Starting to Simmer

Things are picking up.

In the last week, three gubernatorial candidates — Kay Bailey Hutchison, Rick Perry, and Farouk Shami — started running television ads.

Kay Bailey Hutchison announced that she won't quit her U.S. Senate seat before the end of the year, causing a multi-car political pileup on the road to office. There were casualties, to stretch the metaphor too far.

Farouk Shami, a Houston billionaire with a classic rags-to-riches story, jumped into the race for the Democratic gubernatorial nomination.

One of the 11 Republicans who led the coup that made Joe Straus the Speaker of the House unexpectedly said he won't return for another term.

And two weeks from now, candidates start filing (and not filing, if the initial conversations didn't go well). On January 4, the filing stops and the run-up to the primaries on March 2 is underway. Counting? There are 15 weeks until the primary elections.

And after the Thanksgiving break, the pace should quicken even more.

A Tap on the Brakes, a Political Fender-Bender

Kay Bailey Hutchison won't resign from the Senate to run for governor until after she gets to vote on health care and cap-and-trade legislation in Washington. That could keep her in office into the spring. And she's now got a TV commercial running — saying she will stay in office to vote on those issues "at risk to my political future."

She gets to keep her job if she loses the GOP primary to Rick Perry, though she has said she will leave early whether she wins or loses. The political futures more immediately at risk were those of the people waiting on her retirement. The announcement pushes more than a half dozen politicians back into their holes, including Lt. Gov. David Dewhurst, Attorney General Greg Abbott, state Rep. Dan Branch, former Solicitor General Ted Cruz, Railroad Commissioners Michael Williams and Elizabeth Ames Jones, state Sen. Florence Shapiro, and former Secretary of State Roger Williams, all Republicans; and Houston Mayor Bill White and former Comptroller John Sharp, both Democrats.

Everyone on that list was in the race to replace Hutchison in the Senate, except for Abbott, who was looking at Dewhurst's seat, and Cruz and Branch, who were looking at Abbott's. Branch recently dropped out of the race and said he would seek reelection to his House seat. He got tired of waiting to see what would happen.

Everyone else is holding fire, saying they'll keep doing what they're doing now until something opens up. But for officeholders, it means choosing between getting on the ballot (by January 4) to run for reelection, or staying off under the assumption that Hutchison will be out of office, if not now, then in six months or so.

A Candidate to Dye For

Farouk Shami, a hair stylist turned hair and skin products entrepreneur, officially announced his bid for governor this week at his company headquarters in Houston. "The American dream is still alive," he said. "I should know, because today, I, Farouk Shami, am announcing my candidacy to become the great governor of the great state of Texas."

He's been telegraphing that for some time — he told the Austin American-Statesman well before the announcement that he would run and would spend up to $10 million of his own money.

Shami, running as a Democrat, has lined up an experienced gang to run his campaign: campaign manager Joel Coon, general consultants Robert Jara and Dan McClung, pollster Ben Tulchin, and media specialist Tad Devine. Jason Stanford, the campaign manager for Democrat Chris Bell's 2006 campaign, will be Shami's spokesman.

Coon has worked on several campaigns, helping Democrat Travis Childers win a Republican congressional seat in Mississippi in 2008. Jara and McClung are old hands at Texas and especially Houston races. Tulchin is a California-based pollster who works on races around the country. Devine was an advisor to John Kerry and to Al Gore and has managed several campaigns in other countries.

The field for the Democratic primary is crowded, but more than half the voters are undecided. The names at this point include Felix Alvarado, Kinky Friedman, Hank Gilbert, Tom Schieffer, and maybe Ronnie Earle and Eliot Shapleigh, who haven't declared but have been making gubernatorial noises. In a UT/Texas Tribune poll earlier this month, Friedman had 19 percent and Schieffer had 10 percent with everyone else in the single digits. Undecided had 55 percent, leaving plenty of room for new candidates.

