The Eighteen Billion Dollar Man
Texas is facing an unprecedented fiscal crisis during the next legislative session. So I opened my copy of the 988-page budget, grabbed a red pencil, and went to work. And the results weren’t pretty.
Easy come, easy go. Most of the $14 billion in federal stimulus funds that the Legislature used to balance the state budget in 2009 will be long gone when lawmakers return to the Capitol in January. By then, Comptroller Susan Combs will have delivered the bad news: Texas is $18 billion or so short of having enough revenue to pay for public schools, universities, health care, law enforcement, new roads, and all the other state services it delivered in the 2009–2010 budget cycle. This is the deepest hole the state has ever faced, nearly double the $10 billion shortfall in 2003.
The sluggish economy is the major reason for the fiscal crisis, but another cause is that state leaders have enjoyed a long ride on the line of least resistance, choosing not to raise revenue even as demand for state services has soared. For almost two decades, under Democratic and Republican leadership, governors from Ann Richards to George W. Bush to Rick Perry have bet on the come that the state’s robust business climate would provide enough revenue to meet growing needs without their having to take any political risks. Now, with the national economy mired in the worst recession in eighty years, they have rolled craps. The day of reckoning has arrived.
And I’m going to do the reckoning. On the following pages, I propose how the Legislature could balance the books for the next two years, by cutting spending and raising new revenue. I want this to be an honest budget, one that accurately shows readers how daunting $18 billion is, so I’m not going to use cash-management practices known around the Capitol as “smoke and mirrors.” That’s a gimmick that budget writers use as a last resort when they are out of money and out of ideas. For example, one such trick is the estimation of Medicaid caseloads in the upcoming biennium. The Legislative Budget Board, a committee that includes the lieutenant governor, the Speaker, and four members each from the Senate and the House, decides whether the demand for Medicaid services during the next two years will be high, low, or middling. In real life, the demand is always high, but in practice, the LBB routinely adopts a low estimate. That allows lawmakers to budget less money for Medicaid, even though they know that the amount will prove inadequate. Sooner or later, a future Legislature will have to make up the difference.
I have spent several weeks interviewing lawmakers and budget experts about what the 2011–2012 budget might look like: what can be cut and what can’t, what is politically feasible and what isn’t. I have gone through the 988-page budget from 2009–2010, looking for nonessential items that can be trimmed from the current version. One such category is construction: The current budget has about $2 billion for new buildings, and I would eliminate a lot of it. An exception is the long-overdue repair and rehabilitation of mental health facilities. I am not going to balance the budget on the backs of the state’s most vulnerable citizens. However, one trade-off is that I chose to shutter four state agencies, a decision that did not come easily. I realize what that would mean for the employees who work there and for the programs—some of them extremely useful—that these agencies operate. But with such a bleak economic forecast, good programs can become frills. Finally, you will notice that I did all of this without raising taxes, a concession to political reality. Jake Silverstein, the editor of TEXAS MONTHLY, is playing the part of Governor Perry in the exercise. He has vowed to veto any tax increase I might propose.
A word about how the budget process works: The state raises a lot of revenue, but a great deal of it is earmarked for specified purposes. Thus a tax on sporting goods is projected to raise $108,075,135 in the 2009–2010 budget, but the revenue is earmarked for the Parks and Wildlife Department. The sporting goods tax is essentially a user fee imposed on sportsmen. Many other levies (including the gasoline tax, which helps fund the Department of Transportation) are similarly earmarked for particular agencies. These items have sapped the budget of its flexibility, leaving insufficient revenue for big-ticket items such as public schools and health care. The revenue that matters for the purpose of writing a budget is general revenue, or “GR” for short. Most GR comes from sales taxes and is not burdened by earmarks. You may read in the newspaper that the state is spending umpteen billions of dollars. Ignore it. Nobody pays attention to the total amount spent, which includes everything from federal funds to fees and fines. The amount of GR that is available effectively determines the level at which major state services can be funded.
