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January 1999

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FORECAST: Conditions Mild
From the Comptroller: Shaking the Rafters
Legislature Online
Legislative Agendas

On Page 2:
Rainy Day Fundamentals
Another Run at Deregulation
Taming the Budget Beast

Texas stats -- Fiscal and economic data

FORECAST: Conditions Mild
After a blistering biennium in 1998-99,
the Texas economy enters a cool down

Robust economic growth in 1998, followed by moderate expansion in fiscal 1999, will ease the task of writing a budget for the 2000-01 biennium. The economic news in Texas has been unusually good; in fact, the state's vigorous growth rate propelled major tax collections to heights not seen in years. Activity in the next two-year cycle, however, appears more tepid.

The Comptroller's Biennial Revenue Estimate projects that the 76th Legislature will have a total of $58 billion available for general spending. Of that amount, $4.4 billion will come from the 1998-99 ending balance. This includes $1.1 billion from the state's tobacco litigation settlement.

Tax revenue will provide $44.4 billion, and the remainder will come from non-tax receipts. This estimate assumes a transfer of approximately $471 million to the Economic Stabilization (Rainy Day) Fund.

In addition to the major funds, the state will draw $40 billion in revenue that cannot be used for general purpose spending and that is dedicated for specific purposes. Federal receipts, estimated to total $27.7 billion for the biennium, will constitute the major source of dedicated revenue.

State earnings from all sources will total $94 billion in the 2000-01 period.

The state's taxes are expected to contribute 76.5% of all general revenue (GR)-related funds. Compared to the 1998-99 biennium, tax collections are expected to show a 4.6% increase.

The sales tax remains Texas' most important state tax, but the recent dizzying growth in collections will subside in light of Asia's economic troubles and the ensuing stock market gyrations. Most other major state taxes also should register moderate increases with the exception of motor fuel tax revenue, which will drop due to delayed allocations. Total non-tax revenue receipts to GR-related funds will be $9.7 billion in the 2000-01 budget period, with lottery proceeds continuing to be the single largest source.

Economic factors: More than any time in recent history, the three-year economic outlook for Texas will be determined largely by the health of the global economy.

Driven by the North American Free Trade Agreement, reduced tariffs and liberalized trade rules with Mexico, Texas international exports have risen from 6% of the Gross State Product (GSP) in fiscal 1985 to an estimated 14% in fiscal 1998.

After increasing an average 12% annually from 1994 through 1997, Texas export growth dropped to an estimated 8% in 1998. The Biennial Revenue Estimate assumes a generally weak world economy, with the recession in Japan and other Pacific Basin countries (excluding China and Taiwan) continuing at least through the end of fiscal 1999. As such, Texas' export growth rate is expected to slump to a mere 1% in 1999. State export growth will rebound to a more respectable 8% in fiscal 2000, then to 10% in fiscal 2001 as the world economy recovers.

Based on projections of continued moderate growth in the U.S. economy and relatively low--but eventually recovering--oil and natural gas prices, the annual real GSP growth rate in Texas is expected to slow from 5.4% in 1998 to 3.6% annually from 1999 through 2001. Even with the moderating state economic growth, the continuing attractiveness of Texas to businesses and migrants from other states should allow the state to continue to outpace U.S. economic growth by an average annual rate of 1.4% through fiscal 2001.

Largely because of falling stock market earnings, the average annual increase in state personal income growth will drop to 6.1% in 1999--down from 7.2% in 1998--only to rebound to a 6.7% average annual rate in fiscal 2000 and fiscal 2001. Nonfarm employment growth rate is expected to fall from 3.7% in 1998 to an average annual rate of 2.7% during 1999-2001. The unemployment rate is expected to rise from a near-record low of 4.9% in 1998 to 5.4% in 2001.

Tax revenue outlook: In fiscal 1998, Texas sales tax receipts exceeded $12 billion, registering a 9.9% year-over-year increase--the highest growth rate since 1989. Other consumption taxes, most notably motor vehicle sales and rental taxes and the hotel occupancy tax, experienced similar gains.

