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Report of the State Budget Crisis Task Force - Texas Report

Report of the State Budget Crisis Task Force - Texas Report

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Published by ProgressTX
The Lone Star State was fortunate that it entered the recession later than many states and suffered less from its economic dislocations, particularly compared to other fast-growing Sunbelt states. Still, Texas has had its share of fiscal challenges; the 2011 legislative session witnessed one of the most difficult budget processes in recent history. Since then, the state economy has begun to recover and state revenues have rebounded.

What Texas lacks — and should make a priority — is a long-term financial planning process that focuses on the size and shape of major issues that will confront the state in the future. The issues this process would address are familiar. Many are driven by the state’s changing demographic and socioeconomic make-up as dynamic growth makes Texas a more populous, more urban, and more ethnically diverse state.
The Lone Star State was fortunate that it entered the recession later than many states and suffered less from its economic dislocations, particularly compared to other fast-growing Sunbelt states. Still, Texas has had its share of fiscal challenges; the 2011 legislative session witnessed one of the most difficult budget processes in recent history. Since then, the state economy has begun to recover and state revenues have rebounded.

What Texas lacks — and should make a priority — is a long-term financial planning process that focuses on the size and shape of major issues that will confront the state in the future. The issues this process would address are familiar. Many are driven by the state’s changing demographic and socioeconomic make-up as dynamic growth makes Texas a more populous, more urban, and more ethnically diverse state.

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Published by: ProgressTX on Mar 14, 2013
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When Texas became a state in 1845, it retained both its public lands and its public debt from its years as a republic as part
of the annexation agreement. It managed its public finances more conservatively as a state but debt continued to
accumulate, topping $12.4 million in 1851, a huge sum for the time.74 Eventually, the state’s debt problem was relieved as
part of the Compromise of 1850. The Compromise, passed in September 1850, defused a four-year confrontation between
the slave and free states over the status of territories acquired during the Mexican-American War. Under the Compromise,
Texas surrendered its claim to what is now New Mexico but received debt relief in the form of a $10 million payment and
land that is now the Texas Panhandle and El Paso.

Mindful of its financial struggles as a republic, lawmakers wrote stringent debt controls into the state constitution. In its
original form, Article 3, sec. 49, of the Texas constitution prohibited state borrowing “except to supply casual deficiencies of
revenue of less than $200,000, repel invasion, suppress insurrection or defend the state.” The issuance of debt for any
other purposes or for amounts greater than the amount permitted for “casual deficiencies” required a constitutional
amendment. As a result, the constitution has been amended many times to authorize the issuance of general obligation
bonds.

This constitutional obstacle has constrained the accumulation of state debt. Texas only developed significantly high levels
of debt during the Depression. In the mid-1930s, state debt was in the $14 million range, and Governor Miriam Ferguson
repeatedly urged the Legislature to enact both a state sales tax and an income tax to deal with the problem. The Legislature
refused, although it did approve a two-cent-a-barrel tax on oil. Thus the state’s deficits could be reduced only by cutting
appropriations — and thus they lingered. The 1930s later were called the “decade of deficits,” a period finally ended by the
economic resurgence accompanying World War II and the post-war expansion of petrochemicals and other industries.

Well into the 1980s, the state still handled many major infrastructure costs on a pay-as-you-go basis, including public
facilities and state highway construction. The Legislature did not authorize debt financing of highways until the 1990s.

Over time, lawmakers have imposed additional restrictions on the state’s use of debt. While these constraints were eased
to some degree in the 1980s and 1990s to accommodate additional infrastructure investments, the Legislature also
prohibited the state (i.e., future Legislatures) from authorizing general obligation or revenue bonds, and large lease-
purchase agreements to be repaid from general revenue, if the resulting annual debt service would be more than 5 percent
of the average amount of general revenue (excluding constitutionally dedicated funds) over the preceding three fiscal
years.75

In 1997, Texas voters approved a constitutional debt.76 Following the general framework of the earlier statutory ceiling, the
constitutional provision prohibits the Legislature from authorizing additional state debt if the resulting annual debt service
payable from unrestricted general revenue exceeds 5 percent of the average amount of general revenues, excluding
constitutionally dedicated revenues, for the preceding three fiscal years.77

“State debt payable from the general revenue fund” is defined here as general obligation and revenue bonds, including
authorized but unissued bonds, and lease-purchase agreements in amounts greater than $250,000 that are designed to
be repaid with state general revenues. The term does not include bonds that, although backed by the full faith and credit of

Reports of the State Budget Crisis Task Force Texas

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the state, are “reasonably expected to be paid from other revenue sources” and not expected to create a draw on general
revenue, such as highway fund bonds payable from dedicated highway revenues.

Local debt is not subject to this constitutional limitation, but state law effectively establishes debt limitations for local
governments by setting maximum property tax rates.

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