This is the second time I have written an article for TEXAS MONTHLY about how to cut the budget. In 1985 Texas faced a $1 billion shortfall (pocket change by today’s standards), and I wrote a cover story headlined “The Bloody Billion.” The budget was much easier to understand 25 years ago than it is today. Not long thereafter, the Legislature switched to a new format in which agencies identify their priorities and set goals for what they want to accomplish and, in theory, are held accountable for meeting them. Now spending tends to be lumped into much bigger sums than in the old version, and a lot of the little mischief that was easy to find back in 1985 is buried in the big items. It was not hard to come up with $1 billion in 1985. Today, finding $18 billion is going to be very tough. Many of the cuts I suggest are painful and far from ideal, but they illustrate how difficult the task is. Let’s take out the long knives and get to work.
1. ELIMINATE STATE AGENCIES
The Railroad Commission of Texas
The Railroad Commission was created in the late nineteenth century to protect farmers against rapacious freight rates charged by railroads. That mission had become obsolete by the thirties. By then, oil, not agricultural commodities, drove the state’s economy. Texas was overflowing with oil, and prices fell to a few cents a barrel. So the commission was given the duty of regulating production to keep prices up. By limiting the amount that could be produced in Texas, then the most prolific area in the world, the commission effectively set the global price of oil for the next four decades—until 1971, when production in Texas went into decline. OPEC quickly adopted the Railroad Commission model. The Railroad Commission ceased to matter when OPEC became the price enforcer, and it hasn’t mattered since. What does it do today? It spends $13,040,243 to “promote energy resource development.” Now, I ask you: Why does the state need to spend tax dollars on that? Texas has a mammoth energy industry that “promotes energy resource development” every day. Another futile expenditure is $29,067,083 for “oil/gas monitor and inspections.” This may be the most puzzling appropriation in the entire budget. Without a hint of irony, budget writers provide funds for the annual monitoring and inspection of nearly 400,000 oil wells, gas wells, and related facilities. The goal is unreachable, however, because there are not nearly enough inspectors for the job. The Legislature is budgeting millions of dollars for inspections that will never take place.
Texas Department of Agriculture
Has anyone out there ever heard of the Food and Fibers Commission? It was created in 1941, when cotton was king, and it was deemed important enough that it was headed by the leaders of four major universities: the University of Texas, Texas A&M, Texas Tech, and Texas Woman’s University. Some 69 years later, its existence is perpetuated by the Department of Agriculture. Let me state the obvious: Texas is an urban state. Why does it need an agency that spends $72,983,015 in GR to generate marketing opportunities for Texas products and another $9,201,687 to keep the Food and Fibers Commission on life support? The main function of the agency is to distribute more than $700 million in federal funds for nutrition programs for schoolchildren. A worthy cause, but can’t we just outsource the entire operation to the Aggies?
Public Utility Commission of Texas
Once upon a time, the PUC’s role was to set rates for the state’s electric utilities and telephone companies. The utilities went before the PUC in contested-rate cases that pitted the companies against consumers. Then in the late nineties the Legislature made the decision to deregulate electricity, leaving the PUC with essentially nothing to do. It now spends more than $250 million each budget cycle on “electric utility restructuring,” something that has already been accomplished through deregulation. The rest is for telephone regulation, which is not worth the cost of maintaining this large bureaucracy. We don’t need a PUC anymore.
Texas Commission on Environmental Quality
Texas has been fighting with the Environmental Protection Agency for four decades over air pollution. The crisis came to a head in June, when the feds wrested some air pollution permits from the TCEQ after determining that the state’s program does not comply with the Clean Air Act. (State officials emphatically disagree.) Governor Perry has criticized the federal takeover, and Attorney General Greg Abbott sued the EPA. This is the wrong strategy. Don’t look a gift horse in the mouth. The feds have taken over, so let them pay the tab. As an added benefit we’ll get cleaner air than we have ever achieved during years of lax state enforcement.