National tax revenue also displayed unexpected gains during this period. The U.S. economy, extremely strong for several years, is showing signs of cooling. Likewise, state economic growth--as well as the growth in tax collections--can be expected to moderate through the 2000-01 biennium.

Sales tax. For the 2000-01 biennium, the sales tax is expected to provide 62% of available tax revenue and 47.4% of all revenue available for general purpose spending. Collections are expected to rise moderately, topping $27.5 billion. Compared to the $25.4 billion expected in the current biennium, this represents a 8.5% increase.

The 9.9% growth rate in sales tax collections in fiscal 1998 was fueled in part by strong sales in the service (12% growth) and construction (17%) sectors. In contrast, the retail industry saw taxable sales increase 8%.

Motor vehicle taxes. The state's motor vehicle sales and rental taxes and the manufactured housing sales tax will contribute $5 billion in revenue during fiscal 2000-01, up 7.8% from the $4.6 billion expected this biennium. Auto sales are expected to remain steady, fueled in part by low interest rates and dealer incentives. The growth in motor vehicle sales tax collections, however, will likely slow the next biennium, with most of the revenue gains attributable to higher prices and the continuing shift in consumer preferences to trucks and sport utility vehicles.

Franchise tax. Revenue from the franchise tax, the state's primary general business tax, is expected to grow from $3.4 billion in the 1996-97 budget period to $3.9 billion in 1998-99, yielding a dramatic 14.8% biennial increase. However, because economic growth is projected to slow, the growth rate for 2000-01 is expected to fall considerably, to 6.1%, generating $4.2 billion for the biennium.

Oil and natural gas taxes. Oil and gas tax collections in Texas have been dropping for the last decade. The oil production tax accounted for only $303 million during fiscal 1998, lower than any year since 1973. The drop-off is attributed to declining production and low prices, exacerbated by a price slide that started two years ago.

Statewide oil production levels peaked in 1972 at 1.19 billion barrels. By 1998, production had plunged to 464 million barrels, yielding a 3.6% average annual decline rate. The trend will continue as exploration becomes more concentrated overseas. Oil production and regulation tax revenue is expected to decline to $478 million in 2000-01 from $551 million expected in 1998-99.

Similarly, natural gas tax revenue is expected to fall to $1.1 billion for the 2000-01 biennium, from the $1.2 billion estimated for the 1998-99 biennium.

Motor fuel taxes. About three-fourths of the motor fuel tax receipts must be allocated, per the Texas Constitution, to the State Highway Fund, with the remainder credited to the Available School Fund.

Because motor fuel tax revenue depends largely on population growth and business activity, collections are expected to increase moderately. However, the amounts credited to GR-related funds will fall sharply in 2000 due to previous legislation that delayed the June and July 1999 motor fuel revenue allocations from the General Revenue Fund to the State Highway Fund until fiscal 2000. The revenue allocation delay provided an approximate $330 million accounting gain to GR-related funds for the 1998-99 biennium, but this gain implied a corresponding $330 million accounting loss for GR-related funds in the 2000-01 biennium. Even though the tax base will grow in 2000-01, motor fuel tax revenue available for certification will decline to $1.1 billion, down 34.2% from the $1.7 billion expected to be available in the 1998-99 biennium.

"Sin" taxes. Rapidly rising cigarette prices will curb tobacco tax collections the next two years, while combined alcohol tax collections are expected to grow moderately. Tobacco and alcoholic beverage tax collections should total $1.96 billion in the 2000-01 biennium, a decline of $96 million.

Cigarette purchases have been slipping since the mid-1980s as a result of public education and restrictions on smoking in public. Consumption is expected to drop more sharply with tobacco companies boosting prices to fund lawsuit settlements. Therefore, cigarette tax collections (excluding other tobacco tax receipts), which increased each biennium between 1972-73 and 1992-93 and went unchanged in 1996-97, are expected to drop by 8.1% this biennium to $1 billion, only to fall another 12.4% in 2000-01 to $884 million.

