Texas Taxpayers and Research Association

November 13,2009

Talking Points

One of the most critical issues we'll face next Session is how we deal with the structural
shortfall. In recent weeks it has been estimated that the structural shortfall could be
anywhere between $9- 16 billion (depending on the methodology used.)

Let me stick to the facts as we know them today. First, the Comptroller has said that, for
now, she is sticking with her revenue estimate of near zero percent growth in 201 0,
followed by 4% growth for 201 1. There are inany people concerned about the drop in
sales tax collections the last two months. But according to most economists, the
fundamentals are in place for consumer spending to slowly increase over the next year,
meaning a rebound in sales tax collections. Said differently, it's too early to panic. W e
have enough tools in our tool box to balance our budget.

Second, some math. Let's start with the "big ticket" items in our current budget. This
2009 Session. we appropriated $3 billion from the Property Tax Relief Fund, which we set
aside in 2007, to continue local school property tax cuts we first adopted in 2006. This
was a one-time funding source.

We also used $2 billion in General Revenue balances this year, and approximately $6
billion in federal stimulus funds, also one-time funding sources. Adding up those items,
along with assuming up to $5-6 billion in spending growth in FY 2012-2013, we could
need as much as $1 7 billion in 201 1 to balance our budget.

However, that takes nothing into account on the revenue side. You know we have saved
between $8-9 billion in the Rainy Day Fund because we all knew the economy would still
be sluggish leading up to FY2012-13, and that the 2009 federal stimulus funds would
probably be a one-time source of funding. In addition, because the Rainy Day Fund is
based on oil and gas tax receipts, at current prices we anticipate up to $1 billion per year
revenue stream into the Fund. That means the $8-9 billion we left in the Rainy Day Fund,
plus an additional $2 billion in revenue growth for FY2012-13, could result in close to $1 I
billion in the Rainy Day Fund available to help balance the budget next Session.

The Comptroller does forecast flat revenue growth in 201 0, but she also expects 4%
growth in 201 1 and beyond. And any growth in revenues in 201 1-2013 would be available
to balance the budget next Session. Three to four percent revenue growth over that time
period would result in a $4-6 billion increase in revenues. When added to our Rainy Day
Fund balances, we could have between $15-1 7 billion in total revenues available to balance
the FY 20 12- 13 budget.
Another revenue source that may work in our favor is the Permanent School Fund. This
fund has been making a recovery and has a good possibility of adding about $1 billion in
20 1 1, and another $1 billion in FY 20 12-2013. Taken all together with the other revenue
sources above. that's $17-$19 billion in estimated revenue that could be available.

Let me pause for a moment and say I want to be conservative and cautious about how we
spend the Rainy Day Fund, as I believe we need to leave some balance going forward to
maintain a reasonable cushion and help with our bond ratings. Let me just remind you
about April 2007, when I recommended we hold onto most of our surplus, which turned
out to be $9 billion. That decision left Texas one of only six states in the black, instead of
one of the 44 states in the red when Comptroller Combs cut our revenue estimate for 20 10-
201 1 by $9 billion.

Now let's look more closely at the spending side. Just like we did working together in
2003, facing a $10 billion shortfall, if a gap still remains after what 1 just laid out we will
find the necessary spending reductions to balance the budget.

We were very clear with agencies that received federal stimulus funds last Session that
those funds were to be used to the extent possible for one-time items. Now, there's been
discussion that it may be difficult to discontinue some of those items that were paid for
with one-time stimulus funds. But by placing the stimulus funds in an entirely separate
part of the budget, Article 12, we made it clear that those programs will be first to be
scrutinized by the Legislature in 201 1.

Of course, I don't intend to wait until 201 1 to see what happens to the economy. If revenue
continues to be flat or sluggish, I would recommend a letter from leadership telling
agencies to slow down spending their appropriated funds.

From one-time expenditures using stimulus funds, and savings from directing certain
agencies to reduce FY 20 10- 1 1 spending by 1- 2%, if necessary, we could generate
additional savings to help balance the FY2012-I 3 budget. Again, we have the tools in our
toolbox at the present time to balance our budget with anticipated revenues and selected
reductions in spending, and hold a reserve in the Rainy Day Fund to help balance our
budget in the 20 13 legislative session.

We'll also ask the LBB to bring forward performance review ideas that could. save the state
money, and intend to ask committees in some of my interim charges to look at additional
government efficiencies.

In closing, let me say we've made decisions with a lot of help from many of you over the
past four years that have put Texas in a position to weather this economic storm better than
virtually any other state in America.