State Budget Overview for State Budget Overview for thethe

2005 Legislative Session2005 Legislative SessionJanuary 5, 2005January 5, 2005

Eva De Luna Castro, Budget Analyst Eva De Luna Castro, Budget Analyst (deluna.castro@cppp.org)(deluna.castro@cppp.org)

900 Lydia Street - Austin, Texas 78702Phone (512) 320-0222 – fax (512) 320-0227 - www.cppp.org

PRESENTATION OUTLINE:

What happened last time? Current state budget picture Budget needs for 2006-07 Revenue system: current

sources; options for 2006-07

Estimated General Revenue

shortfall of $15.6 billion for 2004-05

The “Balancing” of the 2004-05 State Budget

Cuts to 2003 Budget: $1.4 billionCost shifting: $1.0 billion

“Smoke and mirrors”: $1.2 billionRainy Day Fund: $1.3 billion

Federal Fiscal Relief: $1.4 billion

Revenue Measures: $1.8 billion

Cuts to 2004-05 Budget: $7.5 billion

Where Budget Cuts Were Made

•Health Care (not just Medicaid and CHIP, but also teachers’ and state employees’ health coverage)

•K-12 textbook funding; grant programs such as kindergarten and pre-K expansion grants; Tele-communications Infrastr. Fund (now funds Technology Allotment)

•Layoffs of state employees

•More details available in CPPP’s July 2004 report, at http://www.cppp.org/products/reports/budget-impact04/index.html

Source: Texas Legislative Budget Board, Fiscal Size Up 2004-05.

STATE GOVERNMENT ALL-FUNDS SPENDING

$7.3 $7.7 $5.2

$23.7$7.0

$7.0$27.3

$16.0 $15.4 $1.0$0.3

$0.3

$-

$10

$20

$30

$40

Health &Human Svcs

K-12 Education HigherEducation

Business &Econ. Dev.

Public Safety &Crim. Justice

All Other

Billion $

FederalState*

2004-2005 total: $118.2 billion

*"State" is General Revenue, General Revenue-dedicated, and Other Funds.

State vs. Federal Funds, Current Budget

Source: Texas Legislative Budget Board, Fiscal Size Up 2004-05.

State Budget Isn’t Alone on 2005 Agenda

•General Appropriations Act has to be passed by legislators to keep state services going in 2006-2007 (budget starts September 1, 2005)

•School Finance: equity and adequacy issues; legislators may wait for results of appeal (of State District Judge Dietz’s ruling) before acting. Or they may try to cut local property taxes by enacting or expanding state taxes (franchise tax, new business activity tax, tobacco tax, sales taxes)

•Higher Ed: Texas Grants and other financial aid; Top 10% Law

•Workers Comp reform: increasing return-to-work rates, creating physicial networks, controlling costs, limiting use of workers’ comp

•Other: insurance (homeowners and health); utility regulation; Texas Enterprise Fund; asbestos lawsuits; capital punishment; incarceration policies; same-sex marriage and abortion issues; water policy; tollways

•See House Research Organization Report, Topics for 79th Legislature, http://www.capitol.state.tx.us/hrofr/focus/topics79-1.pdf

2004-2005 2004-2005

GR BudgetGR BudgetPercent Percent

of All of All GRGR

Texas Education Agency $20.6 billion

35%

Health and Human Services Commission

$9.4 billion 16

Department of Criminal Justice $4.6 billion 8

Teacher Retirement System $3.8 billion 6

Dept. of Aging and Disability Services

$3.5 billion 6

Dept. of State Health Services $1.6 billion 3

Employees Retirement System $1.4 billion 2

Higher Education Coordinating Board $667 million

1.1

University of Texas at Austin $483 million

0.8

Family & Protective Services $478 million

0.8

Source: Legislative Budget Board, Fiscal Size Up 2004-05, and budget requests for 2006-07.

