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Legislators worked tirelessly this spring to meet the Supreme Court-imposed June 1 deadline for restructuring the state school funding system. Teacher salaries were raised, property taxes lowered and new revenue streams created.
But did the Legislature look far enough into the future?
Talk of the “outyears” abounded throughout the 2006 spring special session. The tax reform package adopted by the 79th Legislature will go into effect this fall, but the bills also have implications for years beyond the current fiscal year – the outyears.
Why are the outyears of such import to educators this time? Although the special session was focused partially on education, Texas schools will continue to face crucial and costly issues in upcoming years, and this session’s legislation may interfere with the state’s ability to fund those needs.
The Legislature adopts two-year budgets, and is finishing up the first year of the current two-year cycle. So during this session, legislators needed to come up with additional funding for the proposals that would become effective in 2006-07, such as the teacher pay raise, the first year of the incentive pay plan and the high school allotment (details on these and other provisions of House Bill 1 are available at tcta.org). HB 1 also included a requirement that property taxes be cut by 17 cents, which will require more than $2 billion in state money in 2006-07. Lawmakers decided early on that none of the additional revenues raised through the tax bills would be used for these purposes, but instead would be dedicated to further cuts in property taxes.
HB 2
From the start, HB 2 was specifically designed to be an outyears bill. The purpose of the bill is to dedicate the additional revenues generated by the three tax bills (HBs 3, 4 and 5) to a “property tax relief fund” that will be used to provide state funding to offset lowered property taxes. Though technically the bill will go into effect in 2006, its real impact will come in future years.
Legislators took difficult votes to raise and restructure taxes on business (HB 3), standardize the collection of sales taxes on used motor vehicles (HB 4) and significantly increase the cigarette tax (HB 5)–votes that were not taken lightly and that in some cases might carry a political cost. It is unlikely that lawmakers will have much of an appetite for raising taxes again anytime soon. Yet because the new revenues generated by HBs 3, 4 and 5 must be used to lower property taxes, they will not be available for education spending, or Medicaid, or transportation, or corrections or any of the myriad needs facing this state.
Adding to concerns about the long-term consequences of HB 2 is a Senate amendment to HB 1 that remains in the final version of the bill. Proposed by Sen. Tommy Williams (R-The Woodlands), the amendment takes another large step past the initial 17 cent property tax cut, further compressing property taxes by one-third by 2008 (down to $1.00 for districts currently at the $1.50 cap).
HB 1 - the Williams amendment
This amendment was supported by the business community, whose members were expecting to take on the burden of a higher business tax via HB 3 and demanded an offsetting reduction in property taxes larger than that provided in HB 2. However, the costs of the Williams amendment will require an estimated $2.5 billion more per year than provided by the tax revenues from the three new revenue sources.
Where will that money come from? Lawmakers will not want to raise business taxes again, and one of the obvious remaining revenue sources will be the state sales tax. The situation has put policymakers in a bind; many of the same legislators who will want to find new money for education and social services also will be opposed to expanding or increasing the sales tax, which they consider to be a regressive tax hardest on the poor and middle class they are trying to help. There may be state surplus funds available for the property tax cut, with some estimating significant revenue surpluses in coming years. This would alleviate many concerns about this provision, but use of those funds eats into (and possibly eliminates) the pool of money available for other needs.
An alternative scenario was noted by the Center for Public Policy Priorities (CPPP), an Austin-based research institute. The Center estimates that, lacking an available surplus or a new revenue source, state services would have to be cut by 16 percent in order to provide the funding for full implementation of the property tax cut. A CPPP policy paper examining the final products of the session concludes:
“Combining the estimated costs of HB 1 with the estimated revenue from HB 3, 4, and 5 reveals a potentially disastrous gap in future budgets….[T]he expected deficit in 2008-09 is $10.48 billion, growing to $11.12 billion in 2010-11. This deficit will place tremendous pressure on the next state budget, which could cause severe budget cutbacks, an increase in the state sales tax or other state taxes, an expansion of gambling as a source of revenue, or all of the above.”
HB 1 - new education programs
Teacher incentive pay
The incentive programs created in HB 1 will have significant outyear costs. The first of the two programs, which goes into effect in 2006-07, was funded at $100 million and will continue to cost that amount per year. The second program will cost $1,000 per teacher if and when it is fully implemented (at approximately 280,000 teachers, this cost would begin at around $280 million per year). If budget surpluses are not adequate to cover other needs, the plan may not be funded and implemented in the outyears.
High school allotment
A new high school allotment was created at a cost of $275 per high school student, down from the originally proposed $500. This starts at $319 million per year, and will increase over time with enrollment growth.
There are always increasing demands on the state outside of the public school system. As noted earlier, corrections, transportation and Medicaid must fight for a share of any available revenues, along with higher education and other impending issues. But even within the realm of public education, issues not addressed during the spring special session come with high price tags.
Textbooks
The Legislature has not yet funded the Proclamation 2002 textbooks that were distributed to schools at the beginning of this school year (Proclamation 2003 was not issued.) Two more proclamations are in the works: Proclamation 2004 includes secondary, AP and IB math books, and Proclamation 2005 comprises elementary math textbooks. These three years of books combined will cost the state nearly $800 million.
TRS and TRS-Care
Funding for TRS-Care (retiree health insurance) is an ongoing concern. TRS anticipates that it will need to request several hundred million dollars more next year to cover the costs of this program, and the outyear projections deteriorate quickly, to as much as $1.5 billion by 2009.
And at the end of the special session, nearly all members of the Texas House signed a letter of support for full funding of the TRS pension fund in the 2007 legislative session and beyond. The letter estimates this cost at $600 million per biennium, though it must be noted that a healthy economy and good investment returns could reduce or eliminate the need for additional state funding.
Though the outyear fiscal effects of the tax reform package may be of concern, it is worth noting that the upcoming session provides an opportunity to revise or undo changes made this spring before they go into effect. TCTA will continue to work on these issues during the interim and keep you informed of related developments at tcta.org. We also will be focusing on November general elections and working with TCTA members in various parts of the state to help ensure a teacher-friendly Legislature in 2007.
