Author: kmcclain

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Debt in Texas State & Local Governments

Texas has a balanced budget requirement; however, the Texas Constitution of 1876, as amended, does allow state and local governments to borrow funds through the use of bonds.  There are two types of bonds:

  • General-obligation (GO) bonds, which are backed by the full faith and credit of the state.  State GO bonds must be approved by two-thirds of both legislative chambers and then approved by a majority of voters
  • Revenue bonds, which are secured by specific revenue sources

Debt repayment for GO and revenue bonds can be either self-supporting debt (repaid with revenues other than the General Revenue fund*) or not self-supporting debt (repaid from the General Revenue fund*).

“State debt is used to fund a variety of purposes, including transportation, water projects, public housing and construction at state colleges and universities” (Texas Comptroller of Public Accounts, Debt at a Glance, n.d.). Outstanding debt per capita of Texas compared to other states, 2019

Public debt in Texas is relatively low compared to other large states.  In 2019, the state’s total outstanding debt was $51,529,919,000, or $1,799 per capita.  Of this,
  • $18,128,727,000 corresponds to state GO bond debt
  • $13,350,915,000 has been authorized but has not yet been issued to be appropriated/spent ($10,151,061,000 of which is associated with GO bonds)
  • $33,090,518,000 is self-supporting debt

Debt levels have been increasing both at the state level and the local level.  At the state level, outstanding GO debt increased 41 percent between 2010 and 2019 (Texas Comptroller of Public Accounts, Debt at a Glance, n.d.).  Local governments such as cities have been increasingly relying on debt in an attempt to keep up with the state’s rapid growth.

*NOTE:  The General Revenue fund is an appropriated fund in the state budget that is used to make general expenditures to support the daily operations of state government.

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Rainy Day Fund

In 1987, the Texas Legislature passed a joint resolution proposing amending the Texas Constitution to allow for the creation of the Economic Stabilization Fund (ESF), also referred to as the “Rainy Day Fund”, and in 1988, a majority of voters in Texas approved this constitutional amendment at the polls, at which point the amendment was formally adopted.

The Rainy Day Fund can be viewed as “a type of savings account for the state of Texas” (Lumen Learning, Texas Revenue, n.d.).  The Rainy Day Fund was created in response to the downturn in the state’s oil and gas industries during the 1980s “as a way for the state to set aside money, earned when oil and gas revenues were robust, to be spent during times of economic hardship — effectively insulating public programs from whiplash as oil and gas prices rose and fell” (Walters and Essig, 2019).  Since 1990, “any surplus from previous budget cycles, and collections from oil and gas production are deposited into this account” (Lumen Learning, Texas Revenue, n.d.).

The Rainy Day Fund is a contingency fund, which means that spending monies within the Rainy Day Fund can only be approved in certain circumstances.  The Texas Constitution of 1876 (as amended) gives the Texas Legislature the authority to use money from the Rainy Day fund for:

  • a budget deficit (when expenditures exceed revenues) – requires approval by 3/5 of the Texas legislature
  • projected revenue shortfalls (when the Comptroller of Public Accounts forecasts lower revenue in the upcoming biennium) – requires approval by 3/5 of the Texas legislature
  • general purposes (i.e., any other purpose they choose) – requires approval by 2/3 of the Texas legislature

In 2020, $1.13 billion was deposited into Texas’s Rainy Day Fund – down 30% from the previous deposit into the Rainy Day Fund in 2020 (Johnson, 2020) and $500 million from what would have been deposited “if not for the pandemic-driven recession and weak oil prices” (Ramirez, 2020).  This deposit brought the balance of the Rainy Day Fund to $10.7 billion.

There have been several withdrawals from the Rainy Day Fund since its creation, most notably in 2011 when the Texas Legislature authorized a withdrawal of $3.2 billion amid the Great Recession and massive cuts to public schools.  Nevertheless, the size of the Rainy Day Fund has continued to grow because the money deposited into this contingency account has greatly exceeded the money that has been withdrawn.

Graphic illustrating deposits to and withdrawals from Texas' rainy day fund, 1990-2018

From Walters and Essig (2019).

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Fiscal Policy Tools

Texas relies predominantly on two different fiscal policy tools: tax expenditures and tax subsidies.

