Brian Christian Consulting

Twenty-seven years in state government, 14 Regular Sessions of the Texas Legislature, 17 called sessions, and 19 months as a contract governmental affairs consultant (a fancy way of saying lobbyist) has taught me a great deal.  Among the lessons learned, one of the most important may be the intersection of state government policy and the state budget (another lesson is don’t be a jerk, but that topic is for another day).

This realization first dawned on me after my first experience testifying before a legislative committee–Senate Finance in February 1993.  The hearing was held in the Clements Building (where the full Senate was also meeting since the east side of the capitol was being completely gutted).  I was charged with holding down the fort until my then-boss could get there.  If my agency was called before he arrived, I was instructed to go to the table and merely say that our only exceptional request above our baseline was to receive authority to transfer unexpended budget balances between fiscal years.  That was it.

So, of course, he was late…and we were called.  So, I went to the table and did as I was instructed.  I said it with the innocence of a naif who believed in the innate reasonableness of our request (that’s not wholly true—I was so nervous my hair was shaking).  But when I said it, it was like I’d dropped a dead fish on the table.  A debate immediately erupted between the conservative and more liberal Democrats on the committee (this was, after all, 1993).  The argument morphed into a much broader discussion on the merits of giving any state agency, much less ours, such authority.  I sat like a spectator at a tennis match, my head turning back and forth to their back and forth.  When my boss finally arrived, he approached me and whispered, “You look good up here,” to which I replied, hot mic be damned, “Get me out of here!”  One day, I’ll go back and listen to that tape.

Anyway, this made an impression that has stuck with me.  Let’s unpack it, though.  On its face, it seems to be a simple issue—whether state agencies should be able to move money between fiscal years.  But, in this instance, that request ran headlong into a legislative desire to control the purse strings, sweep as much unspent money as possible back into the treasury, and do whatever it took to make the overall state budget foot (and maybe show a surplus).  So, a simple flexibility measure was an important policy priority for the Legislature.

And this brings me to my point.  The budget reflects priorities and sets policy.  You cannot chart a course for any state agency—what it will focus on—without money.  Thus, budget-setting is one of the most concrete ways the Legislature can hold sway over state agencies.  This makes the budget process at state agencies and the legislature extremely important to watch, engage in, and, perhaps, influence.  It also makes it crucial to keep fiscal implications in mind when you’re developing new policy proposals.

The reason I say above that this process is sometimes overlooked is because I have encountered, both inside and outside government, a limited understanding of how the state budget process works (both at state agencies and the legislature); as well as the nexus between a policy or program people want and a little old thing called a fiscal note.

Before we dive in, one caveat.  The state budget can be a black box.  The best possible arguments for why something might be a good idea might, in the end, fall by the wayside for no reason having to do with their merits.  It is, as they say, what it is.  But that doesn’t mean we shouldn’t try.

First, some basics….

            Legislative Budget Board.  The LBB is an agency made up entirely of budget experts.  It’s overseen by a board co-chaired by the Lieutenant Governor and the House Speaker and is comprised of eight additional legislators, four each from the Senate and House.  Right now, those members are Governor Patrick, Speaker Bonnen, Senators Hancock, Huffman, Nelson, and Taylor; and Representatives Burrows, Capriglione, Darby, and Longoria.  The LBB staff are assigned to articles and agencies to allow for the development of expertise, which is crucial for making the process work as well as it does.  Primetime is session, but the LBB monitors the budget and emerging issues throughout the year, making signing up for email updates and regularly checking their homepage a good idea.

            State Revenue and Accounts.  State revenue comes from state taxes, federal funding, and “other funds.”  I’m going to focus on state revenue.  State revenue is deposited into accounts in the state treasury.  General Revenue Funds go into Account 0001 and are not allocated for specific purposes.  General Revenue Dedicated Funds (shorthanded as GR-D) are allocated by state law for specific purposes.  These funds may derive from fees assessed on regulated entities or the public and are often the primary source of appropriations to regulatory agencies.

