On September 2, the Legislative Budget Board (LBB) and Governor’s Budget Office began joint hearings at which all state agencies are describing their budget requests for the 2006-07 budget cycle. These Legislative Appropriations Requests were prepared according to June 2004 instructions from state budget officials to submit “baseline” budgets that reflect a 5 percent reduction in General Revenue compared to agencies’ spending in 2004-05. Most agencies are requesting the restoration of this 5 percent as “exceptional items” that the legislature will have to approve. In addition, exceptional items in budget requests that are publicly available so far call for billions more in General Revenue for K-12 education, financial aid for college students, state employee and teacher health insurance, and prison operations. This short Policy Page provides more information about the needs identified to date, and includes a schedule of major social services agencies’ hearings so that those interested in testifying can make plans to attend.

A MORE REALISTIC STARTING POINT SHOULD BE BILLIONS OF DOLLARS HIGHER, NOT 5 PERCENT LOWER

In a June 16 letter to state agencies, the LBB and Governor’s Budget office told agencies to limit their baseline requests for General Revenue in 2006-07 to 95 percent of current GR spending, or 5 percent less. The only exceptions to this are programs for which additional General Revenue will be needed to “maintain a constitutional school finance system and meet current law requirements, satisfy debt service requirements for existing bond authorizations, and maintain caseloads for federal entitlement services.” This differs from baseline instructions used in the past that also allowed, among other things, for enrollment growth in K-12 and higher education; increases in adult and youth prison populations; and public (state or local government) employer costs for staff benefits.

Under the revised instructions, the amount of “exceptional items” (things not included in the baseline) will be much higher than in past sessions. This may contribute to the perception that agencies are asking for too many budget items that are nonessential, when in fact critical restorations will be competing with increased demands for basic services. In other words, when the baseline is set at an artificially low level to begin with, any amounts approved to restore services to 2004-05 levels are more likely to be seen as enhancements or expansions of services.

A realistic baseline would include the cost of items previously allowed by the legislature, such as prison or school enrollment growth. An even more realistic baseline would allow for health care inflation and other cost drivers beyond agencies’ control, such as changes in the federal match rate for Medicaid and other large state programs.

HOW SOME BIG AGENCIES ARE INTERPRETING THE 5 PERCENT REDUCTION INSTRUCTIONS

The agency that gets the most General Revenue—the Texas Education Agency (TEA), which oversees the distribution of state and federal funds to more than 1,000 school districts and charter schools—has a GR budget of $20.6 billion in 2004-05, or more than a third of all General Revenue spending. But most of TEA’s budget is driven by school finance equity standards, so the 5 percent reduction does not apply to much of the agency’s budget request. Instead, TEA’s baseline request for 2006-07 is $21.7 billion, or $1 billion (5 percent) more than current spending. Exceptional items in TEA’s request total $1.3 billion in General Revenue, with large price tags on items such as the Student Success Initiative (to prevent “social promotion”) needing $251 million to serve sixth- and seventh-graders; new textbook needs totaling $387 million; the Guaranteed Yield Increase needing $301 million more; the Existing Debt Allotment needing $180 million more; and the Instructional Facilities Allotment needing $150 million more. Restorations to grants programs and other items cut by the 2003 legislature (such as the pre-kindergarten grants, Advanced Placement funds, and the technology allotment) account for the rest of TEA’s $1.3 billion in General Revenue exceptional items.

The Texas Department of Criminal Justice (TDCJ), in contrast, has had to apply the 5 percent reduction instructions to almost all of its budget, most of which is General Revenue. In 2004-05, TDCJ will spend almost $4.6 billion in General Revenue. A 5 percent reduction would result in a funding loss of more than $225 million for the 2006-07 biennium. This could mean eliminating 1,800 jobs in the state prison system, including 1,450 correctional security staff; cuts to probation programs would mean increased caseloads and fewer residential and treatment services. TDCJ’s exceptional items include $226 million to prevent the 5 percent cuts, plus $303 million in General Revenue-related funds needed to address higher parole caseloads, reduce probation caseloads, fund managed health care cost increases, and replace one-time or discontinued non-General Revenue funding, among other things.

The Teacher Retirement System is spending almost $3.8 billion in General Revenue (including Rainy Day Fund dollars) for the 2004-05 biennium. A 5 percent reduction at TRS would be a loss of about $188 million for 2006-07. Exceptional items total more than $1.3 billion, with $1.1 billion of that needed to restore the $1,000 health insurance pass-through for about 600,000 active members of TRS, most of whom are non-administrative local school district employees. The other $259 million is needed to keep the TRS-Care program for retirees from becoming insolvent.

The Employees Retirement System is spending almost $1.4 billion in General Revenue to provide health insurance and pensions to state employees and retirees in 2004-05. A 5 percent reduction would mean $68 million less. Exceptional items for ERS total $566 million in General Revenue, or almost $1 billion in total funds (including federal and other dollars, such as the State Highway Fund). Maintaining health care provided through the Group Benefits Plan will require $427 more in General Revenue to deal with anticipated annual increases of 13 percent in 2006-07.

Finally, the Higher Education Coordinating Board (HECB) would see its General Revenue support almost double, from current biennial GR spending of about $667 million, if its exceptional items were approved. About half of the $597 million in exceptional items requested is for student financial aid: $322 million is needed to renew the aid for students currently reached by the Texas Grants program and to continue the B-On-Time program.

Adding together the General Revenue exceptional items of the major agencies and programs identified above, which account for about half of state GR spending, results in a need for new General Revenue that is about $3 billion, or 9 percent, higher than the current budget.

The health and human services agency budget requests are not yet complete, but should be expected to add considerably to the overall demand for General Revenue. (Health care costs are a large part of most HHS agency spending and are expected to continue to increase much more rapidly than general consumer inflation.) A draft version of the 2006-07 budget request for the Department of Family and Protective Services is a sign of just how large some HHS needs may be: the DFPS baseline and exceptional items would require a General Revenue increase of about $200 million, or 42 percent more than its General Revenue budget for 2004-05.