Texas state budget (2011-2013)

Note: This article was last updated in 2013. Click here for more recent information on state budgets and finances.

In February 2012, John O'Brien, director of the Legislative Budget Board, told lawmakers that the state faced a $4.1 billion shortfall, with $3.9 billion of the deficit coming from Medicaid costs. The legislature intentionally underfunded Medicaid. When the Legislature meets again in 2013 lawmakers will need to pass a supplemental budget bill to cover the deficit. Options available to lawmakers include tapping a $1.6 billion revenue surplus or turning to the state's rainy day fund. John Heleman, the Texas comptroller's chief revenue estimator, said that the rainy day fund had $6.1 billion as of Feb. 2012 and will have $7.3 billion by October 2012.

Revenue Reports

In December 2011, Comptroller Susan Combs wrote a letter to lawmakers stating that tax collections were on pace to produce a $1.6 billion budget surplus for the fiscal biennium ending in 2013. The state's Rainy Day Fund at the end of 2013 is forecast to reach $7.3 billion, the comptroller said.

In September 2011, sales-tax receipts in the state rose to a record $1.76 billion, up nearly 12% from the prior year, according to Combs. She attributed the increase to the rise in spending, led by the oil and gas industries. The rise continued in October 2011, when sales tax revenues rose to $2.07 billion, which was about 9 percent higher than expected. The increase is good news for the state budget given that sales tax dollars account for approximately 60 percent of the general revenue the state uses to pay for basic services, including public education and prisons.

Budget

Education

Some Democrats hoped for a special session to restore some of the $4 billion cut from public schools, but Republicans were uninterested. Gov. Rick Perry said on Feb. 21, 2012, that he would not call a special session to address education funding.

The budget uses an accounting shift that delays a $2.3 billion payment owed to public schools in 2012-2013 by one day so that a bill is not due until 2014, thereby going into the next budget. The budget also assumes there will be no growth in the number of school children in Texas, even though it is one of the fastest-growing states in the nation. Critics say the state will short school districts $2 billion that way.

K-12 education funding was cut by $4 billion. About 7,000 schools have been granted waivers to legally raise class size above the maximum 22 mandated in grades K-4, a three-fold increase from last year.

More than 300 school districts filed suit against the state, hoping the courts will declare the cuts and the school funding formula in Texas unconstitutional.

Medicaid

Legislators left a nearly $5 billion unpaid tab for Medicaid, which they planned to cover in 2013 with any unexpected revenue or the $7 billion rainy day fund. The funding ignores the likely growth of enrollment in Medicaid.

State Health and Human Services Commissioner Tom Suehs predicted on Feb. 1, 2012, that the state faces a shortfall of $15-17 billion due to Medicaid.

On May 7, 2012, the state's Medicaid chief said the program will likely only achieve 88 percent of the savings lawmakers hoped for when they passed he budget. Texas Department of Health and Human Services officials expect that lawmakers will need to come up with more than $10 billion to cover the deficit as of May 2012 and increases in the next budget.

Other Cuts

Lawmakers also made a $250 million across-the-board cut to most state agencies funded by general revenue.

Passage of Budget

Lawmakers left unaddressed is the $8 billion structural deficit that recurs every two years as a result of a deal to lower property taxes while transforming the state's business tax that has never generated as much money as anticipated when it the deal was made.

The state faced a budget gap for the 2012-13 biennium that had been estimated to be as high as $27 billion. Lt. Gov. David Dewhurst, the presiding officer of the Senate, said legislators will pursue targeted cuts instead of across-the-board reductions and may even increase spending in some instances. "We're going to cover all our essential services," he said. The budget was not completed during the regular legislative session and lawmakers went to in special session to make cuts of millions of dollars in state services in order to balance the budget.

In a surprise move, the House voted down SB1, the primary budget bill, by a vote of 64 to 71 on June 28, 2011. The House then decided to reconsider its vote and approved the budget by a vote of 80 to 57. The approved bill cuts $4 billion from education and divides the cuts over two years, with 6 percent across-the-board cuts in 2012 and $2 billion in targeted cuts in 2013.

The day before, on June 27, 2011, the Senate had passed Senate Bill 1 and both chambers of the legislature passed Senate Bill 2, a companion appropriations bill.

