It is difficult to remember that Texas was flying high a scant three months ago. The price of West Texas Intermediate (WTI) on February 24th, per oilprice.com, was comfortably in the mid-$50s per barrel, right about where the Texas revenue predictors and budget writers thought it would be. The state’s unemployment rate was below four (4) percent.
There were, however, some ill portents. A former West Texas County Judge told me last October that things were starting to slow down in the Permian, which was subsequently confirmed in the media, such as this article in the Dallas Morning News. That was the nature of the oil and gas beast, so you took the bad with the good. And, anyone who has been around for awhile will tell you that the arrows on the chart do not go up forever—gravity is a thing, after all.
But surely, we could weather some mildly choppy seas. If we created jobs across multiple sectors and continued our population growth, the thinking went, we will be alright.
What a difference three months makes.
My purpose here is not to comment on the government’s response to the COVID-19 pandemic or opine on the timing and approach to reopening the economy. I am hardly qualified and should and will leave that to much smarter people (I will also tune out the Political Industrial Complex’s outrage machine). Nor do I pretend to be an expert on geopolitics and whether Russia hatched an oil price war to cripple Texas oil production. What I do have more familiarity with, however, is the state budget and dealing with cuts.
First, a historical aside. Everyone knows that Texas is famous (infamous?) for not having an income tax. Back in 1991, when I worked at the Senate, there were some discussions about creating one that I only knew about because I helped analyze a draft tax bill. Anyway, we all know what happened. Lieutenant Governor Bob Bullock went out on a limb, and Governor Ann Richards sawed it off. Flash forward nearly a generation, and the chances of implementing a state income tax in Texas in the foreseeable future are not only remote, they are extinct.
Thus, Texas’ revenue stream remains a mélange of taxes and fees. The Comptroller’s Office has a handy chart that shows this, which can be found here. Further, on a more granular level (and more in my wheelhouse), regulatory agencies such as the Texas Commission on Environmental Quality (TCEQ), assess fees that are deposited to the credit of a General Revenue-Dedicated Account and re-distributed (some of them anyway) through the Legislative appropriations process. The Comptroller, once again proving to be pretty darn handy, publishes information on dedicated accounts here.
Additionally, some revenue streams are dedicated for specific purposes. This is great when revenues are steady or increasing. It also, however, can take those revenues out of circulation, making it difficult to redirect funds to address budget shortfalls or other emergencies without legislative (or even constitutional) changes.
All tax revenues are vulnerable to economic downturns, and Texas’ system is no exception. Indeed, Texas’ revenue streams are highly dependent on how the economy performs, meaning that serious economic shocks can cause the bottom to drop out. And, that may be what we are confronting now.
As I write this, Governor Abbott, Lieutenant Governor Patrick, and Speaker Bonnen have issued a directive to state agencies (with notable exceptions) to identify five percent budget reductions for this biennium.
And, we will know more soon. The Legislative Budget Board (LBB) will be issuing instructions to agencies on how to develop their Legislative Appropriations Requests (LARs), and agencies have been put on notice to expect to identify more savings. How much? Usually it has been about 10 percent, but as much as 25 percent seems plausible. Additionally, Comptroller Hegar will issue a revised Revenue Estimate for the state in July, but he is already preparing state agencies and stakeholders for what may be coming. He is on the record as recommending that state agencies go ahead and follow his office’s lead–freeze hiring, suspend salary actions, halt some spending, and identify savings now.
Given that Texas is required to have a balanced budget, this means more money will need to be held back from GR-Dedicated Accounts, and General Revenue appropriations will be reduced, so that the numbers foot when a final budget is passed in late May 2021.
So, the outlook is not great. I have been around long enough to see several different ways this could be pan out. Further, I have cut an operating budget for a state agency organizational unit. I hope my experience might shed some light on what the next 12 months could look like.
Zero-Based or Across-the-Board?
In 2003, the state faced a major shortfall of about $10 billion. At the time, I was the senior advisor to the then-TCEQ Chairman. We received instructions to build our budget from the ground up. Put another way, we started at zero, and we had to build up from there based on core statutory functions, projected needs, and urgent priorities. The goal was to prioritize based on what we were required by law to do, so programs such as permitting and compliance assurance were among the first building blocks. In the end, the TCEQ emerged on the other side without really missing a beat.