Of the state's six alcohol taxes, the mixed beverage gross receipts tax accounted for more than two-thirds of total alcohol tax collections in fiscal 1998. Mixed beverage tax collections, which are based on value of the beverages sold, have grown every year since 1988. Revenue is expected to continue to climb through the forecast period and bring in $643 million for the 2000-01 biennium--an increase of 3.9%.

Collections from the beer and wine excise taxes and the airline/passenger train beverage tax are expected to increase moderately. In contrast, liquor excise tax collections are anticipated to remain flat through 2001.

Utility taxes. Texas collects several utility taxes. Revenue from the gas, electric and water utility tax is expected to drop 5.8% in fiscal 2000-01, down $25 million. The anticipated decline reflects elevated electricity usage during the exceptionally hot weather in 1998. Otherwise, the downward price effects of federal deregulation of wholesale electricity sales and state regulatory actions affecting retail services will likely dampen revenue growth. As such, this tax is expected to generate $410 million in 2000-01, compared to $435 million the preceding biennium.

The public utility gross receipts assessment is expected to remain fairly level, largely because the industry's taxable receipts are projected to stay flat due to increased price competition incidental to electric industry restructuring.

Insurance taxes. After a turbulent past, the tax base for the insurance premium tax has stabilized. Given the state's generally lower motor vehicle and homeowner claims, the outlook for taxable premium growth is slightly greater than 2% per year. The life, accident and health side is also expected to exhibit modest growth. Overall, insurance tax collections are anticipated to rise to $1.6 billion from the $1.5 billion expected for 1998-99.

Other taxes. For the 1998-99 biennium, state hotel occupancy tax collections are expected to reach $425 million, a 17.4% increase. Revenue from this source, fueled by increased tourism and convention activity, is expected to climb by 11.3% during the 2000-01 biennium, generating $473 million.

The inheritance tax, which is levied on estates required to file a federal estate tax return, is expected to bring in $455 million--a 16.5% biennium-to-biennium decrease. The revenue drop follows unusually large collections in 1998 from the settlement of several large estates.

Non-tax revenue: In addition to the $44.4 billion in tax revenue estimated for the 2000-01 biennium, the state will collect $9.7 billion in non-tax revenue.

Interest and dividends. These earnings are expected to dip by 7.2% during 2000-01. The largest single source of this revenue is interest and dividend income earned by the Permanent School Fund for the Available School Fund. Over the next biennium, the State Board of Education is expected to continue restructuring the PSF investment portfolio, putting greater emphasis on capital appreciation.

Lottery proceeds. As economic growth slows and the lottery matures, net proceeds are expected to stabilize. In fiscal 1999, more than 52% of gross lottery revenue will be returned to players as prizes, and the state will receive almost 36%. For the 2000-01 biennium, lottery revenue is expected to be about $2.2 billion, or 2.1% below collections this biennium.

Fees and other revenue. Revenue from fees, licenses, third-party reimbursements and other sources is expected to decline from the $6.7 billion estimated for the current biennium to $6.1 billion in 2000-01. This drop reflects falling revenue from the state/federal Disproportionate Share Program, which helps reimburse state and local hospitals for indigent care.

Tobacco settlement payments constitute the newest source of "other revenue." In January 1998, Texas settled its claims against major tobacco manufacturers for the costs the state incurred in providing Texans with health care for tobacco-related illnesses. The settlement requires manufacturers to make substantial payments into the General Revenue Fund for at least the next 25 years. In fiscal 1999, the state will receive $1.1 billion. Payments are expected to total $691 million in 2000-01, then $500 million per year.

The size of future payments will depend on whether the federal government seeks reimbursement for the federal share of Medicaid payments made for Texans covered by the Texas settlement.

Contributing to this article:
Revenue Estimating Division

From the Comptroller:
Shaking the Rafters

Working at the Comptroller's Office is not for the fainthearted. That goes for the top elected official as well as for all the men and women who carry out the numerous responsibilities of this agency.

