The Revenue Guesstimate

Lawmakers are waiting for Comptroller Susan Combs to forecast exactly how much money the state will collect between now and August 2013 so they can write a two-year budget that spends no more than that. It's not exactly like opening the envelopes at the Oscars, but the entire Capitol community will be hanging on her every word.

If history is a guide, her estimate of revenues will be closer to the bull's eye than the Legislature's estimate of spending. But this is a dark art; accuracy can be elusive.

"You have to begin with the assumption that you're wrong," says Bill Allaway, a former revenue estimator who is now senior adviser at the Texas Taxpayers and Research Association. "Nobody knows what's going to happen over that long a period of time."

"The corollary to you-know-you're-going-to-be-wrong is, you have to believe in statistics," he says. "You have to believe that, on some level, the mistakes are going to cancel out. It's not so important, in a sense, to get every single forecast right. But you want the errors to more or less offset so that the totals get you more or less into the ballpark."

The current biennium's revenue estimate was high, and state leaders have adjusted by asking state agencies to cut their spending before there's a big deficit. Bad economies will do that, especially if they're worse than the economists expected.

What's more, everybody in state government expects a multibillion-dollar shortfall as they write the budget for the next two years. The precise size of the problem isn't yet apparent. It'll be the amount of money available — what Combs is unveiling on Monday — minus the amount of money needed to run state programs.

That second number will vary, according to who's talking. Does the state need to continue doing what it's doing now? That's the current services budget. Does it need to spend the same amount it spent in the last budget? That's a lower number that doesn't include population and inflation growth. Should the amount of spending be cut? A number of people in the Legislature won their elections while loudly answering "Yes!" to that question.

There is general agreement, though, that there is a shortfall of between $15 billion and $28 billion. As soon as Combs presents her report and lawmakers are sworn in the next day, they can get to work on filling that hole.

Texas is a balanced-budget state. That means the Legislature generally can't spend more money than the comptroller says will be available during a particular two-year period. (It can adopt a deficit budget, but only with a four-fifths majority — an unlikely outcome in a government controlled by limited-government conservatives.)

It doesn't matter whether the comptroller is right or not, at least for budget purposes: Her numbers are the official ones. "Once it comes from the comptroller, you have to trust it," says former Lt. Gov. Bill Ratliff, also a former chairman of the Senate Finance Committee.

On Monday, Combs will also present her estimate of how much she expects will be available in the Rainy Day Fund at the end of the current fiscal year and some specifics on the various kinds of revenue that come in, like sales taxes, oil and gas taxes, the lottery and so on. Overestimating how much money is available is not a happy outcome. There's less penalty for having money left over than for coming up short, which is why comptrollers are usually conservative in their forecasts.

Combs can change the estimate whenever she feels it's out of line enough to merit a correction. When oil prices crashed in the 1980s, the state changed its revenue estimate more than once. In normal times, it's not unusual for a comptroller to become more optimistic near the end of a legislative session, when lawmakers are scrounging for dollars to make this or that program work.

"Appropriators are always hopeful they'll come in with an adjustment that will go up," says Talmadge Heflin, a former House Appropriations Committee chairman who now consults with the Texas Public Policy Foundation.

When the budget is written and approved by lawmakers, it goes to the comptroller for certification — her official blessing that it does, in fact, spend no more than she thinks will be available. The governor gets it, makes some line-item vetoes, signs it and that's that.

Unless the numbers are wrong. Lots of little things can go awry, but two big ones make the finance people reach for their Maalox.

The first is that the state brings in less money than the comptroller estimated. The current revenue estimate was overly optimistic about the economy — particularly about retail sales and the taxes they generate. Combs didn't change her overall estimate, but the governor, lieutenant governor and speaker twice ordered state agencies to cut their current spending to try to make things match up.

It could have been worse if the estimate had covered a shorter period — if, for instance, the state had annual budgets, according to state Rep. Warren Chisum, R-Pampa, another former Appropriations Committee chairman "I don't know of any better way to do it," he says. "They're within 3 or 4 percent, generally. The longer the cycle is, the smoother. It begins to heal itself."

The second is that is can spend more money than lawmakers budgeted, a regular occurrence in a financial plan that includes estimates of how many kids will go to public schools, how many people will qualify for Medicaid and other programs and what each of those new people will cost. If the agency estimates are conservative — they generally are — any increases in caseloads or enrollments have to be paid for later on.

Now, for example. The state is running a deficit, according to recent reports from the comptroller's office. Before lawmakers pass a new budget for the 2012-2013 biennium, they'll pass a so-called supplemental appropriations bill — the size of which hasn't been determined, or at least made public — to cover the difference between what they're spending and what they had planned to spend. It has to be balanced at the end. That supplemental spending will come out of the same pot Combs is presenting next week. And since it'll be spent in the current budget, it's money that won't be available for the new budget that starts next September.

For all of the mystery of guessing at what will happen to the economy and to state revenues over the next two years, the people who work with the numbers are generally confident. It's a third-party check on the Legislature, Heflin says, where the comptroller has to sign off on the budget-writers' work.

"I guess we should be surprised they get as close as they do," Ratliff says, and he's not the only one who feels that way.

"We had one year where the overall revenue estimate was absurdly close," says Allaway, who worked on the estimates behind four state budgets. "It was clearly an accident."