Shami will tout a business success story that took him from his birthplace in Palestine through Arkansas and Louisiana, where he started a salon, to Houston, where he founded Farouk Systems, a giant hair and spa treatment company that claims more than 1,200 employees in Texas.

He'll concentrate on education and the environment and will tout his decision to bring his company's production back to the U.S. from China — a move that won him a round of national publicity last summer.

Can he raise the money? The headline on the press release about his announcement gives a clue: "Houston's Billion Dollar Businessman, Farouk Shami, Announces He is Running for Governor." Shami's business, founded in 1986, took off when he signed a distribution deal with Austin-based Armstrong McCall. John McCall is a part owner of Farouk Systems now, and the two men — particularly McCall — were big contributors four years ago to Kinky Friedman's campaign for governor. Shami gave Friedman $24,400 for that run; McCall was in for $1.3 million and was listed, until last February, as Friedman's campaign treasurer.

Shami also contributed to former Rep. Martha Wong, R-Houston, who lost a 2006 race to Democrat Ellen Cohen. And in May of this year, he gave $5,000 to Republican Ted Cruz, who had his sights set on a run for attorney general. In federal races, he's contributed to candidates of all political stripes this decade, including Democrat Hillary Clinton, U.S. Rep. Ted Poe, R-Houston, Houston Mayor Bill White (for the U.S. Senate race), Ralph Nader (in 2004 and 2008), Tennessee Democrat Graham Leonard, U.S. Rep. Sheila Jackson Lee, D-Houston, the Democratic Congressional Campaign Committee (the same month he gave to Cruz), and the Republican National Committee (most recently in 2007).

Surprise!

Brian McCall, a key member of House Speaker Joe Straus' leadership team, won't seek reelection next year. McCall, a 51-year-old Plano Republican, said he's ready to move on to something else, adding that he is not planning to run for the state Senate or Congress or other elective office.

He's the chairman of the Calendars Committee that sets the House's daily agenda and decides which bills do and don't come to a vote. And he's a member of the Polo Road Gang, a group of 11 Republicans who met on January 2 at Rep. Byron Cook's Austin house to choose their candidate for speaker. That bloc, combined with most of the House Democrats and some votes picked up later, made Straus the speaker and ousted Midland Republican Tom Craddick from the post.

He will have served 20 years in the House when his current term ends in January 2011, and he has remained popular in his district: He never got less than 65 percent in a general or primary election and usually ran without opposition. His HD-66 is solidly Republican and would be a difficult pickup for the Democrats even with McCall out of the running.

McCall has been mentioned as a possible candidate for state Senate — speculation resulting from Sen. Florence Shapiro's efforts to win a promotion to the U.S. Senate. Both are Plano Republicans, and if Shapiro were to run, McCall is in a spot to try for her job. He's played down those rumors. And now that Kay Bailey Hutchison has said she'll remain in office until after the first of the year (and the filing deadline for candidates in the 2010 elections), the fuel for that political speculation is scarce.

McCall was himself a candidate for speaker before the 2007 legislative session. He was the apparent leader among candidates to challenge Craddick that year, but stepped aside to back Rep. Jim Pitts, R-Waxahachie, who went on to lose to the incumbent. Both men backed Straus at the beginning of this year, and both were rewarded — Pitts with a new run as chairman of House Appropriations, and McCall, with the job at Calendars, his first chairmanship.

Two days after the McCall news broke, Republican Mabrie Jackson resigned from the Plano City Council, where she's been a member for a little more than a year, to run for his spot. She's a former tech executive, with time at Microsoft and at EDS, and she was once a legislative aide to then-Rep. Bruce Gibson, D-Burleson.

McCall, who's never received less than 65 percent of the vote in his House elections, had already drawn an opponent. Wayne Richard was set to run to McCall's right in HD-66. Now that the seat's open — and more open, based on other election results, to Republicans than Democrats. He's not getting involved at this point in the race for his successor.

Jackson was elected to the council in 2008.

