Unconstitutional, Again

Texas lawmakers have trapped local school districts between the costs of rising state education standards and a constitutional cap on property tax rates, removing local discretion over those taxes, according to the Texas Supreme Court.

That's unconstitutional, and the court gave lawmakers until June 1 to replace that rig with a legal one. Most bettors think that means a special session of the Legislature after the March primaries and after a group of business leaders makes some recommendations about tax reform, but throw in the usual caveat: Gov. Rick Perry is free to call lawmakers in whenever he wishes. 

The court saved lawmakers some heartburn, however, overturning sections of a lower court ruling that would have required the state to spend billions to raise the quality of education to an "adequate" level. The justices ruled that while there are serious problems with the performance of the state's public school system, those problems haven't reached the point of being unconstitutional. A lower court had said the state wasn't providing an adequate level of education to students and that the gap between rich and poor district had grown too great. And two economic studies presented in trial court put the costs of adequacy at up to $6 billion.

The justices ruled with the state and against the school districts on that question of adequacy, but they didn't do so out of any apparent admiration for the school finance system in Texas. In constitutional terms, part of the state's school finance system is rotten and part of it isn't rotten yet. It's like watching a hungry college student foraging through the refrigerator: Some foods are clearly past tense, and some are not yet foul. The local school property tax is, in the eyes of the court, effectively set by the state. That's unconstitutional, or clearly foul. The adequacy of the system is not unconstitutional, though it's got problems. The way Justice Nathan Hecht wrote it in the majority opinion:

"There is substantial evidence, which again the district court credited, that the public education system has reached the point where continued improvement will not be possible absent significant change, whether that change take the form of increased funding, improved efficiencies, or better methods of education," he wrote. "Former Lieutenant Governor Ratliff, the author and principal sponsor of Senate Bill 7 in 1993, echoed the considered judgments of other witnesses at trial when he testified: 'I am convinced that, just by my knowledge of the overall situation in Texas, school districts are virtually at the end of their resources, and to continue to raise the standards... is reaching a situation where we're asking people to make bricks without straw.' But an impending constitutional violation is not an existing one, and it remains to be seen whether the system's predicted drift toward constitutional inadequacy will be avoided by legislative reaction to widespread calls for changes."

Justice Scott Brister dissented, and Justice Don Willett recused himself, since before joining the case he had worked on the state's defense as a lawyer in the attorney general's office. In his dissent, Brister said the school districts didn't prove they had no leeway in setting their tax rates and said they should have had to prove they were operating efficiently. He made a plea for competition — though the issue hadn't been raised by lawyers on either side — suggesting that might be a way to make sure the schools were giving every penny a full workout.

"Today, we know that one thing above all else makes service providers efficient: competition," he wrote. "Even formerly communist countries recognize how efficiency is produced — not by protectionism, not by higher taxes, and not by state control, but by freedom for competition. Yet the school districts that brought this case never once suggested in six-weeks' evidence that competition might make the Texas school system more efficient. No one considered fundamental reforms that efficiency might demand."

The court said 48 percent of the state's school districts were at th4 $1.50 rate and that 67 percent of the districts were either there or within a nickel of it. Those districts educate 81 percent of the state's public school kids. They contrasted those numbers with 1994, the base year used the last time the court ruled on a major school finance case. Then, only 6 percent of the districts were within a nickel of the cap, and 89 percent had rates below $1.40.

The decision leaves lawmakers with three lines of attack on school finance. They could raise the cap on local property taxes, giving school districts some headroom and risking the ire of voters/taxpayers. Option number two would be to ease back on state educational requirements that the school districts say are pushing up their costs and forcing them to tax at the top rate. That would likely be seen as a vote to weaken public education. Option number three is to shift the costs from the local property tax to the state. Even if the overall amount being spent on the schools remained the same, the local districts would be able to lower their share of the costs and reinstate their "discretion" over tax rates.

That would solve the legal problem, and that's where the state government appears to be going. Gov. Rick Perry has a 24-member committee of business people looking at the tax system and how to wring more money out of state taxpayers while lowering the burden on local taxpayers. And Lt. Gov. David Dewhurst and House Speaker Tom Craddick are set to announce a panel of legislators that will figure out how to change school finance to the courts' liking. 

Copies of the opinion and of the dissent are available in the files section of our website.

A Little Something for Everyone

Though they lost the case, state officials were relieved to lose where they did and win where they did. Education groups were disappointed; they won on almost all their arguments in district court, only to have most of that stripped away by the Texas Supreme Court.

