Texas spending limits may slow allocation of record fund balance

1 year ago

As the 88th Texas Legislative Session approaches, legislators are already discussing how the state may best utilize the record $27 billion balance in general revenue that is anticipated at the end of fiscal year 2023.

With at least an estimated $3 billion in unspent American Rescue Plan Act funds as well as an anticipated $13.7 billion in the Economic Stabilization Fund, Texas is expected to start the next fiscal biennium with a balance of nearly $44 billion.

Spending the entirety of this $44 billion balance, however, is not a straightforward exercise for legislators, nor is it an approach that Texas 2036 would advocate for. One of the major factors that will limit the allocation of this massive fund balance is Texas’ various constitutional and statutory spending limits.

Spending limits and how they work

In Texas, there are currently four active constitutional spending limits that have to be observed during every budget cycle, plus one statutory limit that will start to apply with the fiscal year 2024-2025 budget cycle:

“Pay-As-You-Go” Limit – Texas Constitution, Article III, Section 49-a;
Tax Spending Limit – Texas Constitution, Article VIII, Section 22 and Texas Government Code Chapter 316;
Consolidated General Revenue Limit – Texas Government Code Chapter 316;
Debt Limit – Texas Constitution, Article III, Section 49-j; and,
Child Welfare Spending Limit –Texas Constitution, Article III, Section 51-a.

Of these five limits, we’ll focus on three—the pay-as-you-go limit, tax spending limit and the consolidated general revenue limit—as they are most likely to be relevant for upcoming legislative sessions given current and historic spending patterns by the Legislature.

Briefly, on the other two lesser known spending limits:

The constitutional debt limit requires the state’s annual debt service payments not exceed 5% of a three-year average of unrestricted General Revenue funds—a ratio that has never been close to being exceeded since it was established in 1997.

The child welfare limit, limits the state from spending more than 1% of the state budget on assistance grants for needy children and caretakers. Given matching federal funds and administrative expenses usually make up most of these particular expenses, with $83.6 million in state funding on these grants in the current biennia, Texas is still almost $2.6 billion below this particular constitutional limit.

Pay-as-you-go

The constitutional “pay-as-you-go” limit, first passed by Texas voters in 1942, bars spending “… in excess of the cash and anticipated revenue of the funds from which such appropriation is to be made … ” In more colloquial terms, the “pay-as-you-go” limit functions as a prohibition against deficit spending, only permitting the Legislature to spend above anticipated state revenue in emergencies with four-fifths approval of both the House and Senate. Though this limit has controlled in past fiscal biennia, there is little chance that the Legislature will vote to exceed this figure in 2023 with a historic fund balance anticipated.

Tax spending limit

The tax spending limit, passed by Texas voters in 1978, does not permit appropriations from state tax revenues—other than those Constitutionally dedicated for a specific purpose—in excess of the estimated growth rate of the economy. To determine this limit on the spending of state tax revenues, the elected members of the Legislative Budget Board, or LBB, set the growth rate based on estimated personal income growth. The LBB will set this estimated growth rate prior to the legislative session. This limit may be exceeded by a simple majority vote in both the House and Senate.

Consolidated General Revenue limit

The Consolidated General Revenue, or CGR, limit—also called the “population-times inflation” or “P&I” limit—is a new limit established in 2021 by Senate Bill 1336 that will apply for the first time to FY24-25 appropriations.

The CGR limits growth in appropriations from state general revenues to a product of the estimated growth in population and inflation during the current biennium and upcoming biennium for which appropriations are made. While the CGR limit applies to a broader set of appropriations, including those made from constitutionally dedicated accounts, than the tax spending limit, the CGR limit notably does not apply to appropriations made for the purposes of tax relief or for the recovery costs of a state-declared disaster.

The CGR limit may be exceeded by three-fifths passage of a resolution in each chamber that includes the finding and description of an emergency with an authorization of a specific maximum in excess of the limit. The LBB will also set the estimated population-inflation factor growth rate for the purpose of this CGR limit at the same hearing where it sets the estimated personal income growth rate.

Potential impacts on the next budget cycle

Between the tax spending and CGR limits, many factors will affect how much of the projected fund balance ends up being available in practice to budget writers.