It's early in the game, but this and other seats could figure into Straus' efforts to win a second term as speaker. He was elected by a large group of Democrats and a relatively small group of Republicans (including McCall) at the beginning of this year. He's on relatively solid ground going into the 2010 elections; he probably gained a Republican seat in Wichita Falls when David Farabee, a Democrat, decided not to seek reelection. That's Republican turf, unless there's a candidate named Farabee. And Jacksonville Democrat Chuck Hopson switched parties a week ago, adding to the GOP's majority in the House.

Conservative Republicans who want to regain control in the House — their guy, Tom Craddick of Midland, lost to Straus in January — would have to do it by winning over some Democrats and by knocking off some moderate Republicans and replacing them with conservatives. Picking off Democrats is a matter of finding people who aren't in prominent positions in Straus' regime. Picking off Republicans is tougher. But districts like McCall's would be the battlegrounds — especially when the incumbents aren't in the way.

Fight Club

With 198 legislators on the ballot next year, there ought to be more fear in the air. But only a few are in obvious political trouble.

Who's on the list, and what makes them vulnerable?

For Kristi Thibaut, a Democrat, it's three things. She'll face Jim Murphy next November. He's the Republican she beat, narrowly, a year ago. It's a Houston swing district, and she doesn't have Barack Obama on the ballot — and an excited Democratic electorate — to swell the numbers in her favor. Third, she's seeking a sophomore term, which means she hasn't held the seat long enough for the powers of incumbency to flower. Those powers are partly financial, with political action committees and their ilk tending to support people who are already in office. But candidates also get battle-hardened after several elections. They know who their supporters are, who'll knock on doors, and who'll volunteer. Thibaut and her opponent, who's been in more races, come out even by that measure.

For Mark Homer, it's political geography. He's fended off challengers for years and Democrats think he's got a good chance at doing it again next year. But his is an almost overwhelmingly Republican district. He's one of several WD-40s — White Democrats Over 40 — hanging onto a rural seat where voters generally vote for people in the other party.

For Linda Harper-Brown, it's demographics. The Irving Republican represents a district that has become steadily more ethnically diverse, and steadily more Democratic. In 2008, she squeezed past a lackluster Democratic candidate after a recount, winning by fewer than two dozen votes.

Chuck Hopson was on everyone's list. He was in the most Republican House district in the state represented by a Democrat. He changed parties two weeks ago, taking himself off the list of vulnerable candidates in next November's election while moving himself to the list of people who are vulnerable in March. Hopson, now a Republican, faces a GOP primary opponent, Michael Banks, who'll be crowing about the new convert's Democratic voting record. The district is likely to send a Republican to the next legislative session, but which one?

Not all of the vulnerable candidates have opponents yet. Just wait. Major-party candidates start filing for office in two weeks, on December 3, and they have until the end of business on January 4 to add their name to the ballots. There will be four groups of names: those who have primary opponents, those with general election opponents, those with both, and those with neither.

Some, like Lubbock Republican Delwin Jones, face serious primary competition. Not everyone with an opponent will be in trouble. And there will be a lot of open seats — where members like Steve Ogden and Eliot Shapleigh and Brian McCall and David Farabee decide not to seek reelection or where Dan Gattis leaves to run for state Senate — where vulnerability isn't the issue.

The GOP has a slim advantage in the Texas House, and the game there is simple: Democrats want to regain the majority, and Republicans want to widen it. The odds are with the Republicans, after Hopson's defection and Farabee's retirement. Taken together, those moves probably give the GOP a 78-72 advantage. The donkeys remain hopeful, while the elephants are trying to wipe the smiles off their faces. "It's impossible the Democrats will win," says Republican consultant Craig Murphy. "I think the Democrats will have a hard time picking up any new ones."

Murphy also said candidates who look viable — particularly the ones who look good as the fall general election gets close — don't have to have the ability to raise money. It'll come, he says. "Money's just going to be there for a Republican in a targeted race," he says.

