Senator Eliot Shapleigh - El Paso, Texas

Susan Combs Comptroller's estimate is due Jan. 12.

Today's turbulent economic conditions could reverberate through Texas schools, parks and prisons almost three years down the road, even if the economy markedly improves.

State officials are now preparing the official estimate of how much money legislators will have to spend during the upcoming two-year budget, which ends Aug. 31, 2011.

Even though Texas is in much better financial shape than most states, budget watchers expect a pretty conservative estimate — meaning a tight budget — given the uncertain economy. Any revenue beyond the estimate generally would not be available for use until the 2012-13 budget.

The Texas economy, which had been avoiding the national tumult, has now joined the rest of the country in feeling the effects of the financial crisis and the crisis of confidence that followed, said Keith Phillips, a senior economist with the Federal Reserve Bank of Dallas.

On Wednesday, the Dallas Fed released a survey of businesses, mostly from Texas, that showed broad-based weakening in October and November with declining production, sharp cuts in manufacturing jobs and strong demand for bankruptcy and litigation services.

The business outlook for the near-term is gloomy and deteriorating, Phillips said, with improvement not expected for four months to a year.

It is in that climate that Texas Comptroller Susan Combs must assess how the state's economy will perform years from now and put a number on it.

Combs said Wednesday that her team is watching the state's economic fundamentals — home foreclosures, sales tax revenue, job creation — rather than the wild swings of the stock market to arrive at the revenue estimate, which will be delivered Jan. 12.

Budget experts say arriving at an accurate estimate in this climate will be difficult.

"You're basically standing on top of a hill looking down into the darkness trying to figure out where the bottom is," said Dale Craymer, chief economist for the Texas Taxpayers and Research Association, a nonpartisan business group.

William Shkurti, a former state budget director for Ohio who has written a user's guide about revenue estimating, said the current extreme economic uncertainty has created "a revenue forecaster's worst nightmare." Although based in sound economics and broad data, the only certainty is that the estimate will be wrong, Shkurti said. The big questions are by how much and whether it is high or low.

Former Texas Deputy Comptroller Billy Hamilton said the estimate has to be conservative. "There is no upside to being overly optimistic in revenue estimating," Hamilton said. "You don't want to advise the bosses to write more checks than they've got money in their bank account."

At least 41 states are anticipating budget shortfalls this year or next, but Texas is expected to enter its next budget with almost $12 billion on hand in its rainy day fund and other accounts.

Political leaders say Texas has been an exception because of a low-tax, business-friendly environment. Others say the good fortune can be traced to a booming energy industry.

Only $2 billion of the $12 billion is truly surplus revenue, and that will probably be quickly consumed by current costs related to Hurricane Ike and Medicaid.

"There are a lot of very significant needs that are unavoidable," said Combs, warning that there will not be a big pile of undedicated money awaiting legislators .

Big-ticket items that will probably demand additional money in the 2010-2011 budget include employee pensions, schools and Health and Human Services' needs. Those needs will also have to compete for the first time with the Department of Public Safety, which has largely been paid for in the past by the gas tax.

State leaders said earlier this year they wanted to move that $1.2 billion department cost into the general revenue fund that pays for schools, prisons and other basic state services so that the gas tax money can be used for highways.

It might be time for legislators to tap the rainy day fund to "smooth over the potholes, hoping that when they come back in 2011, we'll be through this period," said Dick Lavine of the Center for Public Policy Priorities, an advocacy group for low- and middle-income Texans.

Craymer agreed the rainy day fund should be used judiciously if revenue is tight.

How much lawmakers will have to cover the state's needs will largely depend on state sales tax collections, which fill about half of the $80 billion general revenue fund. Those collections have been growing lately, though at a slower clip than in recent years.

Another big unknown is the revised business tax that was part of the 2006 package that reduced school property taxes by one-third. The business tax, forecasted to bring in $5.9 billion, came in $1.4 billion short in its first year.

Oil and gas taxes have been key to boosting the state's rainy day fund over the past year as prices soared. Now that those prices are dropping, the infusion to the fund will probably stop, and the state will also get less in sales tax and business tax collections from oil and gas companies.

"We don't know how bad it's going to be," Craymer said. "We just know it's not going to be as bad as everywhere else."