After all of these years of devoted readership I've finally found something I disagree with on the editorial page of the Wall Street Journal. 

The Journal, that is, published an editorial this weekend arguing that Governor Perry should veto the budget the Lege just sent to him, on the grounds that the budget amounts to the state's "biggest spending spree in memory." 

My view: as a rule of thumb, if you're talking about Texas, the words "spending" and "spree" don't belong in the same sentence. That is certainly true of the state's current budget proposal. Though bigger than the budget put forth in 2011, it is a fiscally responsible document. It will allocate billions of dollars for much-needed public investments in things like K-12 education, higher education, and infrastructure, and will leave Texas with one of the lowest per capita rates of spending (and taxing) in the country. And although the growth in the budget looks dramatic, you have to keep in mind that a) Texas is growing, and b) the 2011 budget was severely and artificially constrained, for reasons I'll describe below. 

But let's just go through this editorial
Call it the downside of prosperity: The Texas growth spurt has produced a near $20 billion gusher of new tax revenue, and the Republican-dominated legislature, with the support of seemingly every lobby in Austin, wants to spread the bounty. The biennial general-fund budget that awaits the Governor’s signature is $102 billion compared with $84 billion two years ago.
To be fair, Texas's budgeting processes are pretty weird, so let me review some basics.

The Texas constitution limits spending in four ways. The most significant restriction is the state’s pay-as-you-go provision. Under this provision, which was added to the state constitution in 1942, the Legislature can’t appropriate more money than the comptroller says will be available. There is an exception for emergencies, but even then, you need a four-fifths vote in both houses of the Lege. If you want to check, it’s Article III, Section 49a.

The second biggest restriction is that Texas has a spending cap, added to the constitution in 1978: “In no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this constitution exceed the estimated rate of growth of the state's economy.” That’s in Article VIII, Section 22.  

(The latter two restrictions are rarely mentioned, because Texas isn’t really at risk of running afoul of either one, but in case you're curious: the constitution stipulates that if annual debt service exceeds 5% of the state’s average general revenue fund spending, the state can’t issue any more debt. And finally, the constitution includes a restriction against welfare spending: no more than 1% of the state’s biennial budget can be appropriated for TANF.)

In addition to all of these spending restrictions, Texas has a variety of barriers to raising taxes. Some of these are in the constitution, and some are just political. The result is that Texas doesn't raise much money, in per capita terms. And that, in turn, serves to reinforce the spending restrictions: The pay-as-you-go provision effectively ensures that regardless of what legislators want to do, they can't really go crazy. And the spending cap means that even if the state has an unusually flush year, they're constrained by the norms of the previous session. 

It is probably fair to say that the state tends to spend about as much as it can, but that's because "as much as it can" is bound to be "not that much." And Texans are generally fine with this. Evidence: They keep voting for fiscal conservatives, and have done for most of the state’s history (regardless of whether those conservatives were typed as Ds or Rs). Further evidence: the voters are, in fact, the people who keep authorizing these spending restrictions on themselves via constitutional amendments. 

In other words, although the budget currently awaiting Governor Perry’s signature  looks dramatically bigger than the previous one, it doesn't mean that Texas has abruptly abandoned its longstanding tradition of fiscal responsibility. If anything the opposite is true. (Side note: the Journal is talking about the state's general funds budget, not the all funds budget, so that's what I'm talking about here too.) 
Those numbers understate the blowout because $4 billion more was snatched from the state’s rainy day fund. Add various accounting stunts and the Texas Public Policy Foundation calculates a 26% spending increase for the biennium. A broad coalition of taxpayer and tea-party groups is urging Mr. Perry to veto.
So now let’s talk about what’s been going on in Texas over the past couple of budget cycles. As you have no doubt heard, the state of Texas has been doing so well, in recent years, that politicians and pundits have started referring to it as the “Texas Miracle.”

Despite that, when the state legislature convened in 2011 (our part-time Lege meets every other year for 140 days) lawmakers found that they were facing a severe budget shortfall. The estimates of its size vary, because they're based on projections about population growth, school enrollment, and so on. But the summary explanation is that the shortfall was the result of tough economic conditions, exacerbated by severely bad projections on the part of the state’s comptroller, Susan Combs.

That is, although Texas’s economy was doing better than most, the country had been dealing with the worst national downturn since the Great Depression. No state, including Texas, escaped unscathed. Let’s look again at the 2014-2015 Biennial Revenue Estimate--these are in Table 1 (p. 4) of the attached PDF. Between FY2008 and FY2009, gross state product actually declined. So did net personal income and total employment. The state’s population, however, continued to grow; Texas added nearly half a million people over the course of that year, and so the unemployment rate ticked up.

By FY2010, the state was in recovery. So why was there a shortfall in 2011? 

First of all, as Combs put it in her 2012-2013 Biennial Revenue Estimate, tax revenues during the then-current (2010-2011) biennium had been worse than expected, so the Lege was going to have to use about $4 billion to patch up the current budget. Beyond that, she was fairly pessimistic about what collections would look like for 2012-2013. 

Accordingly, Combs estimated that the state would have $72.2 billion available for general-purpose spending. By May, she revised the figure upward, but only to $73.4 billion.