Matt Angle, a Washington, D.C.-based consultant who's played heavily in Texas House races for the last few cycles, admits the Democrats have more districts to defend and that the number of vulnerable Republicans has shrunk. That last part is because the Democrats have been adding seats since the Republicans drew redistricting maps in 2003. "Those districts were drawn to elect 85 Republicans," he says. "We're fighting on enemy turf."

"The key for us is to be aggressive in six to eight districts," Angle says.

Republican and Democratic consultants agree on many of the vulnerable candidates. Both sides know where the fights will be. In no particular order:

• Joe Heflin, D-Crosbyton. With Hopson joining the Republicans and Farabee preparing for self-retirement, Heflin now has the most Republican district represented by a Democrat. The average statewide Republican candidate in that district beats the average statewide Democrat by 32 percentage points.

• Stephen Frost, D-Atlanta. He's on the list for the same reason Heflin is, and Homer, and why Jim McReynolds of Lufkin is on some lists. He's a Democrat in Republican territory, and the Republicans hope, as they hoped before, to knock him off. And by the way, there are no Republicans in the Texas House, the Texas Senate, or the state's delegation to Congress who represent areas where Democrats generally win statewide elections.

• Ken Legler, R-Pasadena, and Tim Kleinschmidt, R-Lexington. Both have the sophomore thing going. Kleinschmidt won a district that had been in Democratic hands for years and they want it back. But Democrats consider him less vulnerable than Legler, who won a tough Republican primary in 2008 and did it in Pasadena, which the Democrats think could swing in their direction. Republicans don't consider either lawmaker to be in real danger.

• Diana Maldonado, D-Round Rock, Carol Kent, D-Dallas, Chris Turner, D-Burleson, and Robert Miklos, D-Mesquite. Like Thibaut, each of them took a district away from the Republicans last year. Throw in the sophomore thing. And count on tons of GOP money for their opponents. These four (five, with Thibaut) are on both the Republican target lists and the Democratic defender lists. Get ready to rumble.

A few count as outliers — reelection candidates who don't make all the lists, but make enough to merit mention here. They're less vulnerable — or appear to be — than the others, but if you were their mother, you'd worry: Reps. Dwayne Bohac, R-Houston, Allen Vaught, D-Dallas, Joe Moody, D-El Paso, and Valinda Bolton, D-Austin. Then there are long-shots — candidates who can probably expect to be targeted and who, if they goof, could move up on the list: Paula Pierson, D-Arlington, Will Hartnett, R-Dallas, Joe Driver, R-Garland, and Abel Herrero, D-Robstown.

All those names and nothing from the Texas Senate or the U.S. Congress?

We can't point you to a Senate incumbent who's vulnerable. Republican Joan Huffman of Houston represents a district that under the right circumstances could elect a Democrat. On paper, anyway: She beat well-financed Democrat Chris Bell in a special election last December. The Democrats aren't likely to spend the money this time.

Two races to watch in the congressional elections, though the operatives in the two parties disagree on vulnerability. The Democrats are making a run at Michael McCaul, R-Austin, with high-tech executive Jack McDonald. The Republicans just don't count McCaul as an endangered incumbent. The Republicans, meanwhile, will likely make another run at Chet Edwards, D-Waco. His is the sixth-most Republican congressional district in Texas, and he's successfully defended it for years. But it's Red turf, and Edwards was on the short list for vice president when Obama was shopping for a number two. That could help, and it could hurt. Either way, he's on the GOP target list.

Calling Dibs

Texas is poised to gain more congressional seats after the 2010 census than any other state. Bipartisan firm Election Data Services, Inc. projects a net gain of 4 seats. The bargaining over the seats has already begun.

Texas, among other states that are gaining seats, will "owe this expanded power to Latinos" and should allot its new districts accordingly says a new report from America's Voice Education Fund, an immigration reform advocacy group. The report, titled "The New Constituents: How Latino Population Growth Will Shape Congressional Apportionment After the 2010 Census," details how Latinos made up over 63 percent of Texas' population growth since 2000 – "the greatest change, positive or negative, among any state in the nation."