Tax Expenditures

Tax expenditures are any reductions in tax liabilities that result from tax benefits to particular taxpayers rather than taxpayers in general.  Tax expenditures can be used to encourage certain kinds of businesses or activities.  Tax expenditures differ from other kinds of government support in that they do not show up on a budget since they reflect taxes never collected; as a result, tax expenditures are difficult to measure.  Examples of tax expenditures include tax-free weekend and tax abatements that exempt certain businesses from some of their property taxes.

Tax Subsidies

Tax subsidies are incentives designed to encourage the production or purchase of certain goods to stimulate or support some businesses.  Examples of tax subsidies include the:

  • Texas Enterprise Fund (TEF), which was created to attract businesses to the state and has awarded more than $500 million to various businesses
  • Events Trust Fund, Major Events Reimbursement Fund, and Motor Sports Racing Trust Fund, which are utilized to attract events to the state
  • Texas Emerging Technology Fund (TETF), which supports start-up companies in cutting edge fields
  • Toward Excellence, Access, and Success (TEXAS), which provides grants created by the Texas Legislature to students who meet certain requirements
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Government Spending in Texas: The Basics

In Texas, most state spending is in the areas of education, health and human services, and public safety and criminal justice.

Appropriations for the 2018-19 biennium, and change in all funds appropriations 1996-97 vs 2018-19 biennia, by article

From Texas Comptroller of Public Accounts, Spending By Article (Nov. 2018)

A Closer Look: Health & Human Services

As the figure above illustrates, spending on health and human services was the second-highest category of spending in the 2018-19 biennium — and spending on this category compared to other state spending increased from 31% in the 1996-97 biennium to 36.4% in the 2018-19 biennium (during this same period, state expenditures increased overall, with 2018-19 expenditures totaling 167.2% compared to those from 1996-97).  Much of the state’s health and human services funding is related to Medicaid, which is a federal social welfare program that is jointly funded by the federal government and state governments.  Medicaid is one of the largest state budget expenditures and accounts for around one-fourth of most state budgets.  As medical costs skyrocket, policymakers worry about the ability of states to continue to fund Medicaid benefits at current levels.

Shortfalls in Revenue

Sometimes, revenue projections exceed actual revenue.  Recall that Texas fiscal policy follows a pay-as-you-go system, which means that the state cannot spend more than it receives in revenue.  As a result, when revenue shortfalls occur, the state must either find a way to continue funding current spending levels by tapping into the Rainy Day Fund, borrowing money, or reducing spending.

Reducing Spending

Between legislative sessions, the Legislative Budget Board (LBB) or governor may recommend prohibiting a state agency from spending money appropriated to it by the Texas Legislature (i.e., an involuntary budget reduction), transferring money from one state agency to another, or changing the purpose for which an appropriation was made.  Recommendations made by the LBB require approval from the governor, and recommendations made by the governor require approval from the LBB.

Another method that has been used to reduce spending is a hiring freeze.  For example, in January 2017, Governor Abbott, with the approval of the LBB, implemented a statewide hiring freeze; this prevented many state agencies, from filling vacant positions that were funded by state appropriations through the end of the fiscal year (August 31, 2017).  Some agencies and/or positions were exempted from this hiring freeze.

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Taxes & Other Revenue in Texas

Some of the more prominent sources of tax revenue in Texas are summarized in the table below.  Of these, the general sales tax is the largest source of revenue for the state, and property taxes are the largest source of revenue for local government.

Tax Description
Franchise tax imposed on any taxable (private sector) entities, organizations, or businesses formed or doing business in Texas; assessed regardless of whether the entity is profitable
Gasoline tax 20 cents per gallon for diesel and gasoline (this is in addition to a federal gasoline tax)
General sales tax 6.25% state tax, plus up to 2% local tax, imposed on applicable goods and services; the list of applicable goods and services has been expanded over time to generate more sales tax revenue for the state
Property tax an ad valorem tax based on the value of a person’s home that is assessed and collected by local governments
Severance tax imposed on the extraction of non-renewable natural resources including gas, oil, and condensate
Sin tax tax on items or activities the Texas legislature considers undesirable or harmful (ex: taxes on tobacco, alcohol, and sexually oriented businesses)

Other sources of state revenue include federal funds received from the federal government (block grants, categorical grants, and general revenue sharing), interest payments associated with state investment funds (like the PSF), lottery funds, and miscellaneous fees (fees for fishing licenses; motor vehicle registration fees; drivers license fees; etc.).

Low Tax State?