As an example, we’ll look at the Texas Commission on Environmental Quality (TCEQ).  It receives a relatively tiny amount of appropriations from Account 001.  The vast majority of its state funding comes from GR-Ds, such as Account 151 (Clean Air Account), Account 153 (Water Resource Management), Accounts 549 and 550 (Waste Management and Hazardous and Solid Waste Remediation Fee, respectively), Account 5000 (Solid Waste Disposal Fees), and Account 5071 (Texas Emissions Reduction Plan).  These GR-D accounts derive from around 100 statutory fees at last count, such as a surcharge you pay when you register your vehicle (one of the TERP fees), or the tipping fee you pay at a landfill.

            Legislative Appropriations Requests (LAR).  Beginning in the Spring and continuing through most of the Summer before every Regular Session of the Legislature, state agencies must develop a LAR that covers the next two-year budget cycle.  The LBB sends each agency instructions (and, the state’s leadership may also give guidance), usually with the direction to keep baseline spending within limits already approved by the Legislature in the current biennium’s Appropriations Act.  It’s not uncommon for there to be additional guidance to identify reductions (e.g. 10 percent over a biennium) as a contingency.  Finally, agencies can request “exceptional items” over and above their baseline request.  These may address specific needs and priorities that have arisen since the last budget exercise or may be requests for certain budget authority (such as what I was asking for in 1993 above).  In the environmental realm, examples include funding for more employees to inspect facilities or expedite permit writing, and more air or water quality monitoring equipment.  Before the start of the next session, agencies will present on their LARs to the LBB and the Governor’s office.  Later, the LARs serve as the outline for the first draft of the Appropriations Bill.

            The Appropriations Act.  Texas adopts a two-year budget.  Only 18 other states do this.  If you’ve read any of my other articles, you’ll know I’m a fan.  It makes state agencies look downrange and plan, and it keeps Texas on an even keel.  The budget (officially called the Appropriations Act) is divided into 10 topic-based “articles” that correspond to the branches of government, natural resources, education, health and human services, and the Legislature itself.  The budget identifies performance targets state government must meet and corresponding funding allocations.  Traditionally, original authorship of the budget (and the first chamber that passes it) alternates between the House and the Senate each session, and the bill is usually numbered as Number 1.

The Legislature is subject to some limitations in setting spending levels.  Article VIII, Section 22, Texas Constitution, prohibits the rate of growth of appropriations not dedicated by the constitution from exceeding the estimated rate of growth of the Texas economy.  The LBB adopts the rate of economic growth and the resultant amount of money available for appropriation shortly before, or very soon after the start of, each Legislative session.  At the same meeting, the LBB also gets a briefing from the Comptroller on the state’s economic health and anticipated available revenue.  The Comptroller compiles this information into the Biennial Revenue Estimate, or BRE, which is the maximum the Legislature can spend.

The Appropriations Act is usually filed shortly after the beginning of session, and the chambers’ money committees—Senate Finance and House Appropriations—start holding concurrent hearings in late January.  That session’s budget bill will, after seemingly endless hours of debate, be voted out of its full chamber of origin sometime in March.  Then the second chamber substitutes its version of the budget, votes it out, and the two sides go to conference.  Once they finish compromising, the final “conference committee report” is voted on by both chambers, and we’re off to the Comptroller and the Governor.

Speaking of the floor debate…it can cover a lot of ground.  First, usually there are instructions from the Lieutenant Governor and Speaker that any amendments must be of no cost to the overall total of the bill, so any changes to one strategy must be accompanied by equal reductions from elsewhere.  Second, members will use the opportunity through hundreds of pre-filed amendments to make statements of policy preference.  The Legislature is limited in its ability to use the budget bill to enact new law, so often amendments are written as spending instructions.  The budget debate is often near the top of the longest floor debates during a session.

            Appropriated vs Unexpended.  One quick side note.  In the context of treasury accounts, such as Accounts 5000 or 5071, it is always important to understand the distinction between what is appropriated to the agency and what is left in a treasury account (known as an unexpended balance).  The Appropriations Act does not necessarily give state agencies all the revenue that comes in, and in many cases the fund balances in treasury accounts grow significantly.

