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Tighter Spending Cap Could Keep Billions Out of State's Next Budget

Depending on your political leanings, the spending cap state lawmakers set this week was either too low, too high or just right. Regardless, the arcane measure could effectively block lawmakers from accessing billions of dollars in state revenue.

Lt. Gov. David Dewhurst (right) and House Speaker Joe Straus listened to testimony on the cost of the continuing border surge during the Legislative Budget Board hearing's on Dec.1, 2014.

An obscure committee of state lawmakers met at the Texas Capitol on Monday to approve an arcane measure with big consequences.

With no debate, the Legislative Budget Board selected 11.68 percent as its forecast of how much the Texas economy will grow over the next two years, even though several economic analysts have predicted the figure could be as high as nearly 16 percent. The number is significant because under the Texas Constitution, the official growth rate sets the limit on how much a portion of the budget for the next two years can increase from the current one. By selecting the lowest figure among multiple estimates, the Budget Board might have cut off budget writers from billions of dollars in available revenue.  

“We may very well end up this session with more revenue than what the state could spend under the cap,” said Dale Craymer, president of the business-backed Texas Taxpayers and Research Association. “We’ve got a lot more revenue thanks largely to what’s going on in the oil and gas industry.”

The Budget Board’s decision quickly drew criticism from both ends of the political spectrum, but for opposite reasons.

“We think it should be a lower number simply to keep pressure on spending,” said Talmadge Heflin, director of the Center for Fiscal Policy at the conservative Texas Public Policy Foundation, which has called for a growth rate of 6.5 percent.

Yet for Dick Lavine, a senior fiscal analyst for the liberal Center for Public Policy Priorities, the Budget Board’s pick was shortsighted and may not allow the state to pay for necessary services or improvements. 

“They could have left themselves the room,” Lavine said. “Now you’ve already set the cap low enough that you may not be able to do what you want to do six months from now.”

The spending cap is more complicated and less comprehensive than its simple name suggests. According to the Texas Constitution, spending from state tax revenue that is not mandated by the Constitution cannot “exceed the estimated rate of growth of the state’s economy.” Federal spending, which makes up more than a third of the budget, is not subject to the cap. Neither are big pots of revenue such as the state gas tax. In all likelihood, less than half of the budget lawmakers approve next year will fall under the cap.

Yet the part of the budget that is subject to the cap generally overlaps the portion over which lawmakers have the most discretion, and includes most state spending on public schools. A majority of the House and Senate can allow budget writers to spend beyond the cap, but Republican lawmakers in particular are loath to support such a vote. Democrats have warned that a lower cap could make it difficult for the Legislature to tackle high-profile shortfalls in some areas, including transportation and education.

“Those are all big-ticket items, and the question will be whether we will have sufficient dollars to meet the state’s priorities under the spending cap we have set,” said state Rep. Sylvester Turner, D-Houston.

Turner, one of two Democrats on the 10-member Budget Board, said the board should have approved a higher spending cap, though he voted with the board’s Republican majority because the outcome was inevitable.

“This was not the time for a person like me to wage my battle,” Turner said. “If I choose to engage in a battle, I want to engage in a battle that realistically I think I can win.”

The fact that the state spending cap is a political issue is unusual. Over the past 20 years, the cap has served as little more than a historical footnote, set high enough that budget writers have rarely found themselves in danger of reaching it. That changed in 2013, when state coffers were unexpectedly flush with revenue after the Legislature had cut billions from the budget two years earlier. Busting the spending cap became a concern for lawmakers negotiating the budget writing process. At one point, Gov. Rick Perry left House Republicans baffled by urging them to bust the cap after previously advocating for making the cap more restrictive. Lawmakers eventually passed a $200 billion budget without busting the cap.

A similar focus on the spending cap could unfold during next year’s session, as a strong Texas economy is expected to once again keep state coffers full.

“We’ve had sort of a perfect storm of an incredibly deep recession with an incredibly robust recovery,” Craymer said.

Many conservative lawmakers and groups are hopeful that the spending cap will become more restrictive. They have called for amending the Constitution to peg the cap to the combined rates in inflation and population growth rather than the current approach, which uses the growth in average state personal income as a proxy for the overall growth in the state economy.

“Texans deserve a conservative budget,” wrote Christopher Paxton, a fiscal analyst for Empower Texans, a conservative group. “Our state cannot have a conservative budget if it does not have realistic limits that adequately protect taxpayers from budget-busting politicians.”

Critics of the population-and-inflation approach have noted that the most common gauge of inflation, the Consumer Price Index, does not factor in the costs of many of the items governments tend to spend the most on, such as highway building materials.

Heflin said the Consumer Price Index was an appropriate metric to use because it is one most voters could comprehend.

“We want it to be as understandable and as transparent as possible, and that’s one of the reasons we stay with CPI,” Heflin said. “I know the argument can be made that that is not the best indicator.”

The focus on state population growth could also be misleading, said Eva DeLuna Castro, a budget analyst at the Center for Public Policy Priorities.

“What population are we talking about?” she said. “The school-age population? The 65-and-over population? The inmate population? There’s growth in some populations that affect the budget more than others.”

Both Perry and Lt. Gov. David Dewhurst have previously called for tightening the state’s spending cap. Their replacements, Gov.-elect Greg Abbott and Lt. Gov.-elect Dan Patrick, have similar positions.

The strong showing by Republicans during this year’s elections suggests that tightening the spending cap could gain traction, Heflin said. Along with changing the way the cap is calculated, there is a growing interest in broadening the cap so it affects more of the budget.

“We think to have a true cap on growth, it would need to apply to all funds, or at a minimum, all state funds,” Heflin said. “I think there is a good chance we will see some movement in that area this session.”

Disclosure: The Texas Public Policy Foundation is a corporate sponsor of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

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