barnett Shale are massive cuts in water and air monitoring done by TCEQ. The agency says the cuts, which would include slashing more than 40 full-time employees, won’t hamper air monitoring activities.

Corrections and Criminal Justice. Budget cutters would eliminate the $4.6 million in funding that pays for 120 professional prison chaplains at state jails and prisons. As many as 1,600 prison jobs would be cut statewide, and the Central Prison Unit in Sugar Land near Houston would be closed. More than $200 million that pays for psychological, health care, and prescription drugs for inmates is also on the chopping block, plus $110 million for programs geared toward probation, community supervision, and treatment alternatives to incarceration. And $8.6 million in funding for indigent defense. And $27 million from programs that help newly released prison inmates get back on their feet.

Counties and Cities. Budget proposals would reduce the income that counties and cities receive from taxes on mixed drinks sold within their boundaries. Also at risk: $27.7 million from gas and road taxes that gets distributed to counties for road construction and maintenance. That money would be redirected to the state’s general fund.

Disaster Relief. Better pray that the next few years are light on tornadoes and floods, because proposed budget drafts cut more than $96 million from grant programs that assist state and local agencies in counties that are declared disaster areas.

Tourism. More than $120 million in cuts are proposed for economic development in tourism, including total elimination of national advertising and marketing campaigns encouraging folks to visit and spend their money in Texas.


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