However, the group notes that there could be some bumps on the road to securing more Latino-friendly congressional districts, since legislative redistricting processes like Texas' often become "enmeshed in partisan politics" — to say the least.

— Reeve Hamilton

Running Shoes

• Stefani Carter, a Republican, will challenge Rep. Carol Kent, D-Dallas. Carter will face Geoff Bailey in the primary. Kent won the seat in 2008 in an upset over Tony Goolsby. Carter is a Harvard Law School grad and a former Collin County prosecutor.

• In October, we mentioned that former state Rep. Rick Green, R-Dripping Springs, had filed campaign finance documents for a Texas Supreme Court run. Justice Harriet O'Neill isn't seeking re-election, and Justice Scott Brister resigned to go into private law practice. After a good look, Green has decided that "it's time" to run. That's the message he put out in a video teasing his announcement. He says he has "noticed that too many justices have been legislating from the bench." Green lost his House seat to Democrat Patrick Rose in 2006.

• Jaime Perez, chief of staff to El Paso County Judge Anthony Cobos, will run as a Republican for the seat currently held by U.S. Rep. Silvestre Reyes, D-El Paso. Perez will face Tim Besco in the primary. Reyes is hoping to keep the seat himself.

• Former North Richland Hills Mayor Charles Scoma will challenge Rep. Kelly Hancock, R-North Richland Hills, in the primary. Semi-retired, Scoma cited Hancock's opposition to local-option transportation funding as the impetus for the challenge. That would be a vote against legislation allowing local voters to raise local gasoline taxes to pay for roads. Hancock easily defeated Scoma when they first ran against each other in 2006.

• Rep. Joe Heflin, D-Crosbyton, formally announced he's seeking re-election. Some Republicans had hopes he would follow Chuck Hopson of Jacksonville and switch parties. Nope. He's sticking with the Democrats.

• Add Charles Perry, a CPA, to the candidates challenging Rep. Delwin Jones, R-Lubbock. He's a Republican, characterizing Jones as a career politician and Zach Brady, who's also challenging, as a trial lawyer.

— Reeve Hamilton

Math Anxiety

The people in government who look at spreadsheets — so the rest of us don't have to — are getting nervous about the state's finances.

Sales tax revenues have taken double-digit dives for five months running; in each of those months, the state's income from those taxes has been more than 10 percent lower than in the same month the year before. In a state where a steady rise in sales tax money has become almost a rule, the intake for the last 12 months is down more than 5 percent. And budgeteers assumed not only that they'd match the old numbers, but that they would exceed them.

Budgeteers used one-time federal stimulus money for ongoing expenses in the current budget — in Medicaid, for instance — that create holes to fill next time they write a budget. The programs will still be there even though the stimulus money probably won't.

And an ongoing "structural deficit" — the kind of term that seems designed to scare people away from a conversation about money — creates an ongoing problem. In 2006, in an effort to lower property tax burdens, the state agreed to spend more on public education. Lawmakers created a new business tax, but it raises less than they agreed to spend on the property tax fix. The gap has to be filled every time they write a budget. Last time, the feds showed up like leprechauns with pots of stimulus money and kept Texas from choosing to use its Rainy Day Fund, raise taxes or make spending cuts. Next time, the stimulus money won't be there, but the hole will be.

The Rainy Day Fund, if budget writers decide to use it, is expected to total about $9 billion. But the sales tax declines and troubles in the economy have grabbed the attention of people who watch this stuff for a living.

It's early in the two-year budget cycle, which began September 1, but if the state gets far enough behind its projections at the beginning of the budget period, it becomes more and more difficult to catch up later.

"Fortunately, it's too early to tell," jokes House Speaker Joe Straus. He and other state leaders are well aware of the numbers, and although they think it's not yet time to act, they're clearly focused on the big question.

Will there be enough money?