Attorney General Greg Abbott waited until the second-to-last paragraph of his written statement to mention that the state lost. "However, the Court did find that our current 'Robin Hood' tax system violates the tax provision of Article VIII. The Court gave the Legislature until June 1 of next year to correct the system." Abbott said the court's decision leaves education policymaking in legislative hands. Other state leaders, like Gov. Rick Perry, say the decision means the state doesn't have to "pour money into education" to satisfy its constitutional responsibilities.

The court discarded the state's contention that the courts don't have a say in the adequacy of the schools, but ruled that the schools aren't unconstitutionally short of that mark. On that issue and on equity, the state's arguments prevailed. If nothing else, that lowered the price tag on the court's opinion considerably. Economists who testified at the lower court trial estimated it would cost as much as $6.1 billion (and as little as $563 million) to bring students up to passing rates of just 55 percent. Had the high court agreed with District Judge John Dietz, the Legislature would be staring at numbers like those.

The districts that sued the state hoped for more from the court on adequacy of the schools and on the gaps between richer and poorer in the state system. They took some solace in the court's finding that the system — while not unconstitutional — is "drifting" that way. Don't be surprised to see a lawsuit within a few months on the equity of funding for school facilities. Some lawyers see enough room in the court's latest opinion for a successful suit on those grounds (the court said lawyers hadn't linked facilities funding to education measures; coming back and doing so now could open that window for school districts that need or want to build).

Lawyers for the districts say the court's ruling establishes a link between the state's standards for school districts and students and its responsibilities to them. "If we're going to have high standards for all state children, then the state needs to pay for it," said J. David Thompson, who represented some of the districts in the case. "Money has to be part of the equation." Another attorney, Randall "Buck" Wood, says the state missed a bullet: "They said 'we're letting you go this time on adequacy, but you'd better fix it."

Wait Until Next Year? 

U.S. Rep. Tom DeLay didn't get the fast ride out of Austin he was looking for. State District Judge Pat Priest told DeLay and his lawyers and the lawyers for the state that he wants them to file more legal briefs and that it might be a couple of weeks before he decides whether the charges against the Sugar Land Republican are valid. If they are, a trial on venue would still be in the wings, along with DeLay's attack on the way the prosecutors wheedled the former majority leader's indictment out of grand jurors.

That could easily push a trial into next year, possibly eroding DeLay's power and reducing his chances of moving back into the offices of the Majority Leader of the U.S. House of Representatives. Whatever the outcome of a trial, waiting is bad for the Texas congressman. He can't hold the leadership post while indicted, and ambitious people are keeping his seat warm for him. That won't last forever, and there's been some talk in Washington, D.C., about holding leadership elections early next year.

Priest let the lawyers argue over the validity of the charges for half a day and then said he wouldn't immediately rule on DeLay's request to throw out the indictments. Lawyers for the Republican's co-defendants — Jim Ellis of Washington, D.C., and John Colyandro of Austin — were on hand to make similar pleas.

DeLay's lawyers say Austin prosecutors have indicted him for breaking laws that weren't in place during the time when he allegedly broke them. They say he's accused of laundering corporate money for Texas legislative candidates but say those candidates never got any corporate money. And they say conspiracy charges against him don't apply because he didn't conspire and no crime was committed.

Travis County prosecutors got a grand jury to indict the three men, in part, on charges of raising money from corporations, sending it through the Republican National Committee, and getting the RNC to send the same amount of money to seven candidates who were running for Texas House spots in 2004. Corporate money can't be used in Texas state campaigns, and prosecutors say the dollar-for-dollar swap amounted to illegal money laundering.

Lawyers for the defendants say such swaps were commonplace under the laws that were then in effect. And they said that no corporate money landed in any campaigns; money from corporations went to the RNC, and money from individuals — legal in Texas campaigns — came back. One more thing: They said laws against money laundering at that time applied only to coin and paper money and not to checks or wire transfers. The indictments include a photocopy of a check for $190,000 to an affiliate of the RNC as part of the evidence of money laundering. Since it's a check, the defense lawyers say, it couldn't have been money laundering under the laws then in effect. 

Charted Territory 

A day before the judges started throwing lightning bolts, a gaggle of business people assembled by Gov. Rick Perry started a cram course on state tax policy. 

They'll spend the next few months trying to reengineer the state's taxes, with at least two things in mind. One, make business taxes fairer and bring the tax system in line with the modern state economy. And two, raise enough money to lower property taxes, making property owners happy while bringing in enough money pay for those cuts and to keep the public school finance system out of court for a while.

