Texas Weekly: Simple Math, Complex Problem

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.