SAVINGS FROM ELIMINATING AGENCIES $1,450,892,050
2. PUT A LEASH ON THE GOVERNOR’S PET PROJECTS
Zero out nonessential funds
One of Perry’s chief concerns has been economic development. Several years ago he asked the Legislature to create two new funds: the Texas Enterprise Fund (currently budgeted for $67,576,000), a pot of “deal-closing” money to recruit companies to come to Texas, and the Emerging Technology Fund (slated for $203,038,327), to provide money for promising start-ups. Critics charged that they were slush funds, and House appropriators summoned Perry’s staffers to a hearing in the spring of 2009 after the governor’s office appeared to bend the rules in awarding a $50 million grant to Texas A&M, Perry’s alma mater. Leaving aside the controversies, the question now is whether these activities should be funded during the worst fiscal crisis in memory. Consider another fund that provided a $25 million handout to bring Formula One racing to Austin. Why should taxpayers foot the bill for a racing entrepreneur when just one city gets the benefit? This is completely irresponsible.
SAVINGS FROM FUNDS $446,038,054
3. SCALE BACK THE PRISON SYSTEM
Release nonviolent drug-possession offenders to community corrections
During the 2003 fiscal crisis, the Legislature decided to save money on prisons by cutting drug and alcohol treatment programs. This was the dumbest thing they could have done. Instead of getting treatment, nonviolent offenders remained incarcerated at great expense before being returned to their communities under supervision. In recent years, legislators involved in corrections policy have wised up. They have figured out that it makes no sense to imprison nonviolent offenders who haven’t committed felonies against persons or property in maximum-security installations. The savings represent the cost of keeping an estimated 8,424 drug offenders in prison who haven’t been convicted of violent felonies. These offenders should be rerouted from prison to probation, parole, and community treatment programs. Incarcerating an inmate costs about $50 a day. Probation and parole cost less than $5 a day. Experts say that drug treatment is at least five times less costly than prison—and is far more effective.
While we’re on the subject of prisons, the Central Unit, in Sugar Land, was built in 1909 and is located in the heart of one of the fastest-growing regions in the state, suburban Fort Bend County. Texas could sell the prison and its 325 acres for $30 million and perhaps receive some development fees. Should the state sell? The case against it is that Texas is experiencing a population boom, and some of the people who will be coming here will turn out to be felons who will end up in prison. The case for it is that I still have about $16 billion left to reach my goal. I say sell.
SAVINGS FROM PRISONS $337,476,000
4. DO THE HOMEWORK ON PUBLIC EDUCATION
Delay some school construction spending until the next budget cycle
Remember what Willie Sutton said when he was asked why he robbed banks? “Because that’s where the money is.” Well, nobody wants to cut spending for schools, but education is where the money is—more than $35 billion in the 2009–2010 spending bill. This is where we start to feel the pain. First up, construction costs. When the Legislature is staring at an $18 billion hole, it’s not the right time to spend unnecessary money on bricks and mortar, so I’m trimming the original $1.4 billion by about 30 percent. (Local school districts can still build or repair schools with local dollars.) Construction of facilities should be put on hold until the next biennium. Because school facilities are supposed to be equalized, the state may run the risk of winding up in court. So be it. Better to litigate tomorrow than be broke today.
Cut administrative costs
Some years ago, I had a conversation with a school finance expert from the University of Houston, during which I questioned why the state didn’t limit administrative expenses for local school districts. “Oh, no,” he said. “You can’t do that. Then Houston would have nowhere to put its incompetent teachers and principals.” Suspicions confirmed. Let’s try again. Education analysts I interviewed say that if the student-to-staff ratio can be adjusted from the 2009 level (7.6 students per staff employee) to the 2006 level (7.9 students per staff employee), the state could save $1.25 billion per year, or $2.5 billion for the biennium. This would require a change in state law—a bill or an edict from the commissioner of education or an executive order of the governor—that would effectively cap staffing at the 2006 level.
Reduce high-stakes testing
One of the big issues in schools today is whether the emphasis on testing is causing students to spend too much time preparing for exams at the cost of learning how to think. I believe the answer is yes. But there is also an astronomical cost involved in developing and administering what has been an ever-
increasing number of tests (twelve in order to graduate from high school). The state recently entered into a contract with Pearson Educational Measurement for student assessment—that is, standardized testing—for which the state will pay more than $468 million over five years. That equals about $187 million for the next biennium. The Legislature needs to have a serious discussion about whether testing—and the cost of testing—has gotten out of hand. Texas should not reduce its commitment to accountability. It should reduce its reliance on high-stakes testing: Mothball the contract.