For example, when the Legislature prepares the supplementary appropriations bill to address shortfalls and unexpected budgetary circumstances in the current FY22-23 biennium, the additional appropriations from state revenue authorized by the supplemental bill will apply against the pay-as-you-go limit for FY22-23.

The additional FY22-23 appropriations from general revenue would decrease the amount of general revenue available for FY24-25, correspondingly shrinking the pay-as-you-go limit for the next biennium. However, by authorizing more FY22-23 appropriations, the base for the tax spending and consolidated general revenue limits expands, increasing the potential cap for each of those limits in FY24-25.

As referenced earlier, the purpose of the appropriations will have a large impact on which spending limits are relevant. With many in and around the Texas Capitol expecting some substantial portion of the fund balance to be used for property tax relief as well as for addressing declared disasters between COVID-19 and Operation Lone Star, there may be potentially billions of dollars in appropriations that would not apply to the new CGR limit, whereas they mostly likely would apply under the tax spending limit.

With regard to the new CGR limit, Texas’s annual population growth ranged between 1.2–1.9% annually between 2011 and 2019. During the first two years of the pandemic, Texas’s population grew an estimated 0.8% and 1.1% in 2020 and 2021, respectively. Inflation annualized between September 2021 and September 2022 was 9.3% in Texas, 8.2% nationally, compared to 5.5% for September 2020 to September 2021 and 0.25% for September 2019 to September 2020.

In the LBB’s most recent fiscal size-up, they cited a Moody’s Analytics projection of 1.1% annual population growth over the 2020s, which is low considering net migration rates into Texas have actually increased since 2020. Even when utilizing a conservative estimate in population growth, if projections show high inflation to continue through FY23, then the estimated population-inflation growth rate set by the LBB will reflect as much, potentially pushing the CGR limit further out of range than the tax spending limit.

In a July 2022 presentation, LBB illustrated projections from Moody’s Analytics for this P&I biennial growth rate against their projections for personal income growth.

These P&I projections from Moody’s account for current high inflation rates suggest it expects inflation to ramp down soon enough for the P&I growth rate to decrease throughout the next biennium.

The revised certification revenue estimate from July 2022 also updated Texas’s certified General Revenue-related appropriations number down to $118 billion for the FY22-23 biennium. This leaves over approximately $4.6 billion in General Revenue fund spending capacity for the current biennium before hitting the $122.7 billion tax spending limit.

Even if legislators end up allocating close to the full amount to reach the tax spending limit for FY22-23, the personal income growth rate LBB will adopt will likely make the tax spending limit the controlling limit. This will mostly be the result of the combination of the CGR limit applying to a larger portion of state funding than the tax spending limit, with a likely large P&I growth rate multiplier, and the previously mentioned big ticket items—tax relief and disaster recovery—not applying against the CGR limit.

The table below shows the various personal income growth rates adopted by the LBB members since 2000, along with what the actual rates of growth were for the respective biennia.

Historically, when considering the various econometric projections put before them, the LBB has typically adopted among the slowest of the estimated growth rates.

For an exercise, let’s use the past two adopted estimated personal income growth rates of 7.06% from the current biennium—the lowest rate adopted by LBB since this limit was approved by Texas voters in 1978—and 9.89% from the prior FY20-21 biennium—the mean of the adopted estimated growth rates in this century—to form a small range of outcomes. With this range, the tax spending limit would grow to allow for approximately $8 billion to $12 billion in additional spending General Revenue spending capacity for FY24-25, depending, of course, on any funding decisions the 88th Legislature makes on the current biennium. That hypothetical additional $8–12 billion in spending capacity, even when combined with the $4.6 billion to meet the FY22-23 tax spending limit, does not feel as flexible when considering that the $27 billion in general revenue balance is merely what we are projected to have at the end of FY23, and does not even contemplate the FY24-25 revenue outlook.

Where to go from here

When the LBB meets to set the various growth rates in the next few weeks and when the Comptroller releases the first Biennial Revenue Estimate in January, the outlook for budget writers will become much more clear. Regardless of the final magnitude of the limits placed on the appropriations for the current and upcoming bienniums, Texas 2036 continues to support and advocate investing available additional revenue with a long-term focus on data-driven, financially sustainable solutions while remaining positioned to weather future economic uncertainty. Any investments must ensure future prosperity, reduce future costs and liabilities, and can be tracked with accurate performance indicators.