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Certification Revenue Estimate 2006-07

February 8, 2006

The Honorable Rick Perry, Governor
The Honorable David Dewhurst, Lieutenant Governor
The Honorable Thomas R. Craddick, Speaker of the House
Members of the 79th Legislature

Fellow Texans:

In accordance with Government Code Section 403.0131, I present herewith the detailed tables for the revenue estimate that I used to certify the General Appropriations Act for 2006-07 and other appropriations bills approved, to date, by the 79th Legislature.

I want to emphasize that this certification revenue estimate is not an update of my revenue forecast, except to reflect the actions of the Regular and two Called Sessions of the 79th Legislature and actual revenue totals for 2005. I intend to monitor state revenue collections and the performance of the Texas economy closely in the upcoming weeks and issue an updated revenue estimate before the next called legislative session.

The estimates in this document have been updated, however, to reflect actual collections through August 31, 2005, the end of fiscal 2005. After accounting for statutory transfers, adjustments, and balances on hand at the close of the 2004-05 biennium, the state will have a total of $67.9 billion in General Revenue-Related funds available to finance appropriations in the 2006-07 biennium.

Fiscal 2005 closed slightly stronger than expected, primarily due to increased sales tax and motor vehicle sales tax remittances during the summer months—events that are included in this document. As such, this estimate reflects a $1.2 billion increase in revenues for fiscal 2005, as I reported to you last September 1, 2005.

This estimate shows that available revenue easily supports current General Revenue spending of $65.9 billion for the 2006-07 biennium. The General Revenue-Related ending balance as of August 31, 2007 is expected to total $2.0 billion, which includes the aforementioned $1.2 billion in revenue, plus $0.8 billion additional growth in various General Revenue Fund account balances.

In addition, two other items should be mentioned. First, the tables reflect a contingency appropriation of approximately $1.8 billion earmarked for public schools. To date, the contingency established by the Legislature to access these funds has not been met. Second, $473 million appropriated in Article IX of the General Appropriations Act is still available for budget execution or may be directly reappropriated through an act of the Legislature.

Taken together, all of these items imply a total of $4.3 billion in General Revenue-Related funds available to be appropriated or reappropriated.

Looking beyond fiscal 2005, the state economy and revenue collections have held steady through the first five months of fiscal 2006. Although many national and state economic indicators are still positive, several economic developments suggest the need for caution. State sales tax collections have grown at double-digit rates for five out of the last nine months, but economic fundamentals—including increasing interest rates, rising household debt levels, and higher minimum credit card payments—strongly suggest that this level of heated activity cannot be expected to continue indefinitely.

In addition, the U.S. personal savings rate turned negative in 2005 for the first time since the early years of the Great Depression. Energy prices remain extremely volatile, and even a small disruption in world oil supplies from Iran, Nigeria, or another major producer would almost certainly launch oil prices to new highs. Just recently, U.S. productivity growth has begun showing signs of slowing down, while labor costs appear to be moving up. This disturbing combination is a possible precursor of rising inflationary pressures.

Also, in an effort to keep inflation in check, the Federal Reserve Board has been incrementally increasing short-term interest rates for the past two years. Although this strategy has proved successful so far, there is no definite sign that these rate hikes will end any time soon. The overall consequence is that interest rates are now at levels that can be expected to cool the economy and, in particular, curtail the surge in housing prices and “mortgage equity withdrawals” that have fueled a large part of U.S. consumer spending boom in recent years.

I should point out that it is more important than ever to rebuild the state’s Rainy Day Fund, which, unfortunately, has been virtually depleted—yet again. I believe that it is absolutely essential to replenish this fund to a prudent balance of $3 billion. Never was this pressing need more obvious than in the last year as Texas struggled to deal with the impact of various natural disasters. Although the books show a current balance of $531 million, most of that money has already been appropriated by the 79th Legislature.

As stated above, I shall continue to monitor the Texas economy and revenue collections, and, pursuant to my constitutional duty, I shall provide an updated estimate of available revenue for fiscal 2006-07 before the commencement of the next called legislative session.

Sincerely,

Carole Keeton Strayhorn
Texas Comptroller

c: John O’Brien, Deputy Director, Legislative Budget Board