Since 1996, the Texas population has grown faster than that of the U.S., increasing the demand for state services, especially in health care, education and transportation. Rising Medicaid caseloads and costs have placed substantial pressure on the state budget. The state’s public school student population also ballooned in the last two decades, while enrollment in our higher education institutions continues to climb.
Nonetheless, state appropriations have risen more slowly than state personal income. The Legislature has succeeded in repeatedly balancing budgets even when revenue growth was expected to fall short of anticipated spending needs.
The relatively slow growth of state spending is due to a number of factors. For example, the state has tried to restrain growth by improving the efficiency of agency spending.
This is perhaps best demonstrated by shrinking state government employment (Exhibit 12). From 1996 to 2019, the Texas population rose by more than 50 percent, from 19.3 million to an estimated 29.1 million. In the same period, state full-time equivalent (FTE) jobs funded by state appropriations fell by about 4 percent, from 225,500 in 1996 to an estimated 215,700 in 2019.
As with the private sector, state government has relied on technology to deliver more services with fewer employees. Consolidation of agencies, outsourcing to private providers and changes in the delivery of state services also helped restrain rising costs.
|Fiscal Year||Texas Population||Texas State Employment|
Note: State government employment numbers do not include health-related institution staff funded by patient fees and other sources not appropriated by the state.
Sources: IHS Markit and Legislative Budget Board
Another factor constraining state spending has been cost shifting, which occurs when changing funding patterns impose greater financial responsibility on other levels of government or end users.
Public school funding provides a good example. Despite a substantial commitment of new state funding for public schools with the passage of the 2006 school finance legislation, rising local property values have reduced state formula assistance. Local property tax revenue has risen significantly faster than state funding and accounts for a growing share of all Texas funding for public schools.
An example of shifting costs to users is higher education funding; state funding has grown more slowly than population and inflation, while tuition and fees have surged by more than 545 percent since 1996.
Despite a relatively robust economy, Texas’ economic growth is not always steady and can fluctuate substantially from year to year (Exhibit 13). Sometimes, expected revenues fall short of meeting budget needs.
|Biennium||Revenue||Appropriations||General Cost Index|
Notes: Changes in state revenue accounting in 1996 prevent comparisons with the 1994-95 biennium. Appropriations for 2018-19 do not include supplemental appropriations as none have been made at this writing; 2019 revenue is estimated.
Sources: Legislative Budget Board and Texas Comptroller of Public Accounts
The Legislature has a number of tools at its disposal to make ends meet in such situations. One option employed in many legislative sessions is to underfund the state’s Medicaid program and then pass supplemental appropriations in the next session to cover the shortfall for the remainder of the biennium. Similarly, the Legislature can delay some payments from one biennium to the next; by the time the Legislature returns, the economy and revenue collections often have rebounded, allowing lawmakers to make up any delayed payments.
Another tactic is to speed up revenue collections by moving tax due dates forward a month, pulling the revenue collection from one biennium forward into the next. Such moves often are reversed in subsequent legislative sessions.
The Legislature also has relied on growing balances in dedicated accounts within general revenue to help balance the budget. Typically created to fund specific programs, these dedicated accounts often have balances because legislators have not appropriated all the revenue in them. Legislation passed in each session identifies which of these balances can be counted to certify the budget. After reducing reliance on these balances in recent sessions, in 2017 the Legislature expanded the number of GR-D accounts whose balances could be counted toward budget certification.
And, as noted in our recent report on long-term liabilities, the Legislature has consistently underfunded state employee pensions, allowing it to reduce spending in the short term but increasing the need for future funding. Similarly, Texas’ original prepaid college tuition plan, the now-closed Texas Tomorrow Fund, has long forecast an eventual cash shortfall. Actuarial projections now show that the program will run short of money in the 2020-21 biennium, resulting in a draw on general revenue.
Texas has been fortunate in that the economy and state revenues haven’t experienced prolonged downturns or stagnant periods. The economy’s resilience has allowed the Legislature to continue using short-term strategies to balance budgets in difficult times, later covering costs that were delayed. In recent years, the state has kept a lid on long-term budget growth by limiting expenditure growth to match that of the state’s population and inflation.
Texas’ revenue needs for education, health care and transportation have driven the budget for years and are likely to continue doing so. At present, state revenues are growing, meaning that the short-term fixes used to keep the state budget in balance can continue to be useful.
It is unlikely, however, that Texas’ rates of economic and revenue growth will continue to match those of the last two decades. While Texas is expected to continue outpacing national economic growth, structural factors such as an aging population will limit growth to some extent — and the state’s economy is always cyclical. Thus, it’s possible that sooner or later the state’s economy and revenue system will fail to come to the rescue after a budget relying on delayed payments and other short-term strategies.
Some of the factors that have helped keep spending in check also may falter. State spending on public education, for example, has been relieved by growing property tax revenue. But that growth has created significant political pressure to reduce property taxes. Doing so would require more state funding or changes to the Texas school finance system.
Furthermore, as this agency has pointed out repeatedly, significant and growing long-term obligations, such as public employee pensions, will require shoring up.
The state will continue to grow and the need for spending on infrastructure, education, health care and other state services will grow along with it. Fortunately, the Texas economy and state revenues are growing as well. But the Legislature will continue to face difficult decisions to balance the budget and ensure the state’s continued fiscal health. FN