We provide the reforms to streamline government and to make services more efficient and less costly. We serve as the state's traffic cop for cutting waste. We estimate revenue for the biennial budget, project the rate of economic activity and identify the fiscal impact of every legislative bill that reaches a public hearing.

This state agency has a record of achievement that is unmatched. Now we will build on that record and perform our duties at the highest standard. Our mission is to chart a course that is bold and new, not timid nor anchored to conventional wisdom.

We begin with the proposition that state government exists for the good of all Texans. Our employees will be the front-line soldiers in the war against waste: working with a citizens waste fighting commission, working in full cooperation with the Legislature and the state's leadership. Our focus will be to improve education, the key to unlocking the door to the next millennium for all Texans.

Texas will have a Comptroller's Office that reflects mainstream, main-street common-sense conservative views and values, one that understands the people of Texas must be heard and their will must be done.

I am proud to be the first woman to serve in this office. With your help, I want to be the best Comptroller Texas has ever had.

Texas Comptroller of Public Accounts

Legislature Online

Texans who want to keep up with what is going on during the legislative session can monitor events using the Legislative Council's World Wide Web site, Texas Legislature Online (TLO).

Information can be obtained 24 hours a day at

In addition, the Texas Senate at and the Texas House of Representatives at have their own Web sites. On their home computers, Texans for the first time can see their legislators conduct the public's business live not only on the floor of each chamber, but in committee meetings.

TLO features links to the Texas House and Senate home pages, the offices of the Speaker and Lieutenant Governor, the Legislative Budget Board, State Auditor, Legislative Reference Library, Sunset Advisory Commission and the State Preservation Board. Information is available on bills and amendments from the current and recent sessions, and users can search text and obtain an index of statutes affected by bills.

Legislative committee membership and meeting schedules can be found through TLO, as well as a schedule of Capitol events and legislative calendars. Visitors to TLO also have access to online versions of the Texas Constitution and statutes.

TLO offers information on legislative districts, legislators, redistricting and even a Find Your Incumbent feature. Links to other state legislatures are available, as are links to the Comptroller's Window on State Government, the State Library, the Texas Administrative Code and the Texas Register.

During a legislative session, the number of "hits"--online visits to the Web site--ranges from 50,000 to 100,000 per day, while during the interim the number varies from 30,000 to 40,000.

The TLO site is available in English only, but the House and Senate Web pages provide some information in Spanish. TLO's most popular features during a session are those used to locate and track legislation. During the interim, the most popular feature is the online version of the Texas statutes.

Contributing to this article:
Loretta Lewis

Legislative Agendas
Growing demands on state services
compete for available revenues

Riding on recent years of economic expansion, the Legislature appears to be in its strongest fiscal position in more than a decade.

Blessed with a surplus from fiscal 1998 and the promise of further revenue growth, lawmakers face the temptation of divvying up the proceeds among a myriad of spending demands. But veteran budget writers in both the Senate and House are preaching restraint, in recognition of the growing demands on state resources.

Just keeping up with existing state services and adjusting for growth in schools, prisons and other fundamental programs will take a big bite out of available funds--at least $3 billion, according to a legislative analysis. That does not account for inflation or unexpected contingencies.

Also, lawmakers will be urged to share the wealth and grant tax relief. Governor George W. Bush is promoting plans to decrease property taxes and grant sales tax exemptions on certain items for consumers, as well as tax cuts for small businesses and for research and development activities.

When lawmakers sit down for budget discussions, they'll find a host of proposals to improve current services and expand programs. Expect campaigns, for example, to improve the state salary schedule for teachers, along with boosting financial aid to college students and disaster assistance to farmers. During the interim, lawmakers also discussed initiatives to improve conditions along the Texas-Mexico border.