Texas took another approach in 2010-2011, when the state faced an even bigger hole (though, controversially, the Comptroller at the time may have missed the revenue mark). Anyway, instead of starting at zero, agencies were assigned percentage reductions based on prior appropriations. The TCEQ’s leadership wisely obtained a measure of flexibility in how this was to be achieved, so that core functions (again, permitting and compliance assurance, including the Small Business and Local Government Assistance program I helped run) were protected. This meant that within the agency, some organizational units took steeper cuts than others, but it all achieved the overall reduction goal set by the Legislature. It also bears noting that TCEQ’s management began banking vacancies in advance of all of this, so that, at the end of the day, no people had to be laid off. Instead, qualified individuals were able to land elsewhere in the agency—a very humane way to handle it. Other agencies were not so fortunate. To us in the trenches with good situational awareness, they seemed to be blithely hiring, even throughout that session. Many of those agencies’ employees had a long, hot summer that year, unfortunately.
Anyway, either approach is valid. As I noted in an earlier post, Chair Nelson (Senate Committee on Finance) has signaled her interest in zero-based budgeting. More will be revealed when the LBB guidance is issued, and when agencies like the TCEQ unveil their LARs—watch this space.
How to Go About It.
Based on my experience at TCEQ, it comes down to two questions: 1) what do we have to have? And, 2) what is nice to have? And, even when you “have” to do something, is there a different, more efficient way to do it? Now, when I think “have,” I think of an organic statute that says, “shall.” Nice to haves are the “mays” in any given statute, or they are programs that may have been implemented under general statutory authority. I think these questions should be the starting point of any deliberation on how to achieve budget reductions.
In my experience, because of the cuts I had to target, I began by zeroing out the “mays” and rethinking how we did the “shalls.” The positions that went with the discretionary programs could be reallocated, but even some of the mandatory program staff could be when we figured out a way to do something smarter. To figure this, I evaluated whether we were being effective and achieving a net, real environmental benefit. Now, I am not suggesting this was easy, or that the reallocated staff were entirely happy, but a certain objective thinking is required when confronting a problem like this. The focus should be, I respectfully suggest, on what meets a customer’s needs and realizes a tangible, measurable environmental benefit.
Additionally, TCEQ also has large pass-through programs, such as the Texas Emissions Reduction Plan and the Municipal Solid Waste Grant Program, that are often tempting targets for achieving most, if not all, of any reductions. At various times in history, TCEQ’s remediation programs have also be tagged with reductions. These, however, also have real costs because of lost benefits from any contraction of their scope and implementation. It is an exceedingly difficult decision for the agency and affected stakeholders.
What Will the Priorities Be?
If you read my recap of the last session, you might recall that the Legislature addressed several pressing issues, such as public education funding. Those pressing issues, I would think, will be the building blocks for the Legislature if it starts at zero in 2021.
So, I would expect that the following issues will be among the top priorities to protect next January: public education, the property tax caps, higher education, emergency response, and health and human services. You might notice that natural resources (also known as Article VI of the Appropriations Act) is not on that list. To be fair, that does not mean the Legislature does not value those programs. To be frank, however, those other items are always among those that get the urgent attention. Plus, there have been some reports in the press that some are already circling TERP’s unexpended balance (which is north of $1 billion) for some relief.
Oh, and remember, the Legislature may be grappling with redistricting during this time, depending on the impacts COVID-19 has on the census. Bottom line: many blue-chip issues will be vying for the Legislature’s attention.
This all, of course, is speculation, though it is grounded in experience. Hopefully, the economy rebounds some in the third and fourth quarters, ameliorating some of the pandemic’s effect. That said, who knows what November 3rd may bring?
The main takeaway is that the budget process that is now getting started will affect all state agencies’ stakeholders and, therefore, bears close watching and protection of interests. Of particular importance may be the unintended consequences the decisions made over the next year have down the road.
That not so distant future, by the way, includes the Sunset Reviews of TCEQ and other Article VI agencies. There is much to do.
