Where does Texas stand, financially?

Last week, Comptroller Glen Hegar provided a comprehensive breakdown of the state’s financial situation for the 2021 legislative session. While the general takeaway has been that things aren’t as bad as they could have been, one word – oft-repeated by Hegar – warrants additional focus: “uncertainty.” While we’ve spent months preparing for the downside of uncertainty, now state leaders need to prepare for the upside – and the accompanying risks and opportunities that come along.

Where do we stand, financially?

The state enters the session with about a $1 billion deficit for FY 20-21. Except, maybe it doesn’t.

On the positive side, this deficit calculation doesn’t account for (a) mid-biennium 5% cuts that lawmakers called for early in the pandemic, (b) potential method of finance swaps made possible by the federal CARES Act; (c) the potential use of newly-passed federal Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSAA) funds; and (d) most uncertain of all – whether additional federal funds may be on the way. On the negative side, this deficit doesn’t account for potential supplemental budget costs, particularly within the state’s Medicaid program. Last session, supplemental Medicaid costs totaled $2.1 billion, but this session they may be lower due to an increased federal matching percentage in the CARES Act.

When all of these factors are combined – it’s seems more likely than not that the state could end end the current biennium either with carry-forward cash to help certify the FY 22-23 budget or the ability to decrease future FY 22-23 costs through supplemental FY 21 appropriations. This is all in addition to the state’s healthy Economic Stabilization Fund, which is projected to have $11.6 billion available for rainy days over the next biennium. Long story short: it may be a rainy day, but the sky doesn’t appear to be falling.

Since nothing in state finances is that simple, let’s break the money down a bit more:

  • Agency 5% Cuts: In May, state leaders called for a 5% cut in state spending for many programs to help prevent a major deficit amidst declining tax revenues and economic activity. As the Comptroller has noted, these savings will not be realized in state budget documents until the legislature passes a bill to move the savings from current programs (where funds are sitting unspent) to areas of shortfall elsewhere in the budget. All told, Hegar estimated this would be about $1 billion, though we may not know precisely until a supplemental appropriations bill is filed.
  • CARES Act Funds: After the March 2020 passage of the CARES Act, the state treasury received $8 billion in Coronavirus Relief Funds (CRF) for use both by the state and on behalf of communities with populations below 500,000. As of mid-December, the state still had around $2 billion in federal CRF funding unspent and may also have expended some of the other $6 billion in a way that would reduce current biennium state costs. For example, if a DPS trooper’s salary was able to be paid out of CRF funding because of the trooper’s COVID-related tasking, that might have reduced the state’s obligation to pay the trooper’s salary out of general revenues. This process – a “method of finance swap” – would not yet show up in state budget documents but could ease the state’s current budget crunch. While it’s hard to know how large of an impact this could have, theoretically the impact could exceed hundreds of millions – if not billions – of dollars. If the state pulled off a significant method of finance swap, additional general revenue would be available in the FY 21 budget, which – if unspent – could carry forward to the FY 22-23 budget process. Additionally, the CARES Act contained $1.3 billion for use in K-12, which was used to prevent cuts to Texas public schools amidst declining revenues (with the added impact offsetting potential GR costs).
  • CRRSAA Funds: While much of the public discourse surrounded the size of stimulus checks to individuals, CRRSAA also included significant additional resources for states to address pandemic response and safely reopen schools. From CRRSAA, Texas is expected to receive $5.5 billion for K-12 public schools, $1.8 billion for higher education, and $287 million for the Governor’s Emergency Education Relief Fund ($153 million of which must be spent on private schools). This $5.5 billion for K-12 represents significantly more funding than provided for schools in the CARES Act, and allowable uses may allow the state to more broadly address growing student needs. Specifically, these dollars can be used to fund efforts to tackle student learning loss, provide additional learning time, purchase educational technology, and among many other uses. Efforts to train teachers, expand access to additional days in the school year, and target learning disparities were already embedded within House Bill 3 – CRRSAA may give the state an opportunity to ensure those efforts remain fully funded without relying on limited general revenues.
  • Additional Federal Funding: The Biden administration has already proposed another large spending coronavirus stimulus package, with many projecting it could be finalized by March. Though still very early, this nationwide package proposes $350 billion in emergency funding for state, local, and territorial governments and $170 billion for K-12 schools and institutions of higher education. In previous allocations, the state of Texas received about 4-6% of the total national Coronavirus Relief Fund (split between state use and communities smaller than 500,000) and about 10% of the K-12 funding in CRRSAA. A Biden relief package could mean that the Texas state government receives an additional $15-20 billion for state use (beyond education) and $17 billion for educational use. That’s a lot of money to potentially add into an appropriations process mid-session!

What happens if we have a sudden windfall?

Many assume that the next federal action on stimulus will be timed to precede the pending expiration of enhanced pandemic unemployment benefits, which are currently slated to end March 14. For context, on March 14, 2019, the state budget (HB 1) was wrapping up its time in the House Appropriations Committee before a March 18 committee vote and March 27 floor debate. In the last session we had a Senate-originating budget (as we do this year), the budget was voted out of Senate Finance on March 22, 2017 before a March 28 floor debate. All this is to say, the possibility of a sudden windfall of funding at this stage would – at a minimum – introduce a lot of “uncertainty.”

If this happens, the budget situation will have meaningful opportunities to address major problems – but also major risks. We’ll dive into this more in future blog posts, but a few significant points:

The state cannot repeat the choices of 2009 and 2011. Last time Texas received a massive increase in temporary federal funding (the 2009 stimulus bill), the state did exactly what the federal government asked: it went on a spending spree. Flash forward to 2011: the federal funding had dried up but the costs of maintaining the programs and the staff were still around. Most know how this ended – historic cuts to public schools that are still discussed a decade later.

Focus on one-time costs and long-term savings: Whether it’s a few billion dollars or tens of billions in federal funds, we can’t get ourselves hooked on money that we shouldn’t expect to be there for us in 2023. But that doesn’t mean we can’t smartly spend on items that will reduce future costs or address future problems. A recent report from the Department of Information Resources identified nearly $900 million in necessary IT and cybersecurity upgrades that need to be addressed for our state to resiliently provide services amidst a pandemic and beyond. If allowable under federal law, we should focus on technological and data infrastructure upgrades that can defray state costs in future biennia while increasing the state’s ability to provide services (and decreasing the state’s cybersecurity exposure).

Close learning gaps and workforce needs with unparalleled effort: Many items tied to COVID learning loss can be addressed using one-time funds. Temporary expansion of the additional days for the school year program and intensive tutoring are two items we’ve discussed previously. But we can also likely use federal funds to ensure all Texas teachers obtain necessary reading academic training, so they’re up to date on the newest techniques on how to effectively teach reading. Likewise, investments in upskilling and reskilling efforts, as well as technological upgrades for educational data systems, can have decades of benefits.

If the opportunity presents, pay down liabilities: Texas has massive unfunded pension liabilities, and the Employees Retirement System pension has an infinite amortization period and an approaching depletion date. State more simply: it’s running out of money. If Congress passes another round of stimulus with pension debt as an allowable use, the state should do all it can to reduce long-term liabilities. This will provide immediate benefits but will also reduce costs in every biennium that follows.