Governor Bush, who is a leading proponent of directing some of the state surplus to the education arena, has recommended property tax relief up to $2 billion. The state would replace $2 billion in property tax revenue that local taxpayers now spend on public education. The Governor has also pledged he will work to deliver $1 billion for discretionary teacher salary increases and an additional $600 million for school facilities, textbooks, advance placement classes and other programs.

Public school enrollment continues to climb. The Texas Education Agency (TEA) predicts enrollment will swell by 140,000 in the next two years in a public school system that now educates almost 4 million students.

From 1988-89 to 1997-98, public school enrollment increased 21%. The ranks of students classified as economically disadvantaged soared by 65% during that period. TEA estimates an additional $1 billion will be necessary to meet the needs of new students in the upcoming biennium.

Not only are Texas school districts struggling to pay the increased operational costs caused by growth, but many districts, especially those in suburban areas, are struggling to provide adequate facilities. The 1997 Legislature addressed this issue by creating the Instructional Facilities Allotment (IFA) program, which allows the state to partner with school districts to repay debt for instructional facilities. So far, 241 school districts have leveraged more than $4 billion to build or renovate instructional facilities.

The state has shouldered about $130 million of the annual debt repayment through the IFA program. Superintendents responding to a survey by the Comptroller in 1997 identified nearly $9 billion in anticipated facility needs and projected that $8 billion of that would be sought in the form of bond elections in the coming years. With this degree of need, many lawmakers will work to expand the IFA program.

Growth in Texas is not confined to the number of students. Taxable property values have risen tremendously, with an average increase of 7.1% over the last year, and values are expected to remain high. As a result, under current formulas of the state's wealth-sharing plan for public education, a larger share of public education funding will be paid by local taxpayers. The state share now hovers around 48.7%.

Increased property values also have forced more school districts, including those in urban areas with many poor children, into the wealth category that must share money with the state. To alleviate this, the amount of money a district may keep before it has to share its wealth probably will be raised from the current $280,000 per student.

School districts with lower wealth are likely to see higher state funding due to property value increases in the Dallas Independent School District. Higher property values in Dallas ISD will soon push that district into the wealth category that receives little or no state aid. This would challenge the legislative equity standard requiring that 85% of public school students be within the state's wealth sharing plan. TEA estimates $1.1 billion will be required to adjust formulas to include Dallas ISD in the wealth sharing system, thus staying in check with equity standards.

Children's health
Congress created the Children's Health Insurance Program (CHIP) in 1997 to extend the safety net around children whose families were too well off to receive Medicaid assistance but too poor to afford health care coverage. CHIP offers a matching rate of $3 for every dollar the state spends to cover children through 18 years of age living at or below 200% of the federal poverty level. In 1999, the federal poverty level is expected to be $16,800 for a family of four.

Texas will be eligible for an estimated $561 million in fiscal 2000. The state also may draw down any unexpended funds it was eligible to receive in 1998-99 when CHIP started.

The state's Health and Human Services Commission (HHSC) estimates Texas has 1.3 million uninsured children. About 550,000 are eligible for Medicaid coverage but for various reasons are not enrolled. Another 320,000 children are ineligible for coverage under CHIP because their families earn more than 200% of the federal poverty level.

That leaves about 460,000 children who will be eligible for health insurance coverage if the Legislature approves a state CHIP program. It is unlikely that all eligible children will join--the participation rate of children in the Medicaid program, available in Texas since 1967, is only 55%.

Eligibility for the state's current Medicaid system is like a patch-work quilt, providing health coverage to children of various income categories according to age. Up to age 1, the state covers children at up to 185% of the federal poverty level. From age 1 to 5, the state's coverage drops to 133% of federal poverty. For children 6 to 18, the state extends Medicaid coverage to families at or below 100% of the federal poverty level.

While many people believe the federal CHIP offer is too good to pass up, the Legislature still must decide on the level of funding the state will commit. Under federal guidelines, the state can expand Medicaid coverage, create a new, separate system of coverage under CHIP or a combination of both.