Legislative Proposed Budgets

After contentious negotiations, the House and Senate started to make progress toward a budget and resolve their differences on May 20, 2011, a week before the end of the legislative session. The two chambers had differed on how much to spend of public education. Negotiators announced they had agreed on spending $80.6 billion in state general revenue, and following the Senate's plan to cut $4 billion from public schools.

Texas Comptroller Susan Combs, had estimated that Texas would collect $77.3 billion in funds available. However, $4.3 billion of those dollar would cover a shortfall in the current budget cycle, which developed after the economic downturn caused the state to collect less money expected. That would give Texas a total of $72 billion to spend, rather than the $87 billion last time, which included federal stimulus funds.

The Senate agreed to back off $1 billion in spending to reach consensus on the budget. The House passed SB11, delaying approximately $2 billion in education costs until the first few days of FY2013 and defers costs without an actual loss of money for schools. House and Senate leaders also found $800 million for the budget by assuming that property values will be higher over the next two years than previously estimated.

House and Senate negotiators on May 26, 2011 approved a $172.3 billion budget that calls for a $15.1 billion reduction in state spending over the next two years. The proposal, crafted after weeks of wrangling to confront a multi-billion-budget shortfall, now goes to both chambers of the 2011 Legislature for a final vote before lawmakers adjourn before midnight Monday. Chief budget-writers said they expect the House and Senate to vote on the two-year spending plan on May 28. The budget includes $4 billion in education cuts but lawmakers are still struggling to adopt a separate school finance plan essential to distributing the reduced funding to the more than 1,000 school districts. The $15.1 billion reduction constitutes an 8.1 percent drop from current spending. A draft House budget at the outset of the session called for a $31.1 billion reduction, or 16.6 percent.

In their initial budget proposals, the House version of the state budget cuts spending by $23 billion. In contrast, the Senate Finance Committee’s budget uses $3 billion from the state’s Rainy Day Fund and cuts $17 billion.

On April 3, 2011, the House passed the $164.5 billion state budget by a vote of 98-49, primarily split down party lines. It cuts approximately $23 billion in state spending with cuts to K-12 education, elderly care and higher education.

Lawmakers positioned themselves for the fiscal debate, with Republicans saying that the state spends too much, and Democrats arguing that the state fails to generate sufficient revenue. Republicans said that no new taxes will be used to balance the state budget.

After a delay, on May 4, 2011, the Senate maneuvered around a 2/3 vote requirement and approved its $176.5 billion state budget bill with a vote of 19-12. The Senate version of the budget spends $7 billion more than the House version and differs in substantial ways. The Senate budget would spend billions more on public education, nursing homes and Medicaid. It cut $11 billion when compared to the FY2011 budget.

The Senate also passed SB1811, which injected $4 billion in non-tax revenue into the budget and utilizes accounting strategies including moving the state’s final $2 billion payment of the fiscal year to the Permanent School Fund from August into September, the first month of FY2012, and collecting the state’s franchise tax a month early in 2013 to bring in about $800 million.

The Senate also passed SB23, which would save about a half billion dollars in health care costs over the biennium by moving Medicaid prescriptions into managed care and increasing managed care for Medicaid patients in South Texas.

On May 29, 2011 the legislature sent a $172 billion budget to Gov. Rick Perry. The 2012-2013 budget -- Texas has a two-year budget cycle -- slashes $4 billion from schools. Those cuts violate state law, so the budget plan depends on the passage of another bill that would tweak the state's school finance system. The budget cuts state spending by $15.2 billion, reduces funding for education and healthcare, and cuts more than 5,700 jobs from the state workforce. The budget would reduce state funding to school districts by $4 billion and shrink the state workforce to 235,135 by fiscal 2013, a decrease of 5,727 from the current 2011 level.

Texas Democrats opposed the budget submitted to the governor. An analysis by the House Democrats' Legislative Study Group said the budget does not account for the state's population growth. The state government needs $99 billion in state funds to maintain services at current levels, but the budget allocates only $80.7 billion in state general revenue, leaving a shortfall of $18.3 billion, according to the analysis.

Legislative Recall

On May 31, 2011 Texas lawmakers returned to the capital for a special session on the budget to deal with a school finance plan blocked by Democrats and Medicaid cost savings. Over the Memorial Day weekend Democrats filibustered a plan that would see a $4 billion cut in school funding. The Republican plan answers a multibillion-dollar shortfall with numerous spending cuts, because of GOP leaders' stand against new taxes and closing tax loopholes and their willingness to spend only a limited amount from the state's rainy day fund.

