AUSTIN — What a difference four years make.

When state leaders were preparing for the 2003 legislative session, they braced for a budget shortfall of $5 billion. When lawmakers arrived in Austin that January, the number written in red ink had nearly doubled to a staggering $9.9 billion.

Now, state leaders have every reason to believe that the 2007 legislative session will begin with the state about $4.5 billion in the black. And one key legislative leader suggests that the surplus might even be double what many are expecting.

“There’s no question that this is a whole lot better time to be preparing for a legislative session than it was four years ago at this time,” said economist Ray Perryman, who heads a financial and economic analysis group in Waco. “That 2003 session was just brutal.”

Perryman and several state leaders say the super-charged pace of sales tax collections over the past 12-14 months is the driving force behind the brightened revenue picture for state government. During the fiscal year that ended in August, sales tax collections jumped 12 percent from last year.

The increase reflects strong consumer confidence and suggests that Texas, along with much of the nation, has shaken off the economic doldrums brought on by a slump in the dot-com industry, 9-11 and high-profile business scandals.

“Texas has recovered from the ’02-’03 economic slowdown that followed the triple economic whammy of 9-11, the Enron and WorldCom scandals, and high-tech bubble bursting,” said outgoing state Comptroller Carole Keeton Strayhorn, who has been the state’s chief financial officer for the past eight years.

Strayhorn’s office, which will be turned over to outgoing Agriculture Commissioner Susan Combs in January, said last month that lawmakers can expect to begin working on the 2008-09 budget with about $4.5 billion in the bank. House Speaker Tom Craddick, R-Midland, said that the surplus could be as high as $15 billion but that at least $5 billion, and perhaps as much as $10 billion, would be eaten away because of rising cost of state-paid health and human services programs and to meet the demand of rising enrollment in public schools.

The state must also pay $2.7 billion for the cuts in local school property taxes that were enacted this year as the centerpiece of the new school-finance overhaul, Craddick said.

How much lawmakers will actually have to spend will be determined by Combs, who will have the constitutional authority to estimate how much revenue will be generated by the various taxes and fees levied by the state. Combs, who won the race by a decisive margin on Nov. 7, said she is heartened by the economic indicators she has seen. But she will not issue her official revenue estimate until she and her staff pore over all the data.

“This process will be exhaustive,” said Combs, who has spent the past eight years running the agriculture commission. “We will spend December crunching the numbers and crunching the numbers again.”

When state leaders faced the giant shortfall in 2003, they imposed deep spending cuts to balance the budget without a tax increase. Perryman said those tight-fisted policies, which continued into the 2005 legislative session, helped give the state a burgeoning surplus heading into next year’s session.

But a report issued this week by the Center for Public Policy Priorities, which advocates for programs on behalf of low- and moderate-income Texans, said that even though the state has slashed spending in recent years, the needs for those programs have not disappeared.

“Part of the reason that anticipated revenues exceed current spending is that approved spending levels are grossly inadequate, with many critical areas . . . still reeling from the cuts approved by the 2003 Legislature,” Eva DeLuna, the center’s senior budget analyst, wrote in the report.

If those cuts were restored, she said, the state would face a $3 billion shortfall.

Whether state leaders will legally be able to spend all of any projected surplus is in question. A provision added to the state Constitution nearly 30 years ago ties increases in state spending to an array of economic-growth indicators . But the provision gives state leaders wide latitude in how those indicators are interpreted.

Perryman said that all of the indicators forecast continued growth, even if the pace slows somewhat from the recent double-digit increase in sales tax collections.

“I’d say that lawmakers are going to be a whole lot happier heading into a legislative session knowing that they’ll have the resources to meet the needs of the state than they were four years ago going in knowing that they were going to have to make some pretty ugly choices in order to balance their budget,” he said.

$5 billion - Budget shortfall state leaders expected before the 2003 legislative session started

-$9.9 billion - Expected deficit when lawmakers arrived in Austin in January 2003

+$4.5 billion - Expected state budget surplus entering 2008-09 budget year, according to comptroller’s office

Click here to read Prudent Stewardship of the State's Budget, a policy page from the Center for Public Policy Priorities, estimating a $3 billion shortfall in the next session.