Where 80 Percent of General Revenue Goes

State Government Spending as a Percent of Gross State Product

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1991 1993 1995 1997 1999 2001 2003 2005

Perc

ent o

f GSP All-Funds Spending

General Revenue Only

Sources: Legislative Budget Board; Comptroller of Public Accounts; US Bureau of Economic Analysis

What Texas State Government Pays For

Source: U.S. Bureau of the Census, State Government Finances series. Data for 2002 for Texas, total expenditures (including trust) of $70.3 billion.

Education - 37%

Medicaid and public welfare -

22%Police &

Corrections5%

Other/ inallocable - 5%

Gov. Admin.

2%Debt Svc. -

1%

Health-3%

Highways - 7%

Insurance Trust (Pensions, UI) -

12%

Natural Resources & Parks 1%

Hospitals - 5%

What Texas Local Government Pays For

Source: U.S. Bureau of the Census, Government Finances series. Data for 2002 for Texas, total expenditures (including trust) of $77.1 billion.

Education - 44%

Other/ inallocable - 8%

Debt Svc. - 5%

Gov. Admin. - 4%

Utilities - 12%

Health - 2%

Hospitals - 5%

Streets & Hwys. 3%

Fire - 2%Insurance

Trust - 1%

Police & Corrections - 6%

Natural Resources & Parks 3%

Housing & Comm. Dev. - 2%

Sewerage & Solid Waste 3%

Texas Per Capita State/Local Spending, Fiscal 2002(Total: $5,975 per capita; 41 % is state, 59 % is local)

$686

$574

$346

$341

$124

$94

$75

$72

$46

$202

$171

$1,475

$- $300 $600 $900 $1,200 $1,500

K-12 Education

Medicaid and Welfare

Higher Education

Highways & Streets

Hospitals

Prisons

Police/State Troopers

Public Health

Parks/Recreation

Judicial/Legal

Housing & Comm Dev

Natural Resources

Source: U.S. Bureau of the Census, State & Local Government Finances, Fiscal 2002.

50-State Ranking:

13th

46th

26th

39th

15th

13th

35th

41st

23rd

36th

33rd

43rd

Indicators of Texas’ Need for Public Social Services

TexasUS

AverageTexas rank

% of Population under 18, 2002 28.0 % 25.3 % 3rd

Child Poverty Rate, 2003 22.8 % 17.7 % 8th

Elderly Poverty Rate, 2003 13.0 % 9.8 % 7th

% of Under-65 Population with No Health Insurance, 2003

26.9 % 17.6 % 1st

% of Residents Aged 25 or over with at least a High School Diploma, 2003

77.8 % 83.6 % 49th

% of Residents Aged 25 or over with at least a Bachelor’s Degree, 2003

24.5 % 26.5 % 27th

Source: U.S. Bureau of the Census, March CPS and American Community Survey

Need Indicators for Tarrant CountyTexas Tarrant

County

% of Population under 18, 2003 28.8 % 28.8 %

Child Poverty Rate, 2003 22.5 % 14.8 %

Elderly Poverty Rate, 2003 13.0 % 9.0 %

Overall Poverty Rate, 2003 16.3 % 11.4 %

Residents on Food Stamps, 2003 8.7 % 4.8 %

Residents receiving cash welfare, 2003

1.7 % 1.4 %

% of Residents Aged 25 or over with at least a High School Diploma, 2003

77.8 % 83.7 %

% of Residents Aged 25 or over with at least a Bachelor’s Degree, 2003

24.5 % 27.5 %

Sources: U.S. Bureau of the Census, American Community Survey; Texas Dept. of Human Services, Annual Report for 2003.