The Senate Interim Committee on Children's Health Insurance recommended creating a separate and distinct CHIP program--similar to Medicaid but not an entitlement. The state could cap or suspend enrollment to control costs. Some committee members were concerned that expanding Medicaid coverage would establish a new entitlement the state would be obligated to support indefinitely.

Various spending proposals exist. The committee recommended relying on funds from the state's tobacco settlement to fund the state's share of CHIP. A memorandum of understanding between legislative leaders and the Attorney General's Office would set aside $151 million a year in the first biennium. Depending on the amount and how it is spent, children's health advocates argue that Texas might not draw its maximum federal allotment the first few years of CHIP. However, Texas is not alone. Because of the way the program is structured, several large states will fail to draw maximum CHIP funds for several years.

Criminal justice
With about 144,000 inmates behind bars, Texas' prison system is the largest in the world. Annual growth has slowed considerably, however, since the state's unprecedented influx of inmates in the early to mid-1990s, according to the Texas Criminal Justice Policy Council. While prison ranks have swelled, primarily due to the declining number of paroles granted, the state has moved into alternative programs, such as community-based programs.

Prison capacity remains an issue, especially concerning the mentally ill, mentally retarded, physically incapacitated, geriatric and terminally ill. Many inmates who are no longer considered a danger to the public are, in fact, the most likely to be exploited in prison. The Senate Committee on Criminal Justice suggested exploring incarceration alternatives for these inmates, including assisted living, sheltered work environments and nursing homes. The state prison population includes about 2,000 geriatric and 10,000 mentally impaired inmates. According to the committee, placing just half the mentally impaired inmates in structured living environments would save about $75 million a year. Also, inmates suffering from AIDS, hepatitis, tuberculosis and other diseases could also be housed in less costly facilities.

The Senate committee also reported that the Texas Department of Criminal Justice (TDCJ) prison guard training could be improved with coordinated training for county jail and TDCJ guards and improved communications between the groups.

One move that may help offset the problems associated with inmates who remain eligible for mandatory release is expanding the TDCJ's Super-Intensive Supervision Parole program, which uses the latest electronic technology to track parolees. The program has helped send nearly half of the most dangerous offenders back to prison.

According to the Senate Interim Committee on Gangs and Juvenile Justice, after-school, weekend and other alternative programs for at-risk youth are key to preventing juvenile delinquency. Texas spends nearly $700 million annually on delinquency prevention programs spread among 34 state agencies. Lawmakers urged consolidating delinquency prevention programs and establishing a statewide gang database.

The Senate Interim Committee on Sex Offenders proposed providing facilities for the long-term care and treatment of sex offenders released from prison. Recidivism among sex offenders is high: 56% of those released are re-arrested within three years, and eight of 10 of those return to prison. Sex offenders would be incarcerated separately from the mentally ill. Individuals completing the inpatient treatment would move to community-based therapy treatment programs.

Year 2000
The projected cost to state agencies and universities to fix Year 2000 computer bugs will total $257 million from 1996 to 2001, up from an original estimate of $238 million, according to the Department of Information Resources' (DIR), Texas Year 2000 Project Office. Updating embedded systems--computer chips in many types of electronic equipment--could run an additional $77 million from 1999 to 2001.

The state initially set December 31, 1998, as the deadline for agencies to complete Y2K work, but several agencies did not meet that goal. State agencies are racing to beat a more important deadline, December 31, 1999, when computers and embedded chips will begin to fail as they interpret the two digit "00" as 1900 instead of 2000, disrupting all date-based computer programs.

The Legislature allocated $110.8 million for Year 2000 computer problems at state agencies this biennium. Universities must use existing funds.

Overall, about 60% of the work in state agencies is complete, DIR reports. However, the Attorney General's Office is considered "at risk" because the agency performs critical duties that may not be fixed by 2000. Most agencies are expected to have at least critical functions in compliance by the deadline.

Another concern is the status of the state's supplier and contractor computer systems. Any disruption at the supplier level could reduce the state's ability to provide services and goods.

Contributing to this article:
Research Division

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