State agencies cannot access funds that are not appropriated to them.  Over the years, I’ve encountered a fair amount of misunderstanding of this point, with some funds erroneously referred to by advocates as “slush funds” agencies are merely sitting on and not spending.  That is incorrect, so please always keep the distinction between appropriated and unexpended in mind!  That said, the Legislature is methodically dealing with this issue.

            The Grand Finale.  Once the Legislature votes on the compromise budget, the Comptroller then must certify that the bill does not exceed the BRE.  In the meantime, the Governor’s office pours over the budget (along with the thousands of other bills on his or her desk) to ensure it reflects the State’s broad priorities.  During session, the Governor’s office keeps tabs on things in real-time, but the period between when the bill hits his or her desk and the end of the “veto period” is still intense.  The Governor has 20 days after sine die to veto bills.  With the budget, the Governor has “line-item” veto authority, meaning specific spending items can be surgically excised.  Once that’s done (and with the Comptroller’s sign-off that we’re within the BRE), the Governor signs the bill, and agencies gear up to implement it for the next two fiscal years.

Broadly speaking, that’s it!  The entire process involves monumental amounts of effort by the State’s leadership and branches of government, long hours (some don’t see the sun for weeks), and occasional despair (at least once each session, the budget goes in the ditch and people fret about a special session).  In my direct experience, there has been only one 30-day called session devoted to the budget and necessary tax bills (in 1991), and it was AWFUL.  Fortunately, it’s rare because we take care of business in the Great State of Texas.

So, what’s going on right now?  Virus-related cancellations have affected committee hearings, but the Legislature’s money committees will be evaluating several issues once things normalize (see my article on interim committees published last January).  One issue of interest to me is House Appropriations’ review of Senate Bill 68 (Nelson/Schaefer).  That bill requires the LBB to perform a careful review of state agency budgets.  Having personally been involved in budget exercises that reduced expenditures, focused efforts on core, value-added functions, and resulted in better operations, I’m keenly interested in how this bill is implemented.

And, virus-be-damned, state agencies are about to embark on developing their LARs.  Those who are interested in advancing policies or “exceptional items” would do well to engage in this process.  LAR development can be a bit opaque, but the veil might be pierced through positive engagement with state agencies between now and August.

Now, there are some emerging issues to watch.  We’ve all followed with growing distress (to ourselves and our portfolios) the economic impacts of the virus and the collapse of the price of oil.  The Legislature had a solid session in 2019, but it made a lot of commitments.  Some of the checks it wrote come due soon, so they’ll have to focus on that.  Speaking of oil, the BRE was grounded in some assumptions about the price per barrel of oil, so the Comptroller’s office is no doubt crunching the numbers now.  Energy funds the state’s Rainy-Day Fund, and economic activity drives the state’s revenue.  It would be wise to maintain good situational awareness as events unfold.  Comptroller Hegar’s office maintains an excellent website, and it is worthwhile to signed up for Fiscal Notes and other updates.

Also, once we transition into pre-filing in November and the start of session on January 12, 2021, remember the nexus between what you want to do and what it might cost.  Every filed bill set for a committee hearing must get a “fiscal note” that is developed by the LBB with input from affected state agencies.  Most bills that have a “cost” to the budget are dead-on-arrival, but occasionally a new idea that is well-thought-out and meritorious does pass and become law.

I recommend that policy or program issues be vetted with a state agency well in advance of bill filing and session.  And, if an agency is not dealing with a filed bill (on which they are prohibited from lobbying for or against), they have more flexibility on what they can say about impacts and fiscal implications.  When I was at TCEQ, I and my staff once met with a trade association with an idea in a September before a session, and we were able to say a lot more about what would be involved and associated costs than if we’d been dealing with a filed bill.  Just bear that in mind.  If I can help, let me know!

In closing, please remember that those who are among the State’s best and brightest work on the budget—in the Governor’s Office, the Lieutenant Governor’s office, the Speaker’s office, the Legislature, and our state agencies.  It is, after all, the foundation on which government, and its priorities, rest.