Delay purchase of new textbooks
Though the state is scheduled to get new science textbooks at a cost of $500 million, the State Board of Education, which requests appropriations for new textbooks, has already said that it isn’t going to ask for the money to buy books, given the reality of the state’s budget crisis. That means the purchase of new science books should (and surely will) be delayed until after the next biennium—when, one hopes, the fiscal crunch will have eased and more revenue will be available to spend. In the meantime, the old textbooks will suffice. And while the SBOE is putting new books on hold, they should also get rid of those social studies texts that defend Joseph McCarthy.
Distribute money to schools through existing formulas
A significant amount of money, nearly $1 billion, is doled out to selected school districts by the Texas Education Agency through grant programs. Districts can get grants for a variety of reasons: to bring up the scores of lower-performing students on standardized tests ($304 million), to provide prekindergarten programs for students who don’t speak English or who are disadvantaged ($208 million), or to develop reading, math, and science initiatives and a high school completion initiative ($152 million). The lawmakers and experts I interviewed who are involved in school finance policy have serious doubts about whether the grant programs are effective at all. The objectives are laudable; the problem is that only a fraction of the school districts, and a fraction of the students, can participate. That is fundamentally wrong. The school finance system shouldn’t give opportunities to some students and not others. Grant programs should be eliminated until the school finance system is reformed in accord with existing formulas.
Reduce the merit pay program
Traditionally teachers have been paid according to their experience and their academic credentials. Conservative reformers argue that teacher pay should be based on student performance. How do you measure student performance? No surprise here: The answer is that you look at how students score on standardized tests. There’s the rub. My objection to merit pay is that it creates an incentive for teachers to devote more class time to teaching to the test. We do enough of that already. This is not my only concern with merit pay. Another is that by spending a large sum on what is essentially an ideological issue, we ignore other problems. Texas has a severe shortage of math and science teachers. Shouldn’t filling that need—say, by establishing scholarships at colleges of education—be a greater priority than merit pay? Schools also have a hard time retaining teachers. Shouldn’t bonuses for experienced teachers who mentor newcomers be a goal? I would turn this expenditure upside down: Reduce the program to $200 million from $396 million and spend most of it on educational priorities. Not political priorities.
SAVINGS FROM PUBLIC EDUCATION $4,509,500,000
5. RETHINK HIGHER EDUCATION
Remove special items
A “special item” is a program at a state college or university that needs seed money from the Legislature so that it can get started. Thereafter, the institution ought to take over the funding. Do you want to guess how often this happens? Almost never. Like all government programs, special items become almost impossible to eliminate. Year after year, universities keep coming back to the well to ask for more funding for their special items—and year after year they get it. Special items have been controversial since Governor Bill Clements tried to get rid of them in the eighties. Some, like UT’s McDonald Observatory, are among the great treasures of the state. Others are on the periphery of the core teaching mission of universities. And still they endure. Texas A&M has the Sea Grant program, West Texas A&M has the Panhandle-Plains Historical Museum, UT-Dallas has the Center for Applied Biology, Texas A&M International University has the Institute for International Trade, and Prairie View A&M has the Texas Juvenile Crime Prevention Center. These are all projects that help raise the profile (and the budget) of their host universities. But at some point, the universities need to provide their own funding. How about right now?
Don’t extend A&M’s Texas AgriLife Extension Service
If I worked for the Legislative Budget Board, I would be fired for recommending these cuts. Steve Ogden, the senator from Bryan—
College Station, is the chairman of the Senate Finance Committee. Rick Perry is the governor of the state. Both are Aggies. Nobody messes with Texas A&M’s budget. So why am I doing it? The answer is that the AgriLife Extension Service dates from the time when a primary mission of land-grant colleges was to provide a service to their communities. Today A&M is an academic powerhouse, and the extension service is an anachronism. It provides education programs to communities across the state—about health, nutrition, and safety; the environment; rural economic development; youth leadership; and wildlife management. The extension service has influenced the lives of a lot of young people over the years, but is it really needed now that Texas is overwhelmingly an urban state? I can think of a lot of good uses for $99,649,354 (such as the kind of cutting-edge research at which A&M excels) other than lawn and garden advice. Even if it is world-class lawn and garden advice.