The first steps are familiar to anyone who watched George W. Bush try to revise the tax system, or Ann Richards, or Bill Clements. The state averages a blue ribbon committee on taxes every five or six years. Bush's effort went through a legislative committee; the earlier forensic teams were made up of business people and legislators. Each of those efforts helped officeholders work their way out of some budget jams; none found a long-term solution that fits the modern Texas economy.

Like their predecessors, Perry's task force started with the rundown on the current tax system and what works and doesn't, along with a quick history of the school finance train wreck that lumbered through the last several gatherings of the Texas Legislature. Lots of it is available in the files section of our website. Economist Ray Perryman, and Karey Barton and James LeBas, the tax and revenue wizards on the task force staff, zipped through Texas Taxes 101. Some tidbits:

• Conventional wisdom is that one in six businesses in Texas pays the state's corporate franchise tax, but that's actually the number that file returns. Only one in 16 actually pays the tax.

• Local and state taxes brought in $65.2 billion in the 2005 fiscal year. The breakdown: property taxes, 30.9 billion (including $16.7 billion for public schools); state sales tax, $16.3 billion; local sales tax, $4.5 billion; motor fuel, $2.9 billion; vehicle sales and rental taxes, $2.8 billion; oil & gas production taxes, $2.3 billion; corporate franchise tax, $2.2 billion. No other single tax produces more than $1.2 billion.

Perry started the meeting, telling the group he wants any new tax to have five attributes: It has to be fair, broad-based, modern to match the state's economy, understandable, and competitive against other state systems. Later on, one of the panel members got a laugh by asking the tax wizards in the room whether any such thing exists.

They pressed the policy folks on whether it's possible to bring partnerships and proprietorships into the business tax without triggering state constitutional provisions against personal income taxes (those taxes are legal in Texas, but only after a public referendum and only if the funds are dedicated to education).

John Sharp, the former comptroller who's chairing the thing, reminded everyone about Perry's stand against income taxes, and reiterated his view that nothing would happen without a ruling from the Texas Supreme Court forcing the Legislature to act (He got that the next day). This turns into a road show next month. Sharp told the group there will be public hearings before year's end in Corpus Christi, Temple, Waco, and Victoria. 

Murdock's Crystal Ball 

The committee got a look at the state's immediate demographic future from Steve Murdock, an academic at UT San Antonio who's also the state's official demographer. His stuff (which you can find online at www.txsdc.utsa.edu/presentations by clicking the links next to "Governor's Select Tax Committee"), is full of numbers and charts and could even make your head hurt, but it's interesting both in terms of economic policy and in terms of school finance. It's the kind of stuff you get from doctors who are telling you to watch your health now so you won't be a miserable 70-year-old, or the financial advisers who tell you to save a little bit here and a little there when you're young, so you won't be a miserable 70-year-old.  

Murdock's work was obviously an influence on the judge who initially declared the state's current school finance system unconstitutional, and he reprised some of that for the tax panel, sliding from population growth and makeup to educational achievement to future household incomes if things change and if they don't. To wit:

• Numerically, Texas is second only to California in growth and should continue to be.

• While that's going on, 103 of the state's 254 counties are losing population.

• Anglos, a group that already makes up less than half the population in Texas, are also making up a smaller part of the state's growth. From 1990 to 2000, Texas added 2.3 million Hispanics, 783,036 Anglos, 445,293 Blacks, and 307,000 "Other", a group that includes Asians and Native Americans. In percentage terms, that last group grew by 81 percent in that decade; the Hispanic population grew 53.7 percent, Blacks were up 22.5 percent, and the Anglo numbers grew 7.6 percent.

• Hispanics will outnumber Anglos in Texas by 2020, by one estimate, and will make up more than half the state's population ten years later.

• A freeze-frame in 2000 of Texans at least 25 years old showed almost 50 percent of Asians had at least one college degree; more than 50 percent of Hispanic adults in the state had stopped short of a high school diploma.

• The median household income for Texas Anglos in 1999 was $47,162; for Blacks, $29,305; for Hispanics, $29,873; for Asians, $50,049. At that point, Texas was below the national average in both median household income (for all groups), ranked 30th among the states, and in per capita income, where Texas ranked 33rd. Given current trends, the overall household income in the state will drop steadily through 2040, while the number of households in poverty will increase for every subgroup: family households, single parent of either sex, etc.