Biennial General Biennial General RevenueRevenue

%%

State Budget, 2004-05 $58.9 billion

Across-the-board 5% cut to baseline (if no exceptions were made)

($2.9 billion) -5%

Major Requests for More GR:

K-12 (TEA): Baseline Increase $1 billion 1.8%

K-12: Exceptional Items $1.3 billion 2.2

HHSC: Baseline Increase $397 million 0.7

HHSC: Current Svcs Exceptional Items

$2.7 billion 4.6

CHIP/Medicaid Shortfall for 2005 $320 million 0.5

Aging & Disability: Baseline Increase

$232 million 0.4

Aging & Disability: Exceptional Items

$1.1 billion 1.8

Family & Protective Services (without CPS reform)

$200 million 0.3

Dept. of State Health Services $163 million 0.3

(continued)

2006-07: Another Tough Budget to Write

Biennial General Biennial General RevenueRevenue

%%

Department of Criminal Justice (avoids layoffs of 1,450 prison guards and 350 other state prison staff)

$303 million 0.5

Teacher Retirement System (mostly to restore teacher health benefits)

$1.4 billion 2.3

Employees Retirement System (mostly state employee health care)

$566 million 0.9

Higher Education Coordinating Board (about half is for financial aid—Texas Grants and B on Time—to offset tuition increases)

$597 million 1.0

New GR needed so far: $10.3 billion 17.5 %

The Big Unknown: GR Growth for 2006-07 (to be announced

Jan. 2005)

$6.5 billion ? 11 % ?

2006-07: Another Tough Budget to Write

K-12 (TEA) Major Exceptional Items

•Textbooks: $387 million

•Guaranteed Yield Increase: $301 million; Existing Debt Allotment: $180 million; Instructional Facilities Allotment: $150 million

•Student Success Initiative (to prevent “social promotion”): $251 million

•Restorations of programs cut in 2003, such as Pre-K/ Kindergarten Grants ($7 million), High School Completion ($3.5 million), Texas Advanced Placement ($1.4 million), Technology Allotment ($12 million)

•GR match needed for Adult Ed/Literacy: $13.6 million

HHSC Major Exceptional Items•Maintaining Medicaid Caseload Growth: $1.3 billion in GR

•Maintaining Medicaid Cost Trends: $1.2 billion

•Decline in match rates for Medicaid and CHIP: $111 million

•Restoring Medicaid rates: $177 million

•Restoring 5% cuts to GR: $26 million

•Maintaining CHIP caseload growth: $65 million; Cost trends and rate restorations: $20 million; benefit restorations $53 million

•Restoring Medicaid services for adults, Graduate Medical Ed: $102 million

•Partially restoring services for Medically Needy: $35 million

•Keeping HHS waiting lists from growing: $47 million; reducing waiting lists over next decade: $255 million

•Rate increases for Medicaid and CHIP providers: $264 million

DADS Major Exceptional Items•Restoring entitlement growth in long-term care programs: $154 million in GR

•Restore 5% GR cuts: $20 million

•Decline in Medicaid match rate: $17 million

•Guardianship program (being transferred from Family & Protective Services): $12 million

•Restore long-term care rates to fiscal 2003 levels: $54 million

•Long-Term Care Provider Rate increases: $531 million

•Rate increase for direct care staff (nurses in State Schools, community care attendants & direct care aides): $240 million

•Entitlement caseload growth staffing: $24 million

Family & Protective Services: Major Exceptional Items

•$12 million in GR to restore foster care/adoption rates to fiscal 2005 levels; $39 million for foster care/adoption caseload growth

•Restoring 5% cuts to GR: $9 million (prevention programs)

•$28 million to restore lost Medicaid funding (Targeted Case Management)

•Adult Protective Services reform: $9 million

•Keeping CPS caseloads from worsening: $26 million

•Restore prevention program cuts: $19 million

•Further restoration/adjustments to foster care rates: $28 million

•Enhanced permanency for children: $28 million

•HHSC report on CPS reform, including recommended funding changes, was due by December 31, 2004; revised budget likely to be submitted based on these recommendations