"That's a question for the comptroller and not for me," Straus said. "I am concerned, though, that we've had several months of significant downturns. I guess the Christmas season coming up will be interesting to watch as well.

"I think we're in relatively good shape right now but there certainly are caution signs ahead," he said.

Straus said interim charges — coming out pretty soon — will address efficiencies in state spending.

"We are in relatively good health as a state, fiscally, and I see no reason to take extraordinary action at this time," Straus said. "But we should always take a look at where we are and find efficiencies where and when they can be taken."

Comptroller Susan Combs remains optimistic and says her agency's estimates of state revenue are still on track. The state is constitutionally required (sort of — see comments) to balance its budget. The comptroller makes a hard estimate of how much money will be available and the Legislature writes a budget to fit. If the revenues fall short, the budget has to be cut. Or taxes have to be raised. Or lawmakers have to find new pots of money, like the $17 billion in stimulus money earlier this year.

Combs will soon issue a "certification estimate" that either confirms or adjusts her last set of numbers. But she's telling people publicly and privately that she's sticking to the current revenue estimate. The numbers are still in motion: The comptroller, the people at the Fed, everybody else — they've got the problem of not knowing when the recession ends. Until they do, they can't forecast the recovery with much confidence.

The numbers have to turn quickly or the state will have to make some budget adjustments. Lawmakers return in 14 months to write the next budget and to correct whatever problems they find in the current one, which runs through the end of August 2011. If the revenue numbers are short, they have to find new revenue, make some cuts, or do those things in some combination. It's still early, but the clock is running.

Keith Phillips, a senior economist with the Federal Reserve Bank of Dallas, recently told an audience at the Texas Taxpayers and Research Association that he expects the state to move into an economic recovery next year, but also said he expects that to be more mild than robust. His forecast for the holiday shopping season — the key part of the year for many retailers — was relatively optimistic. His forecast for next year was optimistic, but not wildly so.

Gov. Rick Perry and others are watching the numbers closely, and Perry says conversations about state agency spending are already under way.

"I don't have to look at numbers to ask [the agencies] to watch their spending and throttle back... Anyone who does not see the impact of this national and international recession, and realize that a prudent individual, whether you work for the State of Texas or you're a private citizen, you ought to ask yourself, 'Do we really need to spend this money? Is the return on investment going to be worth the expenditure?' So, absolutely, all the state agencies should be looking at their expenditures."

Reversal of Fortune

By Billy Hamilton

The comparative economic fortunes of California and Texas have gotten a lot of attention in the news media lately. Texas has done remarkably well during the recession. California—not so much. California, in fact, has been perhaps the hardest-hit state. Its economy was pummeled by the housing market meltdown, and its state finances are a shambles.

Comparisons of that sort are enjoyable when you are winning, and Texas has been. However, with a new legislative session only a little over a year away, we should pay attention to what my old boss, Bob Bullock, used to call the thorns among the roses here in Texas.

It would have been ridiculous to believe that Texas could avoid the national recession entirely, and it hasn’t. The state economy is in recession and has been for several months. Unemployment is sharply higher than a year ago. Housing, commercial real estate, manufacturing and retail sales are all weak. The good news is that the national economy may be recovering, and Texas will follow, hopefully by spring. The bad news is that it is going to be a long, slow, painful recovery nationally.

Between now and the return of the good times, Texas state finances will experience problems of their own. You can get a sense of just how big those problems could be by looking at recent sales tax performance. October sales tax receipts were down 12.8 percent from a year ago. That’s the fifth consecutive month of double-digit drops. The state hasn’t had a positive month of sales tax growth since January.

This trend matters because of the sales tax’s importance in state finances. California is criticized for its dependent the personal income tax, which tends to drop like a rock during a recession. Texas is no less dependent on the sales tax. The tax accounts for nearly 60 percent of state general revenue (which doesn’t include federal funds), and right now, the tax is in free fall.

The last five months are the worst string of sales tax months since the tax was enacted in 1961 and are much worse than during the 2002-03 recession when collections fell by “only” 1.1 percent in 2002 and 1.7 percent in 2003.

