The biggest and toughest challenge legislators will face in the 82nd Texas Legislature will be balancing the budget. Comptroller Susan Combs announced that general revenue for the 2012-2013 biennium will likely be $72.2 billion, $14.8 billion less than the general revenue budget for the current biennium, and the shortfall in the current biennium would be $4.3 billion. She did not quantify the size shortfall expected in the next biennium, but the state would be about $27 billion short if lawmakers decided to continue current service levels in all programs.
Understanding the budget means looking at the two largest spending areas, articles II and III, otherwise known as education and health and human services, respectively. In his acceptance speech as president pro tempore of the Texas Senate, Sen. Steve Ogden, R-Bryan, told those in attendance to that it is “impossible to balance the budget” without making cuts to Medicaid and education.
At more than 1,000 words, the excerpt of the speech is lengthy, but it’s a must-read if you want to understand the next 140 days of the session.
An excerpt from Sen. Odgen’s speech on the opening day of the 82nd Texas Legislature – Jan. 11, 2011
I’d like to share with you a couple of numbers that haven’t been widely discussed because there’s a blizzard of numbers, a blizzard of opinions, and a blizzard of this and that. The comptroller said that the total state revenue in the next biennium is $177.8 billion. That’s everything—general revenue, federal funds, other funds, the whole thing—$177.8 billion. Two years ago, her revenue estimate was $167.7 billion, $10 billion less than that.
My point is this, that a lot can happen in the next 140 days, and that our job in the Texas Senate is to manage the problem and not let the problem manage us. I know, with $177.8 billion and $9.2 billion in the Rainy Day Fund, we can get the job done. It will not be easy, it will not be painless, but we can do it.
One of the areas we have got to address is Medicaid. How we deal with Medicaid will determine how the rest of the budget goes. In the current biennium, we appropriated $44 billion of all funds to Medicaid, and as a result of the federal stimulus that was enacted two years ago, the federal government reimbursed Texas out of that $44 billion, 70 percent was paid for with federal tax receipts and 30 percent was paid for with our tax receipts. We believe that there will no longer be such a stimulus. We believe that the federal government cannot do it and be fiscally responsible. So we are anticipating a federal match that’s more like 58/42.
The difference between a 60/40 match and a 70/30 match—just to round off the numbers—is $4.5 billion, 10 percent of $44 billion. That $4.5 billion is not coming from the federal government; it has got to be replaced with something. Some of it has to be reform. Medicaid cries out for reform. Every hospital in this state and every procedure in every hospital in this state has a different formula for reimbursement. It makes no sense. It has been estimated by our lieutenant governor and others that if we converted Medicaid to a managed care program, we could save $4 billion.
Over 30 governors and the state of Texas have petitioned the federal government for relief. A system that only sends you 60 percent of the money but ties you up with 100 percent of the regulations will not work. So our first job, senators, is to figure out how to save Medicaid. We have got to reform it and we have got to work together to fill the $4.5-billion hole because we are not going to receive any more federal stimulus money.
If you look at our budget with respect to education and health and human services—article II and article III—81 percent of all the general revenue that we appropriate is appropriated in article II and article III. It is impossible to balance this budget without making cuts in article II and article III.
In article III, which is the entire education budget, we appropriate approximately $50 billion. If you look at the Foundation School Program, we appropriate about $35 billion of that $50 billion. The Foundation School Program has serious structural problems and in order to balance this budget, we’re going to have to fix public school finance. And the biggest problem with public school finance is a term called target revenue. If you go back and you remember what we did in 2006 and 2007, we basically held all of our school districts harmless.
What we said in 2006 was, ‘look, school districts, we know that by cutting school property taxes, some of you guys are not going get as much money as you used to, so we promise you’ll get the same amount of money forever.’ School districts get to pick between how much money they got in 2005 or how much money they got in 2006, and we promised to give them the same amount of money no matter what. Per student. So the money keeps going up because the population is going up. We have got to fix target revenue in order to balance this budget.
Target revenue is a form of ‘hold harmless.’ I asked the LBB [Legislative Budget Board] how much hold harmless is costing us and the Foundation School Program and the answer is $5.5 billion. So there’s where your hole is, $4.5 in Medicaid and $5.5 in the Foundation School Program. We have got to fix that. We can.
The last thing I want to talk to you about with respect to the budget is the state business tax, called the gross margins receipts tax. We enacted that back in 2006 as part of the largest property tax cut in the history of this state. And we did. We cut school property taxes by $14 billion. We were going to pay for that in part with a new business tax, the margins tax. The problem is that the margins tax has underperformed what we predicted ever since we enacted it. In fact, it’s underperformed it by a huge amount. On average, year after year after year starting in 2006, the margins tax has underperformed what we predicted when we enacted all these property tax cuts, by about $2 billion a year.
Part of the deficit that the comptroller was talking about in the current biennium of $4.3 billion, $1.2 billion of that is as a result of the margins tax underperforming what we predicted. Here’s the reality: None of us were elected to go out and raise taxes on anybody, but the margins tax is different because if we don’t fix the margins tax, at least change the trajectory of the margins tax, then school property taxes will go up for sure. So when we’re balancing this budget in the areas of public education, we have got to work on that issue of target revenue and fix it, and we have got to work with our colleagues in the House to fix the margins tax if we want to keep property taxes as low as they currently are.