• Texas is slipping steadily in rankings of percentages of adults with high school diplomas, ranking 45th among the states in 2000; and in rankings of those with college degrees, where Texas came in 27th. Both standings were below the national average. 

Political People and Their Moves 

Sherry Boyles, who considered running for state Democratic Party chairman a couple of years ago, plans to run for the job in June. Current Chairman Charles Soechting won't seek reelection. Boyles is in, as are Boyd Ritchie, an attorney in Graham, and Charlie Urbina Jones, a San Antonio attorney. Boyles, also an attorney, is a former statewide candidate (she lost a Railroad Commission race to Michael Williams in 2002) and a co-founder of Annie's List, a Democratic fundraising group.

• Mel Hailey, a former public school teacher who now heads the political science department at Abilene Christian University, is joining the race to replace Rep. Bob Hunter, R-Abilene, in HD-71. Hailey is a Democrat. Hunter isn't seeking reelection, and the field is growing. Republicans looking hard at the race include Rob Beckham, Kevin Christian, Celia Davis, and Susan King. Beckham lost a close congressional race to Charlie Stenholm in 2002 and is a former member of the Abilene city council. Christian was Hunter's chief of staff and has lately been pushing to name an elementary school after his former boss. Davis works in economic development and with military bases and issues in particular. And King was the president of the Abilene school board.

• Van Wilson, a developer and a Republican, will run against Rep. Delwin Jones, R-Lubbock, in HD-83. That's getting busy: Frank Morrison, a former Lubbock city councilman, is also getting into that race.

• Gov. Rick Perry picked up a couple more endorsements, this time from the Texas Medical Association's political action committee and from the Texas Aggregate and Concrete Association.  

• Nicholas Taylor, a Midland attorney and oil and gas exec, will replace lobbyist and former Rep. Ralph Wayne on the Texas Ethics Commission. House Speaker Tom Craddick picked Taylor; he's a former member of the State Securities Board and of the Texas Judicial Council.

• Gail Dalrymple, a lawyer with Clark, Thomas & Winters in Austin, is joining the State Commission on Judicial Conduct. Eduardo Rodriguez, president of the State Bar of Texas, appointed her.

• Jeff Clark was reappointed to another two years on the U.S. Small Business Administration's National Advisory Council. Clark, the former executive director of the National Federation of Business' Texas office, runs a consulting and financial services business. 

Quotes of the Week 

Former U.S. Sen. Phil Gramm of Texas, telling the Washington Post his presidential campaign didn't buy an endorsement from then-Gov. George Ryan of Illinois: "It's a difference between love and prostitution. It's the same in ordinary life. You don't pay people to be your friends."

Republican gubernatorial candidate Carole Keeton Strayhorn, telling the San Antonio Express-News why she's been so quiet of late: "The Capitol press corps... (and) people in general are going to focus on this after the holidays. And frankly, everything I'm doing is gearing up to that."

Rice University political scientist Bob Stein, in the San Antonio Express-News, on the Perry-Strayhorn match-up: "Strayhorn would look like a very decent candidate if she were running against him in an all-comers race. This isn't an all-comers race. She's not right of Genghis Khan. Nor are most Republicans. But most Republicans don't vote in the primary."

Barbara Ann Radnofsky, quoted in the Austin American-Statesman after U.S. Sen. Kay Bailey Hutchison, her opponent, appeared in a parade honoring Hutchison and other former University of Texas cheerleaders: "She's running the fluffiest race you can imagine."

James LeBas, director of financial analysis for the governor's task force on taxes, on the current tax structure: "We're not growing out of a problem. We're growing our way into it. The more we grow, the worse it gets."

Economist Ray Perryman, talking about the politics around personal income taxes: "It's often said that it's a religious issue and not an economic issue in Texas."

Judge Pat Priest, giving reporters his home office phone number and asking them not to abuse it: "I do not have a staff. My wife does not have a staff. Nobody else lives there." And later, speaking to the spectators in his courtroom during a break in procedural arguments in Tom DeLay's campaign finance case: ""It's going to be like this all day. If you came here expecting to be entertained, it's just not going to happen." 

Texas Weekly: Volume 22, Issue 24, 28 November 2005. Ross Ramsey, Editor. George Phenix, Publisher. Copyright 2005 by Printing Production Systems, Inc. All Rights Reserved. Reproduction in whole or in part without written permission from the publisher is prohibited. One-year online subscription: $250. For information about your subscription, call (800) 611-4980 or email info@texasweekly.com. For news, email ramsey@texasweekly.com, or call (512) 288-6598.