State revenue forecasters have noticed national conditions, and the state’s current budget assumptions were built on projections of weak sales tax growth in 2009 and 2010. Weak growth, but still growth. Unfortunately, the tax declined by 2.7 percent in fiscal 2009 (the state fiscal year ends in August), and it is down by better than 12 percent so far this year. Results like those are guaranteed to produce heartburn aplenty for revenue forecasters.

The rest of the tax system isn’t providing much reason for comfort. Motor vehicle sales tax collections were down 22.5 percent in October. Oil and natural gas taxes have been down all year, although state forecasters saw that one coming after the price spike in 2008. Hotel taxes are sagging. Motor fuel taxes are down. The newly reformed state business franchise tax has underperformed projections from the start. Only alcohol and cigarette taxes are up right now. Given the economy, it figures.

The revenue situation could pose real problems for budget writers in 2011 if there isn’t some improvement soon. The state will already be without the federal stimulus dollars that filled a lot of holes in the current budget. Deteriorating revenue conditions could add to what already promises to be a tough budget year.

How much worse could things become? That’s a question I’m glad I don’t have to answer, having retired from the perilous line of work that is revenue estimating. On the plus side, the economy is supposed to be recovering. The next few months could provide evidence of that improvement—or not. A good indicator will be January tax collections. January is the biggest month of the year for the sales tax and reflects a lot of holiday sales. If there’s no recovery by then, we can hope for a spring awakening. If things don’t improve by spring, the state better start squirreling away nuts. It may be a long, cold winter.

We can, however, take comfort that we aren’t alone. I just checked, and California’s revenue collections are already lagging behind projections this year. Then again, their sales tax revenue was down by only 2.4 percent in the most recent month compared to the 12.8 percent drop in Texas. In the current economic circumstances, you take your victories where you can find them.

Billy Hamilton, now a consultant, is a former deputy comptroller of public accounts, and was once the state's chief revenue estimator.

Simple Math, Complex Problem

By Dale Craymer

Budget numbers can be daunting (and really, really big), but the actual math is fairly simple. The real challenge is not addition and subtraction; instead, it’s more like that children’s puzzle where you try to fit round pegs in round holes, square pegs in square holes, and hope in the end that all the pieces fit somewhere.

When the 2009 Legislature convened, budget writers faced a general revenue shortfall of roughly $5 billion. Washington soon offered us gifts beyond our wildest dreams: a $16 billion stimulus package. Half of the money was clearly restricted, but with a bit of fiscal dexterity, the other half could be used to fill the general revenue hole—and even the most mathematically-challenged can fill a $5 billion hole with $8 billion.

It would have been wise to save some of that money, but the feds insist that states “use it or lose it.” Texas lawmakers tried to spend as much as they could on one-time items, but the state had too many on-going needs to ignore.

So when 2011 arrives, lawmakers will face several budget challenges. First, assuming that the current revenue forecast holds and other spending stays in check (cross your fingers here), they will likely have to come up with a billion dollars or more to cover a shortfall in the current Medicaid budget. I could say this estimate is based on a keen analysis of the fact that caseloads and costs are tracking well above the amounts the Legislature appropriated (which they are), but truth be told, there will be a supplemental Medicaid appropriation because there always is one. It is a game the Legislature plays with the Comptroller. Lawmakers think the Comptroller is too conservative in projecting revenues, so they underestimate Medicaid costs with the expectation that additional revenue will materialize to pay for any overruns. In years past, this has been a good bet. In today’s economy, it’s a much greater gamble.

Then comes balancing the 2012-13 state budget. That gets real hard real fast.

The current state budget is financed with $12 billion of one-time money (add to the stimulus money several billion the Legislature wisely socked away two years earlier). Some refer to this as our “structural gap.” That gap will have to be filled. On top of that, add several billion for Medicaid growth (and perhaps much more depending on what happens with national health care reform), a couple hundred million for prisons, and a few hundred million more for employee health insurance and retirement. Higher education won’t be left empty handed, either, so throw in another half billion dollars.