Texas is generally referred to as a low tax state: in 2016, Texas ranked 43rd out of 50 in taxes collected as a share of personal income (8.7 percent — which is 14 percent below the national average) (Institute for Taxation and Economic Policy, 2018).  This is largely because, unlike many other large urban states, Texas does not have a state income tax.

The general sales tax (and most of the taxes that exist in Texas), however, are regressive taxes.  As a result, those with less income tend to pay a greater percentage of their income in state and local taxes here in Texas:

. . . the lowest-income 20 percent of Texas taxpayers — who earn an average income of $13,000 per year — contribute 13 percent of their income in state and local taxes, the sixth highest state and local tax bill for this income group in the country. Similarly, among the next 20 percent of taxpayers — whose average income is $28,400 — state and local taxes, on average, account for 10.9 percent of their income. Texas offers no targeted tax benefits for low-wage workers . . . Meanwhile, the top 1 percent of households in the Lone Star State — a group with an average income over $1.6 million — contribute just 3.1 percent of their income in state and local taxes. (Institute for Taxation and Economic Policy, 2018)

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Taxation: The Basics

Taxes are the primary source of revenue for most governments.  There are four different types of taxes:

  • income taxes, which are taxes collected from an individual’s income
  • general sales taxes, which are taxes collected from the retail price on items and/or services
  • excise taxes, which are taxes collected on specific products (such as tobacco, alcohol, gasoline, etc.)
  • ad valorem taxes, which are taxes that are based on the value of a property

There are three types of tax systems: proportional taxes, regressive taxes, and progressive taxes.

Direct Link: Three Types of Tax Systems

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Texas’s Budgeting Process

Budgeting Process

The video below discusses the steps involved in Texas’s budgeting process.

Direct Link: How the Texas Budget Works: An Overview

Key players in the budgeting process in Texas include the:

  • Legislative Budget Board (LBB), which is chaired by the Speaker of the Texas House and Lieutenant Governor and coordinates the budgeting process, analyzes budget requests, and drafts a budget proposal
  • Governor’s Office of Budget, Planning, and Policy (GOBPP), which analyzes budget requests and drafts a budget proposal
  • Texas legislature, which has the power of appropriations and, as such, is responsible for passing the budget
    • The biennial state budget originates in the Senate Committee on Finance and the House Committee on Appropriations
  • Comptroller of Public Accounts, who certifies projected revenue for the upcoming biennium
  • Governor, who can suggest budget items, signs the budget passed by the Texas legislature, and can use the power of the line-item veto to strike specific appropriations from the budget passed by the Texas legislature
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Texas’s Balanced Budget Requirement

“Except in the case of emergency and imperative public necessity and with a four-fifths vote of the total membership of each House, no appropriation in excess of the cash and anticipated revenue of the funds from which such appropriation is to be made shall be valid.” – Texas Constitution of 1876, Article III, Section 49b

Texas has a pay-as-you-go system, which is a fiscal discipline that requires a balanced budget and only permits borrowing under very few circumstances.  This means that, generally speaking, the state must generate more revenue to increase spending — and when revenue shortfalls occur, state spending must be reduced accordingly.

Texas’s balanced budget requirement shapes politics and policy in the state.  In the video below, former Speaker of the Texas House of Representatives Ben Barnes discusses how the balanced budget requirement shaped the context leading up to the 2003 regular legislative session.

Direct Link: Former Speaker of the Texas House Ben Barnes Comments on Texas’ Budget Requirements

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Rights of the Victim

Victims of crimes in Texas are guaranteed certain rights in the Texas Constitution, including:

  • the right to dignity and privacy during the trial
  • protection from the accused
  • the right to present in court
  • the right of restitution (i.e., compensation for an injury or loss)
  • the right to information about the conviction, sentence, imprisonment, and release of the accused
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Rights of the Accused 

Rights of the accused in Texas either mirror or parallel rights found in the U.S. Constitution.  Many of the rights of the accused in Texas are included in Article I, Section 10 of the Texas Constitution of 1876, which states:

In all criminal prosecutions the accused shall have a speedy public trial by an impartial jury.  He shall have the right to demand the nature and cause of the accusation against him, and to have a copy thereof.  He shall not be compelled to give evidence against himself, and shall have the right of being heard by himself or counsel, or both, shall be confronted by the witnesses against . . . And no person shall be held to answer for a criminal offense, unless on an indictment by a grand jury.

In practice, Texas political culture has not been overly supportive of the rights of the accused, and the ability to obtain decent indigent defense varies greatly across the state.