SAVINGS FROM HIGHER EDUCATION $1,246,583,571
6. STRIP THE CHRISTMAS TREE
Cut TxDOT earmarks
I give up. I have looked and looked for ways to save money at one of the biggest and most controversial agencies in state government, due to its advocacy for the Trans-Texas Corridor, but I can find only little stuff. TxDOT’s budget is a Christmas tree, on which legislators have hung ornaments that require the agency to complete minor spending projects. I regret having to play the role of the Grinch, but here goes: Cut the tourist information center in Lufkin ($150,000); don’t improve the tracks of the South Orient Rail Line between San Angelo and Coleman ($3 million); and sidetrack the Austin—San Antonio rail project ($8.7 million). Finally, let’s ground the Gray County Medical Heliport, a $500,000 item. This brings us to construction. I have made the point elsewhere that a budget crisis is not the right time to undertake new construction projects. Defer the $22,500,000 for new construction and the $29,880,000 allocated for repair and rehabilitation of facilities until the next budget cycle.
The real budget crunch at TxDOT is that the agency has a payroll of more than 14,000 employees, many of whom are skilled engineers. Why does TxDOT need so many people when it has announced that by 2012 it will not have the money to build new roads? If you really want to save money, you have to reduce payroll. You have to furlough state employees. I have not resorted to pay cuts or furloughs elsewhere in the budget. And I might as well not do it here. TxDOT’s labor force is largely funded by earmarked gasoline tax revenue. Cutting payroll will save gasoline tax dollars that can be used to build roads, but it won’t save a nickel of GR.
SAVINGS FROM TXDOT $64,730,000
7. TIGHTEN THE BELT ON STATE AGENCIES
Cut budgets by 5 percent
I don’t mind telling you, I’m getting desperate. I’ve managed to get more than $8 billion in cuts. So I am grateful to the state’s leadership—the governor, the lite guv, and the Speaker—for doing some of my work for me. They have directed all state agencies to cut their budgets by 5 percent. The result has been a savings of more than $1.2 billion, which I will gratefully absorb into my cuts. (Directors have already been told to brace for another round of cuts—perhaps as high as 10 percent—as well.)
You’re probably thinking, “Burka, why aren’t you also imposing a hiring freeze? That’s an obvious choice.” Glad you asked. The problem with a hiring freeze is that some positions cannot be allowed to remain vacant. A hiring freeze won’t work for state troopers or prison guards or Child Protective Services caseworkers or game wardens or probation and parole officers or workers in mental health facilities or skilled nurses at teaching hospitals. If these jobs become vacant, they have to be filled. The same is true for upper-level managers. You can’t just hire somebody off the street for these jobs; applicants have to be qualified to do the work. Then there is the issue of whether the savings are real. When state agencies cut their budgets by 5 percent earlier this year, a hiring freeze was a popular choice for saving money. If I were to propose a hiring freeze, the likely effect would be to duplicate the savings state agencies have already achieved.
TOTAL SAVINGS FROM ALL CUTS $9,305,470,442
1. Roll the Dice on Gambling
Install video lottery terminals
NEW REVENUE: $1,500,000,000
If raising taxes is off the table, then a possible source of new revenue is gambling. The best option is full-scale casino gambling at selected sites around Texas. The state would auction off the licenses, raising several billion dollars and clearing the way for the gaming industry to establish the megaresorts that attract tourists and keep gambling dollars in the state that are currently going to Louisiana and Oklahoma. Alas, Perry will not go for this. For political reasons, he objects to “enlarging the footprint of gambling.” This means gambling would be allowed only at places where it is currently legal—and the only places that qualify are racetracks, which are failing business enterprises. Why should they alone reap the fruits of gambling? The bad news is that the state will miss out on the more lucrative megaresorts. The good news is that racetracks could be wired for video lottery terminals—that is, slot machines—and could be up and running in a matter of months, providing a new stream of revenue in the short term. All this depends on whether the Legislature authorizes gaming. The votes aren’t there now, but as the budget crunch deepens, the prospects could change.