State Health Services: Major Exceptional Items

•$107 million in GR to restore 5% cuts to GR: major programs include child immunizations; HIV/Sexually Transmitted Disease & Hepatitis C Prevention; TB, Hansen’s, & Refugee Health; Kidney Health; Children with Special Health Care Needs; Mental Health Services for Adults & Children; Northstar Behavioral Health; Women & Children’s Health Programs; Family Planning; Substance Abuse Prevention, Intervention, & Treatment; County Indigent Health Care; State Hospitals; Radiation Control; Food (Meat) & Drug Safety

•Medicaid match rates and loss of one-time funding: $8 million

•Texas HIV Medication program: $5.7 million

•General Revenue restoration for Substance Abuse programs: $10 million

•State facilities/infrastructure: $29 million

•Salary upgrades for nurses/LVNs: $10.5 million

Biennial GRBiennial GR %%

State Budget, 2004-05 $58.9 billion

Replacing Robin Hood At least $2.3 billion

4 %

“Buying down” local school property taxes by 10 cents per $100 taxable value

$2 billion 3.4%

Eliminate waiting list (30,000) for working-poor child care

$73 million 0.1%

Reaching the national average in state/local spending from taxes

$16 billion 27%

Other Pricetags

Outcome Depends on Available Revenue

•Comptroller will give legislators the official revenue estimate no later than January 2005

•Good news: revenues for 2004 show higher-than-expected annual growth, at 6.4%, much better than fiscal 2003. Rainy Day Fund balance is back up to $878 million (Sept. 2004).

•Bad news: health care costs—one-third of state budget—expected to continue rising at double-digit rates

•Long-term structural inadequacies of state/local tax system are putting too much pressure on property taxes

•Heavy reliance on sales taxes also makes Texas tax system very regressive (taking more from families with the lowest incomes)

Texas state & major local taxes as a share of personal income

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

1990 1992 1994 1996 1998 2000 2002 2004

State/Local Taxes: Lower than a Decade Ago

3.8%

4.2%

4.6%

5.0%

5.4%

1990 1992 1994 1996 1998 2000 2002

State taxes as % of Personal Income

Local taxes as % of Personal Income

Tax Effort Would be Even Lower if Not For Local Decisions to Fund Basic

Services

Source: Comptroller of Public Accounts, Annual Property Tax Report; Cash Report.

From a Taxpayer’s Point of View

Major State and Local Taxes in Texas, 2004

County Property7%

Special District Property

5%

School Property28%

Other State Taxes21%

State Sales25%

City Property7%

Local Sales7%

Sales Tax 32%

Property Tax 47%

From the State’s Point of View: All Revenue

State Revenue Sources, 2004(Total: $62.1 billion)

Federal Funds35%

Other6%

Lottery3%

Taxes45%

Interest/Investment Income

2%

Licenses, Fees, Permits, Fines,

Penalties9%

From the State’s Point of View: Taxes Only

State Tax Collections, 2004(Total: $27.9 billion)

Motor Fuels10%

Motor Vehicle Sales and Rental

10%

Sales55%

Franchise7%

Insurance4%

Sin (Cigarette, Tobacco,Alcohol)

4%

Other6%

Gas/Oil Production3%

Revenue Options Likely to be Considered

•Cigarette tax: $1/pack increase raises $1.7 billion biennially

•Video Lottery Terminals: $1.1 billion biennially. “Crack cocaine” of gambling.

•Business activity tax: broader base than franchise tax (only applies to corporations)

•Sales tax rate increase — but this is extremely regressive, and TX already has one of the highest rates

•Sales tax base expansion (to services not covered now)

Texas State and Local Taxes as a Percent of Household Income, by Quintile*

11.9%

5.8%4.6% 4.1%

3.3%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

Under $26,816 $26,816 to$52,844

$52,844 to$81,990

$81,990 to$126,345

Over $126,345

Household Income

* Each bar represents approximately 1.6 million households.Source: Comptroller of Public Accounts, Tax Exemptions and Tax Incidence