Add another billion to public education to pay for the promises in last session’s education bill, and maybe even more. Since the state bought into a system of equalized funding, state aid rises and falls as local property values change. With the economy now suffering, property values will likely stagnate or fall (although your local chief appraiser may disagree). School districts won’t be as wealthy. The demands on state aid may actually increase, driving up the state’s public school budget even more.

Granted, there should be some revenue growth, but with most economists projecting a slow, jobless recovery, it may be muted. If so, revenue growth at best may cover spending growth. That leaves the nagging problem of how to deal with that “structural gap.”

Tax hikes? Not likely.

Enter the Rainy Day Fund—currently projected to total $9 billion, and maybe a billion or so more by 2013. Spend the bulk of it and maybe you have enough to finance a “no-new programs” budget without major bloodletting. But, that would just move the ball down the field a bit, passing the gap on to the 2013 Legislature. That also presumes there will be a two-thirds majority in the House and Senate willing to tap the fund—not easy to do. Some may not be willing to draw down the fund to pay for a budget they feel is inadequate. Others may want more budget cuts before they’ll spend from the fund. Finding enough votes in the middle will be difficult.

That means balancing the next state budget may be more a political exercise than a technical one, but like I said, budget work is not really a numbers game. In the final analysis we’ll likely find that we have too many round holes and only a few square pegs left. That will call for some creative carpentry to make it all fit—some sawing here, a bit of trimming there, and a little putty on the side. Hopefully the workers won’t require extensive overtime.

Dale Craymer is the president of the Texas Taxpayers and Research Association, and was previously director of budget and planning for the Governor's Office, chief fiscal analyst for the House of Representatives, and chief revenue estimator for the Comptroller of Public Accounts.

Political People and Their Moves

Former Rep. Sue Schechter, D-Houston, is on the ballot again, but not for a state job. She's running for Harris County Clerk.

Janie Smith won't be roaming the Pink Building anymore; she's moving from legislative liaison for the Department of Public Safety to the agency's driver license division.

Damn: The Associated Press laid off photographer Harry Cabluck, one of the best news shooters around and one of the best-like people ever to grace the press corps in Austin.

Quotes of the Week

Dallas Mayor Tom Leppert, telling WFAA-TV he'd consider running for U.S. Senate if Kay Bailey Hutchison steps down — a few hours before Hutchison said she won't be resigning as early as she had planned: "If the opportunity comes up... then I'll go ahead and look at it. People have been very supportive of what I've done, and I feel real good about what we've accomplished."

Former Vice President Dick Cheney, making a gubernatorial endorsement in Houston: "Texas needs a true conservative champion in the governor's office. We westerners know the difference between a real talker and the real deal, and when it comes to being conservative, Kay Bailey Hutchison is the real deal."

Mississippi Gov. Haley Barbour, chairing an association meeting in Bastrop, just down the road from Austin: "The Republican Governors Association doesn't take sides in primaries. Of course, individual governors can do anything they want to. I personally think Gov. Perry should be reelected and I hope he is reelected."

Retired Florida Judge John Blue, quoted in The New York Times on life sentences for young criminals: "To lock them up forever seems a little barbaric to me. It just seems to me that if you are going to put someone who is 13 or 14 or 15 or 16 or 17 into prison, you ought to leave them some hope."

Deborah Pennington, social studies coordinator for the Conroe ISD, in the San Antonio Express-News: "If what we were doing in the classrooms was that liberal, the state of Texas would be a liberal state because we've all been teaching for many, many years. I don't see any evidence that Texas is a liberal state."

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Texas Weekly: Volume 26, Issue 44, 23 November 2009. Ross Ramsey, Editor. Copyright 2009 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 (512) 302-5703 or email biz@texasweekly.com. For news, email ramsey@texasweekly.com, or call (512) 288-6598.