2. Raise Fees, Not Taxes
Increase fees by 20 percent
NEW REVENUE: $2,759,020,000
Dear Jake, I suspect that we are about to have an argument over whether I am trying to use a backdoor method of raising taxes. I have accepted your ground rules. I’m not going to propose a tax increase. But I am going to argue that fees, fines, licenses, and penalties are not taxes. Here is the fundamental difference: When taxpayers pay the sales tax or the tobacco tax or the hotel tax or the school property tax, they get no direct benefit in return. Their money disappears into the state treasury to be used for goodness knows what. Most of us don’t even get a warm feeling that we are helping our state.
Fees and licenses are different. They provide a direct benefit to the person who pays for them. A driver’s license buys me the right to travel on a public road. The sovereign owns the beasts of the field, the fowl in the air, and the fish in the waters, but hunting and fishing licenses give me the state’s permission to take them for my own. With my own money, I’m purchasing the right to pursue an activity that I love. I can also purchase a license to buy safety for my family by carrying a concealed handgun. If I am a member of a profession, I can acquire a license to pursue my chosen field, whether I am a lawyer or a plumber, and that license is a credential of my competence. I get the benefit of a profession that is regulated and establishes rules for proper conduct that ensure consumer confidence in my work.
Fines and penalties are levied because people violate the law or fail to pay state taxes. No one would confuse these with a tax. The state has the right to penalize those who violate its laws. If you don’t like it, don’t run a red light or forget to get your car inspected. In the 2010—2011 biennium, Texas is projected to take in $13,795,100,000 in fees, licenses, fines, and penalties. This is the third-largest source of revenue in Texas, after tax collections and federal funds. A 20 percent increase would yield $2,759,020,000. One final point, Jake: There is a precedent. The Legislature raised fees and licenses during the 2003 budget crunch. I know that these assessments were not tax increases, because Perry says so. On the campaign trail, he likes to point out that the state faced a
$10 billion deficit that year and that we balanced the budget without raising taxes.
3. It’s Raining, It’s Pouring
Make a withdrawal from the Rainy Day Fund
NEW REVENUE: $4,500,000,000
The formal name is the Economic Stabilization Fund, but whatever you call it, times such as these are what it is for. The Legislature can vote to withdraw money from the fund and spend it in the current budget. I have chosen $4.5 billion as the amount to spend, for two reasons. First, that figure represents half of what the balance in the fund is expected to be during the next session. Second, Representative John Otto, the most tenacious fiscal watchdog in the Legislature, told me that he is willing to spend half the fund. If Otto thinks it is raining, you know it’s time to get out the umbrellas.
TOTAL FROM ALL NEW REVENUE $8,759,020,000
GRAND TOTAL $18,064,490,442
The deed is done: Eighteen billion dollars in cuts and new revenue. Still, it is hardly a cause for celebration. The decisions that I have made—and those that the Legislature will have to make next spring—may balance the budget, but they will cost us dearly. The state’s ability to educate its schoolchildren, to take care of its needy families, to build the roads that make commerce flow has been severely curtailed. If this were a onetime occurrence, Texans could look to the future with considerable optimism. But it isn’t, and we can’t. Because of decisions that the state’s leaders made several years ago, budget crises will be a permanent feature of state government. In 2006 the Legislature cut school property taxes by one third, reaping great political benefits in the process, but its attempt to raise new revenue fell far short of projections. This underperformance has created what state finance experts describe as a structural budget deficit, an ongoing inability to generate enough revenue to pay for the current level of state services. Governor Perry and other state leaders have evidenced no concern about the structural deficit. Instead, they supported reducing the revenue from the business tax, notwithstanding the structural deficit and the looming shortfall. Their fiscal policy is (1) never raise taxes and (2) pray for a boom. The structural deficit is the elephant in the living room of state government. And it may well crush us all.