Budget outlook better than anticipated heading into 87th session

The 87th Legislature convenes Tuesday, January 12, 2021.

On Monday, Texas State Comptroller Glenn Hegar released the biennial revenue estimate for the state, informing lawmakers of the amount of money they are projected to have available as they develop a budget for the upcoming 2022-23 biennium.

While the COVID-19 pandemic has damaged the Texas economy, the estimated shortfall for the current budget has improved since the Comptroller’s last estimate in July. At that time, it appeared that lawmakers would begin the session short nearly $5 billion to pay for the current-year budget. But better-than-anticipated sales tax collections brought that deficit down to just under $1 billion, an amount that could be made up by the 5% budget cuts that state agencies were asked to implement (education and pension spending were exempted).

Legislators will still face an uphill battle finding enough money to continue current levels of services in the upcoming biennium. But Hegar pointed out that Texas is in much better economic shape than most other states.

Questioned about whether legislators will be able to honor state education funding commitments adopted last session in HB 3, he said that lawmakers have made this a priority, and he expressed optimism that the state would be able to keep those commitments.

Where might the money come from?

Of course a quick recovery would help resolve the shortfall, and the COVID-19 vaccine brings hope of restoring normalcy in some economic sectors hit hard by the pandemic (primarily travel and leisure, including hotel and restaurant/bar revenues). But how quickly this could happen will be very difficult to predict.

As for other potential revenue sources, Hegar noted that the Economic Stabilization Fund (commonly known as the Rainy Day Fund) should have a balance of around $11.6B, but it remains to be seen whether lawmakers will be willing to tap into this “savings account”. Additional federal funds may also become available.

Lawmakers are expected to propose a range of revenue options including expanded gambling, and removal of current tax exemptions. But at least some of the deficit is more likely to be made up through accounting mechanisms such as delayed payments that would push costs into the subsequent biennium.

Also noteworthy

In an editorial published this week, Hegar suggested that lawmakers must also consider the state’s long-term needs, singling out the underfunding of Texas pension funds as a particular problem, though he stopped short of recommending a solution. “Major credit rating agencies ― Standard & Poor’s, Kroll Bond Rating Agency, Moody’s Investors Service and Fitch Ratings ― regularly assess our long-term prospects, crucial to the state’s ability to borrow on favorable terms. Their reports are instructive for our future, and while they acknowledge Texas’ strengths, they also detail our challenges. Those include weak pension funding, which S&P says requires active management and has resulted in the 10th-highest pension burden among states….”