Legislative Update July 2020

By Premier Legislative Consulting

You can tell a legislative session is in the foreseeable future when talk of budget instructions to state agencies makes the rounds amongst capitol watchers. That is exactly where we find ourselves.

Each summer, before a legislative session, the Legislative Budget Board sends out instructions to state agencies on how to prepare their legislative appropriations requests (LARs). (The legislative board is composed of the lieutenant governor, speaker of the House, chairs of the Senate Finance and House Appropriations Committees, and three other legislators from each chamber.) LARs are the formal document agencies used to request funding from the legislature for the upcoming biennium.

In recent years, LAR instructions required agencies to show how to cut their proposed budgets by 5 percent. This was largely an exercise to make agencies prioritize their activities and programs. However, this cycle is more complicated than previous ones due to the COVID-19 pandemic and the oil bust’s effects on the Texas economy. In fact, the Big Three (Governor, Lt. Governor and Speaker of the House) have already told state agencies to cut their current budgets by 5 percent. Many functions were exempt from that order, including public education and many health-related programs (the two largest parts of the budget.) But the fact that agencies are being told to cut their current budgets does not bode well for the budget next biennium. Moreover, Sen. Nelson, Chair of the Senate Finance Committee, has told state agencies that the Senate version of the budget will start with all agencies receiving no funding at all. No similar statement has been made by House leaders. The differences between the Senate and House budgets will be ironed out in the conference committee during the legislative session as is done normally.

Unfortunately, current economic news makes for depressing reading. Sales tax revenue in April and May was down about 9 percent and 13 percent respectively, compared to a year ago. These numbers may show slow improvement but are expected to stay below pre-COVID-19 levels for the foreseeable future. This is of particular concern since sales tax is the state’s largest source of revenue.

The current budget was also predicated on oil prices hovering around $55 per barrel and the subsequent tax revenue from the oil production tax. However, due to the oil market bust, the price of a barrel of oil (as of the writing of this column) is just under $40 per barrel. Prices are expected to climb to approximately $50 per barrel and stay there for most of next year. The longer it stays below the $55 assumption, the more damage to state coffers. Other tax revenues are down as well including those from the state’s: natural gas production tax, motor vehicle tax, motor fuels tax, alcohol tax and hotel occupancy tax, just to name a few. Finally, unemployment in Texas is at an all-time high at just under 13 percent. That number is also supposed to show steady improvement over the next 18 months but that will depend on how quickly businesses rehire, and whether they will hire the same number of employees they had in the past.

All that being said, many capitol watchers are expecting there to be a significant cut in state spending in the upcoming biennium, probably in the 5-10 percent range across the board. Such a cut would see a reduction between $12 billion and $25 billion in spending. This would be the largest cut since 2011 when the state was dealing with the fallout from the Great Recession. It does not include any funding that would be needed to fill revenue holes in the current budget. In addition, at this point in time, increases in some state taxes cannot be ruled out. We will need to be vigilant so if that occurs TTA members are not singled out for unfair treatment.

Please let us know if you have any questions or concerns. And of course, please don’t forget to let us know what contacts you have with legislators and other local leaders.

If you have any comments or questions, please contact TTA.