The Democrats in the legislature want to see more of the state's rainy day fund used to support education. Gov. Perry is opposed to tapping the state's rainy day fund, which has approximately $9.7 billion.

Gov. Perry accused Democrats of wasting time and money for creating the need for a special session. In the meantime, bills governing sanctuary cities and TSA pat-downs have the potential to be revived, because Gov. Perry can bring back bills to the floor during the special session. Prior to the special session Perry vetoed a bill that would have expanded the number of Internet retailers required to collect sales tax. Retailers such as Amazon threatened to cut off relationships with Texas marketers if the bill became law.

Union Protests

Between six and seven thousand people gathered at the Capitol on April 6, 2011, to take part in a union-organized protest of budget cuts to education and health care as well as those that would impact public employment levels.

A counter-protest calling on the Senate to make even deeper budget cuts was held simultaneously.

Teacher's organizations continue to rally in Austin to protest proposed educational spending cuts, as well as plan to allow districts to increase the number of students in the classroom and let go of teachers quicker.

Structural Deficit

The state faces a structural deficit in its budget, meaning that a $10 billion budget shortfall will reappear in each future fiscal year until lawmakers align revenues and expenditures, according to John Heleman, chief revenue estimator for Comptroller Susan Combs.

The structural deficit stems from issues with education funding. Heleman said a "structural deficit" developed in the state budget after the 2006 school finance reform package that lowered local school property taxes and restructured the business tax. The Texas Supreme Court found the state's school finance system to be unconstitutional and in response the legislature increased public education funding to $14 billion per biennium. The revenue sources meant to pay for it — primarily the revised business tax — have not covered the cost.

Spending Cuts

K-12 Education

Although school districts had been mostly exempt from prior rounds of budget cuts, lawmakers told school district to anticipate approximately $5 billion less in the FY2012-13 budget as lawmakers begin wrestling with a large revenue shortfall. Cuts of $5 billion would leave the state approximately $10 billion short funding levels required by state law, leading officials to recommend legislation that would alter formulas to cut about 14% of state funding to school districts.

Higher Education

In the initial budget proposal, five community colleges would be shut down.

Medicaid

Texas' biennial Medicaid budget is $45 billion. The federal government covers 60% of the state's share and the remaining amount takes up 20% of the state budget.

The Senate and House passed similar Medicaid bills in the special session that combined bills that did not pass in the regular session. The Senate bill would expand the privatization of health care services, discourage the use of emergency rooms for non-urgent care and encourage state agencies and private health care providers to focus on improving patient outcomes as well as permit hospitals and doctors work together to control costs. The House passed its version of the bill with a vote of 91-47 on June 9, 2011, and the bill will now go back to the Senate for consideration of the small changes the House made. It would permit the formation of health care cooperatives and establish the Texas Institute of Healthcare Quality and Efficiency, which would seek to identify and encourage innovative health care programs that save money. The state would also create the Medicaid and CHIP Quality-Based Payment Advisory Committee to explore ways to pay doctors based on the patient's outcome rather than per procedure. The plan requires federal approval. The state's FY2012 budget relies on the cost saving of up to $700 million predicated on that approval.

Republicans had suggested that the state should opt out of the federal Medicaid program and said that they are studying the cost savings that would result from the opt out. Options before the legislature include remaking Medicaid with only state financing to give states flexibility regarding benefits and cost design, or obtaining federal waivers to allow the state to change portions of its Medicaid program.

Possible Sources of Funds

The governor said he opposed tapping into the state's rainy day fund for the FY2012-13 biennium.

The decision marks a reversal by Gov. Perry who had previously opposed tapping into the Rainy Day fund which he said was an "absolute last resort" because doing so meant, "all we've done is kick the can down the road."

Lawmakers agreed to tap the Rainy Day fund for FY2011 budget in March 2011, and that, combined with budget cuts made for FY2011 and a projection from the comptroller that improved sales taxes will generate $300 million in additional revenue, freed up $4.3 billion for lawmakers to use as they write the FY2012-12 state budget. Legislators proposed a plan to use the newly available $4.3 billion in funds for education and Medicaid. Gov. Perry said that he would veto any plans to use more of the reserves to tackle the 2012-2013 budget.

To combat the $18 billion gap, House budget chief Jim Pitts urged the legislature to consider allowing expanded gambling in the state, although that is not considered to be likely. Fee increases are expected, as is a disbursement from the state school trust fund.