Even at the time, many people--legislators, analysts, etc--thought the estimate was too low. Now we know that it was: when the current BRE was released, in January, the comptroller’s office counted $90.2 billion in general-revenue related funds available for certification.

But that didn't really matter, in 2011, because the Lege can't write a budget based on their expectations. They have to write a budget that fits within the comptroller's estimates. What's going on, in other words, isn't that the current proposal (the $102 billion) is comically bloated. It's that the previous budget, which appropriated $84 billion, was much smaller than it needed to be. 

(As a heuristic, maybe it's worth saying that Texas's annual general spending per capita is less than $4,000 per year, which is one of lowest rates of any state--so although the top-line numbers sound big, keep in mind the scale of the state itself.) 
Two years ago when the state faced a $15 deficit, Mr. Perry buried tax increase talk by signing a zero-growth budget. Mr. Perry’s spokesman Rich Parsons tells us that the 26% estimated increase may be inflated because it doesn’t take into account the underfunding of Medicaid and education in that 2011 budget. Mr. Parsons says that required about $7 billion of supplemental spending bills earlier this year. But even accepting this explanation, which is in dispute, the budget is still 16% higher.
The problem is that Texas grew between 2009 and 2011, as it had been doing for years and as it continues to do. In 2000, we were about 21 million. In 2010, about 25 million. Today, a little more than 26 million. 

In other words, 2011’s “zero-growth budget” was nothing to brag about. It effectively meant that services were cut across the board (and this is not a state that was being unwarrantedly generous about services in the first place). New investments were basically off the table (and this is a state that, as as result of its tremendous growth, needs new investments in basic things like roads and schools). 

Texas Democrats have subsequently observed that it’s a little suspicious that the state effectively got a mandate to cut the budget at this juncture--with the Tea Party movement at its moment of maximum power, and with Perry about to enter the race for the Republican presidential nomination. I think they’re right to make that critique, and there are certainly Texas Republicans (Combs being chief among them) who deserve to be fired for spending half their time bragging on the Texas Miracle and the other half advising a permanent defensive crouch.

But again, keep in mind that the comptroller’s estimate is an actual restriction, because of the constitutional pay-as-you-go provision. It’s probably fair to say that even if Republicans were sanguine, they didn’t think the sweeping cuts were ideal. The evidence is that, as Parsons indicates, big areas of the budget, like Medicaid and education, were deliberately underfunded. I mean, no one issued a press release announcing that that was the plan, but it was pretty obvious that legislators expected to come back in January 2013 and backfill the budget as needed, which is in fact what they did. 
Republicans defend the budget by noting that Texas has urgent public-works needs. Two years of droughts make new water projects a necessity, and with nearly half the new jobs in the U.S. over the last four years springing up in Texas, roads and school funding are priorities too. But the Houston Chronicle notes that nearly everything from mental health to family planning to Medicaid to Mr. Perry’s pet corporate welfare program—the Emerging Technology Fund—won fat funding increases.
You could add up all of the spending on other programs mentioned and it would cost less than spending on public schools, which makes up about half of Texas’s spending and which are, as the Journal correctly says, a priority.
This may be the first time in history that a state experienced a rush of new tax collections and lowered its reserve fund.
Assuming this is true (I wouldn’t be surprised, but haven’t seen the source), I would guess it has something to do with the fact that most states don’t have notable economic growth or a well-stocked reserve fund.

Here’s the kind of rhetoric you hear from those big-spending conservatives who want to draw down the Rainy Day Fund: Although it’s true that interest rates are historically low, making it cheap to borrow, it’s also true that interest rates are historically low, meaning that it doesn’t make much sense to keep billions of dollars in a fund that earns less than 1% interest, especially if the alternative is borrowing at 3%.
The supplemental spending earlier this year also allowed an end run around the state’s constitutional spending cap....By spending more in 2013 the state can now appropriate more in 2014-15, because the baseline for calculating future expenditure growth is ratcheted upward.
This would be a reasonable way of looking at the situation if not for the fact that, as explained at tedious length above, the 2012-13 baseline was artificially ratcheted down by bad budget math.
The danger is that Texas will repeat the fiscal mistake that California has made repeatedly: spend during the glory days and, once the economy slows, raise taxes to cover the deficit. The Texas oil patch is riding high on $95 a barrel oil and a doubling in production in four years. But Texans shouldn’t forget the lesson of the 1980s and late 1990s that oil prices are volatile and a decline can be painful and prolonged.
Nobody in Texas has forgotten that lesson, at all. Through bitter experience we have learned that we can’t just go out back and frack up a few million dollars like our forefathers did. That’s why, for example, the budget on Perry’s desk--the budget that the Wall Street Journal wants him to veto?--expands funding for priorities like higher education. 
Mr. Perry traveled on a business recruiting mission to California in February and poked fun at the tax-spend-and-borrow cycle in Sacramento. He can fix the reckless Texas budget by vetoing all or most of it and insisting on deeper business tax cuts. He should not want people to start comparing him unfavorably to Jerry Brown.
Really, the risk of that happening is remote. 
 


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